Entitlement Spending and the Federal Budget

Background

“Entitlements” is a composite term referring to a large number of spending programs that require payments to persons, state and local governments, or other entities once the recipient meets eligibility requirements. Entitlements represent legal obligations of the federal government. Federal entitlement programs include Social Security, Medicare, federal retirement plans, unemployment compensation, food stamps, and many others. Some programs, most notably Medicaid, are co-funded by federal and state governments.

Spending on some of the largest entitlements is governed by laws other than annual appropriation acts. The Congressional Budget Office (CBO) calls these expenditures mandatory. Mandatory spending fluctuated around 11 percent of gross domestic product (GDP) for five years before the Great Recession. It increased to 14 percent in 2013. It fell to about 13 percent by 2015 but is projected to increase in the future. Long-term projections indicate that if these trends were to continue, mandatory spending would eventually crowd out all discretionary spending, which funds things like national defense, infrastructure, research and development, education and social services, etc. Mandatory spending growth is fueled in large part by demographic trends and high health care cost growth.

One positive piece of news in the period immediately following the 2008 recession and enactment of the Affordable Care Act (ACA) was an unanticipated reduction in the growth rate of major health care programs. Since 2009 the costs of both Medicare and Medicaid have fluctuated around their respective 2009 values, in stark contrast with earlier trends. For example, Medicare costs grew from 2.1 percent of GDP in 2000 to 3.5 percent by 2009. Similarly, the cost of Medicaid increased from 1.2 percent of GDP in 2000 to 1.7 percent in 2009.

Many analysts hypothesize two possible explanations for this slowdown. One could be a general decline in economic activity as a result of the recession. This is a cyclical effect that has no significant impact on the long-term trend.

The second explanation could be structural reforms within the health care industry, such as those made under the ACA. If this factor persists it may reduce budgetary pressures over the long term. At present, however, the magnitude of this effect is unknown.

Most recently CBO projects that major health programs will continue to grow at an increasing pace. The projected outlays on major health programs increase from 6 percent of GDP in the near future to almost 8.5 percent 20 years later.

Spending on social security, Medicare, Medicaid, and all mandatory programs as a percentage of GDP 1974-2016

 

Tax expenditures—special tax relief provisions—are often very similar to entitlements (see Chapter 3, Taxation, for further discussion of tax expenditures). Distribution of the benefits of tax expenditures favors higher-income people, unlike the distribution of the direct-spending entitlements. Reforming tax expenditures is often considered as one of the possible ways to reduce entitlements and fix budget problems.

 

Fiscal challenges related to aging baby boomers and the increased longevity of all Americans can be countered with policies to control health care costs, ensure Social Security solvency, increase retirement savings, help people work longer, restore and strengthen the depleted federal revenue base, and vigorously promote economic growth.

Entitlement Spending and the Federal Budget: Policy

Entitlement spending

In this policy: FederalBudgetcommissiontax expenditureentitlement

Efforts to reform entitlement spending should:

  • recognize that the primary cause of the projected growth in entitlement spending is continuing increases in health care costs and not increased benefits or the aging of Americans;
  • insist that commissions or other bodies charged with recommending legislation or other measures to reduce future deficits be balanced in composition, conduct fair and transparent deliberations that give adequate time and access to all sides, and have a mandate to consider and examine both tax expenditures and direct spending;
  • reject across-the-board cuts in entitlement spending; and
  • subject the creation or expansion of tax expenditures to at least the same scrutiny as the limitation or elimination of entitlement spending.