Introduction

Policy Circle’s president and co-founder, Sylvie Légère Ricketts, and editor, Kristin Jackson, are joined by special guests Andrew Biggs from the American Enterprise Institute and Brian Riedl of the Manhattan Institute to launch this brief.  Listen to the 30 minute call below.

 

History

Key Facts
Social Security, Medicare, Medicaid, The Affordable Care Act, and Income Security are the most well-known federal "Entitlement" programs.
Social Security was launched by the Roosevelt Administration in 1935 in response to the Great Depression. Medicare and Medicaid followed in 1965 as part of Lyndon B. Johnson's War on Poverty.
The average Social Security benefit in 2019 is $1350/month. Roughly two workers pay for each Social Security beneficiary, versus more than 16 workers per beneficiary in 1950. (Mercatus)
In 2017, healthcare programs including Medicare and Medicaid cost approximately $3.5 trillion, 17.9% of GDP. The government contributed about $1 trillion to Medicare and Medicaid in 2017: Medicare cost $600 billion and Medicaid just under $400.
The average couple pays $140,000 in to Medicare and receives three times that back in healthcare services. (IWF, 2011)
Medicaid represents $1 of every $6 dollars spent on healthcare. It has grown from 4 million beneficiaries in 1966 to 46.4 million in 2007 to 65.5 million in 2019. (Statista, Medicaid.gov)
Without reform, Medicare funds may be depleted in 2029 and Social Security in 2034. Not enough people are paying in to finance the benefits that are being paid out.
"...within the next 20 years, the three major entitlements — Social Security, Medicare and Medicaid — along with interest on the national debt, will consume 100 percent of all tax revenue." (Rick B. Larson, president of Sutherland Institute)

Providing for Americans in need has its roots in our nation’s founding. Often referred to as “social insurance” programs, such efforts have existed since colonial times, as outlined in this video. In the colonies, “poor relief” was organized and carried out on the local level and was based on charitable contributions. One of the earliest laws for poor relief was a 1768 Maryland law requiring the building of ‘alms houses’ and ‘work houses’ to address the growing poor. Alms houses were for orphans, the disabled, and elderly. Vagrants, beggars and the idle were sent to ‘work-houses’ for no more than three months to learn a skill so they could eventually become independent.

 

Thomas Paine
Source: National Portrait Gallery

In 1797, Thomas Paine, an advocate for the independence of America, advocated for social insurance to be created for the newly independent country. Thomas Paine is often called the Father of the American Revolution because his pamphlet ‘Common Sense’, published in 1776, inspired American Colonists fighting for independence from Great Britain.”

 

“In 1797, Paine published Agrarian Justice, a pamphlet advocating a social insurance system that would provide for the elderly and disabled, as well as young people starting out in life, with the benefits to be paid from a national fund maintained by property and estate taxes.”  (Law Office of Brendon Conley, SSA

 

America did not go down this path, outlined by Paine, for many years. The Civil War opened up the first door to a centralized social insurance system.

 

During the Civil War, pension plans were created to entice recruits, first providing benefits to wounded soldiers, then to all soldiers, and then to survivors as well. That program grew to be 41.5% of the overall federal budget.  According to the Social Security Administration, the final benefit to a widow of  Civil War veteran was paid out in 2003. Yet, according to this recent article, as of May 2017, a daughter of a Civil War veteran was still receiving a benefit of “$73.13 each month from her father’s military pension.”  

