Fixing the federal budget requires changing how entitlement programs spend

A pdf of President Biden’s FY 2023 budget is seen on a computer on Monday, March 28, 2022 at the U.S. Capitol.
Greg Nash

Though American politicians rarely acknowledge it, federal finances are relentlessly deteriorating almost entirely because of automatic growth in entitlement programs. We often lose sight of this reality whenever other events, such as the COVID-19 pandemic, a tax cut or an appropriated spending binge, cause a onetime worsening of the federal budget deficit.

But such events have very little to do with why federal finances keep worsening year after year. This problem cannot be corrected unless lawmakers reform mandatory spending programs such as Social Security, Medicare and Medicaid.

I recently participated in a timely research project directed by Barry Poulson, John Merrifield and Steve Hanke examining international experience with methods of ensuring sustainable government fiscal policies. My contribution to the volume found that U.S. federal finances can be stabilized only if lawmakers make fundamental design changes to the largest entitlement programs.

Research uncovers a clear historical pattern. Efforts to stabilize the federal budget typically fail because of tendencies to exempt the very programs whose growth drives the problem: namely, Social Security, Medicare and Medicaid. The budget needs to be fixed from the ground up, meaning changes to individual entitlement programs to make them separately sustainable, thereby rendering broader federal finances more manageable.

The history of why our largest mandatory spending programs lack effective financial controls is instructive. Social Security’s untenable cost growth hasn’t been dealt with because of widespread, erroneous assumptions that legislators can and will enact corrective measures when its trust funds near depletion, as was done in 1983. But that 1983 fix was an anomaly, reflecting conditions that haven’t existed for decades since.

Long ago, Social Security’s finances were kept in check largely through conservative accounting methods employed by the program’s chief actuary until the early 1970s. The end of those practices opened the door to legislation creating automatic benefit growth soon thereafter, which lawmakers still haven’t determined how to finance.

The 1983 Social Security fix was possible only because of a previous tradition of funding the program on a pay-as-you-go basis, meaning its trust funds were kept relatively small. Thus, when the system got in trouble, the lack a significant funding reserve compelled legislators to act before the problem got too large.

That’s no longer true; today the Social Security shortfall is already becoming intractably large well before its trust funds approach depletion. The 1983 fix is not the behavioral norm; rather, the norm is the several recent decades of lawmakers evading responsibility, and Social Security’s lack of effective financing controls.

The situation with Medicare and Medicaid is even worse. Medicare is financed through two trust funds, but only the smaller of them (hospital insurance) contains mechanisms to force occasional financing corrections. Consequently, cost growth is faster on the other side of Medicare (supplementary medical insurance), whose growth translates directly into larger budget deficits. Meanwhile, Medicaid has the fewest financial controls of all. It’s no coincidence that in recent years, lawmakers have expanded Medicaid most aggressively of the three programs, despite mounting evidence that expansion is precipitating more improper payments and other problems.

Perhaps the most fascinating finding of my research pertained to which reform approaches work and which don’t. There have been multiple efforts to stabilize the budget through mechanisms that would automatically cut appropriated spending unless lawmakers enact other correctives. These ultimately fail because, first, exempting large entitlements requires far deeper cuts in appropriations than lawmakers will accept, and second because even when they are implemented, they don’t fix the underlying problem.

The most conspicuous failures have been process-based solutions, such as special committeescommissions, fast-track legislative procedures and ostensibly independent cost-cutting boards. Lawmakers have tried repeatedly to outsource the difficult politics to specially empowered decisional councils, and it doesn’t work. As is often said: The problem is not the process, the problem is the problem.

So, what does work? Rare successes include gradual adjustment provisions written directly into law — for example, automatic indexing of Medicare Part B and Part D premiums, or (so far) gradual provider payment adjustments in the Affordable Care Act. The onetime creation of a gradual, automatic correction mechanism is much more powerful and reliable than counting on legislators to assemble fragile coalitions, year after year, to cast difficult votes to cut spending. Many nations employ such automatic adjustment mechanisms to manage their public benefit systems, and several U.S. experts have devised promising methods to automatically keep Social Security and Medicare finances in balance.

But one thing is certain: There is no solution to our worsening budget woes unless we enact an effective means of moderating the exploding cost growth of federal mandatory spending programs. Without such fundamental reforms to Social Security, Medicare and Medicaid, an eventual fiscal crisis is guaranteed.

Charles Blahous is the J. Fish and Lillian F. Smith Chair and senior research strategist at the Mercatus Center at George Mason University.

Tags Entitlement reform Federal budget Medicaid medicare social security social security trust fund

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