The book addresses the question of how and why federal entitlement programs have grown so large and have become so far removed from the ideals on which they were founded. It presents a history of major federal entitlement programs from the beginning of the Republic to the present, showing how they evolved and explaining the forces that caused their evolution. The programs covered include Social Security, Medicare, Medicaid, food stamps, other welfare programs, and nineteenth- and early twentieth-century veterans' disability pensions. These programs have sprung from the noble intention of providing assistance to people who are destitute through no fault of their own. As well-meaning and beneficial as many entitlements may be, they have come at a high cost, measured by lower national savings, higher public debt, and slower economic growth. Today, entitlements present the United States with a fiscal challenge unlike any other in the nation's history.
Revolutionary War pensions were the nation's first entitlement program. The program's evolution provides an early glimpse of Congress's tendency to liberalize entitlements and the forces that drive Congress. The original federal program limited annual pensions to Continental Army soldiers and seamen who became impoverished as a result of disabling wartime injuries or illness. Congress enlarged and expanded these benefits until, in the 1830s, they covered virtually all Revolutionary War seamen and soldiers, including volunteers and members of the state militia, and their widows, regardless of disability or income. Each liberalization was justified on the grounds that it was providing pensions to veterans who were no less worthy of assistance than veterans who were already receiving pensions. Each established a new base of benefits from which Congress considered subsequent liberalizations. Each was a result of political pressures generated by large federal budget surpluses.
The navy pension fund program was the federal government's first trust fund. It was financed by a single, dedicated source of revenue: prize money from the sale of captured enemy and pirate ships and their contents, commonly called "booty." The navy pension's early history provides a second example of Congress's tendency to liberalize entitlement program eligibility whenever surplus funds are available. However, in the case of navy pensions, it was surpluses of prize money in the trust fund rather than overall federal budget surpluses, that mattered. The trust fund's insolvency in 1840, the direct result of an ill-considered benefit expansion, serves as an early warning for Social Security and Medicare trust funds.
The Civil War pension program followed the same evolutionary path as earlier veterans' pensions, except on a far grander scale. The program evolved into a general disability and retirement program for virtually all Union soldiers. At the program's peak in 1896, pensions were provided to nearly 1 million Union soldiers and their survivors, and annual pension expenditures reached an extraordinary 40 percent of federal budget expenditures. The program's liberalizations were fueled by large federal budget surpluses. In the late nineteenth century, the Republican Party used generous Civil War pension benefits to gain electoral advantage. The pensions played an important role in the realignment of the American electorate behind the party in the 1890s. The pension program also spawned America's first national, single-issue lobby: the Grand Army of the Republic. The GAR exerted a powerful influence on pension legislation and served as a forerunner to large twentieth-century lobbying organizations.
Congress enacted World War I disability pension programs with the objective of preventing a repeat of the Civil War pension program's excesses. The novel programs were designed to alleviate future political pressures to liberalize disability pensions as veterans aged. These programs proved to be no match for claims for benefits by ineligible veterans and the availability of large budget surpluses. Congress not only extended World War I veterans' pensions as it had previous wartime pensions; it did so at a much faster pace. Promises of benefits, called "bonus" payments, by a 1924 law spawned mass marches by veterans in cities throughout the country demanding their promised entitlement benefit. The most memorable of these was the 1932 Bonus Expeditionary Force march on Washington, D.C., which ended when troops under General Douglas McArthur's command drove the veterans from the city.
The first year of the Roosevelt administration witnessed the largest reduction in an entitlement program in U.S. history. Franklin Roosevelt terminated pensions for 450,000 veterans and reduced the amount of monthly pensions for thousands of veterans who remained on the rolls. The story of how he achieved this result provides lessons for future presidents. The president made a strong moral and economic case for terminating veterans and used the budget crisis created by the Great Depression to prod Congress to give him the authority to cut pensions. Throughout the remainder of the president's first two terms, President Roosevelt used his veto power and other powers of the office of the president to sustain the vast majority of these reductions.
