Entitlement programs regularly come up during discussions about the American federal budget. Entitlement programs are benefits provided by law if an individual meets the set of requirements laid out as part of the program.
In the United States, Social Security, Medicare, Medicaid, food stamps, and veterans’ compensation are broadly considered to be entitlement programs. This list is not exhaustive, and there is significant debate about what is and is not an entitlement program, but these are the big programs under consideration for reform.
Many Americans in a wide variety of circumstances depend on federal entitlement programs in some way, but these programs are expensive and the government is running a significant budget deficit.
Any entitlement program needs to balance the money coming in with the money being spent. Failure to do so could result in the program failing to function properly, potentially damaging the economy and leaving countless Americans in dire straits.
Why Reform Entitlement Programs?
Depending on how you cut it, entitlement programs take up somewhere over half of mandatory spending by the federal government each year — most sources report it at around 60%. Mandatory spending is the money the government is obligated to pay out each year, on top of which discretionary spending is added.
In 2020, Social Security was an expense of almost $1.1 trillion, with Medicare an additional $835 billion and Medicaid at $425 billion, according to the nonpartisan Congressional Budget Office (CBO). This is, frankly, a lot of money.
These figures mean the federal government paid $1.26 trillion in medical expenses between Medicare and Medicaid in 2020, on top of insurance outlays and personal expenditures. With continued budget deficits and economic challenges on the horizon, serious decisions need to be made within the American government.
The amount the U.S. and its residents spend on health care compared to other countries is further cause for concern. The U.S. pays slightly more than $1 trillion per year on health care for its 328 million citizens, and Americans spend about $10,966 per capita between government dollars and personal expenses as of 2019.
Canada, by comparison, spends $5,418 per capita in government spending, and its national health care system provides Canadians with universal care. At the very least, the U.S. is not getting a great value for its money.
What Does Entitlement Reform Mean?
Political commentators often suggest that welfare reform means cutting spending to programs. However, cutting funding without meaningful changes to processes and policies does not mean things will get better — it just means there will be less assistance through a still-inefficient system.
If, for example, the United States could bring health care efficiency in line with Canada’s on a per capita basis, it would save at least $300 billion per year for the government alone. This is on top of whatever other savings may accrue to individual consumers.
The CBO has been ringing the alarm on increasing health care expenses, saying future spending per beneficiary for Medicare and Medicaid will be the single most important driver of long-term federal government spending.
Considerations for Social Security are equally complicated. Lessening the outlay of Social Security without lessening the burden on the individual means people will pay more for less — a politically difficult pill to swallow.
Reform, then, must address both the funding and expenses of our entitlement programs by modifying how individual programs work and replacing or cutting funding to others. The challenges are ludicrously complex, and an accurate prediction for the full economic and societal impacts of any decision is likely impossible.
Medicare and Medicaid Reform
Medicaid is targeted at helping the poor and Medicare is broadly focused toward the elderly, but both programs provide aid to Americans for medical expenses. Although there are functional differences between Medicare and Medicaid, many reforms would address both programs in similar ways.
The rising cost of these two programs is one of the most often raised concerns. Increasing costs of medical care are the result of complicated and multifaceted factors, including increased use of pharmaceuticals, newer treatments, and longer lives.
There are several proposed reforms intended to address the challenges with America’s medical entitlement programs.
1. Single-Payer System
A single-payer system for health care is popular among those on America’s political left, and for 63% of Americans generally. Single-payer health care is when a single public system covers the costs of all essential health care.
Some in the U.S. call it Medicare for All. Many comparable countries with advanced economies such as Canada and the United Kingdom use a similar system to provide universal health coverage for their citizens significantly more affordably.
However, introducing single-payer to the United States would require a full reexamination and rebuilding of the U.S. health care system. This includes insurance companies and health coverage offerings and the relationships among pharmaceutical companies, physicians, hospitals, and governments.
Although it may save money in the long term, the transition to this model would be a gargantuan undertaking, and many influential lobbying groups oppose it.
2. Affordable Care Act Redux
Another commonly supported option is to update and rework the Affordable Care Act — also known as the ACA or Obamacare — to fix the problems that it has. The ACA was and is, at its core, a compromise meant to ensure more health care without rocking the boat too much. Reworking and continuing to tweak the ACA seems to be a tenable path forward, particularly given the general state of intransigence that pervades Washington, D.C.
Proponents believe providing a public option — a government-sponsored insurance plan to compete with the private ones — as part of the ACA insurance marketplace would encourage private insurance offerings to become more competitive. Having an affordable public option for insurance coverage can ensure people have a realistic way to access health insurance.