 

During the first two decades of the 20th century, government debated state and national old-age pension and workers’ compensation systems, with the courts overturning many federal-level initiatives time and time again. The debate reflected the change from a pre-industrial nation, where people could subsist from their land even if they could do little more, to an industrial nation reflected by a population shift from rural areas to urban centers. In 1923, Montana passed an old age pension law and by 1929 all but four states had workers’ compensation laws in effect. (SSA video)

 

Waiting for relief check during the Great Depression. Source: Wikimedia Commons

Then on Oct 24,1929, the stock market crashed and America fell into a decade-long depression. The unemployment rate soared to 24.9%, more than 10,000 banks failed, economic output plummeted, and these crises led to many calls for change. (SSA video)

 

“When the stock market crashed in October of 1929, American citizens faced economic challenges unlike anything previously experienced in U.S. history.  By the time Franklin Delano Roosevelt became President in 1933, the nation’s unemployment rate hovered at 25%. In a vast departure from previous Presidents, who believed that the federal government has no place in trying to regulate and/or control the cyclical nature of markets, Roosevelt believed that the sheer scope of the Depression demanded the federal government’s intervention. With the support of a largely Democratic Congress, Roosevelt’s Hundred Days ushered in the first wave of New Deal legislation designed to hasten ‘Relief, Recovery, and Reform.’” (The Gilder Lehrman Institute of American History)

 

The New Deal Launches Social Security

President Franklin Delano Roosevelt (FDR) first outlined his approach to responding to the Great Depression in his July 2, 1932, speech accepting the Democratic nomination for president. “American voters the following November overwhelmingly voted in favour of the Democratic promise of a ‘new deal’ for the ‘forgotten man.’ Opposed to the traditional American political philosophy of laissez-faire, the New Deal generally embraced the concept of a government-regulated economy aimed at achieving a balance between conflicting economic interests.” (Encyclopedia Britannica)

 

In 1933 and 1934, Senator Huey Long’s “share our wealth plan” and Francis Townsend’s “old age revolving pension plan proposal” campaigns increased pressure for a federal program to address social welfare. These efforts worked to galvanize popular support for a federal approach. (SSA video)

 

WOMEN IN HISTORY: The Roosevelt Institute refers to Frances Perkins as ‘The Force Behind Social Security.’ She served as chair of the Committee on Economic Security and was the Secretary of Labor for FDR. Perkins was the first female head of a federal agency. (Source: Francis Perkins Center)

FDR’s administration convened the Committee on Economic Security that signed into law the Social Security Act of 1935. Benefits would be given to retirees and the unemployed, and a lump-sum benefit would be given to survivors of beneficiaries upon beneficiaries’ death. The retiree portion was funded by a 2% payroll tax on current workers’ wages, split between employer and employee. One month after signing the bill, Roosevelt appointed the three members of the Social Security Board (SSB) to develop policies and procedures and to enroll more than 30 million people into the system in 1.5 years. The American people started paying the 2% payroll tax in 1937. (SSA video)

 

The War on Poverty Launches Medicare and Medicaid

Medicare and Medicaid were created as part of Lyndon B. Johnson’s War on Poverty.  Johnson, a protege of FDR, was elected to the House of Representatives in 1937, after running for election on a New Deal platform. (Huffington Post)

 

According to the LBJ Library, FDR had originally wanted a national level health insurance program, but he dropped it from the Social Security Act to ensure passage. In 1951, “Harry Truman sent the House a bill that would offer health insurance to those age sixty-five and older, but it was blocked by an intractable Ways and Means Committee. Kennedy tried, too, sending a comparable bill to Capitol Hill in 1962, where it missed passage in the Senate by a few votes.”

 

When President Lyndon B. Johnson was elected in November of 1964, these programs headlined his agenda. He explained his Medicare approach on January 4, 1965, in his State of the Union message, and “three days later he pressed for its passage, issuing a statement to Congress demanding that America’s senior citizens ‘be spared the darkness of sickness without hope.’ In that speech he declared an ‘unconditional War’ on Poverty.” (Washington Post)

 

President Lyndon B. Johnson

The War on Poverty centered around four pieces of legislation:

  • “The Social Security Amendments of 1965, which created Medicare and Medicaid and also expanded Social Security benefits for retirees, widows, the disabled and college-aged students, financed by an increase in the payroll tax cap and rates.
  • The Food Stamp Act of 1964, which made the food stamps program, then only a pilot, permanent.
  • The Economic Opportunity Act of 1964, which established the Job Corps, the VISTA program, the federal work-study program and a number of other initiatives. It also established the Office of Economic Opportunity (OEO), the arm of the White House responsible for implementing the War on Poverty and which created the Head Start program.
  • The Elementary and Secondary Education Act  ”which established the Title I program subsidizing school districts with a large share of impoverished students, among other provisions.” (Washington Post) According to Education Post, “ESEA has been reauthorized eight times since 1965, most recently in December of 2015 when lawmakers revamped No Child Left Behind and renamed it the Every Student Succeeds Act.”

