ENTITLEMENTSPENDING
It’snosecretthatEntitlementspendingintheU.S.isheadeddownanunsustainablepath.With
originsdatingbackto1970sand1980sandleftmostlyuncheckedsince,escalatingspendingtrends
onentitlementswerebroughttogreatfocusinthewakeofthefinancialcrisisandrecession.
Demographictrendsaren’thelping.Still,nothingofnotehasbeendone.Aswe’llsee,despitethe
economicrecoverysincethefinancialcrisis,thegrowthinmanyEntitlementprogramscontinues
unabated.
We'llbeginbylookingatwhenandtowhatdegreeentitlementspendingbeganrising.Thenwe’ll
detailmorerecenttrendswithinasmallsubsetofwelfareandentitlementprograms.We’llthen
covertheconceptsof“welfarecliffs”and“disincentives”andconcludebyofferingsome
demographicfactsonminimumwageearners.Ifnothingelse,treatitallasfoodforthought.
THELONG_TERMGROWTHINENTITLEMENTSPENDING
(Source:NateSilver“WhatisDrivingGrowthinGovernmentSpending?”NYTimes,Jan,2013)
Let’sstartwithsomegeneralfactsaboutlong‐termtrendsingovernmentspending.Thechart
belowshowstheprogressionoftotalgovernmentspending(lightgray),federalspending(dark
gray),andentitlementspending(black)allasa%ofGDP.Ourfocusisonhowentitlement
spendingbeganincreasingasapercentageofeachasearlyasthe1970s.
In1972totalgovernmentspendingwas30%ofGDP.By2011,totalgovernmentspendinghad
increasedto39%ofGDP.Diggingintothedatafurtheronefindsthatoverthatentireperiod,
spendingonentitlementprogramswastheonlycategoryofgovernmentspendingwhichgrew
fasterthanGDP.Saiddifferently,entitlementspendingrisingfrom5to15%ofGDPissolely
responsiblefordrivingtotalgovernmentspendingfrom30%to39%ofGDPoverthelast40years.
Forperspective,bothGDPandtaxreceiptsgrewat2.7%annuallysincethe1970swhilespending
onEntitlements(transferstoindividuals)increasedatanaverageannualrateofgreaterthan4.5%.
Thisisamassivedifferencewhencompoundedoverthislongperiodoftime.
Translatingthedifferenceintobudgetaryterms,spendingonentitlementprogramsin1972was
about$500billionperyearintoday’sdollars(adjustedforinflation).Ifithadkeptpacewith
economicgrowth(asallothergovernmentspendingdid)itwouldtotal$1.5trilliontoday.Instead
it’snearlydoublethatat$2.9trillion.
EvensimplerthanreferencingGDPissimplylookingatEntitlementSpendingasashareoftotal
FederalGovernmentSpending.Asshownbelow,EntitlementSpendinghasgonefromconsuming
1/3oftotalgovernmentoutlaysinthe1970stonearly2/3ofgovernmentoutlaystoday.
Nextwe’lltakealookattrendswithincertaincategoriesofentitlementspending.
HEALTHCARE
(Source:TheHeritageFoundation–The2013IndexofDependenceonGovernment–11thedition,
November2013)
Asareminder,Medicarewasinitiallyenactedin1965.Sincethemid‐1970s,governmentspending
onhealthcareisthefastestgrowingcategoryofentitlementspending.It’srisenat6.7%annualized.
Weallknowthatbythemselvesdemographictrendsandrisinglifeexpectancies(withnochangein
howbenefitsaredoledout)haveturnedpreviousactuarialassumptionsontheirheads.
In2011,Medicare,MedicaidandtheChildren’sHealthInsuranceProgram(CHIP)hadcombined
enrollmentsof109millionindividuals–or32percentoftheentirepopulation.Thesethree
programsaccountedforjustunder$1trillionor6.6%ofGDP.Whilethatfigureraisesquestions,it’s
theprojectedtrendsgoingforwardthatraiseseriousalarms.
TheCongressionalBudgetOffice(CBO)estimatesthatwhencombinedwiththeeffectsofadopting
Obamacare,Medicarespendingalonewillexceed$1trillionby2021.MedicaidandCHIPcombined
willtackonanother$1trillionbythenaswell.That’sanotherdoublingofspendinginjustthese3
programsto$2trillionin10years.Somethingmustandwillchangebeforethen,bychoiceor
otherwise.Wearedivertinganincreasinglydangerousshareofournationaloutputjusttofund
futurehealthcareentitlementsallbythemselves.
