The national debt is projected to surpass $36 trillion, with an additional $1.9 trillion expected in 2025. Critics contend that entitlement programs like Social Security and Medicare may face significant changes that could lead to financial difficulties for many. Is there a way to trim spending related to these programs?
First off, it’s essential to understand what these entitlement programs really mean. Ironically, the U.S. doesn’t enshrine a right to welfare or health care—rather, qualification pertains to how funds are allocated. Essentially, the Treasury will reimburse all individuals who meet the eligibility criteria without needing funds from any council. Adjusting eligibility rules or payment schedules could effectively lower costs.
Social Security, Medicare, and Medicaid—often referred to as the Big Three—are among various qualification programs. By 2024, expenditures on these programs reached a staggering $4.1 trillion, contributing to Washington’s overall spending of $6.8 trillion.
As the population ages, spending on Social Security and Medicare is set to rise, while the number of taxpayers shrinks. By 2035, the Congressional Budget Office projects that spending will soar to $6.4 trillion, surpassing discretionary spending limits.
This situation forms the basis for arguments advocating for reduced eligibility. While significant tax increases could stave off bankruptcy, the current discussion centers on trimming eligibility expenditures.
Work requirements are one angle worth exploring. When the U.S. implemented labor requirements for welfare in the 1990s, it resulted in a 59% decrease in recipients without raising poverty levels, including childhood poverty. Interestingly, after President Obama lifted food stamp labor requirements, the number of recipients doubled the following year.
It may come as a surprise, but the impact of work requirements extends beyond simple labor. They often helped identify fraudulent claims, as many who collected benefits didn’t fulfill mandatory training requirements.
Instead of work obligations, perhaps regular in-person check-ins could be introduced for programs like Social Security and Medicare. Records indicate there are many deceased individuals or fraudulent claimants exploiting the system. It’s important that we ensure the legitimacy of those receiving benefits.
Medicaid, which is partly funded by both federal and state governments, has a matching grant structure that creates problematic incentives. States receive between $1 and $3 for every dollar they spend, resulting in generous budgeting from state officials who feel inclined to leverage federal funds.
These grants enable questionable practices, like deceptive provider taxes. Some states tax healthcare providers to gain matching funds, only for those providers to inflate their fees to cover the tax burden.
Block grants, akin to those used in the welfare reforms of 1996, provide a tested solution. They won’t increase if a state offers optional services, effectively ending the cycle of misleading provider taxes.
As for Medicare, since it’s entirely federally funded, there aren’t any grant savings to consider. However, fostering competition for generic drugs could be a way to control costs. There’s a lot to unpack on this subject, but I won’t delve further here.
Critics often label this situation akin to a Ponzi scheme. It’s a harsh label, but essentially, pensions invest workers’ contributions for future benefits, whereas Social Security utilizes present taxes to pay out current benefits.
Initially, there weren’t many retirees drawing from the system, as the baby boomer generation was actively contributing. This meant that payroll taxes exceeded benefits, leading to the establishment of a trust fund. However, projections suggest the fund could be depleted by 2033, given that it currently relies on purchasing Treasury debt instead of investments, with benefits now outpacing taxes.
It’s worth noting that Social Security offers a low return rate—maybe around 1%. For a point of comparison, state pension schemes often show returns of 6-7% annually. Also, Congress can adjust benefits, meaning there’s no guarantee of those returns.
Young families might be feeling this most acutely. Think about a 25-year-old couple making $50,000, getting ready to buy a house and start a family. They’d pay around $6,000 in payroll taxes, counting employer contributions. If instead, they saved that amount in an IRA and invested it, they might generate $96,000 for retirement, whereas that same $6,000 in payroll taxes could barely bring in $9,000 from Social Security.
Politicians often assert that cuts to Social Security are unethical because they’ve made promises—holding our modest interests hostage, essentially. There are alternatives tied to investments that could yield 4-10 times the retirement benefits.
Discussing entitlement spending does involve tough political decisions. However, it’s possible to find ways to contain costs without making drastic cuts.