These are the key components of modern-day federal entitlement programs.  This Prager U video on Entitlements provides an overview.

 

You may also hear these programs referred to under the umbrella of “entitlements”:

  • Income Security programs include: Earned Income, Child and Other Tax Credits; Supplemental Nutrition Assistance Program (SNAP or food stamps); Supplemental Security Income; Unemployment Compensation; Family Support and Foster Care; Child Nutrition
  • Patient Protection and Affordable Care Act (also known as Obamacare), which created subsidies for health insurance purchased through government exchanges and expanded Medicaid. According to President Obama in 2010, the Affordable Care Act was designed to affirm “the core principle that everybody should have some basic security when it comes to their health care.”

 

Altogether, entitlement programs total approximately 60% of the federal budget, with Social Security, Medicare and Medicaid accounting for 48.5%.

 

However, the looming challenge for entitlement programs is that, as currently structured, they are scheduled to pay out more in benefits than the taxes they take in.  This funding gap leads to annual  shortfalls in our budget, causing our national debt to rise to unsustainable levels. Without changes, components of Medicare are projected to be depleted by 2029, with Social Security just a few years behind in 2034.  Reform is necessary but at the same time politically very difficult since the resolutions involve either cutting benefits or raising taxes, two very unpopular ideas that don’t win elections.

 

 

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Entitlements and Federal Spending

To understand entitlements, it is helpful to first look at the Federal Budget, which has two types of spending: “discretionary” spending and “automatic” spending.

 

Discretionary spending is debated through the annual budget and appropriations process and funds programs such as education, veterans, infrastructure and defense.  Discretionary programs equal only 27% of all federal dollars allocated each year when Congress sets the funding priorities. In 2016, close to 16% of the federal budget went to fund the National Defense, so other discretionary spending was only approximately 11% of the$3.85 trillion budget.

 

The rest of the federal budget is ‘automatic spending’, meaning deducted from the federal budget through scheduled payments because the government is legally required to do so.  Federal “automatic” payments in 2016 constituted approximately 73% of the budget.

 

Some examples of “automatic” spending are:  

  • Social Security
  • Medicare
  • Medicaid
  • Affordable Care Act
  • Income security programs (e.g. SNAP, TANF, Earned Income Tax Credit)
  • Interest on the national debt  

In the chart below, you’ll see the percentage of the budget broken down by each government program that is deemed ‘automatic’.

 

Following are a few details on the major components of entitlement spending, including Social Security, Medicare and Medicaid.  

 

Basics of Social Security

Social Security “is the largest single program in the federal budget. “About 73 percent of the roughly 61 million people who currently receive Social Security benefits are retired workers or their spouses and children, and another 10 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The remaining 17 percent of beneficiaries are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits.”  (CBO)

 

Workers pay in through payroll taxes, which are currently 12.4% on wages up to $128,700, split evenly between the employer and employee.  Beneficiaries begin receiving Social Security checks at age 65, with those born in 1938 or later gradually increasing to age 67.

 

On average, a Social Security retirement benefit is $1,360 a month, or $16,300 a year. (CBPP, Social Security Administration)

 

Today, fewer than three workers are paying for each beneficiary, versus more than 16 workers per beneficiary in 1950. (Mercatus)

 

Social Security Disability Insurance

Social Security also provides benefits to those who are unable to work due to injury or disability.  The share of the U.S. population receiving Social Security Disability Insurance benefits (SSDI) has risen rapidly over two decades, from 2.2% of adults age 25 to 64 in 1985, to 4.1 % in 2005.  This increase is due to an aging population, which is more disability-prone, as well as the increase in the number of women eligible for benefits as more women have entered the workforce.

