Before our depressing discussion today about the fiscal impact of entitlement programs (Social Security, Medicare, Medicaid, EITC, Food Stamps, welfare, and Obamacare, etc), here’s a video of how it all began.
I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.
But if you don’t have the time to watch a long video, here are four key things to understand.
- Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
- Since these programs automatically give people money, they are not part of the annual appropriations process
(the “discretionary spending” parts of the budget that are determined on a yearly basis).
- Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
- Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).
By the way, there’s one additional thing to understand.
Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.
5. Entitlement programs are a slow-motion fiscal train wreck.
Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.
The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity.
…by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.
If you prefer this information visually, here are a couple of pie charts from the study.
While there are dozens of entitlement programs, the big three are Social Security, Medicare, and Medicaid.
The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.
And here’s how they’ve been consuming ever-larger shares of America’s economic output.
What’s driving this ever-increasing fiscal burden?
In part, it’s because we have more and more old people and they are living longer.
So what does all this mean?
Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.
I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.
Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.
Here’s how Capretta describes the relationship.
…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.
I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).
The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.
In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.
P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.
Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.
On a related note, here’s an excellent short video on the English “poor laws” from the 1800s.
P.P.S. In addition to the fiscal burden of entitlement programs, there’s also a major problem in the way these programs discourage work.
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Calling these programs “discretionary” and “mandatory” is one of the political tricks liberals use to defend high taxes and spending. I’ve heard liberals describe this distinction as if the words applied literally: Congress can control “discretionary” spending, but there’s just nothing they can do about “mandatory” spending because it’s … mandatory. Of course Congress wrote the laws that created these programs and Congress can change them. There’s nothing “mandatory” about them. If I write on a piece of paper that I commit to beating my children twice a day, could I defend myself from a charge of child abuse on the grounds that there was nothing I could do about it because it was written on a piece of paper?
And yet, you are unwilling to replace current means-tested programs with a UBI.
A UBI would replace approximately half of all safety-net programs (for no net loss for the people receiving benefits) and ALL tax deductions (essentially capping deductions for the wealthy).
If combined with a flat tax (which is a political loser in the current environment, because of a lack of progressivity), you would have a nice smooth effective tax rate, that is slightly more progressive than the current one.
A side benefit is that 1 M bureaucrats (primarily welfare and IRS) would no longer be necessary, to continue the intrusive nanny state.
The rich would pay for a slight increase in taxes, from an increase in income (coming from a reduction in compliance, and an increase in productive time); resulting from an extra 2% growth in the economy or $400B extra.
Do we stay with the above set-up, or are we willing to start with half a loaf? –> Reduced bureaucrats and increased productivity.
I just watched your recommended video on the poor laws. I have an interest in this subject. My 4x great grandmother, Sarah Waine, claimed poor relief before poor law reform. Her parents had died and she and her siblings did not have settlement in Prescot to where the family had moved. There was an order to send them back, but it was set aside as it was probably too far away. Later she and her sister Mary had illegitimate children and they claimed parish poor relief. They had to name the fathers so the parish could claim contributions from them. All but one of their offspring went on to have stable marriages. I examined the local rate of illegitimacy by looking at the baptism records in the parish church of St Mary the Virgin, Prescot. It peaked at 10% around 1800. Most of the time it was around 5% + or -. I think this covers most births other than from Roman Catholic families. Later my ancestor moved away to NE Lancashire. After poor law reform, the local poor law union was Blackburn. The poor law Guardians tended to be local worthies such as businessmen and clergy. The ones I know about appeared to be decent, honourable men. Despite the change in the law, they continued to provide out-relief. They appeared to have a genuine concern for the poor. The local cotton economy was subject to booms and recessions. Local newspapers published minutes of meetings. I offer no suggestions as to how the poor should be supported.
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The objectivist version is: Compared to what? At whose expense? How did you find out? And the medical crisis is rooted in prohibitionism of 1905 leading to the Harrison Act of 1914 conscripting physicians into a pseudoscience platoon to rubber-stamp every paranoid myth concocted by prohibition lobbyists.
Most government spending is redistribution to special interest groups including a big cut to the government bureaucrats.