A Subsidy for Dignity

A successful idea from Europe can make eldercare more affordable—and provide well-paying jobs—as the boomers approach retirement.
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In the aftermath of the Great Recession, the United States may be afflicted by high levels of unemployment for years to come. Compounding the challenge to public policy is the fact that many jobs in many sectors will never be restored, either because they depended on debt-enabled demand during the bubble economy years, like many jobs in finance, real estate, and construction, or because they are vulnerable in the long term to offshoring or automation.

At the same time, the aging of the American population will create growing demand for personal services, including but not limited to medical care. About a fifth of the U.S. population will be older than 65 by 2050. For this reason, social assistance and health-care services are set to be the fastest-growing sectors of our economy for the next decade.

If labor markets were as frictionless as they are assumed to be in the ideology of free-market fundamentalism, labor would flow easily from labor-shedding sectors like construction to sectors like eldercare, where labor is in growing demand. In the real world, however, this doesn’t really happen organically. It takes intelligent public policy to direct, accelerate, and smooth such historic transitions.

In today’s polarized, unequal America, in which a small minority has enjoyed many of the gains from economic growth in the last generation, a disproportionate share of service-sector job creation may come in the form of luxury services for the rich few. This inflates the number of maids, nannies, pool boys, and other servants in the workforce. At the same time, on the demand side, growing numbers of middle-class and poor Americans might find themselves unable to afford the kind of personal assistance that would enable them to stay in their homes and function normally as long as possible in old age.

Economists have long identified a category of “merit goods”—goods that citizens in any society need in order to live according to widely shared conceptions of dignity but are undersupplied by the free market. While Medicare, Medicaid, and other programs already provide the merit good of affordable health care to the elderly and the poor, a case can be made that non-medical personal assistance for the elderly should be defined as a merit good as well. The elderly need assistance in performing daily, non-medical activities, such as bathing, dressing, eating, getting in and out of chairs, walking, using the toilet, using a telephone, preparing meals, shopping, managing money, and other housework. Currently, an informal care market largely serves their needs: An estimated 43.5 million American adults play the role of unpaid part- or full-time caregiver. This gray sector represents millions of potential jobs, foregone contributions to Social Security and Medicare for individuals, and unknown losses in tax revenues for local and federal governments. Eldercare also contributes an estimated $33.6 billion in costs to businesses per year in lost worker productivity, as middle-aged employees rush off work in emergencies to care for their parents, and an additional $13.4 billion in increased health-care expenses due to increased stress for working caregivers.

Public policy also has a role in correcting another market failure: inadequate compensation. It is seldom pointed out that the creation in recent years of a huge group of the “working poor” in many unskilled or semi-skilled service-sector jobs has been indirectly enabled by programs of the welfare state, like food stamps or wage subsidies in the form of the earned-income tax credit. These programs allow workers to work in jobs that pay wages that are inadequate for minimum subsistence—jobs like store clerk and gardener. In practice, conservatives as well as centrists have long accepted a role for government in “topping up” low market wages with a “social wage” of some kind. Why not address the challenges of unemployment and of aging by subsidizing private-sector jobs with decent wages for workers who specialize in assisting the elderly? It is possible for the government to subsidize private-sector eldercare jobs while boosting the ability of the non-rich elderly to pay for non-medical personal services. We propose here a policy innovation that has worked well in other, similar democracies: service vouchers.

Service Vouchers: A Proven Success

This is how a service voucher works. Individuals who qualify receive vouchers from the government that they can use to employ workers for domestic service tasks such as shopping or housekeeping for nothing or a modest fee. The service workers must be employed by a certified company. The government subsidizes the employer so that the worker receives a decent wage that is the sum of the voucher user’s payment plus the government subsidy.

Service-voucher programs have been successfully implemented on a national scale in a number of European countries, including Belgium, France, and Sweden. These programs were created to stimulate both formal sector employment and “consumer directed” household and personal care for the non-elderly and elderly alike. Family caregivers can choose to work full time or remain as a caregiver, but in the formal sector. Belgium, for example, started a federal program in 2004 that offered subsidized vouchers (titres-services) for domestic services, to be redeemed with government-accredited companies. Individuals living in Belgium can purchase 750 tax-deductible vouchers (each voucher is worth one hour of service) per calendar year, or 2,000 if they are disabled, have a disabled child, are elderly, or are a single parent. The cost of the service is split between the user (who pays about one-third of the cost of the service after taxes by purchasing the voucher) and the government, which pays about two-thirds of the cost of the service through two routes: tax deductions to the user and direct reimbursement of costs to the service provider.

