Entitlements fuel rising costs
In principle, Americans recognize the need for the federal government to spend less money.
The Pew Research Center reports that 70 percent of Americans now believe it is "essential for Washington to pass major legislation to reduce the federal budget deficit this year." Furthermore, the majority of Americans favor spending cuts over tax increases.
However, when it comes to reducing spending for specific programs, the situation is grim. Pew researchers examined 19 specific federal programs, including defense, Medicare, Social Security, education, transportation and aid to the needy. For all but one, the majority of Americans want to maintain or increase current levels of spending. The exception was aid to foreign poor, but even in this area Americans were evenly divided on the issue.
Part of the problem is that we mistakenly equate more spending with better service. Yet expenditures may actually be doing more harm than good. For example, increased spending doesn't actually make higher education more affordable. Rather, student aid tends to translate into higher tuition and what critics have referred to as the "country club model" of higher education. Taxpayer dollars are being used to subsidize lavish dorms, recreational facilities and student services. The evidence is that relatively little of the increase in cost for higher education is directed at instruction.
Government spending often means more regulation. Multiple studies by groups such as The American Council on Education, The Heritage Foundation, and the Advisory Committee on Student Financial Assistance (a federal body chartered by Congress) all draw the same conclusion: Government regulation of higher education is unnecessarily burdensome, driving up costs and reducing access. In other areas as well, growth in government often means more bureaucracy and lower efficiency.
The other problem is that we have a difficult time grasping the magnitude of numbers as large as those involved in the federal budget. Conceptually, we can't visualize the difference between billions and trillions of dollars. Cuts that sound large often represent a tiny fraction of a percent of the budget.
One solution to this problem is to look at our spending relative to our growth in gross domestic product. In fact, some economists have suggested that our budget deficit may be contained with no real reduction in spending, if we merely allow GDP to grow at a faster pace than spending.
However, when we look at the cost escalation of particular programs, compared to growth in GDP, it becomes clear that we have a problem and it is easy to identify the source of the problem: entitlement programs.
According to the Office of Management and Budget, the federal budget has grown an average of 3.4 percent annually since the 1970s. Annual GDP growth during this time averaged 2.7 percent per year. Programs that grow at a slower rate represent a relative cost savings, in terms of the percent of GDP the government consumes. Those that grow at a rate that exceeds the annual growth in GDP create a problem and add to deficits. This is especially true if these programs already consume a large percentage of the federal budget.
Looking at the most costly programs, the growth is telling. Entitlement programs consume more than 60 percent of the federal budget and grow at a rate of 4.8 percent per year. Health care costs are growing the fastest, at a rate of 5.7 percent per year. Hence, Medicare reform must be an essential part of budget reform. The growth is simply unsustainable. Social Security payments and welfare benefits are also growing faster than GDP, at 4.4 percent and 4.1 percent respectively.
Defense spending also consumes a large share of the federal budget, and the increases in dollar amounts sound staggering. But again, we simply don't interpret large numbers well. Relatively speaking, defense is not the problem. Defense spending consumes less than 20 percent of the federal budget and is actually decreasing relative to GDP, with an average annual increase of 2 percent. This means that defense spending is consuming a smaller and smaller share of the federal budget and is already moving in the right direction.
This isn't to say that strategic reductions in defense spending aren't possible. But it is simply not driving the unsustainable growth in federal spending.
Medicare is clearly the main culprit. No one wants to see seniors denied medical care. However, the burden on younger Americans will be crippling if trends continue. When Medicare was first implemented, seniors had a higher poverty rate than the average American. Today the situation is reversed. Seniors are better off and are living longer, imposing an increasingly large burden on the young.
Part of the solution is to raise premiums and deductibles, increase the eligibility age, and means-test benefits. This isn't going to be popular with seniors. However, we are left with no other options. The resources simply aren't going to be available.
April Kelly-Woessner is an associate professor and chairwoman of the political science department at Elizabethtown College. She is also a correspondent for Lancaster Newspapers Inc. Email her at email@example.com.