 

On the other hand, several factors should reduce claims: the modern workplace is safer than in the past, healthcare is better, and jobs are more flexible than ever before, thanks in part to the Americans with Disability Act.  Some experts speculate that workers discouraged by the job market have become more prone to apply for disability benefits. At the end of 2011, there were 10.6 million Americans collecting SSDI, up from 7.2 million in 2002.  In June 2017, 8.8 million workers and 1.8 million dependents received disability insurance, totaling 10.9 million recipients.  The average monthly benefit is $1,172. Some state governments also contribute to the increase in disability payments, preferring to shift individuals from state-funded welfare programs into the federally-funded Social Security disability program.

 

This Vox article outlines the important role of disability insurance, and links to this Social Security Administration chart which projects a steady increase in disability insurance costs, reaching over 14 million beneficiaries in 2050.

 

Basics of Medicare

Medicare eligibility begins at age 65 for seniors. The full benefit age is 66 for people born in 1943-1954, and it will gradually rise to 67 for those born in 1960 or later.

 

In Medicare’s first six months after its passage in 1965, more than 2.5 million Americans received hospital care covered by Medicare. Currently, more than 49.4 million people are enrolled.

 

Medicare has evolved over the years and now has four parts. Some are mandatory for all enrollees; while options like Medicare Advantage also exist. People under 65 with qualifying disabilities are also covered by Medicare, for example a child with serious health issues who is about to turn 18, could potentially register for Medicare. (Click for more details.)

  • Part A (Hospital) pays for care in a hospital, skilled nursing facility, nursing home (except for custodial care activities of daily living like help bathing, dressing, eating, getting in or out of bed or a chair, moving around, and using the bathroom), hospice and certain types of home health services.
  • Part B (Medical) covers what you think of as regular health care, i.e. medically necessary services or supplies needed to diagnose and treat a medical condition. It also covers preventive services for illnesses such as the flu, including inpatient and outpatient physician services and some limited outpatient prescription drugs.
  • Part C (Medicare Advantage), also known as “MA plans”, are government approved plans sold by private companies that may cost the same as or more than Medicare, with the recipient paying the difference. Medicare pays a fixed amount each month for a recipient’s care to the companies offering Medicare Advantage Plans. MA plans come in two varieties – HMO plans and PPO plans – and take the place of Medicare Part A, Part B and, often, Part D coverage. Many offer extras such as vision, dental, hearing aids and wellness services. (See USNews Medicare vs. Medicare Advantage: How to Choose)
  • Part D (Prescription Drugs) provides prescription drugs from a list (called a formulary). Each Medicare prescription drug plan has its own list. Most plans place drugs into different “tiers,” with each tier having a different cost.

The Affordable Care Act worked to reduce future increases in Medicare spending by reducing payments to healthcare providers and Medicare Advantage plans. (Kaiser Family Foundation, upenn.edu)

 

Basics of Medicaid

Medicaid is a joint federal-state program designed to provide health coverage to low-income families, single mothers, and disabled individuals through coordinated federal and state efforts.

 

As CNBC explains for Medicaid “each dollar spent in the program by a state government is matched by the federal government. Sometimes more money is given for states with a higher number of low-income citizens.” According to the Kaiser Family Foundation, “Medicaid programs represent $1 out of every $6 spent on healthcare in the U.S.”

 

See a List of Medicaid Benefits, here.

 

Separately, the Children’s Health Insurance Program (CHIP) was created in 1997 to provide coverage to children in families who are just above the financial eligibility requirements for Medicaid. CHIP is reauthorized regularly by Congress (unlike Medicaid) so it is often in the headlines.