Belgian service workers in the program have a “service vouchers employment contract,” allowing them to accrue social-security rights and making them eligible for other benefits, such as workers’ compensation. This is important, as two-thirds of workers in the Belgian program identify leaving the gray market as a motivation for their participation. Evaluations of the Belgian voucher program lend insights about costs and cost-offsetting. About 40 percent of the program’s costs to the Belgian government are offset by reduced government spending on unemployment benefits and other welfare subsidies, additional social-security contribution revenues, and additional personal-income tax revenues. This calculation does not take into account the value of other positive effects, such as improved productivity and health of workers with fewer care-giving pressures and a better work-life balance, the social benefits of formalizing the gray market, and the improved health and self-esteem that comes with decent employment.

In France, the CESU Social (Chèque Emploi Service Universel, or Universal Services Employment Vouchers) is a national voucher program implemented by local and regional governments. CESU Social was created in 2005 to promote formalization of the personal-services sector, 60 percent of which is estimated to be undeclared in France. Vouchers can be used for the direct payment of workers or for workers hired through companies for housework, assistance for the elderly, disabled, or dependents (including children), help with schoolwork, household and gardening work, and caretaking.

Recipients of social-security benefit programs (including the elderly) receive a personal CESU card (CESU préfinancé) with a pre-paid amount on it, redeemable only for specific services. The recipient uses the card to pay for services, the service provider is reimbursed by the local government (often via a private management company), and the local government pays the social-security contributions owed by the service provider if the service provider is an individual. Incentives to join the scheme include reduced value-added tax rates and subsidized social security contributions (on services provided to the elderly) for businesses providing CESU Social paid services; a 50-percent tax credit on spending on CESU Social services for private individuals; and for self-employed service workers, exemptions from employer public-pension contributions on CESU Social service payments.

In Sweden, where more than 70 percent of eldercare was estimated to be informal, the government introduced a voucher system in 1993. To receive care, municipalities first carry out a needs assessment to identify services to be delivered to the elderly person. Then users receive a virtual voucher redeemable with approved public or private providers for the identified services. The result is that users of eldercare services pay about 4 percent of the costs while 80 percent is paid for by local taxes, and national taxes contribute about 16 percent of costs. Local governments thus enjoy significant independence in how they provide services. However, the national government has placed caps on the maximum amount users pay for services (whether they are publicly or privately provided) and enforces financial sanctions upon municipalities that fail to ensure services are provided.

The Need in America

Currently, nothing like a service-voucher program exists in the United States. The Community Living Assistance Services and Support (CLASS) Act, initially created as part of the 2010 Affordable Care Act, would have provided for in-home services like help in dressing and bathing, but was extremely restrictive, with eligibility limited to disabled individuals. Unlike service-voucher programs, the CLASS program was a voluntary insurance program funded by premiums paid by beneficiaries. Perhaps lending credence to claims that such a plan would be unsustainable, the Obama Administration last October announced that it was scrapping the CLASS initiative because of concerns that it would be too costly for participants.

At the state level, the most closely related program might be Oklahoma’s ADvantage Program, which provides both medical and non-medical assistance to Medicaid-eligible elderly, and allows care recipients to choose the care providers from a list of private, state-certified companies, which are reimbursed by the state.

Instead of service vouchers, the United States has “respite care” programs that provide relief to family caregivers with money channeled to states through the enactment of the National Family Caregiver Support Program (NFCSP) under the Older Americans Act Amendments of 2000. These programs simply offer respite vouchers for family caregivers, giving the person a chance to hire another caregiver and “take a break.” California, for example, has a statewide program offering caregivers vouchers of up to $3,600 per year in respite care, allowing families to choose respite providers.

While respite care programs are worthwhile because of their focus on family caregivers, they will not help the growing number of childless Americans in their old age, nor will they help those who live far from children and relatives and receive no care at all from them, or adults who must work instead of caring for their parents. In contrast, a service-voucher program could be designed to be open to all elderly Americans, whether they have family caregivers or not.

But if we’re seeking to increase government involvement in the provision of non-medical eldercare, why not just have public employees do the tasks directly, instead of a system of public subsidies for private service workers? In theory, public workers can do the job, of course. But one benefit of a service-voucher system is that it reduces the need for people to leave their homes for institutional care. Moreover, the idea of a public home-care service is manifestly unpalatable. Even the social democratic countries of Northern and Western Europe have opted for public subsidies for privately provided home care instead of creating legions of public maids and public yard workers assigned to individual households.

