The 2012 Index of Dependence on Government

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The 2012 Index ofDependence on Government

William W. Beach and Patrick D. Tyrrell

SPECIAL REPORT No. 104 | FEBRUARY 8, 2012from THE CENTER forDATA ANALYSIS


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A Report

of The Heritage Center

for Data Analysis

A Report


for Data Analysis

214 Massachusetts Avenue, NE Washington, DC 20002 (202) 546-4400 heritage.org

NOTE: Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation

or as an attempt to aid or hinder the passage of any bill before Congress.

A FREE ENTERPRISE PRESCRIPTION:UNLEASHING ENTREPRENEURSTO CREATE JOBS

JAMES SHERK, KAREN A. CAMPBELL, PH.D., AND JOHN L. LIGON

CDA10-09 December 14, 2010

The 2012 Indexof dependenceon GovernmenT

WIllIam W. Beachand paTrIck d. Tyrrell

Sr-104 feBruary 8, 2012

A Report

A Report



for Data Analysis

for Data Analysis


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Cover Photo: iStockphoto.com/Rouzes


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SR-104 February 8, 2012

1

Virtually no issue so dominates the current publicpolicy debate as the uture nancial health o the U.S.government. Americans are haunted by the specter oenormously growing mountains o debt that suck theeconomic and social vitality out o this country. Onlythe intrepidly stagnant and jobless economic recoverygarners more attention, and many are beginning tobelieve that even that sluggishness is tied to the nationsgrowing burden o publicly held debt.1

O course, the roots o the problems produced by thegreat and growing debt lie in the spending behaviors othe ederal government. Annual decits ar greater thanthe governments revenue are ueling explosive levels odebt. One such signicant area o rapid growth is thoseprograms that create economic and social dependenceon government.

The 2012 publication o the Index o Dependenceon Government marks the tenth year that The HeritageFoundation has fashed warning lights about Ameri-cans growing dependence on government programs.

For a decade, the Index has signaled troubling andrapid increases in the growth o dependence-creatingederal programs, and every year Heritage has raisedconcerns about the challenges that rapidly growingdependence poses to this countrys republican orm ogovernment, its economy, and or the broader civil soci-ety. Index measurements begin in 1962; since then, theIndex score has grown by more than 15 times its origi-nal amount. This means that, keeping infation neutralin the calculations, more than 15 times the resourceswere committed to paying or people who depend on

government in 2010 than in 1962. In 2010 alone, theIndex o Dependence on Government grew by 8.1 percent. The Index variables that grew the most were:

Housing: 13 percent

Health Care and Welare: 13.1 percent

Retirement: 3.1 percent.

The increase rom the previous Index means that theIndex has now grown by 60.7 percent just since 2001

One o the most worrying trends in the Index is thecoinciding growth in the non-taxpaying public. Thepercentage o people who do not pay ederal incometaxes, and who are not claimed as dependents by someone who does pay them, jumped rom 14.8 percent in1984 to 49.5 percent in 2009. This means that in 198434.8 million tax lers paid no taxes; in 2009, 151.7 million paid nothing.2

It is the conjunction o these two trendshigherspending on dependence-creating programs, and anever-shrinking number o taxpayers who pay or these

programsthat concerns those interested in the ateo the American orm o government. Americans havealways expressed concern about becoming dependenton government, even while understanding that lieschallenges cause most people, at one time or anotherto depend on aid rom someone else. Americans concern stems partly rom deeply held views that liesblessings are more readily obtained by independentpeople and that growing dependence on governmenterodes the spirit o personal and mutual responsibility created through amily and civil society institutions

The 2012 Indexof dependenceon GovernmenT

WilliamW. Beachand Patrickd. tyrrell


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THE HERITAGE CENTER FOR DATA ANALYSIS

2

These views help explain the broad public support orwelare reorm in the 1990s.

This ethic o sel-reliance combined with a commit-ment to the brotherly care o those in need appearsthreatened in a much greater way today than when thisIndex rst appeared in 2002. This year, 2012, marks

another year that the Index contains signicant retirements by baby boomers. Over the next 25 years, morethan 77 million boomers will begin collecting SocialSecurity checks, drawing Medicare benets, and relying on long-term care under Medicaid. No event willnancially challenge these important programs over the

next two decades more than this shit into retirement othe largest generation in American history.