The ACA has an unfortunate poison pill in its structure that is likely to become a major concern down the road. The original law required all individuals to get insurance coverage and forced private insurers to accept customers with preexisting conditions. But insurance pools work because they don’t have to pay out for everyone at once. If insurance had to pay out for everyone at once, it would be incredibly difficult, if not bankruptcy inducing. Covering everyone — including the sickest and most expensive customers — isn’t a great business model.
Private insurance companies tend to do what they can to avoid customers who will cost them money. Before the ACA, this was done by denying coverage for people who had preexisting conditions. Now, that practice is illegal.
That leaves insurance companies little choice but to increase premiums across the board to stay afloat, which puts policies farther out of reach of more and more Americans. And there’s concern that private companies simply wouldn’t be able to compete with the price of a government-subsidized public option even if they tried.
Critics have pointed out that the public option would be expensive. But private insurers are still not serving all comers, and the pandemic showed many are left without coverage under the current system.
3. Privatization 2.0
Some conservative advocacy groups and think tanks are pushing for an increase in privatization for health care across the country. The idea is to move away from government-sponsored health care benefits funded by tax dollars, instead leaving more money in individuals’ pockets to pay for their own care and insurance of their choice.
Proponents of privatization argue that many individuals are paying into a system that is actually paying for the current costs of other people — and relies on future generations to do the same for them. Instead, a privatized system would encourage individuals to save today for their own health care needs tomorrow, allowing them in the meantime to invest the money they would have paid to the government in taxes and earn a profit on their savings until they need to tap into them.
This looks at first blush like it makes sense. In practice, the transition to this situation would leave a large number of people in the lurch and would disproportionately harm those at the bottom of the socioeconomic ladder who couldn’t afford private health insurance even if their taxes were lowered.
Further, privatization does not directly address the underlying issue of how expensive American health care is. It simply assumes the system will become more efficient by necessity or by free-market forces. Other countries that have tried this approach have found it to be ineffective at creating better value for the money spent on health care.
The most likely result of privatization would be increased power to private insurance companies. With many private insurance companies declining to cover preexisting conditions before legislation required them to, this could be a concerning proposition.
The argument that privatized health insurance gives people the opportunity to choose health care that is right for them ignores a number of realities. The main one is that individuals seldom buy their own health insurance in the United States, with most receiving it through their employer.
A privatized system also assumes individuals will be able to make an informed decision about the right coverage for their needs, even without knowing what needs they may have in the future.
4. Health Care Modernization
The most likely path to reform — and probably among the least effective — is an attempt to simply modernize and update the current American health care system. This includes cutting down on insurance fraud through investigatory teams, ad hoc reforms on a state-by-state or even hospital-by-hospital basis, and attempting to negotiate or legislate minor changes to how pharmaceutical companies or medical device manufacturers operate.
All of these changes are unlikely to fully address the impending budgetary shortfalls in the Medicare and Medicaid programs, but politically they seem the most likely. However, the lack of meaningful systemic reforms risks the future viability of these important programs that many Americans rely on for their access to health care.
Social Security Reform
Although the costs of Social Security have expanded less than those of Medicare and Medicaid, increased unemployment has drastically hampered the program’s ability to pull in funds from payroll taxes.
In the United States, there have been more than 36 million new claims for unemployment benefits during the coronavirus pandemic. At the same time, an aging population and longer average life spans threaten to deplete the Social Security program’s funding.
With Social Security, there are fewer concerns about increasing the efficiency of the programs. Although the system is complex, the United States does not underperform nearly as badly compared to other countries as it does covering medical services. This suggests there are limited gains to be made from increased efficiency, instead requiring a more profound set of changes.
1. Universal Basic Income
After being a part of Andrew Yang’s platform in his run for president, universal basic income (UBI) has become a darling of some political analysts and pundits, particularly those with ties to technology companies. UBI gives citizens no-strings cash. It’s as simple as that. If you live in a country that offers a UBI, you receive funds from the government to ensure some basic level of living.
The argument behind UBI is that each individual in an advanced economy should be guaranteed some basic standard of living no matter what — especially as automation and AI reduce the need for and availability of many kinds of jobs. UBI is gaining support on both sides of the political aisle because it gives individuals the power to make their own decisions, protects those at the bottom of the socioeconomic ladder, and is more efficient to manage and maintain than running multiple programs, many of which could be replaced by UBI.
