Social Welfare Spending, Part II: Looking Forward—It’s Still All About Health Costs

If House Republicans were at all serious last July, then they should be putting the finishing touches on their “menu” of social welfare spending cuts that they plan to force the president to choose from in exchange for an increase in the debt limit. Presumably, with this “menu,” a large increase in the debt ceiling would require a large reduction in social welfare spending while a small debt ceiling increase would require a smaller spending cut. This means that House Republicans are again preparing to risk America’s credit rating to eviscerate important and popular programs such as Social Security and Medicare.

I recently showed that the rise in social welfare spending since 1975 was due to: (1) the steady rise in federal health spending, driven in large part by increasing costs in the private-sector delivery of health care goods and services, and (2) the jump in safety net spending during the 2007-2009 Great Recession as programs like unemployment compensation and SNAP  expanded (both because the recession pushed more people into eligibility and because Congress temporarily expanded the programs to blunt the impact of the downturn). Social welfare spending has fallen relative to GDP in the past couple of years as the economy slowly recovers, yet the unemployment rate is still over 7 percent, nearly 40 percent of the unemployed have been looking for work for over 6 months, and the labor force participation rate is at a 35 year low.

Since legislated spending cuts, unlike raising the debt ceiling, are generally about future spending rather than past spending, this post examines the prospects for future social welfare spending. The figure below shows the Congressional Budget Office’s baseline spending projections for social welfare programs that self-identified deficit hawks, including many GOP members of congress, claim are a big source of our “spending problem.” In interpreting these projections, it must be kept in mind that CBO assumes current laws don’t change and the economic variables move toward their long-run values as the economy improves.

CBO projects that social welfare spending for fiscal year 2013 will be equivalent to 13.4 percent of GDP. This spending is projected to increase to 14.5 of GDP by 2023—an increase of about one percent of GDP over 10 years.

Social welfare spending is divided into four functional categories, which are shown in the diagram. The bottom two strata displayed are federal pension spending (the lower layer) and Social Security (the upper layer). Spending on these social welfare programs is projected to increase from 6.4 percent of GDP in 2013 to 6.6 percent of GDP by 2023—hardly the stuff of uncontrollable spending.

The next category of federal spending includes the social safety net programs: unemployment compensation, the Supplemental Nutrition Assistance Program (SNAP), supplemental security income (SSI), and Temporary Assistance for Needy Families (TANF). Spending for these safety net programs fall as a percent of GDP between 2013 and 2023. This projection assumes that the economy and labor market recoveries continue and the temporary extensions and expansions expire as scheduled in fiscal year 2014. Of course, the business-cycle has not been tamed and spending on these safety net programs would increase if there is another recession. But increasing safety net spending during an economic downturn is both predictable and desirable.

The top layer in the diagram shows the projection of federal health spending. This spending grows from 5.4 percent of GDP in 2013 to almost 7 percent of GDP by 2023, as per enrollee health costs continue to increase, baby boomers retire, and the health exchanges and subsidies under the Affordable Care Act (Obamacare) are implemented. The higher spending of the federal health programs is due primarily to increasing enrollments. It is not due to any government inefficiency—per enrollee commercial health spending is projected to rise faster than per beneficiary Medicare and Medicaid costs.

Overall, the projected rise in social welfare spending relative to GDP over the next 10 years is entirely due to increases in federal health spending. And even with the increased health spending, social welfare spending is not spiraling out of control—contrary to the narrative of deficit hawks. And in return for this projected increase in health spending, the number of uninsured nonelderly people will be almost cut in half within the next 10 years.

What goes on outside the 10-year budget window is arguably more important than what goes on inside it in terms of fiscal sustainability. But uncertainty in spending projections increases the further out you look, which should be kept in mind. Under CBO’s extended alternative baseline projection, Social Security spending will increase to 6.2 percent of GDP by 2037, an increase of about one percentage point over 2013 spending as a percent of GDP. By this time, almost all baby boomers will be retired and receiving Social Security (the youngest baby boomer will be 73 in 2037). This hardly seems to qualify as a Social Security “crisis” requiring drastic action.

Federal health spending as a percent of GDP, however, will rise quickly in coming decades; it is projected to almost double between 2013 and 2037 from 5.4 percent to 10.4 percent. Again, however, this is not a problem of government delivering health care inefficiently—total national health expenditures (public plus private spending) could be greater than 30 percent of GDP by 2037. The relevant question for policymakers is whether or not living standards are improved by shifting more health care costs from the federal government balance sheet and onto households. Given the relative success of federal health programs in reining in cost-growth, it seems the opposite is true—moving health care costs out of the federal government’s control will simply make American households spend more on healthcare or go without. They will just be spending it out of their own pocket rather than from taxes.

Looking forward, it’s clear that Washington does not have a spending problem. Instead, it is being pressured by the same health care problem that is threatening households and businesses with rising costs in coming decades. Among the developed nations, the U.S. has the highest per capita health care spending and among the poorest health care outcomes. Fixing the nation’s health care system (of which Obamacare is a first step) will reduce federal spending and go a long way toward long-term fiscal sustainability.