The $10,000 Question

GENERIC retirement nest egg economy
This column was written by Jonathan V. Last.
"ENTITLEMENT REFORM." Few words in the English language make readers turn the page faster.

So let's begin this way: How would you like it if, after you turned 21, the federal government cut you a check for $10,000, every year, for the rest of your life?

If that sounds intriguing, then Charles Murray has gotten your attention.

Entitlements — Social Security, Medicare, Medicaid, welfare, agriculture subsidies, corporate welfare, and the rest — eat up $1.38 trillion of the federal budget today. That's bad enough, but it's getting worse. Because of our rapidly aging population, by 2020, entitlements will cost roughly $2.6 trillion. It is an unsustainable situation. Either these entitlements will be gutted or taxes will rise so steeply that they strangle the economy. Something has to give.

Murray, an American Enterprise Institute scholar, has a solution.

In his new book, "In Our Hands," Murray offers what he calls "the Plan": Halt all government entitlement programs and redistribute tax money directly to citizens. The Plan is elegantly simple. When you turn 21, you begin receiving monthly income from the federal government — deposited directly into your bank account — that totals $10,000 a year. This grant keeps coming, month after month, until the day you die.

Not everyone gets to keep the full $10,000. Once your salaried income hits $25,000, the size of your grant diminishes gradually until those making above $50,000 get only $5,000 a year. The only condition is that you not be in jail — once you're out of the pokey, you get the money.

Murray's main objective is to provide better retirement benefits for less money. On this count, his Plan is attractive. Consider a low-wage worker making $20,000 a year. By investing $2,000 of her grant every year in a conservative index fund, and assuming a 4 percent return on her investment (the lowest rate of return ever recorded over a 45-year period is 4.3 percent; the average is about 7 percent), our worker would have a $253,000 nest egg when she retires. The income from that investment, plus the continuing $10,000 grant, would give our worker a post-retirement, yearly income of at least $30,500. Under the current regime, a similar worker would get about $11,000 a year in Social Security benefits.

Another goal of Murray's Plan is to expand medical insurance while controlling costs. To do this, he proposes some radical reforms of the health-care system, with the result that people pay for their own health insurance, which becomes, like auto insurance, mandatory. Murray's conservative assumptions peg insurance costs for an individual at $3,000 per year, which could be automatically deducted from people's bank accounts.

The Plan is simple, but not without complications. Implementation would require a constitutional amendment and what would amount to a national ID card. Altering the health-care system might be easy compared with the logistical difficulties of disassembling the welfare state — all those government workers would have to get jobs elsewhere.

And then there's the matter of unintended consequences. Who knows what ripples might result? For instance, if government student-loan programs are done away with, college costs should fall as the price structure loses elasticity. That's a good thing.

Even better is that the Plan could encourage family formation, particularly at lower socioeconomic levels, where it is desperately needed. However, the Plan also gives two-income families incentives to keep both parents in the workforce — which some of us find disconcerting. And it might well discourage having children. As Murray notes, "Under the Plan, having a baby is pure economic loss." American fertility rates are already dangerously low.

But the math is seductive. If we were to implement Murray's Plan tomorrow, it would be slightly more expensive than the current entitlement system — $355 billion more expensive. But the beauty of the Plan is that it is essentially a steady-state model. By 2011, our current entitlement system will cost just as much as Murray's Plan. By 2020, it will cost $549 billion more.

Before you dismiss the Plan as an academic exercise, know this: In 1984, Murray wrote the book "Losing Ground," which advocated a massive overhaul of the American welfare system. Those ideas became a reality just 12 years later.

"Losing Ground" was the first major work to postulate that the welfare system institutionalized poverty instead of ameliorating it, as was its intent. Murray argued that this was a logical outcome of the system itself and that, to combat poverty, welfare would have to be redesigned to build in incentives to work. Thanks to the Clinton administration and the GOP Congress, that indeed happened. Eventually the American entitlement system will change, too. Murray's Plan deserves serious scrutiny and is, at the very least, an excellent place to begin the conversation.

Jonathan V. Last is online editor of The Weekly Standard and a weekly op-ed contributor to the Philadelphia Inquirer. This essay originally appeared in the April 2, 2006 edition of the Philadelphia Inquirer.
By Jonathan V. Last