It is not only nancial tests that these programswill ace. Certainly, nancial challenges will be greatover the next several decades, given that none o these

entitlement programs can easily meet its obligationseven now. Doubling the number o people in retirement will constitute a massive growth o the population largely dependent on government programs in theUnited States, and a potentially ruinous drain on ederal nances. Perhaps the most important aspect o the

boomer retirement is its dramatic reminder o the rapidly growing dependence on government in the UnitedStates.

There was such a rapid growth in dependence in2010 that the twin concernshow much damage thisgrowth has done to the republican orm o governmentand how harmul it has been to the countrys nancialsituationhas deepened signicantly. Not only did theederal government eectively take over hal o the U.Seconomy and expand public-sector debt by more thanall previous governments combined, it also oversaw a

second year o enormous expansion in total government debt at the ederal level. Much o that growthin new debt can be traced to programs that encourage dependence. Chart 2 illustrates how 70.5 percento ederal spending now goes to dependence-creatingprograms, up dramatically rom 28.3 percent in 1962and 48.5 percent in 1990.

Many Americans are expressing increasing rustration at this scally grim state o aairs. Most Memberso recent Congresses have known that the major entitlement programs not only need major repairs, but alsothat these programs are starting to drive up annual de

cits and promise to produce substantial decits in thenear uture. Many Americans are especially rustratedby the way Congress ignores or, at best, claims to sup

1. Carmen M. Reinhart and Kenneth S. Rogo, This Time Is Dierent: Eight Centuries o Financial Folly (Princeton, New Jersey:Princeton University Press, 2009).

2. IRS data ound in Individual Income Tax Returns, Publication 1304, 2009, and 1984, Table 1.4; Heritage Foundationcalculations.

1962 1970 1980 1990 2000 2009

0%

10%

20%

30%

40%

50%

heritage.orgChart 1 SR-104

Nearly Half of All AmericansDont Pay Income Taxes

Note: Figures for 1977 to 1982 were extrapolated due tounavailable data.

Source:Heritage Foundation calculations based on data from theInternal Revenue Service, Individual Income Tax Returns,Publication 1304, 19622009, Table 1.4, and various IRS reports.

Percentage of U.S. Population Not Representedon a Taxable Return

23.7%

12%

34.1%

49.5%


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3

port, comprehensive budget reorm plans. Plans likeThe Heritage Foundations Saving the American Dream3and Representative Paul Ryans (RWI) Roadmap,4

which oer well-developed and reasonable blueprintsor getting ederal nances under control, have notbeen seriously debated by most Members o Congress.

This absence o genuine eorts by Congress to manage the ederal governments worsening nancial crisisis now worrying a number o international nancialorganizations, including the International MonetaryFund (IMF). On May 14, 2010, the IMF ranked theU.S. second place among countries that must reducetheir structural decit (caused in part by spending ondependence-creating programs) or risk nancial calamity. The IMF predicts that U.S. public-sector debt willequal 100 percent o its gross domestic product (GDP)by 2015 unless immediate actions are taken to cut thedecits by an amount equal to 12 percent o GDP by2014. Even woeul Greece need only cut its decits by9 percent o its national output.

Then, on August 5, 2011, the credit rating company Standard & Poors downgraded U.S. sovereign debtrom its AAA rating to AA+.5 This dramatic and highlycontroversial assessment o the ederal governmentsnancial health was on the horizon three days earlierwhen Moodys Investors Service announced its viewthat the prospects or the scal health o the centralgovernment had turned negative.6 Not to be outdoneon November 28, the third big ratings agency, Fitchalso revised its outlook on U.S. credit rom stable to

negative (meaning there is a slightly greater than 50%

chance that Fitch will downgrade U.S. credit romAAA over the next two years).7

The IMF, the rating agencies, and many watchucitizens are right to be concerned about the growingdebt and growing dependence. Programs that encourage dependence quickly morph into political assetsthat policymakers readily embrace. Many voters support politicians or political parties that mandate higherincomes or subsidies or the essentials o lie. No matter

3. Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt,

Cut Spending, and Restore Prosperity, The Heritage Foundation, 2011, at http://savingthedream.org/about-the-plan/plan-details/.4. Paul Ryan, A Roadmap or Americas Future, 2010, at http://www.roadmap.republicans.budget.house.gov/(December 2, 2011).

