David R. Henderson  

Origins of the Entitlement Nightmare

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Currently, the U.S. federal government spends about $2.4 trillion per year--about 12% of GDP--on entitlement programs. This amounts to $7,500 per person annually. Only 48% of this spending goes to people officially classified as poor. The federal government provides more than $50,000 per year in Social Security and Medicare benefits to retired middle-income couples. And this is at a time when almost half of households headed by people under age 65 have incomes less than $50,000.

How did we get to this fiscal state? When did Congress's irresponsibility with entitlement spending begin? When the federal government ran budget surpluses, how did that affect Congress's decisions about entitlements? What president in the 20th century made a heroic effort to restrain entitlement spending and then, later, created the largest and most expensive such program in the century? What Republican president helped increase Social Security benefits by a double-digit percent? Finally, is there a way to rein in such spending in the future without kicking up such strong opposition that the restraints will be undone? Hoover Institution economist John F. Cogan answers these questions and more in his fact-filled, carefully researched book, The High Cost of Good Intentions. (Disclosure: John Cogan and I are colleagues at the Hoover Institution.)

These are the opening two paragraphs of my review of John Cogan's book. The review is in the latest issue of Regulation.

Although I liked the book overall a lot, I did have a couple of criticisms, as is my wont. Here's one:

Only one major reform [of Social Security] occurred on the spending side: a gradual increase in the age at which one could receive full benefits, from 65 to 67 by the year 2027. But this reform was not one proposed by the Greenspan Commission. Instead it was the handiwork of Jake Pickle, a Democratic congressman from Texas, whose mentor, interestingly, had been LBJ. Cogan mentions the age increase but does not specify Pickle's role or the fact that the Greenspan Commission had recommended no such age increase. He does point out, though, that "remarkably, the slowly increasing retirement age since 2000 has occurred with little or no controversy."

COMMENTS (11 to date)
Bob Knaus writes:

That is a major reform? In 1983, early retirement was age 62 with 80% benefits of age 65 = 6.7% annually for waiting. When fully phased in, age 62 will be 70% of age 67 = 6.0% annually for waiting. Compare this to the 8% annual gain for waiting until 70. On an actuarial basis, this is about what you'd expect given death rates.
All this "reform" does is offer a greater span of years for prospectively long-lived people to delay retirement. If enough people choose this, it could increase rather than decrease spending.

Rif A. Saurous writes:

The link in your post hotlinks to p. 25 of the pdf, but the actual review is on p. 4.

Thaomas writes:

Is there a strong reason to restrain transfer payments like SS and Medicare? The fact that some SS payments go to non-poor people is not a problem that I can see. SS benefits are taxable; if the authors think that taxation should be more progressive, I'll agree with them.

Raising the "retirement" age is a good idea as it helps undermine the idea of age-based "retirement." I'd like to see the age continue to rise.

Probably the most important reform we could introduce would be to shift to a consumption tax (preferably a progressive consumption tax) to replace the capped wage tax currently used to finance these programs and others that may come along in the future like infant and child care or higher subsidies for ACA if the non-insurance tax is eliminated and premium and co-pays rise in the exchange markets.

Alan Goldhammer writes:

I don't know if Gary is on Medicare yet. I am and what always galls me is that most folks are totally unaware that Medicare Part B and D (the MD visit and Rx Drugs) sections are means tested. Those of us who prepare for retirement and have a significant yearly income pay more for those two benefits than those who are at the base. The problem is with the Hospitalization, Part A which there is no premium and is covered by worker contributions. That's the one that is causing all the problems with Medicare.

Even when you are on Part B&D there are co-pays and a deductible. I always life when everyone talks about Medicare being free health care.

I wonder how many other commenters on this blog are on Medicare and what they think of it (I like it but also have good supplemental insurance as well.)

ColoComment writes:

Alan, in response:
I am 71 yo, and worked until I was 70.
1) Although I was costing my employer nothing under its employee health plan, it refused to pick up my Medicare premiums when I enrolled -- which annoyed me no end. I paid the premiums then, and up until recently, through my HSA account, which has now been drawn down to where it might last only through next year's expenses (God willin' & the crick....)
2) I am healthy. I take no regular medications & see my doctor once a year. I have no supplemental coverage. I do have Part D coverage, at the lowest cost possible, to preserve my position, should I need greater coverage in the future. I pay medical co-pays & dental out of my HSA, along with extraordinary items like shingles vaccination....
3) I had one exceptional medical event about 5 years ago (dislocated shoulder when my bicycle bucked me off), which cost me roughly $250 out of pocket (~$2500 billed), paid from my HSA.
I love my primary doctor, and her practice sees a lot of Medicare elderly, so no worries there. At least for now.
4) Fyi, I don't have high enough income to fall within the means testing, although I have plenty to meet my needs & wants.

David R Henderson writes:

@Alan Goldhammer,
I don't know if Gary is on Medicare yet.
Who is Gary?

Alan Goldhammer writes:

@David - It was a mind failure. I worked with a Gary Henderson for a number of years (no, he was not an economist). Sorry for the confusion. Just meant to ask whether you are on Medicare yet.

David R Henderson writes:

@Alan Goldhammer,
Thanks for clarifying. I’m on Medicare Part A.

John Geibel writes:

Social security is not an entitlement. I was required to pay into it. I had no choice. Years ago I put $2000 into a stock which is now worth $80,000. This was a utility stock in which I reinvested all dividends. If my money (mine and my employer) that went into social security had likewise been invested, it would now be worth several million dollars. The gov't could easily pay me the $24,000 a year that I am getting just from the interest on the money that I have put into SS. But my money was not invested, but used to pay out benefits annually. The way gov't runs SS is like a pyramid scheme.

Robert Mesnard writes:

Wait a minute here! Henderson seems to want to deny payments to those who aren't poor and receive Social Security payments. Since when is it a requirement of Social Security that one must be poor? Social Security is NOT welfare. People who receive Social Security have paid into the Social Security System, in my case I have paid in for over 50 years. My payments were matched by my employers. The Social Security System is not part of the IRS and payments from the Social Security System do not come from the nation's general funds. Social Security funds belong to the workers and their employers who paid the money into the system. Those funds do NOT belong to the government.

Gayle Mitchel writes:

Social Security is NOT an entitlement. We were required to pay into it, as was my employer, by law made by Democrats. I have been paying into SS since age 13. I could have managed my full paycheck much better by investing it instead of it being confiscated from me, thrown into the General Fund, and philandered away by politicians! Why not do away with the wage cap so high earners have to pay SS on their full earnings? Moving the goalposts to older ages as they are now, is ok since medical strides have allowed most of us to live longer, healthier lives. Remove the wage cap and stop the politicians' spending!

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