Entitlements and the national debt
Congressional Republicans and the Biden administration have reached an agreement to increase the national debt while cutting spending on some government programs. These changes are small and did not solve the fundamental problems leading to increased debt and the reasons why all parties should put up with it.
It was hard for the Republicans to achieve more with a Democratic administration, a slim majority in one legislative chamber and negotiating at gunpoint.
President Biden threatened imminent default if Congress did not pass his spending plan. But there were no real grounds for default. Interest payments on all debt make up a small part of budget revenue and can be paid without increasing debt if this payment is made an absolute priority. The administration argued that it could not do this since it had no less important obligations, primarily under entitlement programs, and the budget revenue was not enough for all that.
The very name of these programs suggests that their participants are entitled to certain compensation, and the federal government is obliged to provide them. Since these programs make up the lion’s share of the budget, if such obligations do exist, the government may be forced to borrow more money.
To see the weakness of this argument, it is important to understand that the concept of entitlement is used broadly and applies to very different programs for which the government has different obligations, and which affect the public debt in different ways.
All these programs can be divided into two main categories. The first category includes programs such as Social Security and Medicare, which are government insurances. Programs of the second category, such as Medicaid, Supplemental Security Income and food stamps, are government charities. There are fundamental differences between these two types of programs.
Insurance programs of the first category must be paid from separate trust funds, which are replenished by participants in these programs. Charitable programs of the second category are paid from the general budget, which is replenished by the taxpayers.
Paying for government insurance does not depend on the wealth of the recipient. The charitable programs of the second category are intended only for people who have no other means of subsistence.
Insurance determines the contractual obligations of the government and the right of their holders to receive compensation. Participants in charitable programs do not have such rights.
Many Democrats deny the latter distinction. They claim that beneficiaries of philanthropic programs have the same rights as beneficiaries of insurance, and it is no coincidence that they have brought all these programs together under the umbrella of entitlements. But because socioeconomic rights are not the law of the land, recipients of charitable assistance have no such rights, just as the government has no contractual or constitutional obligations toward them.
An attempt to treat two types of programs identically leads to paradoxical results, which is best seen in the case of extended unemployment benefits. Standard unemployment insurance is paid for by workers’ contributions. When someone loses their job, they are compensated regardless of their savings and other income. After 26 weeks, extended insurance comes into effect, which is now paid from the federal budget. This is essentially a charitable program and, it would seem, should be paid only to those who have no other means of subsistence.
But since it is considered an extension of standard unemployment insurance, it is subject to the same rules. I have known cases where people had millions of dollars in their accounts and when one of the spouses continued to receive a handsome salary, while the second was receiving extended unemployment benefits. That is, millionaires received charity paid for by the people of much lower income.
To solve the problem with the growth of U.S. debt, it is necessary to separate these two groups of programs and carry out appropriate reform for each of them.
With regard to public insurance programs, the basic rule should be reinstated and strictly enforced. They must be paid from trust funds, which are separate from the budget and are replenished exclusively by qualifying contributions, such as FICA or unemployment insurance.
For these funds to remain solvent, premiums or retirement age may need to be raised. But in no case should these funds borrow money from the budget and, accordingly, have anything to do with the national debt.
As for charitable programs, they should be based on a simple rule. Charity should not be paid in debt and should be determined by the available funds. We all use this rule in our lives. We do not expect a person who cannot pay his own bills to give his money to help the poor. But that’s exactly what our government is doing.
I often get phone calls asking me to help some charity. When I say that I am short on money, I have never been asked to donate by borrowing money on a credit card. But that’s exactly what our government is doing.
Following this simple and sensible rule, the government could pass legislation that charitable program payments should not raise the U.S. national debt. Such a law could call for the reduction of these programs, which is not difficult to do, since many of them exceed their intended purpose: to provide a basic existence, and for many for a limited time, until they can provide for themselves.
Such a reform would not only be financially justified but would also benefit many participants in these programs by removing their constant dependence on government subsidies, stimulating work, education and social advancement.
Thus, with the right approach to entitlement programs, there should be no need to increase the public debt to pay for them. Nor should there be such a need for paying interest on the public debt if the government were mandated by law to pay it first.
After all this, the government will have to prove the need to raise the debt ceiling only to pay for non-mandatory programs, which will be much more difficult to do. With the exception of several critical areas such as national security, many others could be cut or eliminated, and along with it the need to increase the national debt.
• Yuri Yarim-Agaev is a scientist and human rights activist. He was the head of risk measurement analytics at JPMorgan and a distinguished visiting fellow at the Hoover Institution.