Entitlement Spending, Part I: Looking Back

It was reported earlier this summer that congressional Republicans planned on demanding that the Obama administration choose from a “menu” of mandatory spending cuts in exchange for raising the country’s statutory debt limit. “Mandatory spending” (or the even less flattering “entitlements”) is a budget wonk’s way of referring to programs such as Social Security, Medicare and Unemployment Compensation as well as for important programs for low-income individuals and families such as Medicaid, the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), and Supplemental Security Income (SSI, a means-tested benefit for the low-income blind, disabled, and elderly).

Before looking ahead at some of the specific proposals for “entitlement reform,” it is instructive to look back at spending on these programs in recent decades to see which have been growing and which have not, and to examine the sources of this growth. The GOP narrative, after all, on why these popular programs must be cut is that they are allegedly spiraling out of control. This post examines whether or not there’s any evidence for this view.

The chart below shows entitlement spending (or, what we’ll call social welfare spending—social insurance and the social safety net programs) as a percent of GDP since fiscal year 1975. In 1975, social welfare amounted to about 8 percent of GDP. By FY2007—the fiscal year before the onset of the Great Recession—these benefits were equivalent to almost 11 percent of GDP. As the unemployment rate more than doubled after the housing bubble burst (from 4.7 percent to 10.0 percent) social welfare spending increased to almost 14 percent of GDP in 2010. Since then it has fallen to under 13 percent as the unemployment rate has slowly fallen.

About half of the increase in social welfare spending over the past 38 years occurred after 2007 as a result of the onset of the Great Recession—the worst economic downturn since the Great Depression. Spending for such benefits as SNAP, unemployment insurance, and Medicaid increased as workers lost their jobs. This is not an accident, or even a problem. These programs designed to be automatic macroeconomic stabilizers—federal spending increases during a recession that increase aggregate demand—that help moderate unemployment rate increases. In addition, some of the increased spending was due to temporary legislative increases in SNAP and unemployment insurance that were part of the American Recovery and Reinvestment Act (ARRA).

It is worthwhile to take a closer look at social insurance spending by dividing it into various categories (see the figure above). At the bottom, government pension spending as a percent of GDP is displayed. Government pensions include civil service and military retirement as well as veterans’ service-related compensation. Between 1975 and 2012, federal pension spending has been virtually constant at one percent of GDP. Next is Social Security spending for retirement and disability insurance, which remained fairly constant at four percent of GDP (with some slight cyclical variation) before rising to about 5 percent of GDP by 2012 as the large Baby Boom generation began reaching retirement age.

The next layer in the diagram includes social welfare programs that are especially sensitive to business-cycle fluctuations: safety net programs such as unemployment insurance, SNAP, SSI, and AFDC/TANF (traditionally known as welfare). Spending for these benefits was equivalent to 1.7 percent of GDP in 1975 (a recession year), less than 1 percent of GDP in 2007 (before the Great Recession). Safety net spending then rose to 2 percent of GDP in 2010 and has slowly fallen relative to GDP as the economy slowly recovers from the recession; it was 1.5 percent of GDP in 2012.

Together, federal pensions, Social Security and the safety net programs were equal to 7 percent of GDP in 1975 and 6 percent in 2007. Spending for these programs increased to almost 8 percent in 2010 due to the recession and has been slowly falling since then.

The last category of federal social welfare spending is health care: Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP, a program to provide Medicaid to children in families with income too high to qualify for Medicaid but can’t afford private health insurance). Spending for these health care programs amounted to 1.3 percent of GDP in 1975 and steadily grew to 4.6 percent of GDP by 2007 (CHIP was enacted in 1997). Federal health care spending reached 5.6 percent of GDP in 2010 before falling somewhat to 5.2 percent of GDP in 2012. Before the Great Recession, the source of growth in overall social welfare spending relative to GDP was health care. But growth in federal health care spending accounted for only one-third of the growth in overall social insurance spending between 2007 and 2012.

The increase in social welfare spending since 1975 that many Republicans seem to see as an economic problem is due to two factors: (1) the increase in safety net spending after the start of the Great Recession, and (2) the steady growth in federal health care spending. Spending for the safety net programs has already started to fall and will continue to do so as the economy slowly recovers.

The rise in federal health spending is due to a combination of growth in enrollments (because of the aging of the population, the recession, and the introduction of CHIP) and increased spending per enrollee. These per enrollee cost increases in federal health spending have been largely driven by private-sector trends: most of the federal government health programs finance health expenditures, but the health care goods and services are actually delivered by private health providers. The growth in federal health care spending per enrollee, however, has actually been lower than that for commercial health insurance (PDF), meaning that efforts to contain federal health spending simply by shifting costs onto private households reduces economy-wide efficiency.

Next up: Entitlement Spending, Part II: Looking Forward