Entitlements: What You Need to Know

What is an entitlement?

An entitlement is a federal program that provides benefits to any American citizen who qualifies.  Examples include Social Security, which sends payments to retired Americans, SNAP (Supplemental Nutrition Assistance Program), which helps low-income Americans pay for food, and Medicare, which funds health care for retired Americans and some non-retirees.

A key feature of an entitlement is that the government’s commitment to providing benefits is open-ended.  For most federal programs, spending levels are set each year by appropriation bills that are passed by Congress and signed by the President.  The government cannot spend more than the amount appropriated.  With an entitlement, as long as the law that established benefits remains in place, the government must spend as much money as needed to provide these benefits to everyone who qualifies, regardless of whatever spending limits are in the enacted budget.

For example, one entitlement administered by the Medicare program pays for kidney dialysis for anyone who needs it.  In recent years, the program has served about 500,000 people per year at a cost of about $6.5 billion.  However, if an additional 300,000 people needed kidney dialysis in 2023, the Medicare program would have to pay for dialysis for all of them.  Administrators could not restrict coverage to those people already receiving dialysis, limit the number of new participants, or announce they were only going to pay 80% of actual costs for everyone to limit costs.   Until Congress and the President change the law, everyone would have to be covered.

What entitlements exist today?

The best-known example of an entitlement program is Social Security, which sends monthly checks to retired Americans. This program was created in 1935.  People who have worked for at least 10 years qualify for partial Social Security benefits at age 62.  The age to qualify for full benefits depends on birth year; for anyone born in 1960 or later, it is 67.  The size of an individual’s benefit depends on their lifetime income.  Americans contribute to Social Security through paycheck deductions. Currently, individuals and their employers each pay a 6.2% tax on income up to $142,000. Because payroll deductions do not pay for the entire cost of the program, the remaining benefits are funded through the federal budget.

Two other well-known entitlement programs are Medicare and Medicaid.  Medicare pays for health care for seniors and the disabled, while Medicaid provides health coverage to the poor.  Medicare coverage is guaranteed to anyone over the age of 65.  Funding is provided through payroll deductions (individuals and their employers each pay 1.45% of income), through premiums paid by Medicare recipients, and from the federal budget.  Other federal entitlements include unemployment benefits, welfare benefits, housing subsidies for the poor, and SNAP.

What do entitlement programs do?

Federal entitlement programs are intended to provide a safety net for individuals during recessions, personal crises (including health and mental health issues), and old age, ensuring that they can maintain a decent standard of living regardless of income.  For example, Medicaid benefits were received by 62% of nursing home residents and about half of disabled adults.  Without these payments, few of these individuals could afford to pay for skilled care.  Similarly, 83% of children whose family income is below the poverty line receive Medicaid support for routine medical care as well as medical emergencies.  Without the federal entitlement, most of these children would not have any health coverage.

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Programs like SNAP, the child tax credit tax, and housing subsidies have been shown to reduce the number of households with children that are in poverty by more than 60%.  Moreover, data shows that children in lower-income households that receive benefits from entitlement programs perform better in the labor market as adults.   One of the most notable achievements of an entitlement program is how Social Security reduced poverty rates for seniors.  As the figure shows, the actual poverty rate among American seniors (9%) would be over four times higher (38%) without Social Security benefits.

How much do entitlements cost?

Entitlement programs make up an increasingly large portion of federal spending, from about 30 percent in 1960 to over 60 percent in recent years. The figure below shows the estimated cost of several large entitlement programs for the current fiscal year (October 1, 2022 – September 30, 2023):

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Health programs include Medicare, Medicaid, and the Child Health Insurance Program (CHIP).  Income security includes programs such as unemployment benefits, TANF, and SNAP.

This chart illustrates the central issue with entitlement programs: while there is strong public support for most of the benefits these programs provide, providing these benefits is costly.  An aging population, increased life expectancy, and increasing healthcare costs will continue to put further stress on entitlement spending over the next 30 years as the Baby Boomer generation begins to reach the age to collect entitlement benefits. As shown in the diagram below, Medicare spending is projected to double to $1.844 trillion by 2031.

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Increasing lifespans and declining birth rates also create problems for Social Security.  Older Americans are collecting benefits for a longer time, and there are fewer younger Americans paying into the program.  Since 2010, the trust fund has been receiving less in payroll taxes than it has been paying out in benefits.  Currently, this shortfall is being covered from reserve funds.  If the program is not changed, the trust fund will be able to pay only about 80 percent of full benefits to recipients after 2035.

Controlling entitlement spending

There are three ways to reduce the growth of entitlement programs.  First, benefits can be cut, either for current or future beneficiaries.  Second, current or future beneficiaries can pay a greater share of the program’s cost.  And third, eligibility requirements for an entitlement can be changed to reduce the number of people who receive benefits.

Proposed reforms to the Social Security program provide a good example of these strategies.  Most studies identify a similar package of policy changes to close the gap between benefits and receipts:

• Currently, the Social Security tax is collected only on the first $147,000 of an individual’s income. Reforms would increase this limit or eliminate it entirely.
• Increase the age where a person is eligible for Social Security (currently 62) or can collect full benefits (currently 67 for those born in 1960 or later) by several years, to 65 for partial benefits and 70 for full benefits.
• Change the formula used to adjust Social Security benefits for inflation (the current formula causes benefits to rise slightly faster than the actual inflation rate experienced by retirees).
• More significant changes would limit the maximum size of Social Security benefits or move to a system where everyone receives the same benefit. Another proposal is to invest a portion of the trust fund in stocks and other securities.  Doing this might increase the size of the trust fund but could also create larger problems paying full benefits during a stock market downturn.)

These proposals illustrate a central issue with entitlement reform: there are no easy solutions.  Curbing increases in the cost of these programs involves pain in the form of higher taxes or lower benefits for someone, either current recipients, future recipients, or both.  Conversely, if no changes are made, entitlements will capture an increasing share of federal spending, leading to higher taxes, increased budget deficits, or cuts in other government programs.