News Coverage on Private Participation in Public Pensions
The Great Society's Next FrontierMike Konczal
As The Washington Post’s Ezra Klein declared shortly after voters re-elected President Barack Obama, one of the major winners last week was health-care reform. With Democrats holding on to the Senate and the White House, Republicans will be unable to repeal the law before all of its provisions go into effect in 2014—after which, the theory goes, the public will come to accept that government has the responsibility to ensure health care is available for all.
This is the end of a long battle for progressives: Health care has been the major missing piece of our welfare state for nearly a century, and for decades making it part of our system of social insurance has been a primary goal of politicians, think tanks, and activists. With this piece of the progressive puzzle in place, the natural question to ask is, What’s next for the welfare state?
One useful way of thinking broadly about what the welfare state should provide comes from Lane Kenworthy, a sociologist and political scientist at Arizona State University. According to Kenworthy, the welfare state should accomplish three things: It should act as a safety net, providing a basic level of security for the poor and protecting citizens from sharp declines in income or unanticipated expenses; like a springboard, it should create opportunities for upward mobility; and, like an escalator, it should ensure that living standards rise across the board as the economy grows. Below are ways that liberals could fix the holes in the current safety net, expand opportunity, and make sure a growing economy benefits everyone.
In a recent paper, Yale political scientist Jacob Hacker and Yale law student Nathaniel Loewentheil give an outline of the holes in the current safety net that need patching. The two pieces in need of the most attention? Health care and retirement security.
Democratic Senator Tom Harkin called Obamacare a “starter home” that will require future work. The program will still leave millions without health insurance, and it may fail, due to its complicated design, to contain costs. Introducing a public option into the state exchanges when they come online in 2014 would go a long way toward controlling costs. As Hacker notes, a public option will build on the successful parts of Medicare while serving as a simple, affordable benchmark that private plans would need to compete with on both costs and quality. Outside of Obamacare, Medicare reform will require budget goals and payment reforms, which is essential for containing spending without shifting costs onto consumers.
The system for retirement security will also need some fixes. Policy wonks talk about the “three-legged” stool of retirement: Social Security, employer-retirement accounts, and personal savings. Government needs to step in to counter the decline of the traditional company pension. The government currently gives large tax breaks to private retirement savings accounts like 401(k)s, breaks that overwhelmingly go to the top 20 percent of workers. It could instead use its resources to provide a universal IRA with an automatic enrollment to all Americans, as well shifting 401(k)s over to a public-private, defined-benefit plan. This would boost the savings of those with less income while also providing greater retirement security.
Despite conservative claims, there’s no immediate crisis in Social Security finances. If a solution is needed, it is important to remember that as inequality has grown, the “cap” on Social Security taxes has reduced the program’s tax base. Eliminating it, or extending it to, say, capital-gains income would reduce any potential long-term Social Security shortfall.
Another way to boost our current safety net is by expanding the parts that don’t reach everyone. For instance, unemployment insurance has kept millions of people out of poverty in this recession and functions as an important tool of macroeconomic stabilization by getting money into people’s hands when the economy tanks. Unemployment insurance, however, only covers around 40 percent of the unemployed due to a variety of state-level eligibility rules. The Government Accountability Office (GAO) found that low-wage workers, in particular, are half as likely to receive unemployment insurance. Expanding unemployment insurance would provide greater security to those with more precarious employment who don’t currently qualify.
Total equality of opportunity is a phantom goal. What the welfare state should accomplish, according to Kenworthy, is making sure each person has the most opportunity possible. As our economy continues to change, commitments to developing opportunities for people will require investment in education as well as a commitment to gender equity in the workplace.
Given that women are more likely to work jobs that don’t provide health insurance, Obamacare already helps with gender equity in the workplace. The next step is to require policies protecting family leave. The United States, Swaziland, and Papua New Guinea are the only three countries in the world that do not have guaranteed paid leave for new mothers. Paid leave makes it easier for mothers to return to work after a child is born as well as to maintain and continue their careers. It can also be expanded to cover both parents, a move that will strengthen women’s access to the labor market even more.
