Are Low-Income Programs Enlarging the Nation’s Long-Term Fiscal Problem?
Programs Outside Health Care Projected to Decline As Share of Economy
Revised November 2, 2012
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. A recent report the Congressional Research Service prepared for Senator Jeff Sessions (R-AL) provides one such set of figures. 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 low-income 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.
The first cause — increased spending on safety net programs because of the recession — is temporary. Congressional Budget Office (CBO) projections show that federal spending on low-income programs other than health care has already started to decline and will fall substantially as a percent of gross domestic product (GDP) as the economy recovers. By the end of the decade, it will fall below its average level as a percent of GDP over the prior 40 years, from 1972 to 2011. (See Figure 1.) 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 low-income programs outside health care (including refundable tax credits such as the Earned Income Tax Credit) averaged 2.1 percent of GDP over the past 40 years. This spending peaked at 2.9 percent of GDP in fiscal year 2010, a substantial increase. But it has already fallen in 2011 and 2012, and CBO projects that it will return to the prior 40-year average of 2.1 percent by 2018 and then fall further, to 1.75 percent of GDP, by 2020 — a level well below the prior 40-year average.
The above figures include expenditures for both mandatory (entitlement) and discretionary (annually appropriated) programs. Federal spending for low-income discretionary programs is virtually certain to fall as a percent of GDP in the coming decade because, under the Budget Control Act’s funding caps, overall non-defense discretionary spending will fall to its lowest level on record as a percent of GDP, in data that go back to 1962. If low-income discretionary programs remain a constant share of total non-defense discretionary spending, their costs will therefore fall as a share of GDP as well.
Figure 2 shows the major components in 2012 of federal funding for low-income programs other than health programs.
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, program expenditures (all spending except interest payments on the debt) will decline as a percent of GDP for the next five years, 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 program expenditures as a percent of GDP.
Revenues, meanwhile, will grow only at about the same pace as GDP under current policy. As a result, the imbalance between expenditures and revenues will worsen, causing the debt to climb steadily as a percent of GDP. And rising debt will cause rising interest costs, aggravating the nation’s long-run fiscal problems. 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.
Here, we examine whether low-income 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, 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; over the past decade, in fact, per-beneficiary costs have risen more slowly in Medicaid than under private insurance, a trend expected to continue over the next ten years. 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 66 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 low-income health care programs. (It’s important to note that CBO projects that these increases will not add to deficits because the costs are fully offset under the Affordable Care Act, primarily through savings in Medicare and new revenues.)
For these reasons, if one simply looks at total expenditures for low-income programs, costs appear to shrink only slightly as the economy recovers, then to stabilize over the rest of this decade as a percent of GDP, and to climb further as a share of GDP in decades after that. The continued growth of low-income health programs cannot be offset forever by continued shrinkage of other low-income programs.
However, if one examines costs for low-income program other than health care programs, the picture changes markedly. Low-income 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 low-income entitlement (or mandatory) programs outside health care equaled 2.0 percent of GDP. This was about 60 percent higher than the average for the 40-year period 1972-2011, which was 1.3 percent of GDP. The costs of these programs have indeed risen significantly in the last few years. For low-income discretionary programs outside health care, total costs equaled 0.9 percent of GDP in 2011, about the same as the 40-year average for those programs. Together, mandatory and discretionary low-income expenditures outside health care totaled 2.9 percent of GDP in 2011, about 40 percent above the 40-year average of 2.1 percent.
- 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 low-income entitlements outside health care will decline steadily as a percent of the economy as the economy recovers, falling from 2.0 percent of GDP in 2011 to 1.2 percent by 2022, below their prior 40-year average. CBO’s long-term fiscal projections also assume that mandatory programs other than Social Security and health care will grow no faster than GDP after 2022.
- Spending for low-income discretionary programs is also expected to decline significantly over the coming decade. 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 decline as well. We assume that low-income discretionary programs will fare no worse or better than non-defense discretionary spending as a whole, and so will share in this projected decline. On that basis, we project that expenditures for low-income discretionary programs will fall from 0.9 percent of GDP in 2011 to 0.5 percent by 2022.
- 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 about 1.75 percent of GDP, well belowtheir 40-year average of 2.1 percent (see Figure 1).
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 slow 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.”
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, 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 is important. Looking back only ten years at SNAP costs, for example, provides a skewed picture of program growth because SNAP participation and costs had plummeted at that time, due in part to a large decrease 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 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 but 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. Of particular note, the percentage of eligible individuals in low-income working families receiving SNAP rose steadily from 43 percent in 2002 to about 60 percent in 2009, the highest on record.
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. 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.
 See Congressional Research Service, Spending for Federal Benefits and Services for People with Low Income, FY2008-FY2011: An Update of Table B-1 from CRS Report R41625, Modified to Remove Programs for Veterans, October 15, 2012, available at http://budget.senate.gov/republican/public/index.cfm/files/serve/?File_id=0f87b42d-f182-4b3d-8ae2-fa8ac8a8edad as of 10-23-2012.
 Debt can and generally should rise as a percent of GDP during recessions, in order to cushion the loss of household income caused by the recession and keep the recession from being unnecessarily deep and protracted. Recessions and their accompanying debt increases are temporary. During normal economic times, policymakers should try to ensure that deficits are modest enough for debt to remain stable or decline as a percent of GDP.
 John Holahan et al., “Medicaid Spending Growth over the Last Decade and the Great Recession, 2000-2009,” Kaiser Commission on Medicaid and the Uninsured, February 2011 and John Holahan and Stacey McMorrow, “Medicare and Medicaid Spending Trends and the Deficit Debate,” New England Journal of Medicine, 367:393-395, August 2, 2012.
 These figures do notassume that the automatic cuts, or “sequestration,” that the Budget Control Act calls for will occur; if they did, the figure would be lower, but by only a tiny amount.
 As with mandatory programs, our figures for discretionary programs do not assume that the automatic cuts, or “sequestration,” that the Budget Control Act calls for will occur; if they did, total non-defense discretionary funding would fall to 2.6 percent of GDP rather than 2.7 percent.
 Congressional Budget Office, “The Supplemental Nutrition Assistance Program,” April 2012.
 The most recent year for which USDA publishes these estimates is 2009.
 These three factors dwarf the impact of SNAP eligibility changes on program costs. For example, CBO estimates that an eligibility change sometimes referred to as “broad categorical eligibility,” an eligibility change that has recently drawn attention, accounts for only 2 percent of program costs.