97-39 EPW
Updated January 28, 1998
CRS Report for Congress
Received through the CRS Web
The Entitlements Debate
David Stuart Koitz
Specialist in Social Legislation
Education and Public Welfare Division
Summary
Federal entitlement programs make payments directly to recipients who meet
eligibility criteria set by law. There are about 400 of them with Social Security being
the largest. Generally, entitlement spending is not subject to control through annual
appropriations, and once an entitlement program is established, its scope can be altered
only by amending the law that created it. Over the past 25 years, entitlement spending
has risen much faster than the federal budget and the gross domestic product (GDP).
Proponents of curbing entitlements believe it is the key to controlling federal spending
in the long run. Left unchecked, they fear, entitlement spending will place a large strain
on federal budgets far into the future, limiting policy options and forcing future
generations to bear an enormous tax burden, especially when post-World War II baby
boomers retire and draw on these programs. They put heavy emphasis on projections
made by the Social Security and Medicare trustees that suggest the programs will not be
actuarially sound in the long run unless major reforms are made.
Others argue that entitlements
per se are not the problem. They contend that it is
Medicare and Medicaid that have grown rapidly, driven largely by the rise in the cost
of medical care nationally. They fear that the current “crisis” atmosphere about these
programs will undermine public support for them, lead to changes that do not address
the root causes of their growth, and result in major reductions in health care for
vulnerable populations and a shifting of costs to patients and health insurers. They
argue that some reformers are raising the specter of major problems for Social Security
in order to justify replacing it with a privatized system. They contend that such a system
would bring more risk to retirement planning and ignore the functions Social Security
now plays in providing adequate incomes to low and moderate income retirees. They
argue that only modest changes are needed to shore up the system’s long-range
condition.
As a result of legislation enacted last summer, a special 17-member panel has been
formed to examine Medicare’s financing problems. The Speaker of the House, Newt
Gingrich, raised the possibility of creating a separate panel to address Social Security’s
problems and the President has pledged action on the issue early in 1999.
Congressional Research Service ˜
The Library of Congress
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Background
Federal entitlement programs make payments directly to recipients (both individuals
and institutions) who meet eligibility criteria set by law. There are about 400 of them
with 10 accounting for 93% of all entitlement spending. Social Security is the largest.
Generally, entitlement spending is not subject to control through annual appropriations
made by Congress. Once an entitlement program is established, its scope can be altered
only by amending the law that created it. Although “pay-as-you-go” budget rules make
entitlement expansions more difficult to enact, entitlement spending is immune from
spending caps that are imposed on federal discretionary programs (i.e., those that are
subject to annual appropriations). In recent years, the fastest growing entitlements have
been Medicare and Medicaid.
Over the past 25 years,
entitlement spending has risen much faster than the federal
budget and GDP. It rose from 37% of federal outlays in FY1970 to 55% in FY1995, and
its share of GDP climbed from 7.2% to 11.4%. Under recent Congressional Budget
Office projections, it could reach 68% of federal outlays by 2007 if not restrained. For
the “big 3" entitlements — Social Security, Medicare, and Medicaid — spending could
rise from 8% of GDP today to 15% in 2030.1
Concern about
entitlement spending has been building for years, and entitlement
constraints of one sort or another have been enacted routinely since the late 1970s. Most
significant were those affecting Medicare payments to doctors and hospitals, although
Social Security, federal civilian and military retirement programs, and many others were
altered incrementally to save money or raise revenue. In 1992, President Bush had
proposed putting an overall cap on entitlements allowing them to increase for population
growth, inflation, and certain other factors (Social Security and interest on the debt would
have been excluded). While not enacted, it was given serious consideration on the Senate
floor. One year later, President Clinton’s proposed a number of piecemeal entitlement
constraints in his initial economic program. They were enacted as part of the Omnibus
Budget Reconciliation Act of 1993 — P.L. 103-66 — which was expected to result in
nearly $500 billion in cumulative deficit reductions over the FY1994-FY1998 period.
