THE ROMNEY PLAN VS THE GINGRICH PLAN

The Wall Street Journal

  • DECEMBER 9, 2011

The Newtitlement State

On Medicare, Mitt Romney has the bolder, better reform.

  • Newt Gingrich has risen from nowhere to lead in the early GOP primaries, and many voters seem to be gravitating to the former Speaker for his reform platform. In Mr. Gingrich’s telling, his ideas are bold and even radical, but the irony is that they’re often much less revolutionary than his rhetoric suggests.

Take Mr. Gingrich’s 49-page manifesto on entitlement reform, which his campaign rolled out shortly before Thanksgiving. It is a fundamentally Newtonian document, both in its ambition—it promises to “reduce federal spending by half or more”—and in its lack of discipline. Oddly, Mr. Gingrich is promoting the more radical reform for the less urgent fiscal problem (Social Security) even as he hedges on what’s needed to reform the main driver of spending growth (Medicare).

Unlike President Obama, Mr. Gingrich is right that these automatic spending programs must be modernized. Social Security was created in 1935 and the country has since undergone vast changes in the economy, the labor force, life expectancies, health care, retirement, consumption and government. Why should we want the same type of system in 2035, or for that matter in 2012?

So Mr. Gingrich wants to let younger workers divert the 6.2% employee half of the Social Security payroll tax into private accounts, much like 401(k)s. Not only could Americans build retirement nest eggs that they would own, some portion of the 6% of GDP that government takes in social insurance taxes would become savings and investment.

The Gingrich accounts would be voluntary, allowing anyone to remain on traditional pay-as-you-go Social Security. This is what Republicans are talking about when they invoke “the Chilean model.” In 1981 Chile decided to give taxpayers the option of remaining in the traditional state retirement system or contributing payroll taxes to accounts. As Mr. Gingrich notes, within 18 months 93% of workers became investors instead of pensioners.

1newtitlements

Associated PressRepublican presidential candidate Mitt Romney

Yet the irony of Social Security is that its slow-motion solvency crisis is relatively easy to resolve—and the political system is moving toward consensus, if haltingly. Mr. Obama’s own deficit commission recommended making the benefit formula more progressive, so that payments to higher income workers grow more slowly, and gradually raising the retirement age over the next half-century to adjust for longer lives.

Personal Social Security accounts are desirable, but that doesn’t mean it makes sense to reject compromises that reduce future liabilities. Yet Mr. Gingrich proposes no such changes in his plan, perhaps because they are politically unpopular. But such an abdication opens him up to charges that he’s not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts (that is, when younger workers put their money in their own accounts, rather than funding current retirees).

Given his Social Security dreams, Mr. Gingrich’s timidity on health care is especially puzzling. Medicare is a much more urgent fiscal nut, which will double in size by the early 2020s to more than $1 trillion annually even under Mr. Obama’s artificial baseline that hides the true spending. The budget can’t be fixed unless health costs rise more slowly, and that can’t happen without changing Medicare.

After denouncing Paul Ryan’s premium support Medicare reform as “right-wing social engineering” in May, Mr. Gingrich now says he supports it as long as it is only voluntary. As with Social Security, people could continue to receive today’s unreformed, open-ended benefits if they preferred. This model may be politically safer and perhaps more saleable to voters, but it also does little to improve the status quo. Why would anyone leave the all-you-can-eat buffet without an incentive to choose cost-conscious options?

Mitt Romney also says he’ll leave fee-for-service Medicare untouched, but the key difference is that under his plan all seniors would receive the same defined contribution. They’d pay the marginal cost above this fixed subsidy, increasing competition for the health-care dollar among insurers and hospitals, doctors and other providers.

Mr. Gingrich’s plan is merely a gloss on Medicare Advantage, which has done some modest good as one out of four beneficiaries have moved to private options but without turning the fiscal battleship. At least on Medicare, Mr. Romney is the bolder reformer.

The Georgian also argues that health savings accounts will redeem the rest of the private market, but we recall that the former Speaker told us the same thing when he tried to get us to support the 2003 Medicare prescription drug expansion. We declined, and Medicare costs have kept on rising.

The contradictions of Mr. Gingrich’s entitlement plan reveal part of his political character, which is that his policies often don’t match the high-decibel, sometimes grandiose nature of his rhetoric. This can make it easier for his opponents to stigmatize his policies as more radical than they really are because Mr. Gingrich tells everyone they’re radical. He might achieve more if he spoke more softly and carried a bigger stick.

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