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Entitlement reform

What is entitlement reform

Entitlement reform is the idea that some of America's biggest and most popular non-military government programs — most notably Social Security and Medicare — should be changed so as to be less expensive in the future.

These programs spend a lot of money today, and unless the laws that govern them are changed, they will spend a lot more money in the future. A wide range of elites in both parties wants to avoid that fate, and entitlement reform tends to be a popular cause among political insiders. At the same time, the main entitlement programs are very popular so any change is contentious.

What are entitlement programs?

The crucial key point about entitlement programs is that these are programs that spend money automatically unless Congress steps in and changes the program. The federal government spends money in two main kinds of ways. One is through the annual appropriations process. Congress passes a law spending a certain amount of money on a certain set of programs over a certain amount of time (typically one year) and then ends this spending unless a new appropriation is made. This is called "discretionary" spending.

The other method — the one that creates entitlement programs — is to establish an enduring, formula-driven program. Congress writes a rule determining who is eligible for payments (in the case of Social Security, senior citizens) and a formula for determining how much money any given person is eligible for. Then the money continues to flow until Congress passes a new law altering the program. This is known as "mandatory" spending or "entitlements."

Which programs count as entitlement programs?

Social Security, which gives cash to senior citizens and a few classes of orphans, and Medicare, which pays for seniors' health care, are by far the largest entitlement programs. And often when people say "entitlements" they have those two programs in mind. But Medicaid, the Children's Health Insurance Program, the Affordable Care Act subsidies, SNAP ("food stamps"), SSI ("disability"), some unemployment insurance, retirement programs for civilian and military personnel, some veterans benefits, a handful of tax credits, the deposit insurance program for banks, and about $15 billion worth of farm subsidies also count. The Congressional Research Service breaks it all down here.

But of the approximately $2.2 trillion in 2014 entitlement spending, about $1.5 trillion was on Social Security and Medicare and about half of the rest was on other health care programs.

Who wants to cut entitlement programs?

On paper, almost everyone who's anyone in politics wants to cut entitlement programs. In practice, almost everyone also wants to accuse their political opponents of cutting these exact same programs. The budgets that House Republican Budget Committee leader Paul Ryan has produced for congressional Republicans routinely entail substantial cuts in Medicare and much larger cuts in proportional terms to smaller entitlement programs that mostly serve low-income populations. Republicans generally call for entitlement cuts in the context of a larger push for tax cuts and a drive for reduced government spending.

President Obama, meanwhile, has repeatedly called for his own set of cuts to both Social Security and Medicare but espouses cuts only in the context of a "balanced" approach that also includes tax increases. Not all Democrats agree with Obama about that, but most of the Democratic Party leadership is on board. Since the end of the 2013 government shutdown, however, there have been no active high-level talks on entitlement reform.

On paper, Democrats' emphasis on a "balanced" approach is very similar to the approach taken by an interlocked network of entitlement reform advocacy organizations. These include the Concord Coalition, the Committee for a Responsible Federal Budget, Fix the Debt, and the Peter G. Peterson Foundation. The entitlement reform groups have not had a great deal of success in getting legislation enacted, but they have shown considerable ability at times to force the entitlement reform topic onto the agenda.

More liberal Democrats generally eschew the rhetoric of entitlement reform, but they also often support specific policies that would likely reduce spending on the health care portion of entitlements.

Who is against cutting entitlement programs?

Most people. Despite widespread and reasonably bipartisan support for cuts in Social Security and Medicare among politicians, a Pew Research Center survey found that only 10 percent of the public wants to cut Social Security benefits and just 15 percent wants to cut Medicare. These results are generally in line with other surveys. The main entitlement programs are among the most popular spending initiatives the federal government undertakes.

And because entitlement cuts are so unpopular, politicians who support them in one context often oppose them in another. Democrats who put entitlement cuts "on the table" in negotiations with Republicans castigate the GOP as Social Security cutters when talks collapse. And Republicans who complain about out-of-control government spending have spent the past five years criticizing the Democrats for Medicare cuts that Republicans also voted for.