WELFARE
(Source:TheHeritageFoundation–The2013IndexofDependenceonGovernment–11thedition,
November2013)
Asbackground,since1964,thefederalgovernmenthasspentapproximately$20trilliononmeans‐
testedwelfareaid.The1996Welfarereformactreshapedtheoriginalpremiseofwelfarebenefits
bydefiningassistanceastemporaryandtyingfederallyfundedbutstate‐directedaidto
demonstrableeffortsbyrecipientstopursueworkandpartakeinwork‐relatedactivities.
The2006DeficitReductionActreiteratedwork‐relatedprovisionsforrecipientsofwelfare
benefits.Probablyduetothedepthoftherecessionin2008,ashiftingpoliticalideology,orboth,in
2012theDept.ofHealthandHumanServicesallowedstatestowaivethework‐related
requirementsforreceivingbenefits.
Movingmoretothepresent,forfiscalyear2011,CongressionalResearchService(CRS)identified
80overlappingfederalmeans‐testedwelfareprograms.Togethertheyrepresentedthesingle
largestbudgetitemin2011–morethanthenationspentindividuallyonSocialSecurity,Medicare,
orNationalDefense.Readthatagainandknowthatwhentakentogetherwiththe$280billionin
statecontributions,thetotalamountspentonwelfarein2011wasjustshyof$1trillion.
95%ofthis$1trillioninspendingcomesfromfourcategoriesofspending:medicalassistance,cash
assistance,foodassistance,andsocialhousingassistance.Despiteaneconomicrecoverysincethe
2009recession,outlaysforspecificsegmentsofwelfareandentitlementassistancehavecontinued
toincrease‐‐insomecasesdramatically.FoodStamps(partofWelfare)andDisability(partof
SocialSecurity)aretwoofthosesegments.
FOODSTAMPS
(Source:SNAP,TheHeritageFoundation,ZeroHedge)
TheFoodStampsProgramisnowknownastheSupplementalNutritionAssistanceProgram
(SNAP).BelowisapictureofparticipationratesinSNAPjustsince2007.
SomesummarystatisticsonSNAP:
 In1970(notshown),1.4%ofthepopulationparticipatedinSNAP.
 In2008(shown),9.6%ofthepopulationparticipatedinSNAP.
 In2011,14.3%ofthepopulationparticipatedinSNAP.Thatisnearly45millionor1in7
people.
Whetherthisandotherwelfareprogramshavebecometoounwieldyandfraughtwithabuseor
whetherthepost‐crisiseconomyhassubstantivelydisenfranchisedlower‐incomehouseholdsfor
factorsoutsidetheircontroldeservesdebatebutwhat’sundeniableiswearemovingtowarda
socialwelfarestateinthisandotherareas.
Inbudgetarytermsandasseeninthenextpicture,justsince2008,Federaloutlaysindollarsfor
SNAPhavemorethandoubled,from$39billionto$82billion.Whileit’seasytoglossoverthese
numbersina$17trillioneconomy,ignoringthesebudgetarytrends‐‐alongwiththehard‐to‐
measureimpacttheyarehavingonthenationalpsyche‐‐willlikelyprovemisguided.
DISABILITY
Source:“GrandTheftDisability”WallStreetJournal,January10,2014.
AsprofiledinarecentWallStreetJournalarticle,outlaysfordisabilityclaimsunfortunately
resemblethoseoftheFoodStampprogram.Whilerecentcasesoffraudandabusesurroundingthe
disabilityprogramhavebroughtattentiontotheissue,theunderlyingtrendshavebeenpercolating
forsometime.Thefollowingchartshowstheriseindisabilityclaimssincethemid‐1980s.
Certainlyanagingworkforcewithlongerlifeexpectancieswouldseea“natural”increaseinthe
numberofpeopleclaimingdisability‐‐butlet’snotkidourselvesthatthereisnothingelsegoingon
here.
 Annualdisabilityclaimshaveincreasedfrom2.7millionin1985to8.9millionin2012.
 ThenumberofmonthlydisabilityclaimsintheU.S.increasedfor202consecutivemonths
throughyearend2013.
Thenextpictureshowsthebudgetaryimpactofthesetrendsalongwiththeconditionofthe
DisabilityTrustFund.


In2013alone,$137billioninclaimswerepaidout,whichistwicetheannualclaimspaid
outasrecentlyas2003.
Assetsheldbythedisabilityinsurancetrustfundpeakedjustbeforethe2008financial
crisis.Againstrapidlyincreasingclaimssince,thepaceofthedrawdownsince2008
suggeststhatunlesssomethingchanges,thetrustfundwillbebrokeby2017.