The New Deal marks the beginning of the modern entitlement system. Until the New Deal, federal entitlements were restricted to people who had performed a specific government service, mainly veterans. The New Deal expanded federal entitlements to people in the population at large, state governments, and private businesses. The landmark Social Security program provided retirement benefits to industrial workers. New federal welfare programs entitled state governments to matching payments for their welfare programs. Unfortunately, important lessons from the government's experience with wartime veterans' pensions went unheeded. The New Deal entitlements also ushered in a new era for the federal courts. The Supreme Court allowed the New Deal entitlements to pass constitutional muster under the "general welfare" clause. Once federal entitlement rights had been granted, the courts adjudicated the nature and extent of these legal rights, eventually creating welfare entitlement rights where none had been legislated.
Congress again demonstrated its inability to withstand pressures to increase entitlement benefits when surplus funds are available. The 1935 Social Security Act called for the program to build up a large reserve fund during the program's early years that could be drawn on in later years to finance benefits in lieu of higher payroll taxes. The "large reserve" debate led congressional liberals and conservatives to join together in 1939 to use the surplus to raise benefit levels, add survivors' benefits, and delay a previously scheduled payroll tax increase from taking place.
The Servicemen's Readjustment Act of 1944, popularly known as the GI Bill, introduced a new type of entitlement program: one that provided in-kind benefits rather than unrestricted cash assistance. The law provided World War II veterans with educational assistance and home, farm, and business loan guarantees. The new type of entitlement bestowed a legal right to reimbursement on persons and institutions that provide the benefits prescribed by the law, in addition to those who receive their services. The GI Bill was the forerunner of the numerous in-kind benefit entitlements enacted in the 1960s and 1970s to provide health care, nutrition, and social services for the elderly, the poor, and the disabled.
At the war's end, the American entitlement state stood at a crucial policy juncture. The New Deal had set the building blocks of the modern American entitlement state firmly in place, but its future remained highly uncertain. President Truman set the course that entitlements would follow for the remainder of the twentieth century. Large Social Security accounting surpluses provided President Truman and congressional Democrats with the means to ensure that Social Security, instead of state old-age programs, became the primary vehicle for delivering assistance to the elderly. In 1950, Congress took a major step toward this end by sharply increasing Social Security benefits and significantly expanding coverage in the workforce. The benefit increase, timed to coincide with the 1950 congressional elections, demonstrated that Democrats had developed the practice of using a major entitlement program to gain electoral advantage into a finely honed skill. Republicans, after showing modest resistance, acquiesced.
From 1950 to the Great Society, congressional Republicans and Democrats joined together to ensure that Social Security replaced state-run old-age assistance as the first line of defense against poverty among the elderly. Monthly benefits were incrementally expanded, and coverage became nearly universal. Large Social Security accounting surpluses fueled the increases in the early 1950s despite the overall federal budget's often poor condition. Congress's use of Social Security to gain electoral advantage was raised to a fine art, as election-year benefit increases were strategically timed. The only new major new entitlement of the 1950s was the Social Security Disability Insurance program. Soon after it was established, the program followed the familiar path that had been blazed by nineteenth-century veterans' pensions, as eligibility was extended to "equally worthy" groups that had been excluded from the original program.
While legislation during the years 1951 to 1964 incrementally expanded federal funding for state welfare programs, major fissures emerged in the New Deal's bedrock welfare policy principles of state autonomy and cash assistance. Federal welfare officials used the threat of withholding federal funds as a lever to limit state authority to set welfare eligibility rules. The threats were a response to state and local government actions, particularly those taken by southern state governments with a history of discriminatory treatment of African Americans, to curtail welfare eligibility. As tensions between the two levels of government mounted, Congress stepped in with legislation to strengthen federal authority. By the mid-1960s, the principle of state autonomy had been greatly eroded. At the same time, welfare officials began to question the wisdom of providing additional cash assistance to the poor and turned increasingly to providing in-kind benefits in lieu of additional cash assistance.
The Great Society program in 1965 marks the beginning of a remarkable ten-year period in which Congress expanded entitlements at a rapid rate unprecedented in U.S. history. Under President Johnson, new health care entitlement programs, Medicare and Medicaid, were created; Social Security disability was expanded to temporarily disabled workers; two large general increases in Social Security benefits were enacted; and the Aid for Dependent Children program experienced its largest expansion in its thirty-year history. Federal revenues from a rapidly expanding economy provided the fuel for this legislative blitzkrieg. The revenue surge, as with previous surges, made the desire to expand entitlement benefits irresistible. The period, one of great social upheaval, witnessed a new entitlement phenomenon: welfare mothers, urged on by government-funded activists, organized and marched on federal, state, and local governments to demand higher welfare benefits and fewer restrictions on eligibility.
