Entitlements
The Issue
Spending on the three largest entitlement programs—Social Security, Medicare, and Medicaid—will cause federal spending to grow from the historical average of 20 percent of the economy to nearly 35 percent by 2035. Spending on Social Security would increase from 4.8 percent of GDP in 2010 to 6.2 percent in 2035. Projections for Medicare and Medicaid spending nearly double in that time period, from 3.6 percent of GDP in 2010 to 7 percent by 2035 for Medicare and from 1.9 percent of GDP in 2010 to 3.9 percent in 2035 for Medicaid.
This spending tsunami is a major threat to limited government because automatic increases are locked in by each program’s governing laws. Entitlements get the first call on tax revenues; other goals, such as defense or national security, must compete for an increasingly smaller share of what’s left. This “locked in” spending is steadily undermining other national priorities and threatens the economic future of younger generations who face an individual debt burden of $200,000.
Decades ago, politicians promised baby boomers lavish health and retirement benefits but provided no way to pay for them. Now we are faced with the consequences of their neglect. Our national debt held by the public equals nearly 70 percent of GDP and is growing rapidly. Medicare and Social Security face almost $46 trillion in long-term unfunded obligations. We must begin now to solve these problems, and we all must be a part of those solutions.
The moral challenge from entitlement spending is undermining our democratic system as more Americans become dependent on the government and other priorities are automatically preempted. We must transform the entitlement programs away from unaffordable social insurance benefits for everyone regardless of need toward a real insurance model that provides economic security for seniors without bankrupting younger generations. Individuals must also provide for more of their foreseeable retirement needs through personal savings and insurance. These steps will ensure a fiscally sustainable future and better stewardship for younger generations.
Recommendations
- Restore fiscal responsibility and protect Americans from unneeded tax hikes. Many opponents of fundamental entitlement reform claim that raising taxes is a feasible approach to solving the entitlement crisis. This assessment is simply wrong. Social Security and Medicare projected deficits are large and growing, and raising taxes to pay for this spending would require doubling tax rates even for the lowest income brackets. Such a policy would be a devastating blow to the economy. The long-term obligations from entitlement programs such as Social Security, Medicare, and Medicaid require more than modest changes in the current system. We must guarantee economic security to today’s Americans while preserving the same opportunity and economic freedom they enjoyed for their children and grandchildren.
- Restore Social Security to its original purpose as a safeguard against seniors living in poverty. By transitioning to a flat benefit and targeting Social Security benefits to those who are most in need, Social Security can fulfill its original purpose as an insurance against senior poverty without placing unbearable financial burdens on younger generations. Americans are living longer and spending more years in retirement than ever before. By gradually increasing the retirement age and then indexing it to life expectancy, we can create a more reasonable balance between a person’s working years and the years he or she receives Social Security benefits. Coupled with tax reform, Americans will have greater incentives to save for their own retirement and work beyond the current retirement age, further alleviating the strained system.
- Transform Medicare to a fiscally sustainable program that offers seniors improved access to quality care. Medicare should be transformed from its current open-ended and unsustainable defined-benefit structure to a premium-support system. Under this model, seniors would receive a government contribution, adjusted to reflect income status and target assistance to those most in need. This would allow for proper budgeting and ensure a high-quality, dependable health benefit for seniors. Premium support would allow seniors to apply their government contribution to the health plan that works best for them, just as Members of Congress and millions of federal employees and retirees are able to do. Competition among insurers would lead to coverage options that respond to consumer demand, resulting in better quality and access to care at lower cost.
- Restructure Medicaid financing and give states broader discretion to provide care to beneficiaries. Medicaid should be restructured to ensure that it is fiscally sustainable. The federal Medicaid allotment to states should be capped, and states should receive greater flexibility to pursue innovative approaches to administering and managing the program. Healthy, low-income beneficiaries should be mainstreamed into private insurance with the help of federal tax relief and additional subsidies. States should focus on providing for disabled and elderly beneficiaries in a way that more appropriately reflects the relative needs of each state.
