Number 14
in Series, "The Future of the Public Sector"
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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Americans have always been ambivalent about government, but in recent years
we have become alarmingly estranged from it. There are three reasons for this
shift in attitude:
First, we feel that the government
is not responding to our current needs. It is busy, even meddlesome, but increasingly
removed from today's real conditions and concerns.
Second, for years now it appears
as if the primary job of government is not governing, but management of the
deficit or of a temporary surplus. The deficit is merely what is left after
public expenditures are subtracted from public revenues. Third, we have come
to believe that much of the information disseminated by the news media and elected
representatives is unreliable.
People feel that they have lost ownership
of their government (figure 1), and this feeling has persisted
even during recent periods of sustained economic growth. Reclaiming ownership
will be a long and arduous process requiring that we develop ways of comparing
the relative needs and opportunities of today's citizens, create more flexibility
in the budget by setting reasonable limits on yesterday's commitments, and restore
a political process that informs and empowers citizens rather than merely panders
to their special interests. The following are eight pathways to a government
more attuned to current and future needs. They do not make up an entire domestic
agenda for the nation, but they do present a comprehensive approach to restoring
the ownership of government to citizens and developing a more dynamic public
sector.
Free Our Fiscal
Future
The impending retirement of the baby
boom generation threatens to overwhelm the federal budget. In fact, under a
current unsustainable law Social Security and Medicare are expected to consume
almost all federal revenue by the middle of the next century. Often narrowly
construed as the "Social Security problem," this fiscal straitjacket is the
inevitable outcome of creating programs that are scheduled to grow indefinitely
without any legislative action. If we are to free ourselves, we must do more
than control future deficits. Figure 2 shows that today's
temporary surpluses are relatively small, especially when compared to the deficits
projected under current law. However, even if projected deficits were zero for
decades to come, our fiscal future would still be ensnared in the extraordinary
commitment to spend ever-increasing amounts of revenue on programs that respond
to past priorities.
This commitment grew up during an
unprecedented period in our nation's history. From 1947 to 1973, it was possible
to enact new legislation that benefited people through expanded domestic programs
and reduced taxes. The sources of funds for these programs were largely hidden,
but perhaps most important were the peace dividends after World War II, Korea,
Vietnam, and the Cold War. Unfortunately, people came to expect that domestic
spending could always grow faster than the economy and that it could do so without
higher tax rates.
Programs with built-in growth have
become more and more dominant over the past few decades, gradually taking ownership
of government away from the people and their elected representatives. While
it can be argued that we can always enact new laws to slow growth, this argument
ignores the cost of reneging on past promises and the extra costs incurred when
new or discretionary needs are not allowed to compete for funds on an equal
footing with these entitlement programs.
The first step, therefore, is to
create some slack in the budget by curbing the automatic growth of current programs
and reducing the competitive disadvantage that new or discretionary programs
now face in the legislative process. At the very least, we can prevent any program
from growing faster than the economy and deny any program eternal exemption
from the legislative process, whether on the expenditure or the tax side of
the budget. While Congress cannot reconsider every program every year, all "permanent"
programs could automatically come up for review or renewal every 5 or 10 years,
on a staggered basis, to ensure that they reflect citizens' current priorities.
Creating a system with greater fiscal slack does not necessarily mean fewer
expenditures-this is a separable issue-but it does allow more decisions to be
made by future generations in response to their own needs.
Give Social Insurance
a Modern Face
Redesigning social insurance requires
us to move beyond a simple focus on budget to a comprehensive reassessment of
the relative needs of all Americans. We must decide collectively whether providing
a 16th or 17th year of retirement should really be a national priority just
because built-in growth has made it one. In addition, neither Social Security
nor Medicare has ever been adjusted for increasing life expectancies, nor has
either been adjusted adequately for the changing demographics of the population-specifically
the movement of the baby boom generation through the life cycle.
There are three reasons for the automatic
growth of Social Security: (1) increased annual benefits; (2) more years of
retirement support, because people are living longer and often retiring earlier;
and (3) the decline in the birthrate, resulting in fewer workers available to
support an increasing number of retired people. Nowadays, people retire for
close to one-third of their adult lives and receive benefits for 17 to 20 years.
If this trend continues, the ratio of workers to retirees will decrease from
3 to 1 today to less than 2 to 1 by 2030. This decrease will mean that benefits
relative to income can be maintained only if tax rates increase by 50 percent;
alternatively, tax rates can be held steady only if benefits are cut by one-third.