Significant steps were taken to constrain
discretionary spending as part of omnibus
deficit-reduction laws enacted in 1990, 1993, and 1997 (P.L. 101-508, P.L. 103-66, and
P.L. 105-33). Those laws “capped” discretionary programs by setting overall
dollar limits
on the amounts that could be appropriated for them each year through FY2002. They also
created House and Senate floor procedures making it more difficult to legislatively
expand entitlement programs or create new ones through FY2002. The latter measures,
however, do not constrain their growth under current laws resulting from inflation, wage
growth, or increases in their eligible populations.
In 1994, a commission appointed by President Clinton, the Bipartisan Commission
on Entitlement and Tax Reform, was asked to examine ways to constrain entitlements and
reform the tax system. Led by Senators Robert Kerrey and John Danforth, the panel was
See
1
Congressional Budget Office,
The Economic and Budget Outlook, Update, September
1997, and
Long-Term Budgetary Pressures and Policy Options, March 1997.
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composed of 22 Members of Congress and 10 people from the public at large. In
December 1994, the two chairmen proposed a package of options to address the issue,
including measures to: gradually raise the age for full social security benefits to 70,
establish mandatory personal savings plans using part of the current payroll tax, means
test Medicare and raise its premiums and deductibles, and alter congressional and civil
service pensions. The panel, however, could not reach a consensus, and in the end agreed
only to advise the President and Congress of the financial demands of entitlement
programs that eventually will emerge from the aging of the baby boomers and that
changes need to be made starting today so that they can be phased in.
In the 104th Congress, welfare reform was enacted abolishing the “individual
entitlement” nature of Aid to Families with Dependent Children (AFDC) and certain
related programs through the adoption of state block grants with relatively “fixed”
allotments through 2002 (creating a sort of “capped” entitlement to the states). However,
attempts to constrain other entitlements, notably Medicare and Medicaid, were not
successful, blocked by vetoes by President Clinton because of disputes over the
magnitude and nature of the proposed changes.
In the 105 Congress, as part of a major effort to balance the federal budget b
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FY2002, the President and Congress reached agreement on near-term constraints on
Medicare and Medicaid (P.L. 105-33). They were estimated to render $385 billion in
Medicare savings over the next 10 years and $37 billion in Medicaid. However, while
having some modest impact on long-range costs, these measures were not designed to
address the large impact of the retirement of the baby boomers. Attempts were made to
include measures to raise the age of eligibility for Medicare from 65 to 67, to introduce
income testing of the Medicare Part B premium, and require a copayment for health care
benefits — all of which were sought by proponents of curbing the program’s long-range
costs — but they were struck from the final legislation.2 In their place, a 17-member
National Bipartisan Commission on the Future of Medicare was created to examine the
long-range problem and recommend changes to address it. The panel is required to make
its report by March 1, 1999.
The Debate
Intense concern remains about entitlement growth. The costs of Medicare and
Medicaid, although abating recently, have risen at or near double-digit annual rates for at
least 2 decades. The prospect of ongoing budget deficits and the passing along of a large
federal debt to future generations adds a deep layer of apprehension. In the long run, the
demographic shift caused by the retirement of the post World War II baby-boomers raises
questions about the affordability of the entire spectrum of age-based entitlement
programs, including Social Security. In addition, annual trustees’ reports for Social
Security and Medicare now show that both programs have significant long-range
financing problems — their funding is projected to be insufficient to cover their rising
expenditures. Problems for the Hospital Insurance portion of Medicare could begin as
soon as 2006. While there is considerable consensus that one or more of these
2These measures were passed by the Senate as part of H.R. 1015, but were not included in
the House bill. They were set aside when conferees for the two bodies met to resolve the
differences in their respective bills.
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circumstances provides a basis for action, there is far less consensus about the magnitude
of the problem and how to deal with it.
