Putting Our Entitlements in Order

Former Secretary of State George Shultz on Social Security and Health Care Reform

Over the course of his career, George Shultz served as Secretary of Labor and Secretary of Treasury to Richard Nixon and Secretary of State to Ronald Reagan. Shultz's reputation for independence survived the Reagan era, in which he famously opposed the Iran-Contra adventure while maintaining credibility as a committed Cold Warrior. And as a strong critic of the war on drugs conducted by his former bosses (and every other recent American president): In a widely discussed 1989 Wall Street Journal op-ed, Shultz wrote, "We need at least to consider and examine forms of controlled legalization of drugs."

More recently, he retained influence as the senior member of the "Vulcans," a group of policy advisors, including his protégée Secretary of State Condoleeza Rice, who helped identify George W. Bush as a rising political star who could lead the Republicans back to electoral victory in the post-Clinton era. He is still respected within the Bush 43 administration, even if one senses that, as a veteran internationalist, he might have preferred a less Lone Ranger-style of foreign policy.

An ex-Marine, Shultz is discreet about differences he may have with the Bush administration and was incensed at the group of generals and ex-generals who broke ranks not long ago to openly criticize former Defense Secretary Donald Rumsfeld. (One wonders what his reaction will be to the book Rumsfeld is reportedly writing about his experiences in the administration.)

These days, the 87-year-old Shultz hangs his hat at Stanford University's Hoover Institution as the Thomas W. and Susan B. Ford Distinguished Fellow. As befits an elder stateman, he is turning his attention to some of the unsolved problems of our society, especially the looming wreck of federal entitlement spending. In a new book, Putting Our House In Order: A Guide to Social Security & Health Care Reform (W.W. Norton), co-written with fellow Stanford economics professor John B. Shoven, Shultz, outlines potential solutions to the Social Security and health-care messes.

Specific reforms Shultz and Shoven propose include changes in the indexing system of Social Security benefits, so that "the rate of increase over and above inflation is either eliminated or moderated," raising the age at which benefits would start, and creating individual accounts "with the possibility of an additional deduction on a mandatory or voluntary basis." They argue that a "Personal Saving Account plan would transfer a significant part of Social Security payments to a Personal Security Account system in which the amount of benefits would directly reflect the amount of contributions. This plan would likely increase national saving, which in turn would increase national income in the future."

"Reform of these programs will not come easily," Shultz and Shoven write in their introduction. "To touch them, many politicians worry, is to touch a third rail. But well-documented projections of the costs of current programs show that inaction is simply not an option. Progress will be promoted by widespread realization of the depth of the problem and of the fact that workable options exist. In fact, the rigidity and stability of the programs are major parts of the problem. Everything about the U.S. economy is dynamic except its major entitlement programs. To serve their fundamental purposes, these programs must be modernized so that they are suitable for the twenty-first century."

West Coast writer Paul Wilner, whose work has appeared in The San Francisco Chronicle, The Los Angeles Times, barnesandnoblereview.com, and many other publications, talked to Shultz at the Hoover Institution in April. Comments can be sent to [e-mail].

reason: Some people go to Washington and get addicted to life there. But you've chosen to divide your time between San Francisco and Stanford. I guess staying back East was not for you?

George Shultz: When I'm in Washington, I like to be in the action. If I'm not in the action, I'd rather be somewhere else.

reason: You're still very much in the action, even from this remove. It was down here at Stanford, wasn't it, that you and others identified the political potential of the current occupant of the White House?

Shultz: He came here, and we had a nice day.

reason: It was more than a nice day, You helped identify him as a candidate who could successfully carry the Republican torch forward in the 2000 election…

Shultz: (Pause). He won.

reason: Twice. With the help of your protégée, Condoleezza Rice.

Shultz: My other protégé was Ronald Reagan. And Condi's a very good friend.

reason: What's your view of recent history, especially in Iraq? Do you think the current arrangement, with Rice, Defense Secretary Robert Gates and Gen. David Petraeus, is more workable, even just from a purely managerial standpoint, than what came before?

Shultz: They had good arrangements before….

reason: What do you think of the prospect of a McCain-Rice ticket?

Shultz: Well, she's kind of ruled it out.

reason: But if she were to call you for advice on the subject, what would you say?

Shultz: She's very capable and can do just about anything. But she's expressed some interest in returning to Stanford, and that's our expectation.

reason: You were identified in The New York Times recently as part of the foreign policy debate for the heart and soul of McCain.

Shultz: I didn't know I was going to be in that story, but I'm a supporter of his.

reason: Have you had a chance to discuss any of the ideas set forth in this book on health care and entitlement programs with him?

