State of the Union: Redefining Domestic Policy by Addressing Market Challenges

Commentary by Pete du Pont

State of the Union addresses give presidents an opportunity to offer their vision for the country. Unlike President Bush's first state of the union, this address undoubtedly will be equally weighted towards meeting the challenges we face at home and abroad. Here's a suggestion for what he should say about some of the challenges facing us here at home.

Today's challenges are tied together by a single word - markets. Whether it's the need to stimulate the private capital markets to get the economy moving again, or it's creating and expanding markets to save our troubled elderly entitlement programs and health care system, focusing on markets is the key to a brighter future.

The nation's economy is in a slump. It's imperative that we enact policies that will stimulate economic growth. Growth is what creates jobs, raises incomes, and makes better goods at lower prices.

But let's be clear - the economic slowdown began with the bursting of the stock market's tech bubble in the late '90s, and the recovery is weakened by the continued bearish markets. The President needs to clearly explain that the state of the stock market is not a rich man's problem, especially with 35 million investor households. When the market declines, consumers spend less, retirement savings are drained, businesses cannot raise money for expansion or new ventures, and state governments lose large amounts of revenue. Ending the double taxation of dividends would help solve all these problems by reducing the cost of equity and growing the market.

That's the short-term challenge. In the long-term, however, the economy is challenged by the looming crises facing Social Security and Medicare. When the Baby Boomers start retiring within the next decade, payroll taxes will no longer be sufficient to fund all the benefits promised. By 2075, when today's newborns will have retired, Social Security's debts will total more than $25 trillion.

This is the reason many experts advocate the creation of personal retirement accounts. Younger workers would be allowed to set some money aside to be invested in real assets, which will earn a market rate of return over the worker's life. These accounts would pay a portion of the worker's Social Security benefit at retirement. If we had implemented this idea 35 years ago, people retiring in 2002 would have earned an average annual rate of return of 7.3 percent.

As challenging as Social Security is, the crisis facing Medicare is more challenging and more urgent. First, Medicare is also partially funded by dwindling payroll taxes. Therefore, it will also run out of sufficient funds to pay full benefits in about a decade.

The second problem is not that Medicare fails to cover prescription drugs. This failure is merely a symptom of the real problem. Despite its popularity, Medicare violates almost all principles of sound insurance. In fact, seniors are the only Americans who have to buy a second health plan just to fill the gaps in the first. This is partly because, unlike private insurance, it literally takes an act of Congress to change what Medicare covers.

The solution? Grant seniors the freedom to use their, and our, money more efficiently. According to an NCPA study by the actuarial firm, Milliman & Robertson, Inc., seniors could have access to the same kinds of insurance as everyone else if the amount Medicare spends on the average beneficiary each year were combined with the amount seniors are already paying for the most popular medigap policy.

Yet the private health insurance market is not exactly a panacea, some might argue. And they would be right. Too many people are uninsured, and those lucky enough to have insurance are often trapped in a managed care plan that refuses to pay for needed treatments.

The solution is two-fold. We should offer a refundable tax credit for the purchase of health insurance. This would level the playing field between those who have employer-provided insurance and those that don't.

Second, the government should encourage the growth of Medical Savings Accounts, Flexible Spending Accounts and Health Reimbursement Accounts. These accounts would solve many of the problems a patients' bill of rights is intended to regulate, by enabling patients to pay for services previously denied by their health plan. And by empowering patients to be better consumers of care, wide-spread use of these accounts will help drive down overall health care costs.

By focusing on stimulating and expanding our marketplace, President Bush can redefine domestic policy in much the same way he has redefined our foreign policy.