Thecorrelationbetweenrecessionsandthesubsequentexpansionofsocialwelfareprogramsis
typical.Whatiscompletelyatypicalthistimeistheprogramscontinuedtogrow(oreven
accelerate)aftertheeconomyrecovered.Justifiedinitssizeornot,thetaxpayersaregoingtoown
thedisabilitytrustfundliabilityanewunlesssomethingdramaticchanges.
WELFARE“CLIFFS”ANDDISINCENTIVES
Source:GaryAlexander,SecretaryofPublicWelfarefortheStateofPennsylvania
Wewilldiscussinafuturepieceotherfactorsthathavenegativelyimpactedlaborandcreated
incomeinequalitybuthereandnowwehavetoaskwhatroleourexpandingsocialsafetynetplays
inlabormarkets.Commonsensesuggeststhatifawelfaresafetynetgetslargeenough,incentives
getmisaligned.Ifpeopledon’thavetowork,mostprobablywon’t,particularlyiftheyareconfident
thattheirbenefitswillcontinueindefinitely.Choicesgetevenclearerifworkingtodayversus
receivingbenefitsisanobviouslyirrationaleconomicchoice.
GaryAlexander,theSecretaryofPublicWelfareforTheStateofPennsylvaniarecentlyassembleda
reportillustratinghowwelfarebenefitscreatemathematicaldisincentives(i.e.“welfarecliffs”)to
pursuingfull‐timework.Inthefollowingillustration,hecomparestheafter‐taxeconomicreceipts
ofthosereceivingwagesandwelfarebenefitstothoseearningtaxablewagesfromfull‐time
employment.
It’sabusypicture.Theverticalleftscaleshowsthehypotheticalsumofwelfarebenefitsandwages
ofasinglemother.Thehorizontalscaleshowstaxablewages.Aslabeled,the“highestwelfarecliff”
showsahypotheticalsinglemomearning$29,000inwageswhilereceivinga“stack”ofwelfare
benefitswhichtogethertotal$57,300after‐taxes.Asthehorizontaldottedlineillustrates,this
equatestoearning$69,000intaxableincomewithnowelfarebenefits.Evenwhenoneassumes
fewerwelfarebenefits(underneaththedottedline),shallower,yetpersistent“cliffs”appear.
Howlikelyinthisillustrationisthissinglemomreceivingwelfarebenefitstobemotivatedoreven
able(ifsomotivated)toreplace$57,300intotalnet“earningsandbenefits”withtaxableW‐2
incomeof$69,000?Candidly,thesizeofthatgapaloneissobering,ifnotinsurmountable.
(Source:“PoorHouseholdsGetting$168inWelfareperDayfromTaxpayers”,KatiePavlich;
Townhall.com)
Boilingitdownfurther,theSenateBudgetCommittee(SBC)releasedareportin2012showing
householdslivingbelowthepovertylineandreceivingwelfarepaymentsarecollectingthe
equivalentof$168perdayinbenefitsacrosstheentitlement“stack.”Thatequatesto$30perhour
fora40hourworkweek.Bycomparison,MedianHouseholdIncomeintheU.S.is$51,000which
equatesto$25perhourfora40hourworkweek.Aftertaxeshowever,thatwageshrinksto$21
perhour.
Thinkaboutthat.Compassionandfairnessnotwithstanding,ifwelfarerecipientsfindthemselves
inbettereconomiccircumstancesthanthemedianhouseholdincomeearnersinthiscountry,what
messagearewesending?Nomatterwhichpoliticallensyoulookthrough,thereissomethingsadly
outofbalancehere.
MINIMUMWAGERECIPIENTS
(Source:TheHeritageFoundation;“WhoEarnstheMinimumWage,SuburbanTeenagers,NotSingle
Parents.”JamesSherk)
Whenonethinksaboutfairnessandsocialsafetynetsthatcomewithdemocracies,minimumwage
earnersrightfullycometomind.It’slogicaltothinkminimumwageearnersembodytheformative
stagesoftheAmericanideal.Wearenotgoingtoarguetheprosandconsofminimumwage
increaseshere.Instead,let’slookatthedemographicprofileofthosewhoearntheminimumwage
andseewhobenefitsfromtheincreases.
In2011and2012,3.7millionAmericansreportedearning$7.25orlessperhour.Thisis2.9
percentofallworkers.Thesenumbersincludepeoplewhoearntipincomeaspartoftheirjobs.
Givenhowthenumbersplayout,it’shelpfultoconsiderminimumwageearnersintwoagegroups,
those16‐24yearsofageandthoseolderthan25.
MinimumWageEarnersAges16‐24(i.e.>50%ofallminimumwageearners)
 Justoverhalfofthoseearningminimumwagearebetweentheagesof16and24.