Since Social Security policy is unlikely
to increase birth rates, much of the growth in Social Security will have to
be controlled by limiting the growth in annual benefits and curtailing the number
of years of retirement support promised to future retirees. The latter measure
limits both tax rate increases and cuts in annual benefit rates because it simultaneously
decreases the number of Social Security beneficiaries and increases the number
of taxpayers. A necessary consequence of improved health and longer life should
be an extended contribution to the work force, as opposed to constantly placing
additional burdens on future generations.
A modern social insurance system
should also foster more private savings, whether through mandates, taxes, or
tax subsidies to employers. This is not an argument for pure privatization,
since most of these plans to date ultimately transfer large burdens back to
the government safety net, but some interdependence of public retirement and
saving policies is necessary for the future.
Controlling health costs is more
complex because the current reimbursement system contains incentives to increase
the cost and use of services almost without limit. Tax policy further encourages
excessive consumption of health insurance by exempting all employer-provided
health benefits, no matter how generous, from Social Security and income taxes.
Therefore, in addition to rethinking who should receive health care benefits
and for how long, public health insurance reform requires restructuring the
way health care services are financed and delivered. Reform in this area has
begun, but it still faces the challenge of ensuring basic equity as the attempts
to control costs expand.
Make a Government
for All Ages
If an average-income couple retiring
today walked into an insurance company, they would have to pay about $500,000
up front to receive the equivalent of the Social Security and Medicare benefits
they are now promised. That amount is scheduled to increase significantly every
year into the future. A government for all ages would put retirement and health
programs in the context of other social needs, including education and opportunities
for accumulating wealth. It would also redirect retirement policy toward the
elderly with the greatest need, such as the very old. We should look at what
society is distributing to whom and move toward matching resources with greater
relative needs.
This does not mean that society should
ignore the elderly-far from it. Despite the expected growth and tremendous redistribution
of benefits, the United States does only a mediocre job, relative to other industrialized
nations, of keeping the elderly out of poverty. It is even worse at protecting
widows and widowers or people over 85. To meet the needs of the truly poor among
the elderly, survivors' benefits must be redesigned, and Medicare programs such
as home health care must be approached as a reasonable response to the increasing
geographic separation of generations.
Making a government for all ages
requires not a one-time policy change, but a commitment to continually reevaluate
relative needs and respond appropriately to emerging circumstances. It requires
each of us to look less myopically at benefits for our current age group and
more farsightedly at how public programs might best serve each citizen over
a lifetime. Since cutting benefits across the board makes no sense and overall
growth in benefits must be controlled, we must continually review the mix of
benefits provided and constrain automatic growth in programs in order to have
sufficient resources for the emerging needs of all citizens, including the elderly.
Improve Everyone's
Chance to Build Financial Security
By creating opportunities for accumulating
assets, especially among the most disadvantaged, society can give everyone a
greater stake in the future. At the same time, distributing the ownership of
wealth more widely has the immense advantage in a democracy of equalizing power
among races and classes.
Simple redistribution of income does
not create wealth. In fact, paying out cash or in-kind benefits actually discourages
saving and wealth ownership among beneficiaries. Wealth creation is more difficult
and takes longer to achieve. However, by creating incentives for saving that
emphasize wealth creation, government can help people build financial security.
Our government has long been involved
in encouraging the creation of wealth through home ownership and private pensions.
At one time, these policies served as an equalizing force, but their momentum
has undoubtedly slowed and may have stagnated. Continuing to focus government
policies for wealth accumulation on these areas makes sense because together
they constitute over half of the total private wealth of all families, and they
dominate the private assets of families in the bottom half of the income distribution.
Current housing policies to assist
the poor focus on rental subsidies and public housing. This focus, as well as
the many limits on wealth associated with determining eligibility for other
assistance programs, discourages people from buying homes. Housing policy needs
to be reoriented so that people at the bottom of the income distribution can
receive at least as much in subsidies for home ownership as they currently receive
for rent or public housing. There has been a little progress in this direction
recently. We also need to move toward programs, such as vouchers, that are more
portable across jurisdictions for those seeking work.
While the government has attempted
to encourage ownership of wealth through tax incentives for pension plans, it
is clear that the current system will not create the hoped-for expansion in
pension coverage for the majority of retirees. Despite progress in increasing
pension wealth, there remains a significant gap in coverage between highly compensated
employees and other employees. The reform of private pension policy should fall
in line with Social Security reform, especially given the inevitable paring
of growth rates for public benefits. Possible changes include mandating contributions
to individual accounts for retirement or providing government matching funds
for private savings, especially for people with lower incomes.