 

2017 Federal Poverty Guidelines – federal poverty level incomes. (Source: Families USA)

As a result of the Affordable Care Act policies, many states expanded Medicaid. Eligibility in those states went from the non-elderly population with income at or below 100% of the federal poverty level to those with income below 133% of the poverty level (because of the way this is calculated, it turns out to be 138% of the federal poverty level), and allowed states to provide Medicaid coverage for low-income adults without children.  See table on the right for numbers.  

 

Medicaid has seen tremendous growth over the years. Today approximately 68 million people are enrolled, according to the October 2017 enrollment report. In 1966, only 4 million people were enrolled in Medicaid; that number grew to 20.2 million in 1975. In 2007, enrollment had reached 46.4 million and has increased every year since. (statista)

 

 

The Kaiser Family Foundation reports that Medicaid enrollment rates are higher during economic downturns: “When individuals lose their jobs and incomes decline, more people qualify and enroll in Medicaid, which in turn drives increases in total Medicaid spending. As economic conditions improve, Medicaid enrollment growth slows in the absence of other policy changes. This held true in recent years for Medicaid spending and enrollment growth – spending and enrollment growth peaked in FY 2002 (during an economic downturn), slowed in FYs 2006 and 2007, and then peaked again in FY 2009 during the Great Recession. As economic conditions improved, Medicaid enrollment and spending slowed in FY 2011 through FY 2013. (Exhibit 1.1)”

 

 

 

The number of Americans enrolled in Medicaid was expected to have increased from 68.5 million in 2015 to 72.3 million people in 2017; it actually increased to 73.7 million, and estimates continue to predict increases. Below you can see the types of enrollees:

 

 

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Entitlements Face an Uncertain Financial Future

 

Because “automatic” entitlement programs are funded year to year, these programs do not receive the same level of oversight as the fiercely debated discretionary programs. Often they end up bloated and inefficient. In addition to lack of rigorous debate about Social Security and Medicare, both face demographic and health-care cost challenges.

 

With demographics, the worker-to-beneficiary ratios have shifted over time as the Baby Boomer Generation has aged, such that fewer people are paying in to accommodate a larger cohort of beneficiaries, which is not sustainable. Baby Boomers began retiring in 2008. Though the Baby Boomers will eventually pass out of Social Security, the program’s costs will remain high and continue to rise due to longer life expectancies.

 

“America is getting older. Some 10,000 baby boomers reach the age of 65 each day. By 2050, a fifth of the U.S. population will be age 65 or older, the Congressional Budget Office projects, up from 12% in 2000 and 8% in 1950.” (WSJ)

 

“Moreover, this large contingent of Americans isn’t simply retiring; it will live longer after retiring. The number of people aged 85 or older will make up 4% of the population by 2050, 10 times more than a century earlier. As Americans get older and live longer, they will require more long-term care: The Department of Health and Human Services has estimated that 52% of Americans turning 65 today will develop a disability requiring long-term care services.” (WSJ)

 

In the case of Medicare, the program pays out far more than workers pay in.  As recorded in 2011, “The average couple will pay $140,000 into Medicare during their working years, but will get nearly three times that amount back in health care services through Medicare. It’s no wonder, then, that the program faces a budget crisis.”  (IWF)

 

Cost of care is the other component driving up Medicare costs.  “U.S. health care expenditures have steadily increased as a share of gross domestic product (GDP) over the last half century, increasing from 5.0 percent of GDP in 1960 to 17.4 percent in 2013.” (CMS.gov)

 

With healthcare costs on the rise, access to health insurance does not always equate access to health care. “Medicare beneficiaries know that when doctors cannot afford to treat them, they stop accepting Medicare patients. That means it’s harder for seniors to find the doctors they need. Typically, in a market, prices would help balance supply and demand. Medicare’s price controls prevent this process from working.” (IWF)

 

Entitlement Spending Drives up National Debt

Automatic spending for entitlements is consuming the federal budget and represents a large percent of our nation’s gross domestic product (GDP). In FY 2016, mandatory spending accounted for over 70% of total federal spending.

