The Entitlement Train Rolls On

The House is expected to take up the Senate-passed budget resolution next week and thereby set the stage for consideration of an epic, $3.5 trillion tax-spend-and-borrow reconciliation bill later this year. Democratic leaders are already planning for this effort to add another $1.75 trillion to federal debt over a decade based on conventional scoring rules (which exclude growth effects); the reality is likely to be worse. The reason is the iron law of entitlements: they always become more expensive than initially advertised. A corollary is that their offsets rarely measure up, or else Congress scales them back if they might actually pinch.

Consideration of this plan is taking place against a backdrop of rapid budgetary deterioration. Part of the story is that back-to-back global calamities — the financial crisis that began in 2007 and the ongoing COVID-19 pandemic — forced the federal government to borrow heavily to minimize the resulting economic damage. At the end of this fiscal year (on September 30^th), federal debt is likely to stand at $23.0 trillion, or 102.7 percent of GDP, up from 40 percent of GDP at the end of 2008. The 2021 deficit alone is expected to be 13.4 percent of GDP.

The other source of financial distress isn’t new, or unexpected. Entitlement spending has been growing rapidly for a half century, and has long been projected to balloon with population aging, which is now well underway. Absent serious reform of the major programs, control of federal debt was going to be a struggle even without the twin crises of the past decade-plus.

The emerging Democratic legislation is billed as a once-in-a-generation initiative, but it is really more of the same, only with a higher price tag. Like countless other bills before it, its primary purpose is to expand existing entitlement programs, create several new ones, and supposedly offset the costs by targeting villains — in this case, rich Americans, large corporations, and drug manufacturers. It would also create new pressure for further expansions in future bills.

The list of planned spending initiatives is long, and growing:

• dental, vision, and hearing coverage in Medicare;
• eligibility for Medicare at age 60;
• extension of more generous premium subsidization under the Affordable Care Act (ACA);
• a new fully-subsidized insurance option in states that have not expanded Medicaid as authorized in the ACA;
• more generous home and community-based long-term care services in Medicaid;
• mandatory family and medical leave for workers;
• extension of the new monthly child tax credit created in the most recent COVID-relief law;
• provision of free and universal pre-K;
• free tuition for attendance in community colleges;
• multiple green energy initiatives;
• and expansions in scores of other existing federal programs and agencies.

The primary architects of the legislation have already signaled that $3.5 trillion is not enough for what they have in mind. Their fix is to sunset new benefits as needed to artificially lower costs. Once in place, with households receiving new federal support, they expect (with good reason) that the political imperative for continuation of the benefits (perhaps with liberalizations) will be overwhelming.

The budget resolution calls for a minimum of $1.75 trillion in offsetting revenue hikes and spending cuts, which means federal borrowing could increase by up to $1.75 trillion. The sponsors believe more rapid economic growth will partially close the gap, but the plan’s heavy emphasis on consumption, rather than investment, makes that unlikely.

The addition of scores of new commitments to those that already exist will accelerate a trend underway for a half century. The federal government’s increasing focus is on administration of social welfare support, through benefit programs (with a heavy concentration in health care). The high cost of this activity makes it more difficult to adequately fund other federal services and agencies. The Congressional Budget Office (CBO) projects the total commitment for entitlement programs will reach an average of 17.2 percent of GDP over the period 2042 to 2051, up from an average of 9.1 percent of GDP in the 1970’s.

If the Biden administration and the Democratic majorities in Congress succeed in passing their plan, it will not be the end of the story. When the ACA was enacted in 2010, its authors pledged it would not increase federal borrowing. Since enactment, several of its key financing provisions have been repealed (such as the “Cadillac tax” and the Independent Payment Advisory Board), while its benefit provisions have been made more generous.

The same pattern is sure to unfold with this year’s legislation. The tax hikes on the wealthy may come with loopholes that lower their revenue effects. The funding for stricter IRS enforcement could easily disappoint too. And the history of price controls, which are planned for the drug industry, does not engender confidence that all would go according to plan. Further, the benefit programs will be designed to build pressure for liberalization. Income tests used to limit costs now can be relaxed later, as has been done with the ACA’s subsidies.

Signs of an over-extended federal enterprise are everywhere. The commitments the government has made even before any new programs are created already far exceed what has been collected in revenue historically. CBO expects the deficit in 2031 to be 5.5 percent of GDP if all goes well over the next ten years, which is above the norm (around 3 percent of GDP) in the postwar era up to 2008. It is possible the general public will come around to accepting higher taxes to close the existing budget gap and pay for more generous social support too, but that is not the current plan. Democratic leaders contend that all of what they are proposing in new benefits, along with deficit reduction at some undetermined point in the future, can be financed just from higher taxes on the rich. That’s not how other countries do it (they tap their middle classes with broad-based taxes, such as VATs).

The better bet is that the U.S.’s entitlement system will continue to be fueled with more and more borrowing until it becomes obvious to sufficient numbers of creditors that the federal government can no longer both service its outstanding debt and pay all of its other bills too.

James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.