Why is entitlement spending going up?

In 1970, entitlement program spending was equivalent to about 5 percent of the total national income of the United States. Today it's more like 15 percent and projected to steadily rise. The historical and (especially) projected increases are mainly driven by three factors. In order from least to most important, those are expansion of health insurance programs associated with the Affordable Care Act, the overall trend toward higher health spending, and the aging of the population.

According to the most recent Congressional Budget Office Long-Term Budget Outlook, 54 percent of the increase in spending over the next 15 years is due to population aging. More elderly people means more spending on Social Security and Medicare. Nineteen percent is due to ACA program expansion, and 28 percent is due to "excess cost growth" in the health care system. As you look further ahead in time, excess cost growth continues to drive higher and higher spending while the other two factors level off.

What could we do to reduce entitlement spending?

There are four main options.

  • Reduce the number of people who are eligible for entitlement programs, most plausibly by raising the threshold for who counts as old enough.
  • Make benefits less generous to some of the people who are eligible.
  • Make health care programs less generous to health care providers, by continuing to cover the same services but offering less money to the people who provide the services. Liberal proposals to have Medicare "negotiate" prices with pharmaceutical companies fit this model, as do various plans to tweak reimbursement rates.
  • Last and most appealing, we could do something to reduce structural cost growth in the American health care system through greater efficiency.

The problem here is that while ideas for how to accomplish the efficiency goal abound, they are almost invariably controversial and it is difficult to assess their effectiveness in advance. Read all about these arguments on our health spending cards.

Are entitlement cuts the same as austerity?

In theory, no. The debate over entitlement reform has to do with the very long-term budget over the course of decades. The debate over stimulus versus austerity — whether the government should increase borrowing or reduce it in order to boost the economy — is about the short term. It is entirely possible to believe we should do more short-term spending to fight unemployment and less long-term entitlement spending to reduce the budget deficit. The Obama administration's first budget director, Peter Orszag, calls this "barbell stimulus."

Conversely, politicians who are skeptical of entitlement reform generally favor tax increases to avoid the need for cuts — but tax hikes are also a form of austerity.

In practice, however, the debates tend to overlap. Back in 2011, for example, Erskine Bowles and Alan Simpson — leaders of the push for entitlement reform — predicted that the United States was just two years away from a fiscal crisis if entitlement reform was not enacted, mixing the short-term and long-term issues together.

Why do people want to reduce entitlement spending?

Many political actors simply dislike taxes, and the best way to restrain taxes over the long term is to restrain spending. Entitlement spending is one large and growing block of spending, so if you want lower taxes you need to fight for entitlement reform. Another set of concerns has to do with the budget deficit. Entitlement spending is an important driver of government borrowing, which many people think is responsible for many current and potential ills.

But a specific reason why entitlements in particular often attract elite opprobrium is the nature of the spending. Entitlement programs mostly go to bolster the living standards of elderly people who aren't working. Other kinds of government programs — spending on infrastructure or education or public health or job training — can be understood as investments in the future of the American economy. Retirement programs don't have the same characteristics. And since the share of retirees in the population is growing, critics say it is simply unsustainable to continue on the present course.

What are the main options for Social Security reform?

Social Security is an extremely large program, so reformer proposals typically package a series of options together. The most common ones are:

  • 1. Raise the retirement age.
  • 2. Change the inflation measurement used for cost-of-living increases to what's called the "Chained CPI."
  • 3. Cut benefits for more affluent retirees (known as "means testing").
  • 4. Raise taxes by subjecting a larger share of rich people's income to Social Security taxes.
  • 5. Invest the Social Security Trust Fund into stocks and other investment options.
  • 6. Wholly or partially transition Social Security into a system of private accounts.

Of these options, entitlement reformers are generally focused on 1 through 4. The actual impact of 6 on Social Security's finances is quite ambiguous, but at different times it has been a very popular conservative structural reform.

What are the main options for Medicare reform?

