It is difficult to see someone suffer when others have plenty. Civilized societies deplore that scenario and establish programs to lessen that suffering. That is the underlying basis of many government programs that provide economic security for the elderly; it makes good policy sense, which is why the Social Security program is strongly supported by a large majority of the population.
Most social programs have been positive additions to society by most people’s standards; they are examples of snitching sandwiches, which is what good public policy is all about. But they are not free lunches. Because they are presented as free lunches, without cost, the snitched sandwich they actually provide is much smaller than it could be. The problem is that the programs have been oversold on the benefits, and costs have been hidden or pushed aside, to be faced later, which leads to decisions about programs being made without the appropriate balancing of revenues and outlays.
The central problem with government programs for the elderly is that entitlements have been emphasized but costs have been downplayed and pushed aside. Initially, when these programs were established, many people were paying in but there were few recipients, resulting in the government appearing more generous than it would have had the costs been faced directly. The programs were sold to society by creating a sense of future entitlements among the population without fully accounting for the costs of those entitlements.
The created entitlements were both implicit and explicit. The explicit entitlements sometimes, but not always, showed up on the government budget; the implicit ones did not show up on the budget, but they were entitlements just the same. The problem is a ‘real’ problem, not a ‘financial’ one. Trust funds, or individual investment accounts, will not solve the problem unless they either include a way to get a larger percentage of real resources from workers in the future or reduce the benefits that are promised for the future. Most political discourse shies away from discussing the degree to which the entitlements will have to be cut, or how greater resources will have to be gathered to meet promised entitlements. Ideally, these programs would have been structured as ‘steady state sustainable’ – that is, structured so that steady state expenditures and revenues would be neutral in response to changing economic and demographic conditions over time.
Steady state sustainability should be a central consideration of policies, and embedding that consideration in the design of the system will lead to a better balancing of obligations to pay the entitlements and the ability to pay them.
Because social programs have been designed without many, if any, built-in adjustment mechanisms, the programs have been expanded too much in good times and will have to be cut in bad times. Political considerations will push aside facing these problems until they are at crisis levels and must be faced. For example, in the mid-1990s there was a move to face these problems; at that time both the Republican- dominated Congress and the Democratic President advocated cuts in Medicare and Medicaid due to the slowing economy and the declining fiscal capacity of government. However, in the late 1990s economic growth increased, and the willingness of either side to consider the issues started to wane.
In 2001 economic growth slowed, but by then the political will was lost. Instead of facing up to the difficult issues, both sides essentially pushed them aside, and jointly expanded the Medicare program to include prescription drug benefits, enacted in 2003, even as the forecasted trillions of dollars of surplus metamorphosed into large projected budget deficits, making it even more difficult to deal with the future imbalance between expected entitlements and expected responsibilities to pay for those entitlements, responsibilities captured in the concept of fiscal capacity of the government.