Moreover, service vouchers would also have another economic benefit. If introduced to the United States, they would provide policy-makers with a valuable and flexible tool to supplement, not replace, the earned-income tax credit (EITC). This would mark an advance, for several reasons. One is the over-reliance of American public policy on the EITC as a tool for raising the incomes of the poorest Americans. The EITC is a federal income tax credit for low-to-moderate income workers. The tax credit is refundable, meaning that the government pays money to supplement the wage income of workers whose incomes are so low that they do not pay income taxes. Most economists agree that the EITC works best in smoothing out the income of workers with limited or interrupted labor-market participation. But with the support of Republicans and Democrats alike, the EITC has also been greatly expanded as a substitute both for in-kind benefits, which are unpopular with the American electorate, and a higher minimum wage, which is opposed by most conservatives and many businesses. Over-reliance on the EITC may be good politics, but it’s bad policy.

The EITC suffers from other design defects as well, especially when it is diverted from its best use in helping workers with intermittent work records and turned into an all-purpose tool for raising incomes at the bottom of the labor market. Like other wage subsidies, including service vouchers, the EITC indirectly subsidizes the employers of low-wage labor, even as it directly subsidizes low-wage workers. As presently designed, the EITC has no limits on what kind of employers receive tax subsidies. The EITC can subsidize workers who help elderly people shop or keep their homes clean. But it can also subsidize non-union workers toiling in sweatshops or armies of menial servants laboring on the estates of billionaires. A service-voucher program avoids this problem by strictly limiting the kinds of jobs that are subsidized. Shoppers for the elderly, yes; pool boys, no. Service vouchers have another advantage over the EITC program, as well as over other kinds of general wage subsidies. While both the EITC and service vouchers produce a limited redistribution of income, service vouchers also provide a limited redistribution of purchasing power to the middle-class and poor elderly by permitting them to obtain services they could not otherwise afford.

The Dignity Voucher

To meet the needs of the elderly while creating jobs for low-skilled workers, we propose our specifically American version of the service-voucher idea, which we call the Dignity Voucher program—an innovative system of service-care vouchers for the elderly. Modeled on the best practices of service-voucher programs in other democracies, and complementing existing, limited respite-care programs intended to aid families that care for their members, the Dignity Voucher program could increase employment of low-skilled workers by stimulating demand, even as it raises tax revenues and worker wages by replacing informal gray-market labor with new jobs in the formal economy.

The federal government would provide state governments with funding for eldercare services in the form of Dignity Vouchers. Qualified retirees would be able to use the Dignity Vouchers to purchase a limited number of hours of non-medical personal assistance in tasks like housekeeping and transportation from personal-service companies that are certified by federal and state governments. The Dignity Vouchers would permit retirees to pay less than the minimum wage to the employees of the personal-service companies, while the companies would be required to pay above the minimum wage. Government would pay the service companies the difference between the voucher payment and the employee’s wage. Congress or states may choose to require employers to provide specific benefits to workers (health care, pensions) or limit overhead costs as a percentage of the value of services provided.

In order to minimize any possible abuse while maximizing effectiveness, an experimental Dignity Voucher program needs to be carefully designed.

Qualified Employers The subsidy must go to a government-licensed company that employs the service providers (care workers), not directly to the recipients or the providers. That will ensure that the money is not used for off-the-books payments to black-market labor. It would also ensure that the employers obey federal and state workplace, civil rights, and minimum wage laws. Qualified employers would be eldercare service companies that are licensed by the states and meet all local, state, and federal requirements. They should be regularly audited, in order to deter abuses of the system, and could be private or public entities. The decentralized Swedish example may be a good model for the Dignity Voucher program because it pushes private-sector competitive efficiencies and job creation but avoids the type of cost escalation seen in the U.S. health-care system. In fact, because the United States has a larger existing pool of private eldercare providers than Sweden did at the outset of reform, the provision of vouchers can more quickly stimulate competition and growth in the sector, making it an appealing job-creation option.

Qualified Activities Just as in each of the models outlined above, non-medical activities that qualify for subsidy under the Dignity Voucher program would be defined by federal and state law. They might include personal assistance in housework, transportation, cooking, and other chores. Medical assistance should be excluded from the Dignity Voucher program as that would be covered by Medicare and Medicaid.