 

In 2017, Social Security spending was $945 billion, and is projected to be $1.67 trillion in 2027.  In 2017, Medicare spending was $600 billion and is projected to be $1.16 trillion in 2027. Measuring against our nation’s gross domestic product, in FY 2016, automatic spending was 13 percent of GDP (compared with 12.8 percent in 2015). (CBO, CBPP)  

 

Meanwhile, the continuous deficits run by the nation have ballooned national debt. In 2017, the federal government spent $693 billion more than it took in revenues and in 2016 it overspent by $585 billion. Every year we spend more than we take in which results in a deficit; those annual deficits added up over time have resulted in over $20 trillion in national debt.

 

As of June 2017, the Congressional Budget Office projected the following for spending versus revenue:

 

How Current “Fixes” are Failing

The main approach to address the rising cost thus far has been to increase the payroll tax, but this has failed to close the gap. Thus, unfunded liabilities continue to grow and the funds designated to pay out certain benefits, such as the Social Security Trust Fund, have been diverted to other government priorities.  

 

Payroll Tax Changes

The payroll taxes that fund Social Security, known as FICA taxes on your paystub, started at 2% and now are up to 12.4%, but still cannot cover the costs of benefits that are paid out. Payroll taxes can also be a disincentive to work because workers, particularly millenials, are not confident they will receive their full Social Security benefits and thus see taxes paid as a loss. This is contrasted with their 401(k) contributions that they view as deferred income and an investment they will eventually be able to access.

 

Payroll taxes also depress workers’ wages because the employer portion of the tax can be passed on to the employee in the form of a lower salary. The Social Security Administration and Congressional Budget Office assume that new employer payroll taxes would reduce employee wages on a basically dollar-for-dollar basis.

 

Today, money is paid from your paycheck to a current retiree or Medicare recipients. With an increase in Baby Boomer retirees and decrease in workers, this becomes a non-self sustaining financing system, similar to a “Ponzi” scheme. (Mercatus)

 

According to the Kaiser Family Foundation, “The Medicare Hospital Insurance (Part A) trust fund is projected to be depleted in 2029.” (Kaiser Family Foundation).  Social Security combined accounts are projected to be depleted in 2034. (CBPP)

 

Unfunded Liabilities

As of 2017, our Social Security program faced an unfunded liability of $12.5 trillion. As the American Action Forum puts it: “Social Security’s promised benefits exceed projected payroll taxes and Trust Fund redemptions by $12.5 trillion.”

 

Some estimate that nationwide we have over $87 trillion in unfunded Medicare liabilities. While it is hard to pinpoint the exact total of these liabilities, in 2016, Medicare cost taxpayers $349 billion dollars more than was collected in taxes for those services. Eight years of the Obama Administration oversaw a $2.4 trillion cash shortfall (2009-2016) in the Medicare program. And, by the end of 2017, the Medicare trustees project that the Trump Administration will have added its own $344 billion Medicare cash shortfall. (American Action Forum, Moody’s 2016, Mercatus)

 

Social Security Trust Fund

Until 2010, the Social Security program was taking in more revenue than it was paying out in benefits. The surplus went into the Social Security Trust Fund, which then “subsidized the U.S. government to the tune of over $2.3 trillion.” When the federal government spent these Social Security revenues on non-Social Security programs, the Treasury Department issued bonds to the Social Security Administration, which are held in the ‘Trust Fund.’ “The federal government is in debt to itself.” (13D Research)

 

As explained by the Center on Budget and Policy Priorities:

Social Security’s pay-as-you-go structure depends on having a lot of people paying in to the system, with fewer people taking benefits out of the system. In 1940, there were more than 150 workers paying into Social Security per beneficiary. By 1960, there were just five workers per beneficiary. By 1990, it was 3.4 workers for each beneficiary. And today, there are less than three workers.”

 

When the federal government needed to service deficits, instead of borrowing costly debt, it borrowed from the Social Security trust funds.  So “When Social Security needs to start cashing in its holdings of Treasury securities to meet its benefit obligations, the federal government will have to increase its borrowing from the public, or raise taxes or spend less.”  

