Are We a Nation of Takers?

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EntitlementSpendingChart.If nothing else, media coverage of the “fiscal cliff” debates have made most Americans aware that federal spending is outpacing federal revenue, thereby fueling a massive—and growing—federal budget deficit.   It is also likely that most people have heard that Social Security and Medicare, the two largest “entitlement” programs, are major contributors to this budget crisis.

Most Americans probably do not know how many entitlement programs there are, how much is spent on them, and how they have grown in the past fifty years or so, all of which are well-documented in this compact book by Nicholas Eberstadt entitled A Nation of Takers.  Moreover, it is unlikely that most persons who receive benefits from the largest of these programs see themselves as “takers,” in the sense used by Eberstadt. 

While Eberstadt has assembled an impressive array of empirical evidence, it is not necessarily the whole story.  Not all entitlements are government “welfare,” as that term is commonly used.  Moreover, Eberstadt’s moral reasoning, that this entitlement “epidemic” represents a “national declaration of dependence” which has converted our society into a “nation of takers,” is not fully persuasive.

Eberstadt follows the Commerce Department’s Bureau of Economic Affairs in defining entitlements as “current transfer receipts of individuals to government” which are “benefits received by persons for which no current services are performed.”  The term “current” is significant here, because it implies that services might have been performed in the past.

Eberstadt’s most striking statistics are the growth of these programs between 1960 and 2010.  In constant 2010 dollars, entitlement programs grew from about $250 billion to $2.2 trillion.  Given that the U.S. population also grew during this time, perhaps a more useful comparison is per capita entitlements, which grew from about $1000 per person in 1960 to over $7000 per person in 2010, a staggering seven-fold increase.

The increase in entitlements as a percentage of total federal expenditures is another troubling trend.  In 1960, entitlements accounted for about 30 percent of federal budget outlays, but in 2010 that figure had climbed past 65 percent.  In other words, nearly two-thirds of government spending is for entitlement benefits.  Eberstadt uses this trend to raise the possibility that entitlement expenditures might eventually “squeeze out” other federal programs, particularly those mandated by the U.S. Constitution. He uses national defense as his prime example.

Although there are dozens of entitlement programs, Eberstadt stresses that four programs deserve the greatest attention, because they account for nearly 90 percent of the total.  Social Security accounts for about one-third of the total; Medicare one-fourth; Medicaid a little less than one-fifth; and Income Maintenance a little over one-tenth.   The last category includes food stamps, Earned Income Tax Credits (EITC), Temporary Assistance for Needy Families (TANF, which replaced AFDC in 1996), and Supplemental Security Income (SSI, primarily for disabled persons).

This means that eligibility for nearly 60 percent of entitlement programs, Social Security plus Medicare, is determined by age, and only about 30 percent of entitlement programs have eligibility requirements based on income or poverty status.  I believe this distinction is critical when evaluating Eberstadt’s moral arguments.

Another startling statistic is the proportion of Americans in households receiving an entitlement benefit of some type.  The Census Bureau reports this as 49 percent, but Eberstadt notes that Census figures underreport participation in many means-tested (e.g., “antipoverty”) programs, so he concludes the true rate is over 50 percent.  Since this rate includes older persons receiving Social Security and Medicare, perhaps a more telling statistic is the 30 percent of Americans who live in a household receiving a means-tested program benefit, which is nearly double the rate of 17 percent in 1990.

Before commenting on Eberstadt’s empirical evidence and his conclusion that we have become a “Nation of Takers,” there are two additional essays in this book, one by William A. Galston and the other by Yuval Levin, presented as “dissenting points of view.”

Galston questions the causal link between growing entitlements and dependence, which Eberstadt sees as the primary moral problem.  Galston sees Social Security as similar in principal to a private sector retirement plan, where employees and employers contribute to a retirement fund, to which employees are entitled when they retire.   This does not make the retiree “dependent” in the negative sense used by Daniel Patrick Moynihan (referring to Eberstadt’s quote of Moynihan that “the issue of welfare is the issue of dependency”).  A similar argument could be made about Medicare.

Galston distinguishes between Social Security and Medicare on the one hand and means-tested programs on the other, like Medicaid and food stamps, which provide benefits at no cost to recipients.  He says the growth of benefits for persons above poverty thresholds raises a “moral hazard” of expanding dependence, but he also says that “there is no moral algorithm that tells us whether it is better for public programs to help too many people or too few.”

The essay by Yuval Levin takes a more complex and nuanced approach to the growth of the “liberal welfare state,” which he sees as a threat to civil society.  He agrees with Eberstadt that the expansion of U.S. entitlement programs must have some effect on its citizenry, and he is especially concerned with Eberstadt’s statistic that more than half of Americans now claim a federal entitlement of some kind.

