The Viability of Entitlements
Let’s being honest. Entitlements have a bad reputation in some circles in American society. Critics claim that we’re becoming an entitlement society where too many people feel that they are due or “entitled” to government assistance. Others complain that these programs are unaffordable, devouring the federal budget, or unsustainable due to trust fund depletion. Fortunately, none of these criticisms are valid.
By definition entitlements are provisions of a law that require payments to any individual that meets the eligibility criteria of the law. Entitlements are a binding obligation on the part of the government and eligible recipients have legal recourse if that obligation is not fulfilled. Social Security, Medicare, veteran benefits, and the Children’s Health Insurance Program are examples of entitlements. Even the farm bill, for all practical purposes, is an entitlement. In 2017, entitlement programs accounted for nearly one half of the federal government’s $4 trillion budget.
While the vast majority of Americans support the aforementioned entitlements, younger people, and even those not close to retirement, fear that entitlements, specifically Social Security and Medicare will not be around when they retire. This fear is understandable. Conservatives are constantly raising the specter of bankrupt trust funds spelling the demise of both Social Security and Medicare. The Social Security trust fund is projected to run out of money by 2034, with the Health Insurance fund (Medicare Part A) running out of money even earlier, by 2026. By law these trust funds are not allowed to payout more money than the trust fund holds in nonnegotiable government Account Series Bonds.
It’s here where we can identify the real problem. The Supplementary Medical Insurance fund (SMI), better known as Medicare Parts B and D is not in trouble, and the reason is that SMI has the legal authority to pay full benefits even if the trust fund is fully exhausted. In other words, the lack of a trust fund balance will in no way hinder the federal government’s ability to fund Medicare Parts B and D. The federal government has, as a sovereign nation who creates their own currency, an unlimited financial ability to make all mandated payments, what complicates matters, for some entitlements, is the lack of legal authority to make payments in excess of what’s in the trust funds, and it’s only this limitation which generates illusion that entitlement program payments cannot be made into the future.
In the early 1990’s Robert Eisner, an economist at Northwestern University, pointed out that our trust funds are simply accounting devices. The Social Security Administration makes no actual payments. Social Security payments are made by the Treasury acting through the Federal Reserve. The trust fund balances simply show whether expenditures made are greater than, or less than, the Social Security taxes we collect. Notice that while veterans’ benefits are an entitlement, there is no trust fund from which these payments are supposedly made, further highlighting the fact that a trust fund is not a necessary requirement for an entitlement to exist or have payments made.
This point about the government’s ability to finance entitlements was formally addressed in the House of Representatives, when in March of 2005, Alan Greenspan, then Chairman of the Federal Reserve, testified to the Committee on the Budget saying, “There is nothing to prevent the government from creating as much money as it wants.” Nevertheless politicians (and too many economists) insist that trust funds must be kept solvent. The proposed solutions always involve some combination of tax hikes, benefit cuts, or in the case of Social Security, an increase in the retirement age. All of which no matter how you parse it, works to the detriment of all concerned.
An increase in withholdings taxes, coupled with an income cap, makes the tax regressive burdening low-income families more than upper income families. Changing the indexing method to a Chained-CPI, as some have proposed, will reduce benefits and cheat retirees out of the income increasing productivity gains experienced by other families. And raising the retirement age is inequitable. Minorities, especially minority males, have lower life expectancies. Raising the retirement age will reduce their lifetime benefit payments relative to white families.
The irony for Social Security, is that the earmarked tax President Roosevelt sought was intended to build public support and to put the program politically beyond the reach of Congress. FDR thought that if the program did not rely on general tax revenue that Congress would have no reason to reduce benefits in the future since it would have no net impact on the budget.
In the end, what Robert Eisner clearly demonstrated was that the only guarantee for federal programs, or entitlements, is Congressional intent. Trust fund balances are immaterial, as the SMI trust fund demonstrates.