Providing universal pre-K is another important step in ensuring all Americans have the most opportunity available. As New America fellow Dana Goldstein writes, “If we want to fight poverty and equalize educational opportunity, we cannot ignore the disparities that develop before a child ever enters the public education system.” According to University of Chicago economist James Heckman, early educational intervention produces both positive and long-lasting effects on school achievement, job performance, and social behaviors for children from disadvantaged backgrounds. Universal preschool should be universally available for children age three and older, and feature well-trained teachers working with small groups of children, focusing on a full range of development. This will also benefit women who want to work, creating opportunities for both those women and the children who will gain access to much-needed early education.
The final component of strengthening the social safety net is the escalator, making sure that as we become a richer country, rising growth benefits all workers. Since the late 1970s, wages for the median worker have stagnated while inequality has skyrocketed. How can the welfare state help ensure that growth is broadly shared and the economy works for the benefit of all? This difficult question will likely take decades to tackle, and there are already three conflicting ideas about what should be done.
Kenworthy argues that the best way to address inequality is to aggressively expand tax credits like the earned income tax credit (EITC), which boosts the wages of lower-income workers—particularly those with children. It is a form of wage subsidy that encourages work because one needs to be in the labor force to take advantage of it. Given trends in the global economy, Kenworthy argues that even if we get unemployment below 4 percent, it is unlikely that wages at the bottom end of the distribution would grow. Instead, he calls for using the EITC to subsidize wages. The EITC, he argues, could be used to boost wages even in the middle class, say, for workers making up to $80,000, and indexed to increases in GDP or average worker compensation. This would use the tax code to boost the stagnant wages of average Americans.
Another approach would create an unconditional basic income (UBI) that rises with GDP growth. The proposal gives every legal resident a cash stipend, usually targeted around the poverty level. This income is universal, so everyone gets it regardless of their income or work status, and it is unconditional. A UBI has support from across the political spectrum. Those on the left argue it will create greater egalitarianism by increasing the bargaining power of workers, force employers to find innovations that eliminate difficult and unpleasant work, and recognize the value of de-commodified caregiving and other cooperative, non-labor activities. Some on the right argue that it would allow for the removal of many government programs that either provide assistance or public services directly, folding them all under one that works entirely through cash payments.
These two approaches differ in one key respect: The EITC requires work participation, whereas the UBI would go to everyone whether they work or not. Kenworthy worries about the political and employment effects of providing everyone a basic income. That could make it politically unpopular while also affecting the tax revenues necessary to fund it.
Besides these two proposals, policymakers have suggested boosting wages directly by intervening in the labor markets. Policies that focus on “predistribution,” to use Hacker’s term, include a higher minimum wage, better rules for unionization, curbing the ways that big business uses the government to increase its profits (finance, copyright), as well as a greater emphasis on full employment. Predistributionists argue that additional, large-scale redistribution is politically difficult and fragile, particularly when workers have fewer resources and less organizational strength to demand and sustain it. In the end, though, predistribution and redistribution are likely to complement each other rather than cancel each other out.
The 40-year conservative project to dismantle the welfare state has failed. Ronald Regan couldn’t reduce the size of the government (even his own), and the reactionary plans of George W. Bush and Paul Ryan to privatize Social Security and bleed out public health care have been rejected by voters. The slow-motion implosion of the conservative movement means that an abstract notion of a minimal state with no social insurance is not coming.
As Kenworthy notes, people value insurance more as they grow richer. Insurance provides protection against both the unknown and bad luck. And the welfare state is how social insurance is provided in the United States. As such it will take on a larger, not a smaller, role as our country grows richer. With the promise of health care completing the project of the 20th-century welfare state, liberals need to envision how to meet the needs of a new century.