The Case for “Aggressive” Reform
The main focus for many proponents of curbing entitlements is on the long-range
strain that entitlements may impose because of demographic factors, specifically the aging
of the baby boomers and the low birth-rates that have prevailed since the mid-1960s. The
ratio of people aged 20-64 to those 65 and older is projected to fall from 5.1 to 1 in 1980
to 2.8 to 1 in 2030, reflecting the general condition that there will be far fewer workers
to support the number of entitlement recipients. As their costs are directly linked to the
aging of the population, Social Security, Medicare, and Medicaid — the “big three”
entitlements — are expected to grow rapidly when the baby boomers begin retiring in or
around 2008. Proponents of imposing gradual constraints on these programs feel that to
leave their growth unchecked would ultimately require higher taxes that would severely
strain the economy. They contend that the levels required would be prohibitive and would
limit the taxes the government could levy to cover the costs of its many other functions
or pressing new functions that may emerge in the future.
Many fear that the federal debt held by the public, now standing at $3.8 trillion as
a result of decades of borrowing to cover budget deficits, puts an unsustainable mortgage
on the future. They worry that the Nation’s savings rate is much too low, in part because
the federal government has borrowed so heavily from the financial markets. Given that
discretionary programs represent only one-third of federal spending and already have been
“capped” through FY2002, they feel that entitlements are the only logical place to look
for additional constraints. Entitlements are “where the money is.” Simply put, these
proponents feel that entitlements are too big to ignore.
Still others point out that irrespective of any general concerns about entitlements,
Social Security and Medicare have their own financing problems. Even with Medicare
constraints recently enacted as part of the legislation to achieve a balanced budget, the
Medicare Hospital Insurance (HI) trust fund is projected to be insolvent in 2006. The
Social Security funds would be insolvent by 2029. Hence, these proponents argue that
Social Security and Medicare need to be altered, if only to deal with their own financial
inadequacies. They argue that steps need to be taken today so that whatever is done can
be phased in slowly, thereby giving today’s workers time to adjust a lifetime of
expectations about their retirement and what these programs will provide them. Waiting,
they fear, would require precipitous changes in the future in the form of sharp tax
increases or greatly reduced benefits.
Yet others contend that immediate action is needed as a matter of
fairness. They
argue that only 25% of entitlement expenditures goes to the poor, and that the sums going
to people who are well off are too large and unnecessary to afford them a comfortable
retirement. They point out that today’s retirees on average get back more than they paid
into Social Security and Medicare and that even in the absence of long-range constraints,
today’s retirees get back far more than baby boomers will get. These proponents contend
that to put off changes in these programs to the next century is unfair to today’s workers
who must pay for overgenerous and non-targeted “transfer” payments with the prospect
that their own benefits will have to be scaled back substantially.
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The Case for “Moderate” Changes
Those who favor a more restrained approach argue that the singular focus on
entitlements is wrong. They feel the word “entitlements” is too amorphous because it
encompasses many programs with very different purposes, and fear that it will lead to
indiscriminate “capping” of program spending that will be misdirected and not address
the long-range issues effectively. While acknowledging that growth of some entitlement
programs is a major issue, they feel that each program should be looked at separately.
Some argue that talking about “entitlement reform” is a way to avoid talking about
Social Security and Medicare (which together represent 60% of all entitlement spending).
They feel that some reformers are using the entitlement forum to attack Social Security
and Medicare with the hope of eroding support for them. They contend that the financial
problems of these programs are resolvable through traditional tax and spending changes
and that many of the programs’ critics are raising the specter that the programs will
“bankrupt the Nation” as a means of promoting major structural reforms, such as
privatization.
Others argue that entitlements are not the real budget issue. With the exception of
Medicare and Medicaid, they have not been growing that rapidly, but in fact, have
represented a relatively stable share of GDP since the mid-1970s. They contend that the
problems with the federal budget and the mounting debt result mostly from revenue losses
arising from major tax cuts enacted during the first year of the Reagan Administration.
