A bolder plan would freeze benefits more broadly so middle-class retirees in the future got checks with the same inflation-adjusted value as today’s middle-class retirees. The bigger the savings, the more room there would be for another progressive change to the program: raising its minimum benefit so it serves as a guarantee against poverty.
Where Social Security could be improved by changing its benefit formula, Medicaid needs an overhaul of its basic federal-state structure. States get more federal money the more they spend. This has several bad effects. Affluent states can afford to spend more, so they get a disproportionate share of federal dollars. And though the structure is supposed to strengthen states, it also sets them up for budget crises. During boom times, state officials can expand Medicaid for their own voters while knowing taxpayers in the rest of the country will foot most of the bill. (The feds offered an even better deal for states to expand the program as part of the Affordable Care Act, which explains why most of them took it and the holdouts have been folding one by one.) When there’s a bust, cutting those benefits back is a losing proposition. The officials have to inflict more than $2 of pain on the state’s voters to save $1 for state budgets.
Federal funding also distorts state budget decisions in another way: It makes spending an extra dollar on Medicaid more attractive to state policymakers than, say, spending more on education. Even if much of the Medicaid expansion just takes the place of private health insurance, the state will still come out ahead with federal dollars. And states have proved adept at gaming the system, padding their costs to get more from the treasury.
The latest proposal for a less perverse funding structure for the program comes from Chris Pope of the Manhattan Institute, a conservative think tank. He would have the federal government directly fund all of the Medicaid benefits it mandates, give states a capped allotment for long-term care and let them raise and spend their own funds on any additional benefits. Much less of the program’s spending would involve one level of government paying for decisions made at another level.
To pursue this change to Medicaid, though, Republicans would have to get over the bad habit of confusing the current funding arrangement with the federalism they revere. They now have a partisan interest in reform they did not before: It would mean that fewer federal dollars went to blue states and more to red states.
To make either Medicaid or Social Security more progressive, Republicans would also have to overcome their instinctive belief that “redistribution” is the worst thing about the welfare state. These reforms would make these programs more effective at taking from higher earners and giving to lower earners and thus make the government more redistributive.
If that makes the government better at serving its broadly supported goals and cheaper at the same time, that ought to be fine. Entitlement reform can be progressive and conservative, too, if we want it to be.
