Why the U.S. Can't Keep Costs Down


Here’s why it’s hard for the U.S. government to keep its costs down: Seniors and the very poor are entitled by law to almost half its money. Congress can trim other expenses, and automatic budget cuts and the cessation of two U.S. wars have slowed spending growth. But Social Security, Medicare and Medicaid are exempt from budget wrangling and are growing: from $1.7 trillion, or 48 percent of the fiscal 2014 budget to an estimated $3.2 trillion, or 53 percent of the U.S. budget, by 2024. Over the decades, these three programs have attracted the mildly pejorative term “entitlements” along with debate about their long-term fiscal health. Nonetheless, for 30 years attempts to contain their cost to taxpayers have failed.

The Situation

The federal deficit will narrow through next year, then entitlement costs are projected to widen it. For Social Security, there were 16 workers paying into the system for every person drawing benefits when payments began in 1940; the ratio of workers to beneficiaries is expected to fall to 2-to-1 by 2035. The Congressional Budget Office in November offered 79 options to reduce the deficit, including reducing Social Security benefits for new beneficiaries and increasing Medicare premiums. These aren’t likely to be enacted. A case study: Lawmakers agreed in December 2013 to reduce military pension benefits by $6.2 billion from 2014 to 2023. Veterans’ groups protested and lawmakers restored $5.7 billion two months later. The U.S. welfare state, accounting for about 20 percent of gross domestic product, is still small compared with those of many developed countries. In France, Belgium, Denmark and Finland, social programs consumed more than 30 percent of GDP in 2013.

The Background

Social Security was established by President Franklin D. Roosevelt in 1935 to curtail poverty among the elderly. Medicare, aimed at providing health care for seniors, was proposed by FDR’s successor Harry Truman and became a reality in 1965 along with Medicaid, a program assisting low-income Americans. Today about 59 million people — one in every five Americans — receive Social Security benefits averaging $1,217 a month. There were 54 million Medicare beneficiaries last year and almost 70 million Medicaid beneficiaries. That explains why plans to change entitlement payments are a political minefield. George W. Bush made partial privatization of Social Security the cornerstone of his second-term domestic policy, only to see the idea rejected within months by both houses of Congress, which were then controlled by his own Republican Party. When House Budget Committee Chairman Paul Ryan rolled out a plan in 2011 to cut $4 trillion in federal spending; he was greeted with an attack ad showing a look-alike rolling a frightened grandmother off a cliff. President Barack Obama built $500 billion in Medicare savings into his health care act, only to be pilloried for “raiding” the program by his 2012 election opponent Mitt Romney and running mate: entitlement budget cutter Ryan. The president offered to curb inflation increases in Social Security in the hope of getting a “grand bargain” to reduce the federal deficit. In the absence of willing partners, he swiftly abandoned the idea.

Source: Congressional Budget Office
Source: Congressional Budget Office

The Argument

Longer life expectancies and rising medical spending help drive up entitlement costs. Those calling for cuts say the programs divert necessary investment in schools, road repairs, national defense and the environment. On the other side, advocates say reducing entitlement programs will only worsen the growing gap between the rich and everyone else. Senator Elizabeth Warren says a generation-long squeeze on the middle class makes it imperative to expand Social Security benefits by boosting payments, adopting a government measure called CPI-E that tracks the impact of inflation on seniors. Others note that health-care costs are falling; if the trend continues, the entitlement problem will shrink too.

The Reference Shelf

  • Video of President Lyndon Johnson signing the Medicare bill on July 30, 1965, and giving Harry Truman the first identification card.
  • The National Academy of Social Insurance makes the case for boosting taxes to shore up Social Security’s finances.
  • A New America Foundation argument for expanding Social Security.
  • OECD Social Expenditure Database.

First Published March 18, 2014

To contact the writer of this QuickTake:

Toluse Olorunnipa in Washington at tolorunnipa@bloomberg.net

To contact the editor responsible for this QuickTake:

Anne Cronin at acronin14@bloomberg.net