At the federal level, budgetary spending can be grouped into two categories: entitlement and discretionary spending.
Entitlement programs are those that are required to provide benefits to everyone meeting the program’s eligibility requirements. Federal entitlement programs include Social Security, Medicare, unemployment compensation, food and nutrition assistance, and many others. Some entitlement programs, most notably Medicaid, are co-funded by federal and state governments.
Spending on entitlement programs depends on the cost of delivering the service and the number of people who qualify. The number of people who qualify is in turn determined by demographics (e.g., how many people are in the age or income group that qualifies) and the economy (e.g., how many people are unemployed).
In contrast, discretionary programs receive a set budget from the legislature during each budget cycle. The number of people served by a program is limited by the corresponding budget amount. Examples of discretionary programs include infrastructure, education, social services, and research and development.
Deficit reduction efforts have sometimes focused on entitlement spending because these programs consume a large and growing portion of the federal budget. Higher spending 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.
Tax expenditures, such as tax credits and tax deductions, are very similar to entitlements in that the payments are made to everyone who qualifies for them and are not subject to annual budget decisions by the legislature (see also Chapter 3, Taxation—Tax Expenditures). Distribution of the benefits of tax expenditures favors higher-income people, unlike the distribution of the direct-spending entitlement programs.
ENTITLEMENT SPENDING AND THE FEDERAL BUDGET: Policy
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 and conduct fair and transparent deliberations that give adequate time and access to all sides;
- subject the creation or expansion of tax expenditures to at least the same scrutiny as the limitation or elimination of entitlement spending; and
- reject across-the-board cuts in entitlement spending.