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To get reconciliation right, target the citizens who need help most

by Robert L. Bixby, opinion contributor - 10/21/21 10:31 AM ET

Congressional Democrats face many hard choices as they seek to fit an ambitious agenda of social spending on child care, college education and health care into a reconciliation bill with a maximum cost of roughly $2 trillion over 10 years. It is clear, however, that the proposed programs are simply too pricey if lawmakers want to make them permanent and available to all. In fact, the price tag would exceed even the $3.5 trillion starting point of the reconciliation negotiations.

Some have argued that the best way to lower costs while maximizing impact is to do it all, and do it all now, but only for a few years. It’s an old strategy, designed to minimize cost and buy time. As the expiration date draws near (the theory goes), the programs will have become too politically popular to let lapse, forcing lawmakers to extend them or make them permanent.

This approach, however, has serious drawbacks, beginning with the fact that it would be a monumental and expensive gimmick. A set of policies that cost $2 trillion over five years would, in reality, cost $4 trillion or more over 10 years.

Moreover, the temporary nature of the programs would introduce significant uncertainty into the fiscal plans of states, families and businesses who come to rely on them. It would also cloud the budgetary outlook for the federal government itself. The laborious process of setting up an administrative structure for a host of new programs would be a colossal waste of time and taxpayer funds if the programs lapsed on schedule.

Finally, this strategy introduces a huge political risk for advocates of these programs. Republicans might be back in charge in one or both chambers, or the White House when the benefits expire. They could sit back and watch the programs expire without casting a single vote.

Recognizing these drawbacks, others have argued that Democrats should focus on a targeted subset of their full agenda and make sure that these items are fully paid for on a permanent basis. That makes a lot more sense from a policy perspective, but free and universal eligibility could still result in larger than necessary costs.

While there is no way to avoid making some hard choices about what stays and what goes, there is a third approach that could help keep costs under control while allowing for the enactment of a broad agenda: Make sure that new benefits are targeted to those who are most in need.

Universal eligibility is popular for obvious reasons. Everyone benefits and this provides a self-generating core of political support. But for a nation grappling with a debt burden growing at an unsustainable rate, universal eligibility makes little sense as a fiscal matter. Inevitably, a lot of money would be spent on people who don’t really need help.

Moreover, it would be inconsistent with how most current programs are designed.

Nearly all entitlement programs have conditions or formulas that take into account a beneficiary’s income when determining the level of benefits or the amount of subsidy from the government. Many programs only provide benefits to individuals who have low incomes and/or low levels of wealth. In other words, they impose a “means test.” Examples include Medicaid, the Supplemental Nutrition Assistance Program (SNAP) and Supplemental Security Income (SSI).

Other programs are available to all, but with varying degrees of subsidy based on income. Social Security, for example, has a progressive benefit formula in which beneficiaries with lower lifetime incomes have a greater proportion of their earnings replaced by Social Security when they retire. And higher-income seniors pay income taxes on their Social Security benefits, while lower-income beneficiaries do not.

Medicare, the largest health care entitlement, is also a universal entitlement because eligibility does not depend upon income and individuals receive the same package of health care benefits, even if they have large amounts of assets or high incomes. Over the past 25 years, however, some modest income-related measures have been enacted to reduce the share of program costs subsidized by the government for well-off individuals. Most notably, there are higher premiums for wealthier beneficiaries who enroll in Medicare Parts B and D.

At the time the Medicare measures were enacted, many feared that charging higher premiums for some would undermine the program’s foundation. But several years later, it is clear that they served to strengthen Medicare by improving its finances without harming its beneficiaries.

Unlike the “free” eligibility proposed in the Democrats’ reconciliation bill, Medicare and Social Security also require contributions from beneficiaries in the form of payroll taxes or premiums to establish eligibility. Even though these contributions do not fully cover the costs of the programs, they evoke a sense of personal responsibility because beneficiaries know that they are not getting something for nothing.

Targeted spending on certain activities is also a better way to foster long-term economic growth. According to the Penn-Wharton Budget Model, by 2051 “a combination of targeted preschool and targeted childcare programs increase GDP by 0.1 percent relative to current policy, even if deficit-financed. Universal versions of these programs are more costly and would instead reduce GDP by 0.2 percent by 2051.”

The takeaway is clear: Policymakers can reduce federal entitlement costs by targeting subsidies to those most in need or by requiring some form of income-related contribution as a condition of eligibility.

The same principle applies to revenue as well as spending and could be used to help pay for the new benefits. Many of the largest “entitlements” in the tax code, such as the deductions for home mortgage interest, employment-based pensions and health insurance, provide much larger benefits to those with the highest incomes.