The national debt exceeds $36 trillion with a projected $1.9 trillion to be added in 2025. Critics contend that placing entitlement programs like Social Security and Medicare off limits dooms Uncle Sam to bankruptcy. Can we contain entitlement spending?
Let’s first be precise about entitlement programs. Despite the name, the U.S. recognizes no right to welfare, healthcare, or Social Security. Entitlement refers to the spending mechanism. For entitlements, the Treasury pays all individuals who meet the program’s criteria without Congress appropriating funds. Entitlement spending can be cut by changing the eligibility criteria or payment schedule.
We have many entitlement programs with Social Security, Medicare, and Medicaid comprising the “Big 3.” In fiscal 2024, entitlements amounted to $4.1 trillion of Washington’s $6.8 trillion total spending.
An aging population will boost Social Security and Medicare spending and reduce the proportion of Americans paying taxes. By 2035 the Congressional Budget Office projects entitlement spending to increase to $6.4 trillion and the deficit to exceed discretionary spending.
This is the basis for claiming entitlements must be cut. Significant tax increases could also avert bankruptcy, but today I focus on entitlement spending.
I see reasons for hope, beginning with work requirements. Work requirements imposed on welfare in the 1990s reduced recipients 59 percent without increasing the rates of poverty or childhood poverty. The doubling of recipients in one year after President Obama dropped work requirements for food stamps also demonstrates effectiveness.
The impact of work requirements is perhaps surprising as typically only job training was required. Yet job training identified fraud. Millions of Americans who were working and collecting welfare never showed for mandatory training.
Periodic in-person visitation could substitute for work requirements for Social Security and Medicare. DOGE uncovered records suggesting millions of deceased or fraudulent Social Security recipients. We deserve assurance of the legitimacy of beneficiaries.
Medicaid is a joint Federal and state program funded primarily by Federal matching grants. States receive between $1 and $3 for every dollar they spend and pay only 10 percent of the Obamacare Medicaid expansion.
Matching grants create terrible incentives. Elected officials like to play Santa Claus with our tax dollars. State officials become even more generous when spending Washington’s dollars.
The grants enable deceitful provider taxes. States “tax” healthcare providers to raise their matching dollars and providers pass the tax on in higher Medicaid charges.
Block grants, used in the 1996 welfare reform, offer a proven solution. A block grant does not increase when states offer optional coverage. Block grants would also end provider tax chicanery.
Medicare is entirely Federal, meaning no grant savings here. Increased competition, especially for generic drugs, can control Medicare costs. I recently detailed Trump Administration efforts here and will not cover this again.
This brings us to Social Security, which critics call a Ponzi Game. More accurately, it is a cruel scam perpetrated on Americans. Pensions invest workers’ contributions to accumulate assets to pay benefits. Social Security pays benefits using current taxes.
With few retirees initially and the Baby Boom generation working, payroll taxes exceeded benefits, building up the trust fund. But the fund purchased Treasury bonds instead of stocks, and with benefits now exceeding taxes, the fund balance is projected to be gone by 2033.
Social Security offers a very poor rate of return, possibly as low as one percent. For comparison, state pension plans presume 6 to 7 percent annual returns. And the benefits are not even guaranteed as Congress can change the benefit formula.
Young families particularly suffer. Consider a married couple both age 25 earning $50,000 and looking to buy a house and start a family. Their earnings yield $6,000 in payroll tax including the employer contribution, which could pay a lot of bills. If the couple saved and invested $6,000 in an IRA, this could yield $96,000 in retirement income. Instead, $6,000 in payroll taxes might produce $9,000 in Social Security benefits.
Elected officials refer to the benefits as guaranteed often enough that I think cuts would be immoral. Politicians frequently claim their opponents plan to cut Social Security, holding our modest benefits hostage to make us reelect them. An investment-based alternative could offer four to ten times larger retirement benefits.
Containing entitlement spending will require politically difficult choices. The potential exists, however, for containment without draconian cuts.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