Medicare is intimately linked to the broader health care system in the United States, so many proposals for reforming its cost structure ultimately come down to the broader question of health-care costs. But four big Medicare-specific ideas are frequently debated:

  1. Raise the age at which people become eligible for Medicare benefits.
  2. Reduce the prices that Medicare is willing to pay for medical services.
  3. Transform Medicare from an open-ended commitment to seniors' health care into a voucher to defray the cost of private insurance.
  4. Reduce benefits for more affluent retirees (known as "means testing").

Reformers espouse different versions of all four of these, but option three — known as "premium support" — has been especially prominent lately due to the efforts of Paul Ryan.

What's chained CPI?

There are a lot of slightly different ways of calculating inflation. Right now Social Security benefits are adjusted for inflation by using the CPI-W index. A slightly different approach would be to use a "chained" price index. A chained index assumes more switching between broadly similar products — if apple prices rise sharply, people will eat pears instead of just bearing the cost — and thus shows a slightly lower inflation rate. Switching to the chained index would very slightly cut benefits across the board each year, producing a small but growing savings.

On the technical question of which kind of index better captures the theoretical concept of inflation, economists broadly agree that chained indexes are better. But this sheds little light on the normative question of whether benefits should be cut.

What's means-testing?

A program that's not means-tested at all is one that is available to rich and poor alike on equal terms. Prosperous people can afford to send their children to private school (and often do) but are entitled to send kids to government-operated schools for free. But inside the school, subsidized lunches are generally available to poor kids but not to more affluent ones. That's means-testing. You target the benefit at the population that needs it most.

Medicare and Social Security are both somewhat means-tested currently, but benefits are available to everyone. One way to reduce spending on either program would be to do more means-testing and make benefits less generous for more affluent people. To save a considerable sum of money you'd need to define "affluent" relatively broadly — think the top third rather than the top 1 percent. In economic terms, means-testing is essentially the same as a progressive income tax increase. But in political terms, cutting spending through means-testing tends to be popular with conservatives who hate the idea of taxing the rich and unpopular with liberals who love taxing the rich.

What's premium support?

Premium support is a controversial idea for reforming Medicare by replacing it with a program that would subsidize the purchase of private health insurance. (Broadly this would be similar to how Obamacare works for the non-elderly population.) Of course, whether or not this would save money depends entirely on how generous the subsidies would be. Fans of premium support believe that shifting to this model would encourage the development of a more efficient health care system overall. But in strictly budgetary terms, the savings (if there are any) arise simply from spending less money on seniors' health care.

Different iterations of plans from House GOP budget chief Paul Ryan have set the cap differently, but the current version of the proposal would cap the growth in Medicare subsidy spending at the growth rate of national GDP plus 1 percent. One could, in principle, generate the same financial savings by keeping Medicare's current structure in place and imposing the same cap.

People are living longer; should we raise the retirement age?

Perhaps we should. Average life expectancy is much higher today (77 years versus 62) than it was in 1935 when Social Security first began paying benefits, and one way to cut entitlement spending would be to raise the eligibility age in line with that increase. But much of that increase in life expectancy relates to reduced infant mortality, better vaccination of children, and other matters that are irrelevant to retirement. The average number of years that a person who's already reached the age of 65 can expect to live has increased by five, a considerably smaller number. And the retirement age has already been raised by two years, partially rolling that increase back.

Another relevant issue is that the vast majority of the increase in life expectancy has accrued to higher income people, whose jobs are also less physically taxing. Consequently, a higher eligibility age would be one of the most regressive solutions available.

Where can I learn more?

Health-care spending is the most important and most conceptually complicated element of entitlement reform. The best way to understand the Medicare piece of entitlement reform is simply to read up on health-care spending and general health-care resources.

On Social Security, the Social Security Administration's history page is a very useful resource. The Center for American Progress's 2010 Social Security reform proposal is a good introduction to mainstream Democratic thinking about the issue, while former Social Security Deputy Commissioner Andrew Biggs, now at the American Enterprise Institute, regularly offers a right-of-center view on the issue.


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