Invest in Learning
over a Lifetime
Even more important than ownership
of physical capital is education-the ownership of human capital. Lifetime learning
is the key to developing and maintaining the human capital necessary for advancement
in a modern economy that richly rewards both knowledge and education. Therefore,
it is important not just to extend formal educational opportunities backward
and forward, but to improve education at all stages of life, from early childhood
through old age.
The need for early childhood education
is intensified by the changing structure and needs of the American family, as
well as by the new requirement that women on welfare, including those with infants,
work. There is increasing evidence that having constructive contact with adults
from birth is essential for a child's healthy development and for many other
positive social outcomes, ranging from academic success to fewer out-of-wedlock
births to higher earnings. Despite substantial public and political support,
still more needs to be done to decrease teacher turnover, increase accessibility
to high-quality educational programs for all children, and incorporate parents
into the structure of educational programs so that the programs complement the
home environment.
A larger and more complex issue is
the viability of the current K-12 education system. The considerable disparity
in educational opportunity by income and school district is exacerbated by the
link between education and lifetime earnings in our economy. A society that
stresses opportunity must increase choice and innovation. This requires that
we evaluate and ensure quality in schools-not simply by throwing more money
at the old system, but by directing our resources to changing social needs.
One component of improved quality is better teachers, yet paying teachers more
will not in itself improve quality. We must simultaneously raise standards for
teaching and provide the necessary structure within schools for teachers to
excel.
The need for continuing education
for adults is driven by three developments in our society. First, the rapid
changes inherent in a technological society require adaptability and opportunities
for learning new skills. Second, real earnings for low-skilled workers have
declined and competition for their jobs has increased; at the same time, companies
have had trouble finding qualified workers in other areas. Finally, the concentration
of educational resources at one end of the age spectrum no longer makes sense
for a society in which people are living longer and the market is requiring
updated skills. Continuing education is essential if society is to reap maximum
productivity from an aging workforce.
Increase the Amount
of Time Children Spend with Adults
Public resources for young people
are centered on a six-hour school day for nine months a year-a timetable built
around the stereotypical farm family. Because of the many changes in family
life, including the large growth in single-parent families and two-earner couples,
children are increasingly left on their own after school and during summer breaks.
The statistics for children during
these times are alarming. Most of the crimes committed by and against young
people take place between 2 p.m. and 7 p.m. on school days. In addition, children
who are left alone after school report high levels of boredom and loneliness
and are exposed to excessive television viewing. There is even some evidence
that children's differences in educational achievement by economic and social
class result partly from differential access to out-of-school time in supervised
enrichment or extracurricular activities, and that the drop in knowledge that
occurs over long summer vacations disproportionately affects children from low-income
families.
Providing longer school days or
years is one option for increasing the time children spend with adults; extending
extracurricular or work opportunities during after-school hours is another.
Much of the responsibility for engaging young people will fall on private programs,
but government must do its part by recognizing that the conventional school
schedule is far from meeting the needs of school-age children or the demands
of the modern workplace. Government programs must address and accommodate the
fundamental need of every child for adult supervision, guidance, and mentoring.
Support the Modern
Family
By determining who should benefit
and who should pay on the basis of outdated stereotypes of the family, government
policies lead to work and marriage penalties in public assistance programs,
the tax code, and retirement programs. Through these programs, society creates
very different tax and subsidy rates among families in fundamentally similar
situations and makes strong antiwork and antimarriage statements to significant
portions of the population, especially people in low-income communities. The
importance of these problems is magnified by issues of fairness as well as the
costs, effects on incentives, and damage to our social fabric.
Public assistance programs are targeted
to a very specific segment of the population and are designed to phase out benefits
as incomes rise. The inevitable effect of many uncoordinated phase-outs is a
high implicit tax rate on any additional income, whether earned by working or
by marrying a working spouse. This encourages many people not to work, or to
work without reporting their income, and to avoid marriage. These problems could
be mitigated over time through subsidies that avoid creating unusually high
combined tax rates.
The tax code causes similar disincentives
for marriage and work by heavily penalizing the income of the second earner
in a family where both earners have similar incomes. Another form of discrimination
against second earners comes from a Social Security system that provides significantly
fewer benefits to a two-earner couple that contributes the same amount in taxes
as a one-earner couple. For example, a one-earner couple with annual earnings
of $57,600 will receive $20,399 in benefits while both spouses are alive, and
$13,599 for the survivor after one spouse dies. A couple who earn the same total
and pay the same taxes will receive $18,229 while both spouses are alive and
only $9,155 for the widow or widower. This difference is simply an artifact
of a system designed to meet the need for spousal benefits in a time when most
women did not work.
