Entitlement Benefits vs. Entitlement Costs

>> John Cogan: As you probably all know, the source of the growth in government spending is entitlements. And I wanna show you just how much of that growth is and explain a little bit about why we're seeing that growth. So these are the major entitlement programs in the federal budget.

The top two, Social Security and Medicare are the biggest. Social Security, sort of the granddaddy of all entitlement programs. Most of those expenditures go for seniors, some go for the disabled. Then you can see what I've called the in-kind benefit programs, which are entitlements to specific services for low income people and maybe less low income than before, which we'll get to in a minute.

But Medicaid, the ACA, Child Health Insurance, and you have nutrition programs, housing programs, and then you have a slew of cash assistance programs. All of these latter programs are means-tested programs. That is, the higher your income, the less you will get under these programs, and eventually, you'll cease to become eligible for these programs.

Now, entitlements, from a budgeting standpoint, operate very differently than all other programs in the budget. So the way all other programs work is Congress sits down every year and appropriates a specific amount of money for each program. And so it knows in advance how much is going to be spent, because it sets a limit on the amount that can be spent, and it does that every year.

So in that world, if the entire budget was what I call discretionary programs, non-entitlements, Congress would look at revenues, and then they would look at how much they're going to appropriate to match it. Entitlements operate completely different, okay. Entitlement programs are open-ended. Congress does not set an appropriation for entitlements in advance.

They set the rules of operation of the program in advance. They create a legal obligation on the part of the United States government to make a payment. So it says if you reach age 66 for Social Security and you've worked for at least ten years, you're eligible for a benefit of x.

And so it sets the eligibility rules for the program and the benefit levels for the program. Expenditures in any year can be whatever the product of those two are. And so the determinants are outside of the appropriation process. They're driven by demographics, they're driven by economic conditions. They're not driven by budgeting.

Most of these entitlement programs are permanently authorized, or authorized for a minimum of four years at a time. And so the vast majority of these are on automatic pilot, and they have no annual review process, and some never get reviewed. So you can see how a program like that can get quickly out of control.

It's disconnected for the most part from its revenues. And so this may be the most interesting chart of all. It shows expenditures on four different categories of government spending from 1962 to the present, and then the dotted lines show the projection for the future. It's all relative to GDP again.

The blue line is entitlements. The green line is defense. The red line is all other programs in the budget. And then that final yellow line is net interest. And this is the whole budget broken into four categories. So what this chart shows you is that all of the growth in government spending over the last 60 years has been a consequence of entitlement programs.

Most people think that defense is a huge part of the budget, and they scream loudly about defense's contribution to deficits. Well, look at defense spending. It's been going down relative to GDP or as a percentage of the budget. It's been going down pretty much for 60 years. I mean, it's a little bit misleading.

The beginning of this is the Vietnam War, and that's why it's a little bit high, right? But the Vietnam war spending, as you can see, came down rapidly in the late 60s, early 70s. That little kind of pimple up in the 80s is the Reagan buildup. And then you could see, I think you could see if you look closely, the Iraq and Afghanistan war spending.

Very, very little impact on the budget. In fact, the spending on Iraq and Afghanistan is trivial compared to the growth in entitlements over this period. So entitlements are the driving force, a non-defense discretionary, roughly in line with defense spending over the last 30 years or so. Net interest, a very small component now.

But as I said earlier, projected to grow. And again, these projections, I think are underestimates of where we're actually gonna head up. So the interesting thing about this to me, though, from a political standpoint is the growth in entitlements has been continuous. I mean, you got bumps up and bumps down, but it's been relatively continuous.

There's no period of systematic reductions. You see a little flattening in the 80s and 90s, but for the most part, it's been growing. And so we've had Democratic presidents, we've had Republican presidents, Republican congresses, Democratic congresses all through this period, right? And so you can't really tag this to too much partisanship.

Both parties have been involved in this production of these entitlements and their growth. The way we used to tell it in the Reagan days was, when it comes to spending, there's really no difference between Democrats and Republicans. Maybe the only difference is that Democrats enjoy it, but they both do it.

And so when you listen to Republicans these days howling about these expenditures on the ACA and so forth, they will still continue to spend on it. They just don't really enjoy it like Democrats do. But in any event, all of the future growth in government spending, as you can see, is due to entitlements and due to interest payments on the debt.

This is quick chart, I can show you. Just shows that Social Security and Medicare are the prime sources of the growth in government spending over the last 60 years, at least maybe last 50 years since the mid 70s, and they will occupy the lion's share of government spending increases over the next 30 years.

So when you think about the future problem, both of these charts combined together show you a, that it's entitlements, and then within entitlements, it's really these programs for senior citizens, Social Security and Medicare. So let me spend a moment now on how to meet the challenge. Now, I focus all of my remarks on the cost of government spending and on the cost of these entitlements.

I haven't talked at all about the benefits of these programs. And the reason for doing so is just, I really wanna emphasize to you that there is a cost that goes along with the benefit. The benefits of Social Security, Medicare, some of these means-tested programs over the years have been enormous.

