Why The US Can't Cut Its Budget Deficit

Obstacle to Deficit Cutting: A Nation on Entitlements
by Sara Murray
Thursday, September 16, 2010


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Efforts to tame America's ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.

At the same time, the fraction of American households not paying federal income taxes has also grown -- to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

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A little more than half don't earn enough to be taxed; the rest take so many credits and deductions they don't owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.

"We have a very large share of the American population that is getting checks from the government," says Keith Hennessey, an economic adviser to President George W. Bush and now a fellow at the conservative Hoover Institution, "and an increasingly smaller portion of the population that's paying for it."

The dimensions of the budget hole were underscored Monday, when the Treasury reported that the government ran a $1.26 trillion deficit for the first 11 months of the fiscal year, on pace to be the second-biggest on record.

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Yet even as Americans express concern over the deficit in opinion polls, many oppose benefit cuts, particularly with the economy on an uneven footing. A Wall Street Journal/NBC News poll conducted late last month found 61% of voters were "enthusiastic" or "comfortable" with congressional candidates who support cutting federal spending in general. But 56% expressed the same enthusiasm for candidates who voted to extend unemployment benefits.


As recently as the early 1980s, about 30% of Americans lived in households in which an individual was receiving Social Security, subsidized housing, jobless benefits or other government-provided benefits. By the third quarter of 2008, 44% were, according to the most recent Census Bureau data.

That number has undoubtedly gone up, as the recession has hammered incomes. Some 41.3 million people were on food stamps as of June 2010, for instance, up 45% from June 2008. With unemployment high and federal jobless benefits now available for up to 99 weeks, 9.7 million unemployed workers were receiving checks in late August 2010, more than twice as many as the 4.2 million in August 2008.

Still more Americans -- 19 million by 2019, according to the Congressional Budget Office -- will get federal aid to buy health insurance when legislation passed this year is implemented.

The expanding federal safety net has helped shelter many families from the worst of the downturn. Charlene A. Mueller-Holden doesn't fit the stereotype of a person on benefits. Laid off from J.P. Morgan Chase & Co. (NYSE: JPM - News) in January 2008, Ms. Mueller-Holden, 38, drew unemployment for 99 weeks.

The Newark, Del., resident knocked $40 a month off her mortgage payments through the federal Making Home Affordable Program, designed to keep people in their homes by helping them modify or refinance their mortgages. But when her unemployment benefits ran out, Ms. Mueller-Holden and her husband, a government employee, couldn't afford the $1,008 monthly payments.

She turned to the Delaware State Housing Authority which, under a federally subsidized program aimed at helping families with children stay in their homes, gave her $1,000 a month for five months toward mortgage payments. She and her two sons ate lunch for free at the local school this summer, and she has applied for free lunch for one of her sons who will be a first grader this year.

Ms. Mueller-Holden's family earned too little to pay federal taxes last year, and received an extension on their state taxes. "Quite frankly, I don't care about the deficit," says Ms. Mueller-Holden. "It's going to take years upon years upon years to pay this all back," she says, so it's better to focus on job growth now and deal with the deficit later.

Government data don't show how many of the households receiving government benefits also escape federal taxes. But there is certainly some overlap between the two groups, since many benefits are aimed at those earning too little to pay income taxes and at people who don't have jobs, and who thus don't pay payroll taxes.

Cutting spending on these "entitlements" is widely seen as an inevitable ingredient in any credible deficit-reduction program. Yet despite occasional bouts of belt-tightening in Washington and bursts of discussion about restraining big government, the trend toward more Americans receiving government benefits of one sort or another has continued for more than 70 years -- and shows no sign of abating.

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An aging population is adding to the ranks of Americans receiving government benefits, and will continue to do so as more of the large baby-boom generation, those born between 1946 and 1964, become eligible. Today, an estimated 47.4 million people are enrolled in Medicare, up 38% from 1990. By 2030, the number is projected to be 80.4 million.

The difficulty of restraining benefits when so much of the population depends on them is now on view across Europe, where efforts to rein in deficits are forcing governments to cut popular entitlements. European countries have traditionally provided far more generous welfare benefits than the U.S. has, including monthly allowances for children regardless of income, free college tuition and universal health care. Public retirement programs are also bigger, since the combination of aging populations and low birth rates means fewer workers are paying into the system.

In recent months, political leaders in Europe have struggled to convince voters that change is necessary. German Chancellor Angela Merkel has exempted pensions from her government's planned budget cuts, reflecting the growing power of the retiree vote. French President Nicolas Sarkozy is facing mass protests, including a national strike week, as he tries to raise France's minimum retirement age from 60 to 62. Greece's government had to face down demonstrations this year when it slashed pension benefits, as it was forced to do to get bailout money from other European countries and the International Monetary Fund.