This legal view that welfare benefits were a gratuity and not an entitlement underwent a significant change in the mid-1960s and early 1970s. Three major Supreme Court decisions from 1969 to 1971 radically expanded the legal rights of welfare recipients and claimants. The Court (1) declared that long-standing state "suitable home" regulations violated federal law, (2) struck down state residence requirements for welfare as a violation of an individual's constitutional right to travel, and (3) ruled that welfare benefits were akin to property and were therefore protected by the Constitution's due process requirements. This last case established a legal entitlement right to welfare benefits.
During Richard Nixon's presidency, the food stamp program was nationalized, a permanent federal unemployment program was created, a new revenue-sharing program that entitled states and local governments to a share of federal revenue was established, and child nutrition programs were converted into an entitlement to school districts. Presidential proposals for a federally guaranteed annual income and national health insurance program failed. Fueled by pressure from large accounting surpluses in the Social Security trust fund, Congress raised Social Security benefits by 69 percent in four years and indexed Social Security benefits to inflation. But the flawed indexing formula set the program on a path to insolvency. The entitlement liberalizations from 1969 to 1975 caused federal entitlement spending to grow annually at a remarkable 10 percent inflation-adjusted rate. By 1975, entitlements accounted for nearly half of all federal spending.
The years of Jimmy Carter's presidency, plagued by large federal budget deficits from the prior dozen years of entitlement liberalizations, witnessed a dramatically slower pace of entitlement expansions. No new entitlements were written onto the federal statute books. Expansions were mainly limited to the food stamp program in which stamps were made free of charge. The major legislative action concerned Social Security. By 1977, the flawed indexing formula that had been written into the statute books in 1972 had pushed Social Security toward imminent insolvency. Congress responded by enacting a new wage replacement formula that, for the first and only time in the program's history, significantly reduced benefits that had been promised to workers. The reductions were not limited to people who would retire decades later. They were also reduced for workers who were in their late 50s at the time the law was enacted.
President Reagan was the first president in U.S. history to attempt to comprehensively reduce entitlement spending. His efforts were part of a larger package of economic policies designed to restore noninflationary growth to the U.S. economy. The package produced a colossal battle with Congress. The first two years of furious combat dominated the business of Congress. Congress subjected almost every major entitlement program to at least some retrenchment. Fiercely contested budget battles continued for the next six years as Congress sought to return to its long-standing practice of incrementally expanding entitlements. The administration's implacable opposition and large budget deficits severely limited entitlement liberalizations. The entitlement restraint from 1981 to 1989 reversed a thirty-year upward trend. Yet despite the Reagan administration's achievements, the entitlement state in 1989 remained largely intact. Its largest programs had defied retrenchment.
By the early 1990s, federal officials recognized the true magnitude of the looming fiscal storm that entitlements had created. Yet the executive and legislative branches of government ignored the warnings. Both branches of government worked in concert to expand eligibility for Medicaid, the earned income tax credit, and food stamps and to expand Medicare to prescription drugs. These liberalizations mainly extended aid to "worthy" nonpoor persons. Congress and President Obama capped off the period by extending health insurance subsidies to people with incomes up to 400 percent of the poverty line. Attempts to restrain federal spending proved fruitless. In one striking departure from these legislative patterns, Congress enacted reversed decades of federal welfare policy by eliminating an individual's entitlement to AFDC benefits and transferring program policymaking authority to the states.
Federal entitlements now distribute government aid on a scale that is unprecedented in history. Over half of all U.S. households receive entitlement assistance. Most entitlement spending serves purposes other than reducing the degree of poverty among the poor. The soaring growth in entitlement spending creates a unique fiscal challenge. History provides a guide to meeting the challenge, but a fundamental restructuring is needed. A restructuring must keep in mind that providing assistance to individuals who are impoverished through no fault of their own is a hallmark of a compassionate society. The book optimistically concludes by noting that the main elements for a change in entitlement policy are coming into place. There is widespread public skepticism that entitlements are delivering on their promises and that the country can afford to deliver on future promises. But mounting public pressure will ultimately force a change in government policies.