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Are Low-Income Programs Enlarging the Nation’s Long-Term Fiscal Problem?

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Several conservative analysts and some journalists lately have cited figures showing substantial growth in recent years in the cost of federal programs for low-income Americans. These figures can create the mistaken impression that growth in low-income programs is a major contributor to the nation's long-term fiscal problems.

In reality, virtually all of the recent growth in spending for means-tested programs is due to two factors: the economic downturn and rising costs throughout the U.S. health care system, which affect costs for private-sector care as much as for Medicaid and other government health care programs. Moreover, Congressional Budget Office (CBO) projections show that federal spending on means-tested programs other than health care programs will fall substantially as a percent of gross domestic product (GDP) as the economy recovers — and fall below its average level as a percent of GDP over the prior 40 years, from 1972 to 2011. Since these programs are not rising as a percent of GDP, they do not contribute to our long-term fiscal problems.

Specifically, federal spending for mandatory (or entitlement) programs outside health care (including refundable tax credits like the Earned Income Tax Credit) averaged 1.3 percent of GDP over the past 40 years. This spending reached 2.0 percent of GDP in fiscal year 2011, a substantial increase. But CBO projects that it will return to the prior 40-year average of 1.3 percent by 2020 and then remain there.

Federal spending for low-income discretionary programs is virtually certain to fall as a percent of GDP in the coming decade as well. Under the Budget Control Act's funding caps, non-defense discretionary spending will fall over the decade to its lowest level as a percent of GDP since 1962 (and probably earlier).

As a result, total spending for low-income programs outside health care — both mandatory and discretionary programs — is expected to fall over the coming decade to a level below its prior 40-year average.

Background: Fiscal Issues and the Role of Health Care

The nation faces a serious long-term fiscal problem as a result of a large projected imbalance between revenues and expenditures. Under current policies, total expenditures will decline as a percent of GDP through mid-decade, as the economy continues to recover from the recession, but climb indefinitely thereafter as health care costs continue to rise throughout the U.S. health care system and the population ages. These two factors — the growth of health care costs and the aging of the population — explain all of the long-term growth of expenditures as percent of GDP (other than interest payments on the debt).

Yet revenues will grow only at about the same pace as GDP. As a result, the imbalance between expenditures and revenues will be sufficiently large that the debt is projected to climb steadily as a percent of GDP, especially if all the tax cuts of the last decade remain in place. Debt cannot grow indefinitely as a percent of GDP without eventually causing economic harm and falling living standards. This is why the nation's long-term budget trends are considered unsustainable.[1]

Here, we examine whether means-tested programs will rise in cost as a percent of GDP and thereby contribute to our long-term fiscal problems.

To be sure, Medicaid is projected to rise significantly in cost, relative to GDP, for several reasons. To begin with, health care costs throughout the U.S. health care system — in both the public and private sectors — have been growing faster than GDP for several decades. Medicaid isn't the causeof this systemwide cost growth, and over the past decade, per-beneficiary costs have been rising more slowly in Medicaid than under private insurance. Moreover, Medicaid costs per beneficiary are substantially lower than those under private insurance (after adjusting for differences in beneficiaries' health status), because Medicaid pays providers much lower rates and has lower administrative costs. But systemwide health care cost increases, driven in part by medical advances that improve health and lengthen life but add to costs, are expected to push up health care costs faster than GDP across the board in coming years and decades — including in Medicaid.

A second reason that Medicaid costs will rise faster than GDP is the aging of the population. Older people have much higher average health care costs than younger people. Today, elderly and disabled beneficiaries account for 25 percent of Medicaid beneficiaries but 68 percent of program costs. As the population ages, the number and share of Medicaid beneficiaries who are elderly will increase, raising program costs.

Another reason that Medicaid costs will continue to rise significantly is the continued erosion of employer-based health coverage. Over time, the share of low-income people able to get coverage through their (or their families') employers has fallen, so more of them have turned to Medicaid for coverage.

Finally, the coverage expansions in the Affordable Care Act — both in Medicaid and for subsidies to help near-poor and many middle-income families afford coverage in the new health insurance exchanges — will raise expenditures for means-tested health care programs. (It's important to note that CBO projects that these increases will not add to deficits because the costs are offset under the Affordable Care Act, primarily through savings in Medicare and new revenues.)

For these reasons, if one simply looks at total means-tested programs, costs appear to remain high in the years to come and will likely continue climbing over time as a percent of GDP. But if one examines costs for means-tested programother than health care programs, the picture changes. Means-tested programs outside of health care will decline in cost as the economy recovers and are not projected to rise in future years as a percent of GDP.


  • In fiscal year 2011, total federal expenditures for means-tested entitlement (or mandatory) programs outside health care equaled 2.0 percent of GDP. This was about 50 percent higher than the average for the prior 40 years, which was 1.3 percent of GDP. The costs of these programs have risen significantly in the last few years.[2]

  • But the recent increases are largely driven by the economic downturn and temporary program expansions under the Recovery Act. CBO projections show that total expenditures for means-tested entitlements outside health care will decline steadily as a percent of the economy as the economy recovers, falling to 1.3 percent of GDP by 2020 and thereafter.[3] By 2020, total means-tested entitlement expenditures outside health care, measured as a percent of GDP, will return to their prior 40-year average (see graph). Moreover, CBO's long-term fiscal projections assume that mandatory programs other than Social Security and health care will grow no faster than GDP after 2022.