Qualified Recipients Qualified recipients should include the middle-class elderly as well as the low-income elderly, but a means test might exclude affluent retirees. The Dignity Voucher program might also include the disabled of all ages. Because need is more easily determined by local officials, the qualification of recipients might be left to state or local governments (like the municipal government evaluation of individuals in Sweden), even though the funding comes from the federal government. However, individual evaluation or means testing could undermine political support for the program, and it would also significantly increase its administrative costs. Awareness campaigns—the responsibility of local governments, although qualified employers will have a vested interest in advertising their services to qualified recipients as well—could target qualified recipients.

Qualified Providers To work, the Dignity Voucher program must operate in the formal sector, and the Belgian case shows that integrating service workers into the social welfare system (Social Security, Medicaid, unemployment insurance, etc.) is key to drawing workers out of the informal sector and protecting them from exploitation. Service workers in the Dignity Voucher program must therefore be qualified providers: qualified by state standards and given all of the rights and responsibilities of employees under federal law. Qualified providers, or service workers, would further be limited to U.S. citizens or legal immigrants. During the initial phase of the program, preference might be given to individuals who have suffered prolonged periods of unemployment during the present recession.

The benefits of Dignity Vouchers or similar service vouchers in the United States would not be limited to new kinds of decent jobs for domestic service workers and access to needed aid for the elderly. In Europe, service-voucher programs have had some success in shrinking black markets in labor by reducing the demand for extra-legal employment. Evaluations of the Belgian voucher model show that a significant portion of the cost of the program to the government—at least 40 percent in the Belgian case—can be directly offset by increased revenues and decreased tax expenditures. These offsets largely depend upon how successful the program is in formalizing gray-market eldercare, and thus increasing income-tax receipts and reducing benefits paid to unemployed or underemployed individuals.

A service voucher program like the Dignity Voucher program that we propose could deter illegal immigration to some degree by reducing the demand for off-the-books labor. The Dignity Voucher program would allow the elderly to pay less than the minimum wage to U.S. citizens and legal immigrants who, thanks to the government subsidy to the service company employer, would be paid above the minimum wage. Paying the mean national caregiver wage would help ensure that government subsidies do not serve to undercut existing caregivers or create a situation in which service workers are unable to earn a living wage and become dependent upon other government aid.

The automation of recipient selection (perhaps using the Social Security Administration) and implementation of the program also reduces administrative costs. For example, the French model seems to lower the costs of being in the formal sector for both workers and recipients. On the supply side, social security contributions of workers in France are calculated automatically with the prepaid CESU card, and on the demand side, the system promotes direct hiring and payment of service workers, potentially lowering costs and hassle for service recipients, who have a free choice in purchasing services.

Tested Abroad, Needed Here

The United States should learn from the success of other nations that have adopted service-voucher programs. Like other countries, the United States must address both unemployment and the challenges presented by an aging population. Claims by politicians, pundits, and policy analysts that a “twofer” policy proposal can solve two problems at the same time should be subject to critical scrutiny.

We believe that our proposal can withstand the test. Increasingly, our economy will be dominated by personal services that cannot be automated or offshored, and a large part of the service economy will be driven by demand for eldercare services generated by the aging baby boomers. This demand is currently being met in part by family caregivers as well as the informal labor market. U.S. businesses lose worker productivity and pay higher health care costs for employees providing caregiving at home, while black-market labor costs local, state, and federal governments tax revenues. Existing respite-care programs for caregivers are inadequate and could be supplemented or replaced by a service-voucher program.

The Dignity Voucher program proposed here should be tested as a pilot program. If it is considered a success, then Congress should consider scaling it up and making it a permanent part of America’s system of social insurance, addressing the previously unmet needs of many elderly Americans for modest personal assistance by a mix of public funding and private provision. The cost of the program would depend on its scale. Some, if not necessarily all, of the costs, could be offset in the federal budget as a whole by savings in unemployment payments or by reductions in tax expenditures for home ownership and health care that disproportionately benefit the affluent. An American service-voucher program could be paid for by a small, dedicated payroll tax, by another dedicated tax like a portion of a federal value-added tax, or by general revenues.

Tested abroad and needed here, service vouchers can provide a new and useful tool in the repertory of American public policy. A service-voucher program of this kind would accomplish multiple goals. It would increase demand for low-wage service sector workers. At the same time, it would provide indirect financial assistance to elderly Americans who are capable of functioning and living in their own homes but need occasional personal assistance that they cannot afford on their own. It would help American families by reducing the burden of supporting their elderly relatives. Finally, it would generate tax revenues, as informal, off-the-books, underpaid labor is replaced by adequately paid labor in the formal labor market. The use of service vouchers to create jobs while helping the elderly is exactly the kind of bold new idea that America desperately needs today.