Still, Europe does offer examples that change is possible. Germany slashed benefits for the long-term unemployed in 2004, a step that analysts credit with prompting more Germans to get jobs as well as improving the country's budget balance. Cuts to entitlements are politically possible, says Daniel Gros, director of the Center for European Policy Studies, a nonpartisan think tank in Brussels, "but societies need some time to get used to the idea."

The U.S. government first offered large-scale assistance during Franklin Delano Roosevelt's New Deal. The Social Security Act, passed in 1935, created the popular retirement program as well as unemployment compensation, the early stages of what became known as "welfare" and assistance to the blind and elderly. In the 1940s, the G.I. Bill offered unemployment benefits, education assistance and loans to veterans. That same decade, Washington began offering free or reduced-price lunches to children from low-income families and, a decade later, monthly benefits to the disabled.


Lyndon Johnson's Great Society programs brought food stamps plus Medicare and Medicaid. In the 1970s, Supplemental Security Income was created on top of routine Social Security benefits for the poorest of the elderly and disabled, and so-called Section 8 vouchers began subsidizing rental housing. The earned-income tax credit was launched in 1975 to offer extra cash to low-wage workers, and grew in the 1990s to become one of the government's principle antipoverty programs.

Benefits for children were expanded in 1997 with the State Children's Health Insurance Program during the Clinton administration -- and were expanded again in 2009. Shortly after President Barack Obama took office, Congress passed the American Recovery and Reinvestment Act, the stimulus bill, which among other things extended unemployment compensation and offered incentives for states to cover more workers.

All this is expensive. Payments to individuals -- a budget category that includes all federal benefit programs plus retirement benefits for federal workers -- will cost $2.4 trillion this year, up 79%, adjusted for inflation, from a decade earlier when the economy was stronger. That represents 64.3% of all federal outlays, the highest percentage in the 70 years the government has been measuring it. The figure was 46.7% in 1990 and 26.2% in 1960.

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When the economy recovers, some -- but not all -- current recipients of federal aid are likely to lose their benefits, which some say is reason enough to keep them going for now.

"If there became an expectation that government was going to provide over half of the population's well-being to a significant degree without requiring anything of the recipients, there would be reason for concern," says Robert Reischauer, a former Congressional Budget Office director and now president of the Urban Institute, a liberal-leaning think tank in Washington, D.C. "I don't think that's where we are or where we're headed."

The public appears divided on what to do. A new Allstate/National Journal poll found that 35% of voters want the government to make sure future retirees receive all the benefits they've been promised even if it means raising taxes. Another 34% said the government should make retirement programs "financially sustainable" by making some cuts to those benefits and raising some taxes, and 22% said they'd be willing to see benefits cut to restrain the programs' rising costs.


The call for restraining benefits resonates with voters like Robert Letherman. "You name it, someone is lining up to get bailed out, or a handout, courtesy of the hard-working American taxpayer," says Mr. Letherman, 39, a real-estate developer in Elkhart, Ind.

Mr. Letherman says he has struggled through the recession like many others, but doesn't qualify for government assistance. His income has declined 40% since 2007. Some $4 million in development projects percolating in the spring of 2007 have since been shelved.

He supports helping people in need, says Mr. Letherman, but believes many people game the system. Extended unemployment benefits, for example, give some Americans an excuse not to go back to work, he says. If it were up to him, government would be half the size it is now.

He favors eliminating pensions for all government workers, excluding military and intelligence personnel, and would impose a nationwide sales tax to pay off the country's debt. "If we continue down the path of deficit spending, the great recession of 2008 will be nothing compared to what we will face in five, 10, 20 years," he says.

Cutting federal benefits while the economy is still weak would be a mistake, some analysts say, because it could hinder recovery by giving consumers less money to spend.

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Paul Hester has relied on government benefits since he lost his job in June 2009. The 54-year-old microbiologist has a master's degree and was earning a salary of $50,000 at the Indiana State Department of Health. He says he regularly looks for jobs, but has landed only two interviews in the past year.

Influenced by the credit wariness of parents who lived through the Great Depression, the Indianapolis resident has always been thrifty. He once watched his dad walk into a dealership, "plop down $10,000 in cash and buy a car." Mr. Hester has one credit card, and before he was unemployed, he tried to pay it off every month.

He lives on $375 a week in unemployment checks and his health-insurance premiums are subsidized by the federal government under a provision in the fiscal stimulus enacted by Congress in February 2009. His daughter, a college sophomore, pays for part of her schooling with Pell Grants, a federal program for low-income students that is set to expand because of new legislation that increased the number and size of grants.

"I don't like taking government money," says Mr. Hester, but "what else is there?"

-- Marcus Walker contributed to this article.

Write to Sara Murray at sara.murray@wsj.com

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