While acknowledging that Medicare and Medicaid have grown very rapidly, they argue
that simply constraining these programs (while ignoring cost pressures in the health sector
generally) will only transfer their costs to private insurers and other payers of health costs.
Advocates for civil service and military retirees feel that their programs have become
“scapegoats” as policymakers press for budget cuts, even though together they represent
only 8% of entitlement spending. They feel that policymakers are fearful of tampering
with Social Security and are looking elsewhere for cuts. They argue that their recipient
populations, unlike those of Social Security, Medicare, and Medicaid, do not reflect
demographic trends in society and that the recent downsizing of the federal civilian and
military workforces will have a favorable impact on the costs of their retirement systems
in the long run. Moreover, they contend that the relative generosity of their systems has
been exaggerated and that their benefits are comparable to those of private sector workers
when those workers’ Social Security and private pensions are considered together.
Still others argue that “tax expenditures” need to be considered as much as spending
reductions. They are another form of entitlement, the existence of which causes large
amounts of income to go untaxed. The largest of them — the mortgage interest, pension,
and health insurance deductions and exclusions — represent nearly $200 billion annually
in “foregone” tax revenues.
Yet others say that the concern about entitlements is overblown. They argue that as
people live longer, they will work longer, and that as relatively fewer younger people
enter the workforce, there will be labor market inducements for older people to remain
on the job. They argue that the projected low ratio of workers to dependents is not
unprecedented; it existed when the baby boomers were in their youth. Moreover, they
point out that the baby boomers are entering their prime working and savings years, and
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today’s low savings rates reflect the greater consumption needs that people have at earlier
stages of their lives. They contend that the rate will rise as the baby boomers age.
The Outlook
To some extent the existence of large and persistent federal budget deficits has given
impetus to both short and long-range entitlement reforms. With passage of legislation to
bring the federal budget into balance by FY2002, the outlook for further changes is
uncertain. While significant Medicare spending constraints were enacted with the recent
budget-balancing legislation, major Medicare proposals included in the Senate-passed
version — to raise the age for Medicare eligibility from 65 to 67, to require higher
monthly premiums for higher income households, and to impose a co-payment on home
health care services — were dropped from the final bill. Instead, that legislation deferred
consideration of the program’s long-range problem and possible measures to resolve it to
a new 17-member commission. Under the legislation, the commission’s report is not due
until March 1999. In the meantime, the $385 billion in Medicare constraints (impact over
a 10-year period) that were enacted in the budget legislation are expected to defer the
insolvency of the HI trust fund until 2006 or 2007. Although the Social Security program
faces a long-range deficit, insolvency of its trust funds is not projected until 2029 (under
the Social Security trustees’ “best guess” assumptions). A recent advisory council did
recommend that action be taken soon to address Social Security’s problems so that the
necessary changes could be made gradually, and hearings have been held and a number
of bills introduced in recent years to examine and alter the program. However, neither the
President nor the congressional Committees with jurisdiction over the program (Ways and
Means in the House and Finance in the Senate) have proposed specific legislation to move
the issue. The President and Speaker of the House, Newt Gingrich, have suggested the
possibility of forming another panel or Commission to tackle the problem, and in his State
of the Union address on January 27, 1998, the President pledged action on the issue early
in 1999. He stated that he wanted to conduct bipartisan forums around the country in the
coming months to draw out the public’s views, hold a White House Conference on Social
Security in December, and next year, convene congressional leaders to craft bipartisan
legislation.
For Additional References
CRS Report 96-43.
Current social security issues, by David Koitz and Geoffrey
Kollmann.
CRS Report 95-543.
The financial outlook for social security and medicare, by David
Koitz and Geoffrey Kollmann.
CRS Report 97-620.
Budget reconciliation in the 105 Congress: achieving a balanced
th
budget by 2002, by David Koitz and Dawn Nuschler.