 

The CBPP position is that, “That will be a concern for the Treasury — but not for Social Security, as long as the solvency of the federal government itself is not called into question.  Social Security will be able to sell its bonds just as any private investor might do.”

 

The year “2034 is the ‘headline date’ in the trustees’ report, because that is when the combined Social Security trust funds are expected to run out of Treasury bonds to cash in.  At that point, if nothing else is done, the program could then pay 77 percent of scheduled benefits, a figure that would slip to 73 percent in 75 years.” (CBPP)

 

The Effect of the Affordable Care Act on Medicare and Medicaid

 

While the Affordable Care Act worked to rein in some of the expanding costs of Medicare, it increased the size of Medicaid by incentivizing states to expand access to healthcare services for people in a larger range of lower income individuals. In essence, Medicaid was transformed into a program to meet the healthcare needs of the entire non-elderly population with income below 138% of the poverty level, versus the previous access for adults with children below 100% of the poverty level. (Huffington Post) In expanding this pool, many analysts have claimed it reduced an incentive to find quality work.  

 

According to the executive director of the Economic Research Center at The Buckeye Institute, “When the Congressional Budget Office (CBO) analyzed the Affordable Care Act (ACA), it found that the ACA would reduce work, in large part because of Medicaid expansion. Single, childless, able-bodied adults were made eligible for Medicaid under the ACA, and CBO estimated that many of these individuals would work less since they no longer needed full-time jobs to maintain health insurance. Indeed, labor force participation in the U.S. has fallen and public policies like Medicaid expansion, which can deter work, have contributed to this.” (The Hill)

 

Other Entitlement programs not covered in detail in this brief are:

  • The Affordable Care Act which – in addition to increasing medicaid – expanded government’s role in the healthcare sector.
  • Anti-poverty programs like TANF, SNAP (known as food stamps), SSI (supplemental security income), LIHEAP (Low Income Home Energy Assistance Program)
  • Farm subsidies and federal retirement.

 

For more information on ACA, please view the Policy Circle Brief on the Affordable Care Act. For information on anti-poverty programs, please see the Policy Circle Brief on Poverty.

 

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Role of Government

 

Broad support exists to provide a safety net for those in need, including those who require temporary assistance due to economic hardship or health problems.  But it is important that this net be run efficiently and designed so as not to trap people in dependency. Former House Speaker Paul Ryan’s “A Better Way” agenda and a previous House Committee on the U.S. Budget report, “The War on Poverty: 50 Years Later,” from 2014 both seek to address the problems inherent in our byzantine anti-poverty programs. (See The Policy Circle Brief on Poverty and The Policy Circle Brief on Economic Growth)

 

But the role of government in entitlements is up for debate. Some point to the first clause of Article 1 Section 8 of the U.S. Constitution which outlines the powers of the legislative branch including the provision to provide for the ‘general Welfare of the United States’:

“The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States”

 

Others posit that the original goal of that clause, as interpreted through the Federalist Papers, is that the legislative branch (i.e. Congress) should only fund those powers that were duly enumerated, so entitlement programs should be handled at the state and local level, not at the federal level.

 

The debate traces back to those among our Founding Fathers.  Jefferson and Madison promoted a smaller government and tighter reading of the Constitution while Hamilton and Adams promoted a greater role for the federal government and a less restrictive view of the Constitution.

 

A free market perspective, as articulated by F. A. Hayek in his 1944 book Road to Serfdom, is that social programs can be applied in ways that are harmful, but that is not an argument that seeks to eliminate their usefulness completely:

“it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective. But there is no incompatibility in principle between the state’s providing greater security in this way and the preservation of individual freedom.” (Nicolas Wapshot, Keynes Hayek: The Clash That Defined  Modern Economics)

 

While erring on the side of less federal government and regulatory involvement, the question is where to draw the line so as not to create harm. And, as noted above, there is no politically easy way to scale back entitlement spending once it is established.