- Reform the budget process to ensure that entitlement programs are fiscally sustainable. Social Security, Medicare, and Medicaid are not subject to annual debate in Congress as part of the federal budget process. With the baby-boomer generation enjoying longer life expectancy, the cost of these programs will increase to alarmingly high levels. Congress should set a 30-year budget for each major entitlement, with an obligation to adjust the programs as necessary to keep them within budget and protected from insolvency while ensuring that low-income Americans are protected from poverty. Congress should also reveal the projected cost of any proposed policy or funding level for each significant federal program over a long-term horizon of 75 years so that lawmakers avert mounting long-term challenges.
Facts & Figures
- Total means-tested welfare spending (cash, food, housing, medical care, and social services for the poor) has increased seventeenfold since the beginning of Lyndon Johnson's War on Poverty in 1964. Though the current trend is unsustainable, the Obama Administration plans to increase future welfare spending rather than enact true policy reforms.
- Collectively, entitlement programs would need nearly $46 trillion today to fully fund benefits promised in the future, and every year program reform is delayed, that price tag increases by $1 trillion or $2 trillion.
- Some argue for taxing only the wealthy to raise revenues and reduce federal deficits, but hiking income taxes on these taxpayers would increase their rates to mathematically impossible levels. To close the 2035 deficit, the top two rates would increase to 139 percent and 150 percent, and in 2050, they would reach 206 percent and 223 percent.
- If the average historical level of tax revenue is extended, spending on Medicare, Medicaid, the Obamacare subsidy program, and Social Security will consume all revenues within less than two generations. No revenue will be left to pay for other government spending, including constitutional functions such as defense.PDF
- In combination with other entitlements, such as food stamps, unemployment, and housing assistance, Medicare, Medicaid, and Social Security constitute more than half of total spending.
- Social Security began running deficits in 2010, and its trust fund will be exhausted by 2036, which is when seniors will see about a 25 percent cut in benefits, if Congress and the President fail to enact meaningful entitlement reform.
- In net-present-value terms, Social Security owes $9.1 trillion more in benefits than it will receive in taxes.
- Medicare spending is one of the main drivers of long-term runaway deficits because of the combined effects of an aging population and rising health care costs. In 2010, spending on the program was 3.6 percent of GDP. Under current policy, this will more than double by 2040 and continue to rise.
- The cost of benefits that Medicare has promised citizens but cannot pay over the next 75 years is estimated to be $36.8 trillion. Previous attempts to control rising costs have contributed to serious gaps in coverage, an increasing number of demoralized doctors refusing to accept new Medicare patients, and an excessive and growing bureaucracy. Even so, billions of dollars are lost ever year to waste, fraud, and abuse.
- Taxpayer subsidies already account for 85 percent of Medicare program costs.
- Medicaid, the joint federal–state health program for the poor, elderly, and disabled, serves roughly 16 percent of the nation’s population, and the explosive growth in costs increasingly stresses state budgets and draws taxpayer funding away from other state spending priorities, like transportation and education.
- Between 1990 and 2010, combined federal and state Medicaid spending increased from $72 billion to over $400 billion. Federal spending alone has increased from $40 billion in 1990 to an estimated $271 billion in 2010.
Selected Additional Resources
- Stuart M. Butler, Alison Acosta Fraser, William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, Heritage Foundation Special Report No. 91, May 10, 2011.
- John Fleming, Emily Goff, and Kathryn Nix, “2011 Budget Chart Book,”.
- David C. John, “Social Security 2011 Trustees Report Shows Permanent Deficits,” Heritage Foundation WebMemo No. 3256, May 16, 2011.
- Robert E. Moffit, “The First Stage of Medicare Reform: Fixing the Current Program,” Heritage Foundation Backgrounder No. 2611, October 17, 2011.
- Robert E. Moffit, “Medicare’s Deteriorating Financial Condition,” Heritage Foundation Foundry, May 13, 2011.