Critics of UBI point to its enormous cost — to be expected for an initiative that would roll up multiple big entitlement programs, including Social Security — and the relative lack of case studies to refer to for its implementation. There have been only a few trial UBI programs, with one from the 1980s in Manitoba, Canada, that showed promising results, some recent experiments in Canada and Kenya, and some economic theory to back it up.
UBI does not do away with the costs people face, but merely subsidizes everyday living expenses and may result in net greater outlays of capital than current Social Security options.
Proponents argue that the increased security and ease of use of a UBI system will pay dividends down the road. People whose basic income needs are guaranteed are better able to pursue higher education or job retraining, start their own businesses, and shoulder times of hardship without worrying about how to put food on the table in the meantime.
UBI also could reduce the number of abusive or illegal workplaces as workers feel more safe to exercise their rights or leave to pursue a better opportunity, knowing their basic needs will be covered.
Finally, UBI may do away with a number of other government assistance programs, including food stamps and student lunch programs, because every individual would be given a UBI payment and be able to decide how to spend their money instead of the government making that decision for them.
The implementation of a UBI option would be a drastic and expensive undertaking beyond what most governments have ever attempted in terms of Social Security. There would likely be high transition costs in getting it running, and it would undoubtedly take time to transition from many different programs to one.
2. Funding Increases
Some argue Social Security is an absolute necessity, particularly given the economic downturns of 2008 and 2020. Each of these instances have left widespread unemployment, in some cases pushing back individuals’ lifetime earnings by a decade or more due to factors entirely beyond their control.
The simplest solution for bringing Social Security back into a balanced budget is to raise more funding through one means or another. All budgetary adjustments like this require the money to come from somewhere — either by spending less money elsewhere or bringing more money in. Cutting other programs could free up money to fund Social Security, but what to cut is a thorny political issue.
Unless funding can be diverted from elsewhere in the budget, taxes will have to go up to pay for the increasing costs of Social Security. This could be done by increasing payroll taxes, which fund Social Security today, or through raising income taxes.
3. Cutting Social Security Benefits
Another possibility is to cut Social Security benefits, including lowering the amounts people receive, making it more difficult for individuals to qualify for benefits, or cutting support altogether.
According to recent projections, Social Security funds will run out in 2037, after which incoming taxes will be enough to pay just 76% of scheduled benefits. If that were to happen today, 65 million Americans would see their benefits slashed, leaving many impoverished or worse.
Abruptly ending Social Security benefits would likely lead to a homelessness crisis beyond anything seen in the United States since the Great Depression. A more likely outcome may be individuals receiving less money from Social Security than they would have previously or having to wait longer to start drawing benefits.
Workers may be forced to save more on their own for retirement or to live on slimmer and slimmer budgets in their golden years. Unfortunately, many Americans are without any significant savings to help carry them through lean times or retirement, leaving most to rely on continued Social Security benefits.
Without Social Security benefits, elderly Americans unable to work may find themselves homeless or forced into living with members of their extended family. Both of these outcomes hurt the economy. Health problems become worse when you are forced to live on the street or can’t afford routine care, which further exacerbates the health care cost problem.
Moving in with family members also foists the burden onto relatives — both financially and in terms of caregiving labor — potentially hindering younger generations’ efforts to save for their own futures.
4. Cost of Living Adjustments
One less controversial approach to changing how Social Security works is to reform it such that the benefits are more aligned with the cost of living. Trying to calculate cost of living is as much an art as a science, and it is easy for entire debates to take place regarding how to define it. Cost of living adjustments may be able to balance Social Security outlays with economic growth, helping to offset inflationary pressures.
The reality, however, is that adjusting the program for inflation won’t make Social Security solvent. This reform may help but would still require funding increases or benefit reductions. Any change in outlays from Social Security will detrimentally affect members of the current working-age generation. However, failure to reform could cause the entire program to collapse.
Entitlement programs need to be reevaluated and either properly funded or reformed. The COVID-19 pandemic revealed the severity of underlying problems in our society, with so many people living one economic downturn away from disaster.
Simply cutting these programs entirely and leaving American citizens in freefall would undoubtedly cause unnecessary suffering and damage both to individuals and to the economy as a whole.
So much of the public debate around reform has been about increasing the efficiency of the existing systems. Some argue these kinds of reforms are based on 1980s economic models that have long since been proven to be insufficient for finding the solutions we need. With political capital to enact systemic changes in remarkably short supply, and the threat of further crises on the horizon, the pandemic may be the start of a series of challenges rather than the end.