 

 

Principles of Reform

 

As reforms become increasingly unavoidable, the goal is to make sure important programs are sustainable for younger generations, while not making changes for those on the cusp of or already in retirement.  Specifically some principles of reform should include:

  • Priorities to keep spending in line with revenues
  • Opportunities for increased patient/local control, responsive to individual needs instead of one-size-fits all blanket programs
  • Opportunities for competition – to create the opportunity for increased efficiency, high quality and contained costs
  • Work requirements for Medicaid to address potential for ‘harm’ from government influence
  • Coordination among programs to reduce redundancy and operate more efficiently
  • Introduce a lifetime earnings test and retirement age

 

Below are some of the more well-known reform proposals:

 

Work Requirements

President Clinton incorporated work requirements in the Temporary Assistance for Needy Families (TANF) welfare program in 1996. In January 2018, the Trump Administration issued guidance allowing states to establish work requirements for Medicaid. According to The Hill, this is the first time in the 50-year history of the program that states have had the option to “apply for waivers to allow them to require Medicaid enrollees to work in order to receive coverage.” Those who oppose such an option fear people in need will lose coverage if they can’t meet such requirements or will be precluded from registering due to bureaucratic hurdles. (The Hill) Here is a pro-work requirements graphic from Foundation for Government Accountability (FGA), explaining the various components of welfare reform and work requirements.  

 

Medicare Premium-Support

Under a “premium-support” model, “the government would continue to help seniors seek health insurance coverage by paying them directly and then encouraging them to seek health insurance in the private market. In a more progressive premium-support model, like the one proposed by former Rep. Paul Ryan, poor seniors and sick seniors would receive more government support because of their greater needs. This would give seniors the power to make choices that make sense given their circumstances. Policymakers could also promote more cost- sharing among beneficiaries which would create an incentive to maintain good health and seek treatment only when it’s truly needed.” (IWF)

The goal of a premium support model is to “reduce the growth in Medicare spending by increasing competition among health plans and providing a stronger incentive for beneficiaries to be cost-conscious in their plan selection.” (Kaiser Family Foundation)

“Paul Ryan’s premium support model would ‘change Medicare from a single payer system in which the government pays directly for seniors’ health care to one where beneficiaries could use their government benefits to buy private insurance.’” (CNBC)

 

Block Grants for Medicaid

Instead of a matching system – predicated on each dollar spent in the program – block grants would provide a lump sum of money to states. The stated goal would be to incentivize efficiency and disincentive states from spending more money in order to receive more funds from the federal government. When states need more funding for their programs they would have to weigh choices such as, increasing taxes or charging enrollees.

 

“Under Mike Pence, Indiana’s Medicaid system began requiring premium payments, a system that happened to be guided by Seema Verma, who Trump nominated to lead the Centers for Medicare and Medicaid Services.” (CNBC)

 

An expert on entitlement programs, Andrew Biggs, outlines these Social Security reform options.

 

 

What You Can Do

 

  • Read up on entitlements and what your taxes are going towards if you work
  • Explain to someone the key issues with entitlements and ideas for positive changes
  • Speak up about accountability and planning for retirement to your friends and family
  • Keep an eye out for entitlement reform ideas to be floated by Congress this year and share your views with your state and federal legislators

 

Thought Leaders in Entitlement Reform

 

Questions for Discussion

 

  • How can programs support seniors who are close to retiring or in retirement, while shoring up them up for younger generations?
  • What are the impacts of these entitlements on our community?  Who cares about this and which part(s)?
  • How can we contribute to cutting red-tape, influence government priorities?
  • How can voters help politicians feel like they can talk about reforms to our entitlement programs without losing their next election?

 

March 2018

Suggestions for your Next Conversation

Explore the Series

This brief is part of a series of recommended conversations designed for circle's wishing to pursue a specific focus for the year. Each series recommends "5" briefs to provide a year of conversations.