They've lifted millions of individuals out of poverty, prevented others from falling into poverty. And so the benefits are clear. Every developed country in the world has a social safety net as sort of a hallmark of a compassionate society, and the United States is no different in that regard.

But we've gotta balance these benefits against their costs. And I maintain that we've got an unbalanced system now, that the benefits of these programs are still there, but the costs have become very, very large. We haven't balanced the system right. And the cost, as I've said here, is a fiscal burden which we've talked about.

And also these programs for low income benefit programs that to some extent Social Security have disincentive effects for self-sufficiency. So when I said that the system is out of balance, here's what I mean. And this relates just to federal entitlements programs. So in 2019, more than half of all US households are recipients of at least one federal entitlement program.

Now all seniors, of course, are in Medicare and Social Security, so stripped them out of the population. And 41% or two out of every five younger households, prime age working households, are receiving at least one entitlement benefits. 60% of the recipients are not in poverty. Total entitlement spending at the federal level is 5 times the amount needed to eliminate poverty entirely.

And about $700 billion each year goes to households in the top half of the income distribution. And so this entitlement system that we started out decades ago had really two purposes. One, it was designed to provide a means of financial security for individuals in old age, to prevent poverty in old age.

And then in the 60s especially, we added what we call welfare programs, or I like to say low income benefit programs as a way of providing a social safety net for those individuals that are unable, for some reason or other, to make it on their own. Those were the original purposes.

And this is what we have now, a system that provides benefits high up the income distribution, very little targeting on the original populations and the original purposes that the programs were designed to serve. The programs for seniors are particularly generous. The typical couple reaching age 65 and qualifying for Social Security, should be 67 now, will receive, in present value terms, benefits from Social Security and Medicare that will total over $1 million.

So how should you think about that? That's when the typical couple reaches Social Security's full retirement age. The government hands them a check for $1 million. That's the way you think about a present value. So it's an enormous sum of money. Child and daycare credits on the low income side now go up to families with incomes up to 74,000.

And the ACA now goes to families with incomes that are exceeding 200,000. So we've got this enormous retirement system for seniors. And then for our low income benefits, what we've been doing over the years is increasing the income eligibility levels for these programs. And that's how we end up with so much of the assistance going to individuals that are not living in poverty.

So if we're gonna meet the fiscal challenge, we have to confront the hard facts of life. Deficit spending is a way of life in Washington. In the last 60 years, the data that I've shown you here, we've only balanced the budget around a surplus in five of those years.

And four of those five were in the late 1990s when we had an extraordinary economic bubble from the high tech takeoff. Spending was not constrained very much then, but the revenue take was so large that we got balanced budget despite Congress. In any event, it's a way of life.

When you think about it, you've got a reverse, a built-in behavior, behavior that's been built in over at least six decades. So it's not a small challenge. Second is the deficit is far too large for any single congress to eliminate. If you wanted to eliminate the deficit next year, you'd have to raise taxes by 40%, or you'd have to cut spending by 33%.

That's not gonna happen. So in some sense, the problem is become a little bit too large for a congress. Now if you had a Congress that was forward looking, we're able to look out ten years and put together a plan that they could adhere to for ten years, you might have a way of getting at a fix.

But most members of Congress are not thinking past their next election. They tend to be very, very focused on the near term. And that makes it even more difficult to solve a problem like this. If one is going to take on the deficit through spending, you have to hit the most sensitive programs in the budget.

Entitlements for low income individuals and entitlements for seniors. If you want to solve the budget problem with tax increases, you've gotta hit the middle class. The deficit is so large that if you taxed away 100% of the income of the top 1% of the US population, you still have a deficit afterwards that you could take all of the income by the top 1% of the US population, and you still wouldn't balance the budget.

And so any increase in taxes to solve the problem has to be achieved through a large tax on the middle class. Very tough. But the key is to meeting the challenge. You've gotta have economic growth. Economic growth is essential. The only times we've come close to reducing the deficit significantly or balancing the budget is during strong periods of economic growth.

As I've said, you've gotta limit the most sensitive programs in the budget. You've gotta limit the growth in Social Security, Medicare, Medicaid, you've gotta cap eligibility for means-tested programs. Maybe twice the poverty line would do it. I've calculated to go further. And then you have to avoid armed conflicts.

And you've gotta avoid armed conflicts without expanding the defense budget too much. That is an extraordinary challenge for the diplomatic corps of the United States. So major takeaways. We are on an unsustainable fiscal path. Entitlement spending is the problem. The way you should think about this is higher taxes and debt are merely the means of financing the problem.

Fiscal policy should focus on restraining these entitlements. And the way we should think about doing that, in some broad sense, is just returning these programs to their original purpose of providing a measure of economic security for individuals in old age and a safety net for individuals who are unable to provide for themselves.

So I'll stop there, and I'll be happy to take any questions that you might have.