April 15 (Bloomberg) -- President Barack Obama says Social Security and Medicare fulfill “the guarantee of a secure retirement,” providing Americans benefits they have earned through a working lifetime of contributions.
Republican House Budget Committee Chairman Paul Ryan looks at a broad array of so-called entitlement programs and sees a corrosive effect. “More and more able-bodied people are becoming dependent upon the government,” he said on NBC’s “Meet the Press” in January. Left unchecked, Republicans say, Obama’s “entitlement society” will bankrupt the nation.
Republicans have been working to convert the once-neutral entitlement label into a negative, potentially making it easier for Congress to shave social spending. That move was underscored last year when presidential candidate Mitt Romney, who chose Ryan as his running mate, castigated 47 percent of Americans “who believe that they are entitled to health care, to food, to housing, to you name it” in a private talk to campaign donors.
“‘Entitlement’ used to be a fairly positive thing,” said historian Edward Berkowitz, an expert on social-welfare policy at George Washington University in Washington. “Now, the term is being changed. Entitlement is this form of social spending that’s getting out of control.”
Under Obama, voters received their first new entitlement in almost half a century with the expansion of health insurance to tens of millions of the uninsured. Now, with the president’s new budget containing proposals to lower spending on Social Security and Medicare, Americans are about to discover the limits of their entitlement to government help.
In a bid for a deal with Republicans to cut the deficit, Obama last week proposed changing the formula for calculating cost-of-living adjustments for Social Security recipients, which could mean benefits 10 years from now about 3 percent lower than previously projected. Medicare spending will be trimmed by reducing payments to doctors, hospitals and drugmakers while requiring more affluent patients to pay more.
Spending on Social Security and what the White House describes as “means-tested entitlements” -- including Medicare, Medicaid, food stamps and jobless benefits -- rose 40 percent over the decade ending in 2012, according to White House budget documents. That was more than twice the inflation-adjusted increase in the size of the economy over that period.
Still, any cutbacks are risky, with public support for the largest entitlement programs unwavering. Eighty-seven percent of respondents to a Pew Research Center poll favored increasing Social Security spending or keeping it the same compared with 10 percent who backed cuts. Respondents rejected Medicare cuts by 82 percent to 15 percent, according to the Feb. 13-18 survey.
Yet while Democrats portray the most costly entitlements as benefits that voters have paid for, typical wage-earners retiring in 2010 will receive at least $3 for every $1 they contributed to the Medicare health-insurance program, according to an Urban Institute study. Some will do even better: A married couple with one worker earning the average wage will reap more than six times their Medicare contributions.
From the start of both programs, Americans were conditioned to regard Social Security and Medicare as special. “The checks will come to you as a right,” explained a 1936 government pamphlet that introduced the program.
President Franklin Roosevelt, who proposed Social Security, later said he had established a dedicated funding source to protect the program from future political attacks.
“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits,” Roosevelt said. “With those taxes in there, no damn politician can ever scrap my social security program.”
President Lyndon Johnson created a similar mechanism to support Medicare. And in signing legislation creating the health-insurance program for the elderly in 1965, he said of the 65-and-older population, “they are entitled” to medical care.
In 1972, Congress indexed Social Security benefits to increase automatically each year to match rising inflation. As the consumer price index grew at an average annual rate of 7.9 percent over the next five years, indexation cemented Americans’ view that they had a right to their monthly checks unlike other government services.
The 1974 law that created the modern budgetary process mentioned lawmakers’ “entitlement authority” to make payments to those “who meet the requirements established by such law” - - possibly the first official use of the phrase.
Andrew Biggs, a former principal deputy commissioner of the Social Security Administration, says the term reflects the “automatic” nature of such spending unlike so-called discretionary programs whose outlays Congress adjusts each year.
“These are not welfare payments,” he says. “They’re benefits you get for paying the taxes you pay. It shouldn’t actually be taken as pejorative.”
In 1981, “entitlements” came into wider use, according to “Debt and Taxes,” a book by John Makin and Norman Ornstein. On June 24 of that year, President Ronald Reagan said the “automatic spending programs, what we called entitlements” were mushrooming in cost “and our elected representatives don’t have any control over them.”
Speaking at the annual convention of the Jaycees in San Antonio, the new president decried what he labeled “budgetary time bombs set to explode in the years ahead.”
Still, for years, “entitlement” remained a non-controversial term, merely reflecting legal eligibility for specified government benefits.
“Many of us who are of a certain age grew up with it, so we’re used to it,” says Jared Bernstein, 57, a former top economic adviser to Vice President Joe Biden. “But I prefer ‘social insurance,’ which I think is more accurate.”
Though “entitlement” is widely used by Democrats as well as Republicans, economist Dean Baker of the Center for Economic and Policy Research says the term’s meaning has been altered by “people who want to see cuts in the programs.”
To most voters, the dedicated payroll tax that funds the two major social insurance systems is what distinguishes them from programs supported by general tax revenue.
Social Security is financed by a 12.4 percent payroll tax, evenly divided between employee and employer. In 2010, the last year before a temporary reduction in the tax was enacted to spur the economy, Social Security drew 93 percent of its annual funding from payroll and other dedicated taxes.
Social Security’s disability trust fund is expected to be exhausted in 2016, though in the past Congress used funds from the program’s retirement account to cover shortfalls. Social Security will have sufficient income to pay full retirement benefits through 2033, according to its trustees.
Americans paid $195.6 billion in Medicare taxes in 2011, according to the most recent government data. That program, which spent $549 billion that year, is projected to run short of money in 2024.
Early Social Security beneficiaries got the best return on their contributions. A two-income couple with both individuals earning an average wage of $44,600 who reached age 65 in 1960 received more than seven times as much in lifetime benefits as they paid in payroll taxes, according to C. Eugene Steuerle and Caleb Quakenbush of the Urban Institute.
The retirement program has become less generous as the payroll tax has increased from the original 2 percent rate and the retirement age has been gradually raised. The same couple turning 65 in 2010 would be expected to roughly break even on their lifetime Social Security contributions.
Medicare is becoming a better deal as health-care costs rise. That average couple retiring in 2010 can anticipate receiving $387,000 in lifetime benefits in return for just $122,000 in taxes.
“You’re entitled to get what you paid in,” says Biggs, now at the American Enterprise Institute. “Are you entitled to three times what you paid? Legally, yes, you are. But morally, of course you’re not. If people want benefits, they need to pay for them.”
For the average-wage couple reaching age 65 in 2030, the Medicare payback will approach four times their lifetime contributions. They can expect $664,000 in lifetime benefits compared with $180,000 in contributions.
The disparity between contributions and benefits means Medicare is becoming increasingly dependent upon general government revenue.
In 2011, payroll taxes and premiums covered 48.1 percent of Medicare’s total spending while the Treasury paid 41 percent of the bills.
In 2001, the share of Medicare costs covered by general government revenue was 30 percent. The addition of a new prescription drug benefit in 2003 without additional financing, along with continued aging and rising medical-care costs, is draining government coffers.
Berkowitz, the historian, says both sides in the debate over reducing government spending will use language allowing them to ultimately claim victory.
The administration’s “sensible” embrace of changing Social Security’s cost-of-living adjustments -- or “chained CPI” -- masks a policy shift that will reduce benefits.
“It’s so technical that nobody gets it,” he says. “So we can argue in the end that we cut spending and preserved the programs.”
To contact the reporter on this story: David J. Lynch in Washington at email@example.com