  • One also must take low-income discretionary programs into account. Under the Budget Control Act's funding caps, non-defense discretionary spending — which averaged 4.0 percent of GDP over the past 40 years — will fall substantially over the coming decade as a percent of GDP, from 4.0 percent in 2012 to 2.7 percent by 2022. Such a large decline makes it virtually inevitable that spending for low-income discretionary programs will also decline.[4]

  • In sum, since mandatory programs outside health care will fall back to their historical average in coming years and stay there, and low-income discretionary programs are almost certain to shrink below their historical average, total expenditures on low-income programs outside health care will fall over the coming decade to belowtheir 40-year average.

What About Rising SNAP Costs?

Expenditures for the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp Program) have risen fairly dramatically in recent years. The single biggest reason is the effect of the recession and the lagging recovery on the economic circumstances of millions of Americans. Long-term unemployment (of six months or more) remains near the highs for recent decades that it set during the recession. A recent CBO report confirmed that "the primary reason for the increase in the number of [sNAP]participants was the deep recession from December 2007 to June 2009 and the subsequent slow recovery; there were no significant legislative expansions of eligibility for the program during that time."[5]

Put another way, the recession sharply increased the number of low-income households who qualified for and applied for the program, and SNAP expanded to meet the increased need. Without SNAP, poverty and hardship would have been significantly worse in the last few years.

But SNAP spending has grown by more than just the economic downturn can explain. This has produced considerable misunderstanding of issues related to SNAP cost growth. Some people have looked at the recent trends in SNAP enrollment and costs and assumed SNAP costs will remain at their current high levels or continue growing after the economy recovers. Analysis shows that such assumptions are off the mark.

As in many other areas of budgetary analysis, the year one picks as a "starting point" for an analysis is important. Choosing a starting point that only looks back ten years at SNAP costs, for example, provides a skewed picture of program growth. This is because SNAP participation and costs had plummeted at that time, due in part to a largedecrease in the proportion of eligible families receiving SNAP in the latter half of the 1990s. The 1996 welfare law was intended to encourage work, but in the first years after its passage, many families that moved from welfare to low-wage work were cut off SNAP when they left welfare — even though they remained eligible for SNAP benefits — because of problems in state administrative systems.

That result was contrary to what Congress intended. Aggravating this problem, some states instituted administrative practices in those years that had the unintended effect of making it harder for many working-poor parents to participate in the program, largely by forcing them to take substantial time off from work for repeated visits to SNAP offices every 90 days to reapply for benefits. This prompted analysts and practitioners on a bipartisan basis (including, for example, Ron Haskins, the chief staff architect of the 1996 welfare reform law for the House Ways and Means Committee's Republican majority) to call for reforms that would improve access to SNAP for low-income working families. It also prompted both the Clinton and the Bush administrations to act.

A bipartisan consensus emerged that policies that made it difficult for people to continue receiving food stamps if they left welfare for low-wage work were misguided and contrary to welfare reform goals because they diminished incentives to work. Accordingly, Congress enacted significant, although relatively modest, changes on a bipartisan basis in 2002 and 2008 to lessen barriers to SNAP participation among working-poor families, as well as modest improvements in benefits that primarily helped such families.

In addition, Congress enacted a large temporary increase in SNAP benefits as part of the 2009 Recovery Act in order to reduce hardship and deliver high "bang-for-the-buck" economic stimulus.

In short, there are threemain reasons for the large increase over the past decade in SNAP enrollment and costs: the downturn in the economy, the Recovery Act's temporary benefit increase (which accounts for 20 percent of the growth in program costs between 2007 and 2011, according to CBO), anda large increase in the percentage of individuals eligible for food stamps who actually receive them. This percentage fell from 75 percent in 1994 to 54 percent in 2002, but is now back to 72 percent.[6] Of particular note, the percentage of eligible individuals in low-income workingfamilies receiving SNAP rose steadily from 43 percent in 2002 to about 60 percent in 2009, the highest on record.[7]

This raises the question of what lies ahead for SNAP costs. History shows that SNAP caseloads and expenditures will decline as unemployment and poverty fall. SNAP caseload growth already has slowed substantially; in fact, caseloads fell modestly in January and February 2012, the most recent two months for which data are available. CBO projects that in the coming years, the share of the population receiving SNAP will decline markedly.

The SNAP "participation rate" — the percentage of eligible households that receive benefits — may decline some as well. The research literature shows that the percentage of eligible households that actually apply for and receive SNAP benefits is greater when benefits are larger and lower when benefits are smaller. The Recovery Act's temporary benefit increase almost certainly increased the SNAP participation rate; after it ends in November 2013, the participation rate could decline a bit.

The graph on the next page shows SNAP costs as a percent of GDP from 1995 to the present and CBO's projections through 2022. As it shows, by 2018, costs are expected to decline all of the way back to their 1995 level as a percent of GDP and then to edge lower.


The story for SNAP thus resembles the story for overall low-income program spending outside of health care. Costs have grown substantially in recent years as a percent of GDP — an appropriate response to the worst economic slump since the Great Depression. But as the economy recovers, costs will return to, or even edge below, prior levels as a percent of GDP. These programs therefore do not contribute to the nation's long-term fiscal problems.Policymakers and others may hold different views about whether programs for the poor should be maintained at current levels, strengthened, or weakened. But the mistaken assumption that the universe of safety-net programs is experiencing ever-increasing costs is not a sound reason to impose deep cuts in this part of the budget.


Edited by ☠

India, gun buyback and steamroll.


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