To cut entitlements, US can look to one of Europe's welfare states

In a rare act of bipartisanship, four members of the US Senate have introduced legislation that would fix one small part of the entitlement mess plaguing the country.

Democrat Joe Manchin of West Virginia, Independent Angus King of Maine, and Republicans Tom Coburn and Jeff Flake, from Oklahoma and Arizona respectively, have put together a plan that would make sure individuals collecting Social Security disability benefits aren’t also collecting unemployment insurance, which is intended only for those able to work and actively seeking work.

While the proposal is not a cure-all by any means, it shows that common sense bipartisanship is possible, even in today’s poisoned political climate. America needs more such initiatives, even modest ones.

One of America’s chief fiscal burdens is the mounting cost of entitlements (Social Security, Medicare, and Medicaid) – an obligation that will only grow larger as baby boomers age. In tackling this problem, the United States should look to what many might see as an unlikely model – the European welfare state, Sweden.

“Usually, U.S. policymakers look to Europe to determine what not to do when it comes to social-welfare policy,” James C. Capretta, former associate director of the US Office of Management and Budget, wrote a few years ago.

But, he continued: “When you are in a hole, the prudent first step is to stop digging, and the United States can indeed gain insight into how to ‘stop digging’ the entitlement hole” by studying the reforms that some European countries have implemented. Most notably, he suggested, we should study what Sweden and Germany did to cut their long-term government pension commitments.

Twenty years ago, Sweden’s economy was on course for a financial train wreck. Sweden acknowledged the source of the problem – an aging population, a shrinking workforce, longer life spans, and a generous pension system that virtually everyone recognized as unsustainable. Then it did the unthinkable: Right and left made common cause to fix the problem.

The first part of Sweden’s story should sound familiar to Americans: The US today is on a similar trajectory. The second part will sound alien: politicians from both sides of the aisle working together to tackle a serious problem.

What did Sweden’s leaders do?

First, let me tell you what they didn’t do: They didn’t attempt to use the consensus on pension reform to launch a broad-scale assault on the country’s social-welfare system. Too often in our own country, ideologues on one side or the other approach reform as an “all or nothing” fight to the death. Sweden didn’t go there.

Sweden also didn’t go in the opposite direction: Defenders of the social-welfare system didn’t circle the wagons and declare blanket opposition to change, as certain US politicians and organizations are wont to do.

Sweden’s politicians recognized the challenge facing the country and devised a long-term practical solution. That solution involved several elements, including partial privatization, a gradual increase in the retirement age, and automatic reductions in the guaranteed state pension, adjusted annually to reflect increases in longevity.

Part of Sweden’s success story was also the recognition, as Swedish Finance Minister Anders Borg told The Economist magazine recently, that “if you want to run a big welfare state,” you need to have a strong balance sheet, running surpluses in good times.

Of course, the ideological divide in the United States in many ways is at the root of gridlock in Congress. Yet, according to a new McClatchy-Marist poll, released just yesterday, 65 percent of adults want government officials to compromise to find solutions.

With the Census Bureau predicting a near doubling of the over-65 population in the US between 2005 and 2030, from approximately 37 million to 70 million, Washington doesn’t have much time to waste before acting.

The median age in the United States is already just over 37 years, with some 14 percent of the population over 65. While Sweden is further along in its population aging – with the median age over 42 and about 20 percent of its population over 65 – the US is heading in the same direction. So the time to fix the big entitlement programs is now.

Washington has tried before and failed due to powerful special interests and fractious partisan politics. But the Coburn-Flake-King-Manchin initiative shows that cooperation on these issues is possible.

If the senators are successful with their modest proposal, they may move on to bigger things. Let’s hope they do – and that more lawmakers join them. While combating abuses of the unemployment and disability programs is a far cry from the kind of large-scale entitlement reform that Sweden successfully tackled, it’s at least a start. Success here would give Congress something to build on. The future health of the American economy may depend on such successes.

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group and co-author, with Justin Rose and Michael Zinser, most recently, of “The US Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback.”