Shultz: I think he thinks of me as a foreign policy person. I saw him recently and gave him a copy of the book, so he may look at it.

reason: The subjects you discuss in it couldn't be more timely. But how do we get these programs under control. How would you rate the positions of the candidates?

Shultz: Clinton's plan, apparently, is to force people to pay for health insurance. Obama says that he thinks the reason many people don't have health insurance isn't that they don't want it, but that they can't afford it. So I tend to agree more with that. Anybody, Republican or Democrat, can adopt some of the solutions we propose. We believe that the Social Security issue can be resolved more readily and that health care will require intermediate steps.

reason: One of the specific suggestions you make is to remove health-care tax exemptions for businesses.

Shultz: We didn't suggest that—President Bush suggested that. We mentioned various suggestions, including that idea, Milton Friedman's plan, and (Democratic Congressman) Rahm Emanuel's plan. Many of the proposals are interesting, but they're quite radical, and we didn't think a radical plan would likely succeed. Social Security is a problem that can be solved. There are various ways to do it. But it ought to get done. Nevertheless, the health of the system depends on other factors. The bigger the economic pie, the easier it is to cut a slice from it.

reason: The argument being made by Elizabeth Edwards and other critics of Obama and McCain's plan is that if everyone isn't covered, the costs will just be passed on to consumers.

Shultz: We have a lot of history that if you order people to do something, it doesn't work out very well. Remember Prohibition?

reason: Yes, but there's also the history of the creation of Social Security and of Medicare, where people can't opt out of paying into the system.

Shultz: When Franklin Roosevelt created Social Security, in his wisdom, he said that the one thing it should not be is a welfare program and that we couldn't afford such an approach. We keep borrowing from the Social Security trust fund—the politicians can't seem to keep their hands off it.

We favor subsidizing existing spending, providing benefits for people 65 years old and older regardless of sex or prior medical conditions. But that's different from saying to you, if you're a healthy 25-year-old, that you have to buy insurance for everything. They want insurance against a catastrophic event—they don't want to cover acupuncture, or wigs, or all kinds of things that make it more expensive. So how do you bring that about? Provide an insurance policy for the 25-year-old that makes sense. I'm 87 years old. I don't want the same policy as a young man; I'm in a different position.

reason: So as a free-market advocate, you think competition would get costs down?

Shultz: If you're mandating things to people, you won't get lower costs.

reason: You and Shoven are at some pains to say you want to preserve the safety net by taking incremental steps.

Shultz: It's incremental, but it's bold—we have a lot of suggestions.

reason: You mentioned President Bush's efforts in this regard, but his attempts at reform came up against a stone wall of resistance.

Shultz: As did President Clinton's. There's a bipartisan recognition that this is a problem that needs to be solved, and a bipartisan recognition of the resistance to solving it.

reason: If the federal government won't do it, what about local communities? What do you think of Gov. Schwarzenegger's and Mayor Newsom's health-care proposals?

Shultz: We know and like them both. The governor's proposal hasn't gone anywhere, so there's no need for me to talk about that. What's interesting about Newsom's proposal is the idea of clinics where ordinary health care needs can be addressed inexpensively.

reason: As you watch the deficit increase—along with the costs of funding the war—is your feeling one of, "A plague on both their houses?"

Shultz: I haven't seen any lack of appetite for more domestic spending programs. The last time anything substantive got accomplished [on Medicare reform] was when two Irishmen [Reagan and Speaker of the House Tip O'Neill], who didn't agree on much else but knew this was a big problem, could get together over drinks and work to help fix it and get the changes through Congress.

reason: You mentioned Prohibition—I know you've taken a somewhat controversial stand for the legalization of recreational drugs.

Shultz: I don't think of them as "recreational." They do enormous harm, and we should do everything we can to prevent people from taking them. But the current system isn't working.

reason: You write in Putting Our House in Order about the successes of our economic system. As you point out: "Over the last 150 years, the U.S. economy has become increasingly stable. The economy was in recession nearly 45 percent of the time during the last half of the nineteenth century, 33 percent in the first half of the twentieth century and 16 percent in the last half of the twentieth century. In the post-World War II period, the occurrence of down quarters has diminished sixteen in the years between 1946 to 1965 to fifteen from 1966 to 1985 to just five since then. Meanwhile, even as the economy has grown to Herculean size, its rate of growth has continued to be robust."

Despite the threats of terrorism, entitlement costs and the current downturn in the economy, are we better off today than we were 20 years ago?

Shultz: The economy has been very successful, but there are other problems, so we have to work on them.

reason: Are entitlements a bigger problem than terrorism?

Shultz: I don't see how you get very far by comparing them. Terrorism is a gigantic problem.

reason: Which is a greater threat to our way of life, though?

Shultz: Well….Entitlement spending is something we have to face up to.