Fairness and economics in entitlements

Wednesday, 13 July 2011 20:00

In this series, I’ve reviewed the major federal and federal/state entitlement programs, including Medicare, Medicaid and Social Security (old age, survivorship and disability benefits). Important decisions are facing us, and political considerations will naturally come to the fore in that debate, as the two parties and different interest groups seek to energize and mobilize their supporters. However, sometimes it makes sense to step back and try to look dispassionately at the fundamental issues. In this concluding piece, let’s go back to first principles, asking three basic questions about entitlements: What is fair? What is economically efficient? What is feasible?

Concerning fairness, I would submit that most Americans could agree that there is some level of subsistence, some floor, below which American citizens should not fall (except voluntarily, of course). If we limit consideration to children, Americans would certainly support this proposition even more broadly and emphatically. By “subsistence,” I mean simply a share in the scarce resources necessary for well-being, such as a place to sleep, food to eat, access of the young to education, and basic medical/dental care. (Broadening the proposition to “all legal residents” or “all residents, legal or otherwise,” raises many questions that are beyond the scope of this article. We will consider those in a coming series on immigration issues.)

Is it possible to provide this basic level of support for all Americans? It was a premise of President Johnson’s “Great Society” and “War on Poverty” that we could. On the whole, we are probably less optimistic now. Of course, the definition of “basic level of support” is crucial. If we define this too low, fairness is only given lip service. For example, if six families can cram into a two-bedroom apartment, does this meet the goal of a place to sleep? But if we define it too high, we start to erode the ethic that is so important in motivating people to work. President Clinton tried to address the incentive problem in his broad-ranging reform of the welfare system.

Of course, a well-tuned system of entitlements might be seen as relatively fair or just and not excessively harmful to incentives, but this is academic if we cannot afford it. A recent report by the Congressional Budget Office throws light on this issue. See “The CBO’s 2011 Long-Term Debt Outlook” at CBO.gov.

The report highlights that in 2008, our national debt represented about 40% of our national output (GDP), close to the 40-year average of about 37%. But by the end of 2011, only three years later, national debt will reach 70% of GDP. The CBO then projects two scenarios out to the year 2035. In both cases, federal spending will continue to exceed tax revenue. Under the “extended baseline” scenario, which I consider completely unrealistic, debt would climb to “only” 85% of GDP. Under a more politically realistic “alternative” scenario, the debt ratio would climb to 190%. This would be a tremendous amount of debt for an economy of our size to finance; our credit rating would be lower and our interest rate cost of refinancing significantly higher (a possible “debt trap” scenario). Consider by comparison two of our major trade competitors, China and India: both have current debt to GDP ratios below 5%. It is said by some (with whimsy but also truth) that the United States government, measured by spending, is basically “an insurance company with an army.” Even if we project that military spending shrinks, the entitlement (the “insurance company”) portion of GDP will continue to grow under current policies. This is why any talk about fairness and social justice has to be tempered by our national financial predicament, present and future.

Andrew Szabo CFA is managing director of Greenwich Financial Management (dba). Securities offered exclusively through Choice Investments Inc., member FINRA/SIPC. Contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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