25 Fiscal Lessons
Learned over the course of 25 years, paving the way toward a better economic future.Read the Lessons
Individuals with the least wealth or income potential are the most dependent on government programs for support. Thus, when policymakers talk about reforming entitlement programs, many observers are concerned about the potential impact on these vulnerable groups. The good news is that there are plenty of responsible ways to reduce costs without unduly burdening beneficiaries.
Nearly all entitlement programs have conditions or formulas that take into account a beneficiary's income when determining the level of benefits or the amount of subsidy from the government. Many programs only provide benefits to individuals who have low incomes and/or low levels of wealth; these programs are known as “means-tested.” Those that are available to all, but with varying degrees of subsidy based on income, are considered “universal entitlements.”
Social Security, the biggest program in the federal budget, is not means-tested. Beneficiaries with higher lifetime incomes receive larger monthly benefits, although beneficiaries with lower lifetime incomes have a greater proportion of their earnings replaced by Social Security when they retire. This makes it a universal entitlement program with income-related benefits.
Social Security benefits could be reduced for those with high incomes during their working years or in retirement, providing large budgetary savings, without impacting vulnerable beneficiaries. Indeed, several bipartisan commissions, including the Bipartisan Policy Center’s recent Commission on Retirement Security and Personal Savings, proposed reductions in future benefits for higher-income individuals while actually decreasing old-age poverty.
Medicare, the largest health care entitlement, is also a universal entitlement because eligibility does not depend upon income and individuals receive the same package of health care benefits even if they have large amounts of assets or high incomes. Over the past 25 years, however, some modest income-related measures have been enacted to reduce the share of program costs subsidized by the government for well-off individuals. Most notably, there are slightly higher premiums for wealthier beneficiaries who sign-up for Medicare Parts B and D.
At the time these measures were enacted, many feared that charging higher premiums for some would undermine the program’s foundation. But several years later, it is clear that they served to strengthen Medicare by improving its finances without harming its beneficiaries. Given this success, policymakers should look for other ways to better target subsidy reductions.
Medicare and Social Security are not only the largest programs in the federal budget, currently comprising almost half of all non-interest spending – they are also the fastest growing. Over the next decade, these programs are projected to increase by just over 2.4 percent of gross domestic product. Means-tested programs, on the other hand, currently comprise just one-fifth of non-interest spending and are projected to grow by less than 0.2 percent of GDP. In fact, means-tested programs that provide benefits other than health care (such as food stamps) are projected to decrease relative to GDP over the next decade. The takeaway is clear: Policymakers can reduce federal entitlement spending without reducing subsidies for those who need them.
The same principle applies to revenue as well as spending. Many of the largest “entitlements” in the tax code, such as the deductions for home mortgage interest and charitable giving, provide much larger benefits to those with the highest incomes. The bipartisan Simpson-Bowles fiscal commission and others have recommended eliminating or altering these deductions so that they don’t provide subsidies to individuals who could afford and would likely engage in the subsidized behavior even without the tax subsidies.
A sustainable fiscal policy requires hard choices and shared sacrifice. Policymakers can and should start this process by reducing subsidies for those who do not need them.