Cutting entitlement spending is all the rage right now. That is good, because it will be impossible to put the nation’s finances on a sustainable footing without changes in the major entitlement programs.
But much of the rhetoric on the issue is bad. It stokes public passions with alarms about spending trends but then dances away from the tradeoffs we must face.
This seems particularly common in those who most loudly proclaim their willingness to “make tough choices.”
Many of us really do not understand exactly what these programs are, why spending on them is increasing rapidly or what the implications of cuts will entail. If we don’t move from demagoguery to discussion, we will fail to straighten out our nation’s finances.
A column last fall explained what is meant by the much-misunderstood term “entitlement” and described the major federal programs in this category. The pressing issue is why spending on such programs has risen the way it has. Demagogues tend to sidestep this key question, usually implying that spending is growing simply because successive Congresses and presidents have created many new programs and have increased benefit levels for existing ones. This is one cause but a relatively minor one.
The reasons for rising outlays vary from program to program.
Changes in the age structure of the population, particularly the aging of baby boomers, the cohort of 79 million living people born from 1946 through 1964, dominates rising outlays for age-related and FICA-funded programs like Social Security and Medicare. It also pushes up outlays for Medicaid, which is funded from general tax revenues, because payments to nursing homes and for in-home health care for the elderly are a large but often unappreciated fraction of Medicaid spending.
Increasing per-procedure costs of medical care and the introduction of new medical treatments unknown even a decade ago also are a major problem for Medicare and the driving one for Medicaid, the Children’s Health Insurance Program and medical benefits for veterans.
The decline in household income and persistent unemployment from the recession are a third factor, one that has pushed up outlays for unemployment benefits, the Supplemental Nutrition Assistance Program and, to a lesser extent, for Temporary Assistance to Needy Families. (SNAP is the new title for the program long known as food stamps, TANF is the program that replaced Aid to Families with Dependent Children in the late 1990s and is the program most people have in mind when they talk about “welfare.”) This increase in use due to the economic downturn is the major cause for increases in outlays for most entitlements other than Social Security and Medicare.
High unemployment or lower incomes for many households also increase the number of beneficiaries for both Medicare and for CHIP because these programs are “means-tested.” You are eligible only if your income is below specified levels. Lower incomes because more people are unemployed make more people eligible.
Finally, there are some changes in the number of programs, in their eligibility criteria and in benefit levels. Often cited as a key contributor, they are less common than people think and a much less important driver of increased spending.
There has been no substantial change in Social Security benefit formulas since the mid-1980s. And at that time, some benefits, such as those for surviving children, were cut back rather than expanded. The net worth limitation in means testing for food stamps was eased in the late 1990s. That change is responsible for some of the growth in spending on this program over the past 10 years, but the increases since 2007 are due largely to increases in the number of people qualifying under existing criteria, not further changes in those criteria.
It is ironic that when many people talk burgeoning entitlement spending, they are thinking of TANF, or “welfare.” That is the one entitlement program that has seen a substantial drop in spending over time as a result of changes made in the late 1990s.
Not much can be done to reduce spending on programs where an aging population is the principal cause for increased outlays other than cutting benefit formulas. Yet despite all the ballyhoo about curbing entitlement spending, cutting Social Security benefits remains political anathema.
Medicare’s problems merit a column in themselves. But again, except for the addition of the Part D drug benefit in 2006, increases in outlays are driven by the same general increases in health care costs that plague private insurance and by an aging population.
Medicaid, a complex and poorly understood program, also merits its own column. One unappreciated factor is “long-term care” which consists of nursing home and in-home health care services. These make up 40 percent of all Medicaid spending in Minnesota. They are not limited to the elderly; many recipients are physically or mentally handicapped people well under retirement age. A large chunk goes to nursing homes. Nationally, about 60 percent of all nursing home residents are supported by Medicaid. Cutbacks in federal funding for this are more likely to shift costs back to states and counties than to reduce spending for government as a whole.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.