Entitlement spending is mandatory spending as mandated by congress and differs significantly from discretionary spending. Entitlement spending generally makes up around 60% – 65% of total US government spending.
The main components of entitlement spending are Social Security, Medicare, Medicaid, Income Security (Unemployment), and two other small categories. If you are interested in more details of discretionary and entitlement spending, please read, The US Budget Explained: Discretionary vs. Entitlement Spending.
Entitlement Spending History
The Congressional Budget Office (CBO) conducts non-patisan research on behalf of and at the request of congress. The chart below shows the history of US government entitlement spending since 1973 as a percent of GDP.
Story 1: Growth in Medical Expense
This chart tells several stories. We have annotated the growth in
different periods because there are different phenomenon as play. The first period is from 1973 to 2007 (before the start of The Great Recession. The first story is growth in medical expense.
The growth in entitlement spending from 1973 through 2007 is clearly dominated by medical costs as represented by 390% growth in Medicare and 321% growth in Medicaid spending. Social Security alone only grew during this period by 23% driven primarily by increasing numbers of people entering the program.
Medical costs have grown as a result of several factors.
First, new and more expensive technologies, including procedures, therapies, and drugs, have entered the market. When people are sick, they naturally tend to demand the latest approaches. Additionally medical technology providers now aggressively market their products directly to the public. This marketing causes consumers to place demands on doctors and providers. Many of these advertisements end with, “Ask your doctor for…”
This form of marketing within the medical profession is called DTC (Direct to Consumer) marketing. Instead of marketing to doctors, firms market directly to consumers.
Only the United States and New Zealand permit this aggressive approach.
Second, lobbying by the pharmaceutical industry creates laws and regulations favorable to the large corporations who provide the medicine and procedures.
Lastly, medical malpractice lawsuits are very prevalent in the US. Additionally, legal awards in malpractice cases are high relative to most of the rest of the world. As a result doctors tend to over-prescribe diagnostic procedures as well a medicine as this creates a stronger legal defense in the case of a malpractice lawsuit.
Story 2: Unemployment
Now let’s look at what happened in the 2 years 2007 – 2009.
What we see between 2007 and 2009 is remarkable increases in spending in ALL categories of entitlement spending. What could possible happen in just 2 years to create such dramatic increases in spending?
Well, it was, of course, unemployment. When people become unemployed, they may enter retirement early (for example if they get frustrated by age-related job discrimination), may seek unemployment bridging payments, may seek medical help via Medicare and Medicaid, and so on.
The dramatic increases in government deficits started under the Bush administration is attributable to two factors. First, Bush policy favored lower taxes and increased spending, directly biasing the system toward increased deficits. Second, and of larger impact, was unemployment created during The Great Recession. Unemployment creates a double negative impact of also dramatically reducing government revenues, as those who are unemployed, do not pay taxes. My article Fixing the US Budget Deficit: All Gain, No Pain explores this phenomena in more detail as well as discussing solutions to the US deficit issue.
Story 3: Economic Recovery
The third story in this chart is economic recovery.
Since 2009, we have seen modest (and uneven) economic recovery including steady reduction in deficits. Relative to entitlement spending, what we see since 2009 is significant declines in all categories expected to be sensitive to ups and downs of employment. Unemployment is modestly down, Revenues are modestly up, and deficits have begun reducing.
Facing the Future of Entitlement Spending
Controlling future entitlement spending entails at least two major areas of focus.
First and foremost should be reducing unemployment, so that unemployment related expenditures decrease accordingly. Not only will reduced unemployment reduce entitlement spending, it will increase revenues, thereby reducing deficits.
The second major area of focus needs, of course, to be reigning in spiraling medical costs. Prudent policy may include controlling Direct to Consumer (DTC) marketings, reforming malpractice law, and some form of medical rationing or direct cost controls.
Throwing Out the Baby With the Bathwater?
Some camps propose coarse high-level controls on the entitlement program. An example is downwardly adjusting cost of living increases across the board.
In my opinion, a more focussed specific approach aimed at the actual specific causes of the problems may be more advisable.
CEO, Rain8 Group LLC
Note that the figures above are reduced by offsetting receipts. Offsetting receipts averaged about 1.2% of GDP from 1973 to 2012. This amount is subtracted from each category above on a weighted basis to reflect total net spending.