Entitlement Spending and the Economy

Chart 2.81: Entitlement Spending and Economy

Entitlement Spending — considered as government pensions, healthcare and welfare — started out at the beginning of the 20th century at 0.4 percent of Gross Domestic Product (GDP). As you can see from Chart 2.81, entitlement spending was negligible until the Great Depression of the 1930s.

Chart Key:
- Welfare spending
- Healthcare spending
- Pension spending

In response to the Great Depression President Roosevelt and the New Deal cranked up welfare spending to 1.5 percent of GDP by the mid 1930s and over 2.0 percent on the eve of World War II in 1940.

In 1950, entitlement spending had reached 3.3 percent of GDP, mostly welfare, but by 1960 entitlement spending had reached 5 percent of GDP as Social Security spending started to ramp up.

In 1965 Congress passed Medicare, Medicaid and the Great Society programs, and entitlement spending exploded, breaching 11 percent of GDP in 1976.

By the early 1980s, entitlement spending reached 13 percent of GDP and pensions spending stabilized at a little over five percent of GDP, with welfare spending stabilized at three to four percent of GDP. But healthcare spending sustained a steady rise, from three percent of GDP in 1980 to five percent of GDP in 2000.

Since 2000, entitlement spending has increased, peaking briefly at 18 percent of GDP in 2010, with pension spending at 6.4 percent of GDP, health care at 7.3 percent GDP and welfare spending at 4.5 percent of GDP in the aftermath of the Great Recession of 2007-09.

In the 2010s welfare spending has contracted but health care and pensions spending has increased. In 2015 pension spending is estimated at 6.8 percent GDP, health care spending is estimated at 7.5 percent GDP, and welfare spending is estimated at 2.6 percent GDP.

Entitlement Spending and Government

Entitlement spending has increased from about five percent of all government spending in 1900 to 45 percent of all government spending, federal, state, and local, in 2010.

Chart 2.82: Entitlement Spending and Government

In the early 20th century entitlement spending represented about five percent of government spending: mostly health care spending. But the Great Depression changed all that. Starting in the early 1930s welfare spending expanded rapidly from two percent of total government to ten percent of total government by 1940, so that total entitlement spending reached 15 percent of total government.

Entitlement spending shrank as a proportion of government spending during World War II and resumed at about 15 percent of government after the war. But then entitlement spending began a steady increase, reaching 20 percent of government spending by 1970, principally due to the increase in Social Security spending.

From 1970 to 1980 entitlement spending exploded from 20 percent to 30 percent of government spending, but then shrank a little in the 1980s as Social Security and health care spending stabilized and welfare spending shrank.

Starting in 1990 entitlement spending began another surge, increasing from 33 percent of government to 41 percent by 1994 and health care spending increased from 10 percent to 15 percent of total government spending.

In the 2000s entitlement spending increased modestly, but increased sharply in the Great Recession, reaching nearly 47 percent of government spending in 2010. Entitlement spending is estimated to amount to 48.7 percent of all government spending in 2015.

Social Security

Social Security is the biggest government program in the United States.

Chart 2.83: Social Security Outlays as percent of GDP

Social Security was passed in 1935 during the run-up to the 1936 presidential election. Benefits for the Old Age and Survivor Insurance (OASI) program started in 1937, and reached one percent of GDP for the first time in 1955. Outlays thereafter increased rapidly, breaching 2 percent of GDP in 1960. Then OASI growth slowed, reaching 3 percent of GDP in 1973. Benefit growth resumed rapid growth in the 1970s, hitting a peak of 4.2 percent of GDP in 1983.

In the 1980s OASI benefits declined modestly to 3.9 percent of GDP by 1989, but then started a slow increase in the early 1990s, reaching 4.1 percent of GDP in 1991. But then OASI benefits declined slowly as a percent of GDP in the rest of the 1990s and the 2000s, bottoming at 3.3 percent GDP in 2006. In the Great Recession OASI benefits started to increase, hitting 4 percent of GDP in 2013. With the post-WWII generation retiring, OASI benefits have continued to increase, with an estimated 4.2 percent GDP in 2015 and 4.5 percent GDP by 2020.

In 1956 Congress passed the Disability Insurance (DI) program and benefits started in 1958. Benefits reached 0.5 percent of GDP in 1976. After peaking at 0.56 percent of GDP in 1977 DI benefits began a slow decline, bottoming out at 0.42 percent of GDP in 1990.