Levin believes the impact of this expansion is not just on the moral character of American life, but on the civil society upon which our government relies to replenish and sustain the liberal welfare state.  It is not merely the increase in the number of beneficiaries compared to the number of taxpayers, but also in the inefficiency of benefit delivery.  This is best illustrated in government health programs, both Medicare and Medicaid, which are costing more and delivering less, and whose projected costs are not only sustainable, but threaten to “undermin[e] the ethic of our democratic republic.”

While agreeing with much of Eberstadt’s statistical evidence, neither Galston nor Levin see the problem of entitlements primarily in moral terms, transforming American society into a nation of takers increasingly dependent on government largess.    While the two dissenting essays offer useful perspectives, there is more to say about the way in which Eberstadt has presented his data, pursued his argument, and offered future scenarios.

With respect to his data, putting all government transfer payments in the same entitlements box weakens Eberstadt’s moral argument and limits discussion of remedies.  Social Security, Medicare, antipoverty programs, and certain other categories of entitlements have different origins and rationales, enjoy varying levels of public support, and require different remedies.  Indeed, it is likely that successful remedies depend on recognizing these differences.

The problems can be illustrated starting with two smaller entitlement programs, Veterans benefits (about 3 percent of total transfer payments) and unemployment compensation (about 5 percent).   Like certain other entitlements, Veterans benefits (mostly pensions and disability provisions) are justified by past military service and resultant illness or injuries that entitle the Veteran to some sort of compensation or health care.  Veterans benefits enjoy widespread popular support, and most Americans would not group them with other entitlement programs, particularly means-tested welfare programs.

While unemployment insurance is means-tested, the test is prior employment (terminated by an employer) rather than poverty status.  Moreover, unemployment compensation has a fixed time limit, the insurance is funded in part by employers, and therefore it is not like transfer payments funded exclusively by taxpayers.  To be sure, recent extensions of unemployment insurance (paid entirely by the federal government) threaten to transform unemployment compensation into a more traditional welfare program.  While this expansion should be scaled back, the original program is not controversial and is not seen by most as a government handout.

This brings us to the largest two entitlement programs, Social Security and Medicare, which account for nearly 60 percent of entitlement spending.  Both of these programs are triggered by age requirements, and they have one other feature in common, noted by Galston, which distinguish them from means-tested antipoverty programs.  Most beneficiaries contribute to these programs during their working years, thereby changing the moral calculus.

While payroll taxes may not provide a retiree’s full benefit, their contributions contradict the notion they are simply receiving a government handout.  In 2010, for example, Social Security outlays were $580 billion compared to cash income of $680 billion.  Medicare outlays were $525 billion compared to cash income of $505 billion.  Equating these programs to welfare, as that term is commonly used, is not a convincing argument.

Despite their similarities, there is reason to separate these two programs when it comes to remedies.  As a technical matter, Social Security is relatively easy to fix, as noted by Galston, while Medicare is not, as noted by Levin (Galston concurs).   While neither fix is easy politically, Social Security can be put on sound footing with relatively modest changes in retirement ages, cost of living increases, or payroll tax changes.  The entire program does not need to be overhauled.

Putting Medicare on sound financial footing is much more complicated, because of severe inflation in the costs of medical treatment.  This matter is too complex to resolve here, and in fact there is no clear consensus about how to do this even among those who want to put medical insurance and treatment on a sustainable basis.

The final category of entitlements is traditional welfare or antipoverty programs, including Medicaid and the income maintenance programs, which comprise the traditional welfare or antipoverty programs.  About 30 percent of entitlement spending go to these programs, amounting to $666 billion in 2010.  Unlike Social Security and Medicare, welfare recipients do not pay in to these programs, and their moral justification is the safety net concept.  All three authors note that eligibility for some of these programs have been expanded beyond clear poverty criteria, and they present the greatest threat for expanding the type of dependency warned against by Daniel Patrick Moynihan.

While there is broad public acceptance of welfare as a safety net, there is less consensus that welfare should be extended well into the working and middle classes, with no provision for co-payment.  This might be the most promising area for reform, in the same way that AFDC was reformed in 1996.  Elsewhere I have estimated nearly $200 billion in annual savings by scaling eligibility back to a reasonable definition of poverty (“Restoring a True Safety Net” in National Affairs).

Eberstadt’s strategy seems to be shaming Americans into action by putting all entitlement programs under the same roof, with a truly staggering price tag, then accusing America to be a nation of takers.  This strategy is effective only if it is credible to treat all entitlement programs as welfare.  I think a more promising strategy is to recognize the differences in these programs, take advantage of different program characteristics and levels of support, and create a more tailored plan of reform much like the successful welfare reform of 1996.

Related items: A podcast at Liberty Law Talk with Nicholas Eberstadt, author of A Nation of Takers.