Foster a New Democratic
Citizenship
U.S. democracy is more open, inclusive,
and rich in information today than ever before, yet our political conversation
is mired in divisiveness and resentment-a tale of what "they" are doing to "us."
This alienation and the general distrust of any information, whether provided
by the news media or elected representatives, has led to cynicism-which, unlike
skepticism, is decidedly un-American. Cynicism breeds apathy about government
and leads individuals to shirk their civic responsibilities. The hard work of
redesigning policy commitments and reallocating public resources requires that
we exercise our collective judgment, and that judgment can only be arrived at
through honest talk about the difficult trade-offs that will underlie these
changes.
In general, trust in government is
established through the day-to-day choices made by individual citizens and politicians.
If would-be leaders are rewarded by citizens for telling the truth about difficult
and complex policies, they will become more truthful and hence more trustworthy.
Improving public trust requires us to design arrangements that will make it
safer for would-be leaders to tell the truth as they see it and easier for citizens
to hear and act on competing truths in a well-informed way. Doing so requires
improving the communications media, nourishing deliberative and thoughtful public
opinion, and supporting institutions that encourage responsible journalism and
civic education.
There are many ways to move toward
these goals. We can improve the communications media by providing a counterbalance
to the powerful commercial incentives to feed passive consumers a steady diet
of simplistic, divisive, and dramatic news. Telecommunications technology now
makes it possible to link cable, telephone, television, and personal computers
in an interactive system that will give voters access to public forums and policy
databases and enable them to exchange views with government officials, candidates,
and each other.
Experiments with "civic journalism"
are treating the public's deliberations about politics and policy as news and
are reconnecting journalists to their communities. Closely linked to civic journalism
is the need to reconsider conventional ways of gauging public opinion; scientists
have already developed some polling methods based on reflection and thoughtful
discussion. Coalitions of watchdog organizations, supported by journalists,
could monitor facts and hold each other responsible for the information they
print.
A new commitment to civic education
is needed, beginning in the schools and continuing into adulthood. Its aim is
to produce "good enough" citizens-that is, ordinary people with a commonsense
interest in practical solutions to public problems. Good enough citizens think,
feel, and act on their own interests in the context of a common public life.
They listen as well as speak, and they accept the premise that their own direct
experience does not provide everything required for making competent judgments.
Getting the Government
We Deserve
Not much can be done to reconcile
citizens and the government-to get the government we deserve-without a concerted
effort to remove the obstacles blocking these pathways. The government we deserve
is not necessarily bigger or smaller, more conservative or more liberal than
the one we have today. Rather, it is one we can use to make choices that will
meet our current and foreseeable needs, one that gives us a justifiable sense
of ownership over public policy decisions.
Real progress will come from understanding
how needs and demands are changing in the economy and in family life, how prior
commitments tie up most new government resources, and how the political process
can be manipulated to deter us from making realistic trade-offs among competing
needs.
Moving forward requires rethinking
our commitments, responsibilities, and decisionmaking process. Only in that
way can we break free of a mind-set that limits our vision of policy in the
year 2050 to a variation of policy in 1950.
About the Authors
C. Eugene Steuerle is a senior
fellow at the Urban Institute. His books include Retooling Social Security for
the 21st Century, The New World Fiscal Order, Serving Children with Disabilities,
and The Tax Decade, all published by the Urban Institute Press. He has worked
under four different U.S. presidents on a wide variety of social security, budget,
tax, health, and other major reforms.
Edward M. Gramlich is a member
of the Board of Governors of the Federal Reserve System. He has also served
as deputy and acting director of the Congressional Budget Office, dean of the
school of public policy at the University of Michigan, director of the policy
research division at the Office of Economic Opportunity, a senior fellow at
the Brookings Institution, and a staff member of the research division of the
Federal Reserve Board. He has written on topics including budget policy, fiscal
federalism, and social security.
Hugh Heclo, Robinson Professor
of Public Affairs at George Mason University, is recognized as an expert on
the government and social policies of western European nations and the United
States and has received awards for books including Comparative Public Policy
and Modern Social Politics in Britain and Sweden. He is a former senior fellow
at the Brookings Institution and the recipient of a Guggenheim Fellowship.
Demetra Smith Nightingale
is a principal research associate in the Human Resources Policy Center at the
Urban Institute, where she is director of the Welfare and Training Research
Program. Her research interests include analysis and implementation of social
welfare programs, especially employment and training programs. She is co-editor
of the recent book The Work Alternative: Welfare Reform and the Realities of
the Job Market (Urban Institute Press, 1995).
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