In the 1990s DI benefits slowly increased as a percent of GDP breaching 0.5 percent of GDP in 1993, 0.6 percent of GDP in 2002, and 0.7 percent of GDP in 2008. In the Great Recession DI benefits have increased, reaching 0.8 percent of GDP in 2009 and 0.85 percent of GDP in 2012. In the economic recovery since 2009 DI benefits have decreased modestly, to an estimated 0.83 percent GDP in 2015 and an expected 0.76 percent GDP by 2020.

Chart 2.84: Social Security as percent Federal Spending

Reckoned as a percent of federal spending, Social Security grew fastest in the 1950s, from 2 percent of federal spending in 1950 to over 10 percent in 1960. In the 1960s, Social Security grew more modestly ending the 1960s at about 13 percent of federal spending, but then grew to 20 percent of federal spending by the mid 1970s.

Since the mid 1970s Social Security has rubbed along at about 20 to 22 percent of overall federal spending.

Medicare

Medicare is the federal health care program for US seniors.

Chart 2.85: Net Medicare Outlays as percent of GDP

Medicare, the universal health program for older people in the United States, was passed in 1965. Initially the program included two parts, the Part A Hospital Insurance program and the Part B Supplementary Medical Insurance program. In 2003 Medicare was expanded in the Medicare Modernization Act to include Part C Medicare Advantage, and Part D SMI Drug program.

Chart Key:
- Part D SMI Drug
- Part C Medicare Advantage
- Part B Supp. Medical Ins.
- Part A Hospital Insurance

Medicare Part A, the Hospital Insurance program, went from nothing to 0.5 percent of GDP in its first deade, reaching 0.5 percent of GDP in 1974. Part B, the Supplementary Medical Insurance program, only cost 0.1 percent of GDP in 1974. Part A doubled to 1.0 percent of GDP by 1982 while Part B quadrupled in size to 0.4 percent of GDP by 1985.

In the early 1990s Medicare Part A Hospital Insurance spending expanded briskly, from 1 percent GDP to 1.5 percent GDP in the mid 1990s, while Part B Supplementary Medical Insurance increased from 0.4 to 0.6 percent GDP.

Starting in the mid-1990s we start showing spending for “Part C” Medicare. Although Part C, the Medicare Advantage program, did not start until 2006, following the Medicare Modernization Act of 2003, Medicare started paying capitation fees to private health plans with the Balanced Budget Act of 1997. Part C spending data is taken from the annual Medicare Trustees Report and netted out of Part A and Part B benefits.

From the mid 1990s Medicare Part A Hospital Insurance spending (net of Part C spending) declined, from 1.5 percent GDP in 1995 to 1 percent GDP in 2000, and since then it has flatlined at around 1.1 percent of GDP. Medicare Part B Supplementary Medical Insurance (net of Part C) also declined, from 0.6 percent GDP to 0.45 percent GDP before recovering to 0.73 percent GDP in 2003. By 2011 Part B had hit 0.83 percent GDP. It is expected to decline slightly to 0.79 percent GDP in 2015 and 0.80 percent GDP in 2020.

Medicare has always made capitation payments to managed care organizations; in the period shown from 1996 to 2005 these payments stood at about 0.3 percent GDP. When Part C Medicare Advantage began formally in 2006 with the passage of the Medicare Modernization Act, spending for managed care rose sharply. Indeed all the growth in basic Medicare shows up in Part C spending, hitting 0.4 percent GDP in its first year 2006, and rising to 0.7 percent GDP by 2011. Part C is expected to increase to 0.74 percent GDP in 2015 and 0.85 percent GDP by 2020.

Medicare Part D, the SMI Drug Plan, was passed by Congress in the Medicare Modernization Act of 2003 and took effect in 2006 costing 0.2 percent GDP in that year. Subsequently the Medicare Drug spending hit 0.3 percent GDP in 2009 and 0.37 percent GDP in 2011. Part D spending is estimated to decline to 0.35 percent GDP in 2015 and increase to 0.45 percent GDP by 2020.

Chart 2.86: Gross Medicare Outlays as percent of GDP

As presented in the annual federal budget, Medicare outlays represent “net” spending on the program. Premiums and other collections received by Medicare are not considered as “receipts” but are counted as negative spending and subtracted from the overall cost of Medicare. The difference is about 0.5 percent of GDP, so “gross” Medicare tops out at an estimated 3.54 percent GDP in 2015 instead of the published “net” amount at 2.98 percent GDP. The difference between “net” and “gross” mainly applies to Medicare Parts B, C, and D. Part A is financed almost entirely by the payroll Hospital Insurance tax on workers.