Thisgroupistypicallynottheirfamily’ssolebreadwinner.Theirfamiliesgenerallydonot
relyontheirearnings.
 Over75%ofindividualsinthisgroupareworkingpart‐timejobs.
 Over60%ofindividualsinthisgroupareenrolledinschool.
 60%arewomen
 Theaveragefamilyincomeforthisgroupis$65,900peryear.
MinimumWageEarnersAges25andOlder
 Thisgroupisfarlesslikelytoliveinmiddle‐incomehouseholds.
 Over50%workpart‐timejobs
 67percentarewomen
 TheaveragefamilyIncomeforthisgroupis$42,500peryear.
Theimageofpeopleearningminimumwageturnsouttobesomewhatdifferentthanonemight
think.Philosophically,singleparentsworkingfulltimeandlivingnearthepovertylineprobably
describestheprofilemanythinkofasdeservingassistancealongtheway.Unfortunatelywethink
forthosewhosupporttheideaofraisingtheminimumwage,thisdemographicisbarelyfeatured.
Asitturnsout,just4%ofminimumageworkersaresingleparentsworkingfulltime.
SUMMARYTHOUGHTSANDQUESTIONS
“Theproblemwithsocialismiseventuallyyourunoutofotherpeople’smoney.”
Theunsustainabilityofentitlementspendingisoneoftoday’smostinconvenienttruths.Alongwith
themathematics,politicalpolarityaroundtheissuesisscalingnewheights.Eventhesources
consultedforfactsareoftenbiasedtopresentingthosefactsinamannerthatservestheirown
politicalorideologicalpurpose.Allthewhile,nothingisgettingdoneandthetrendsaregetting
moreominous.
Likebrokenrecords,politiciansononesidesayraisetaxeswhiletheothersidesayscut
entitlements.Onesidesayscorporationsshouldpaypeoplebetterand/orbetaxedatahigherrate.
Theothersaysentitlementsandgovernmentspendingarecrowdingoutmoreproductive
investmentsthatwouldgeneratepermanentprivatesectorjobs.Onesidesaystherichshouldpay
morewhiletheothersaystherichalreadypaymostofthetaxesanyway.Nomatterwhichsideyou
areon,prolificpoliticalinertialeavesyoufeelingshort‐changed.
Hereiswheretherhetoricgetsexposedaswhatitis:nothingbutemptywords.Askanypolitician
ormostanycitizen(richorpoor)whatformsthebackboneofthiscountry.Asifreadingfroma
script,manywouldsay“middle‐classfamilies.”Aswe’llseewhenwelookatlabormarkettrends
andincomeinequalityalongwithwhatwedescribedhereonentitlements,thisso‐calledbackbone
isbeingdisenfranchised.Risingandconspicuousincomeinequality“above”coupledwithever‐
swellingranksofthosereceivinggovernmentbenefits“below”iscreatingahard‐to‐ignoresqueeze
forthatmarriedfamilywith2workingparentsand2children.
Makenomistakethatourfree‐marketeconomicsystemhascreatedmorewidespreadprosperityin
theshortestamountoftimeinallofhistory.Butisitatallpossiblethatwehavegrowntoo
complacentbasedonourpastachievements?Isitatallpossible,thatwearerestingonourlaurels
andjustassumingourspendingandhabitscancontinueontheirpresentpathwithoutadverse
consequences?
SUMMARY
 EntitlementSpendinghasgonefrom5%to15%ofGDPsincethe1970s.
 GovernmentspendingonHealthcareaccountsfor6.6%ofGDP.Projectedtrendsarefor
governmentspendingonhealthcaretokeeprisingatapproximately7%annuallyunless
somethingchanges.
 Welfarespendingalonetotaledjustunder$1trillionin2011.Thatsameyear,45million(or
1in7)peoplereceivedgovernment‐subsidizedfoodassistance.
 Somewelfarerecipientsreceivetheequivalentof$30perhour‐‐whichexceedsthehourly
after‐taxmedianhouseholdincomesofthecountry.
 Nearly9millionpeoplearecollectingdisabilityvs2.7million30yearsago.Unless
somethingchangeshere,taxpayerswillbebailingoutthedisabilitytrustfundinthenot‐to‐
distantfuture.
Verylittle,ifanyofthis,seemssustainablefarintothefuture.Inthepast,fastertrendeconomic
growthandabroadertaxbase(revenues)haveboughtustime.Hereandnow,hardchoicesare
stillchoicesandunlesswestartmakingthem,highertaxes,higherborrowingandtheweightof
entitlementsaregoingtohaveincreasinglyimportanteconomicandsocietalimplications.Weall
haveagrowingstakeinwhichwaythatpendulumultimatelyswings.