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Federal entitlement reform and the states.

Federal entitlements must be tackled if the federal fiscal house is to be put in order. States are wary that such reform may shift greater financial and political burdens to them.

In budgetary politics federal entitlements have become the 800-pound gorilla sitting in the corner--something impossible to ignore, but no one wants to disturb it. The U.S. deficit is approaching $4.5 trillion, growing by $1.25 billion a day. We spend $276 billion on Social Security, $200 billion on Medicaid and Medicare, $54 billion on welfare and social services, $19 billion on farm supports. Sacrosanct? Up to now, yes, but politicians are eyeing them more seriously than ever.

Several broad proposals, such as spending caps, means-testing, an administrative cost ceiling and health care reform, have been advanced as ways to cut entitlements and reduce the deficit.

The proposal to impose a "cap" on entitlement spending has perhaps the greatest potential to achieve savings. This is the mandatory spending analog of an across-the-board cut in appropriations. It was advocated by President Bush and New Mexico Senator Pete Domenici, and has enjoyed some support among conservative Democrats. Under this approach, there would be a statutory cap on entitlement spending. If the cap were breached, uniform cuts would be made to all entitlement programs.

Well, almost all. As was the case with Gramm-Rudman-Hollings (which required across-the-board spending cuts if a deficit target was exceeded), significant exemptions are envisioned by most advocates. The Domenici proposal exempted Social Security, deposit insurance and, of course, interest on the debt. Increases in the cap would be allowed for growth in the beneficiary population, the consumer price index and an additional fixed factor.

The full ramifications of a cap on entitlement spending are not at all clear. By definition, an entitlement grants individuals a legal right to obtain funds or services from the government; a person denied payment can sue to compel a government agency to make good on the obligation. What happens if a cap or spending limit is reached, and there are qualified individuals who are not served? Do they sue? If the state is the delivery agent for an entitlement program, will the state be subject to a court order requiring payment to individuals whom the federal government will no longer serve?

A second approach to reforming entitlements is to subject more of them, or even all of them, to a means test. Most entitlement programs provide benefits regardless of the income or wealth of the recipient, and most entitlement beneficiaries are not poor. Currently, less than one-fifth of mandatory program spending is means-tested. One possibility is to withhold a portion of any benefits that cause total household income to exceed a specified level. A second is to recapture benefits through income taxation.

This approach basically calls for taking away middle-class benefits, requiring a change in the philosophy of many programs, from Social Security to student loans, that were designed to be available to most citizens. Since these are also most of the voters and taxpayers, extensive means-testing of entitlements is politically hazardous.

A third proposal would fix the federal match rate for administrative costs for AFDC, Medicaid and food stamps at 50 percent, and combine the funding into one grant, which would be allowed to grow only by the rate of inflation. While this might save federal administrative costs, it could result in a shift of costs to the states.

Finally, there are those who argue that the "entitlement" problem facing the federal government is really a health care problem. Indeed, the dramatic growth in the costs of Medicare and Medicaid is a substantial portion of the problem. This is in part because health care costs have been rising much more rapidly than other costs. Between 1980 and 1990 the medical care price index rose at nearly twice the rate of the overall consumer price index.

Significant reform of health care policy seems likely under the new administration, though what form it may take is uncertain. It is, however, a certainty that any reform will greatly affect states, though whether the ultimate effect will be to ameliorate or exacerbate state fiscal problems is not clear by any means.

The question of entitlement reform presents states with a dilemma. If entitlements remain off limits for budget cutting, then savings must continue to come from discretionary spending. This means that cuts will lean heavily on programs like WIC, education assistance, highways, mass transit and aviation, wastewater treatment grants, community development block grants and low-income home energy assistance, as they have for more than a decade. Entitlement reform, if it can be made politically viable, opens the possibility of a respite for aid to state and local governments.

On the other hand, because of the unpopularity of reducing entitlement programs, states have real reason to fear that the outcome of "reform" may be to shift a greater burden to them, both fiscally and politically. States, cities and counties must make sure they have a voice in any entitlement reform.

The Top Ten

Excluding debt service, 10 programs account for nearly nine-tenths of entitlement spending. They can be grouped into six broad categories:

* Social Security--$276 billion in '91, or about 41 percent of mandatory spending excluding debt service.

* Health care benefits--almost $200 billion, or 29 percent.

* Social services and welfare--$54 billion, or about 8 percent.

* Farm price supports--$19 billion, less than 3 percent.

* Federal pensions--$18.5 billion, less than 3 percent.

* The savings and loan without--$17 billion, 2.5 percent.

Did You Know?

* Most of the big growth in entitlement spending began in the 1960s. In 1962, two-thirds of the budget was made up of discretionary spending. By 1991, that number had shrunk to two-fifths. Under current projections, two-thirds of the budget will be composed of mandatory spending by 1997.

* More than 14 percent of federal spending--about one-fourth of all mandatory spending--is for debt service, which cannot be cut.

* Most of the growth in entitlement and mandatory spending, both relatively and absolutely, has come in two areas: Social Security and health care programs.

* About one-fifth of total federal spending, or one-third of the mandatory share, is for Social Security.

* The cost of federal health benefit programs grew from 7 percent of the federal budget in 1970 to 13.5 percent in 1990. These programs could account for 28 percent of the federal budget by 2002.

* The cost of all entitlement, other than health care and Social Security, rose at an annual rate of 3.1 percent between 1980 and 1990--lower than the average annual rates of inflation (4.8 percent) and GDP (7.5 percent).

* More than 60 percent of all federal entitlement spending flows to the 12 percent of Americans who are age 65 or older. Two-thirds of Medicaid spending goes to long-term care for the needy elderly and disabled.

* Only one out of every five federal entitlement dollars goes into any form of nonmedical aid to Americans who are not retired.
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Author:Zimmerman, Christopher
Publication:State Legislatures
Date:Mar 1, 1993
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