5. Standard and Poors, United States o America Long-Term Rating Lowered To AA+ Due to Political Risks, Rising Debt Burden;Outlook Negative, August 5, 2011, at http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563(December 2, 2011).

6. Steve Schaeer, Moodys Arms U.S. AAA Rating, Assigns Negative Outlook Ater Debt Deals First Step,Forbes, August 2, 2011at http://www.orbes.com/sites/steveschaeer/2011/08/02/moodys-afrms-u-s-aaa-rating-assigns-negative-outlook-ater-debt-deals-frst-step/(December 2, 2011).

7. Mark Gonglo, Fitch Arms US as AAA, But Cuts Outlook to Negative,The Wall Street Journal blog MarketBeat, November28, 2011, at http://blogs.wsj.com/marketbeat/2011/11/28/ftch-afrms-us-as-aaa-but-cuts-outlook-to-negative/?mod=google_news_blog(December 2, 2011).

1962 1970 1980 1990 2000 2010

0%

10%

20%

30%

40%

50%

60%

70%

80%


More than 70 Percent of FederalSpending Goes to Dependence Programs

Sources: Office of Management and Budget, Historical Tables: Budget

of the United States Government, Fiscal Year 2012, 2011, Table 1.1, pp.22 and 23, and Heritage Foundation calculations sourced throughout

the Index of Dependence on Government.

Share of Total Federal Spending

2003:68.3%

70.5%

1990:48.5%

1962:

28.3%

2003:68.3%

70.5%

1990:48.5%

1962:

28.3%


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how well meaning policymakers are when they createsuch aid programs, these same programs quickly spiralbeyond their mission and become severe liabilities.

Many countries have already passed the scal tippingpoint at which reckless growth in dependence programshas produced domestic debt crises. How ar along thepath to crisis is the United States? Are Americans clos-ing in on a tipping point that endangers the workingso their democracy? Or have Americans already passedthat point? Can this republican orm o governmentwithstand the political weight o a massively grow-ing population o Americans who receive governmentbenets and who contribute little or nothing or them?How seriously have these ederal programs eroded civilsociety by nulliying what were once social obligations,and by crowding out services that used to be providedby amilies, congregations, community groups, and

local governments?To explore these questions, one must measure how

much ederal social programs have grown. The Index oDependence on Government is an attempt to measurethese patterns and provide data to help ascertain theimplications o these trends. Table 1 contains the 2012Index scoresrom 1962 to 2010, with 1980 as thebase year. As the table indicates, dependence on gov-ernment has grown steadily at an alarming rate.

THE FISCAL CALAMITIES CREATED BY

GROWING DEPENDENCE

Entitlements. The issue o dependence is particu-larly salient today when more and more Americans areincreasing their reliance on government as they passinto retirement. Current retirees became eligible orSocial Security income, as well as or health care ben-ets rom Medicare or Medicaid, at age 65.8 These pro-grams currently make up 42 percent o all non-interestederal program spending. Over the next two decades,that spending will increase to nearly 62 percent o non-interest spending as 10,000 baby boomersper day retireand begin to collect benets. Jointly, these programs

will enable the government dependence o nearly 80million baby boomers.

This phenomenon is particularly troubling becausemost o the soon-to-be users o these programs are mid-dle-class to upper-class Americans who do not needgovernment support. Since eligibility or these pro-grams is linked to age, not nancial need, millionaires

collect the same benets, such as subsidized prescription drugs through Medicare Part D, as do low-incomeretirees.

Paying or these middle-class and upper-classentitlements in the coming years will require unprecedented levels o decit spending. Focusing on SocialSecurity and Medicare alone, Americans ace $45.9trillion in ununded obligations (read: new borrowing)over the next 75 years. That is more than $200,000per American citizenan unsustainable level o debtthat is sure to slow the economy and could orce evenhigher rates o taxation in the uture. The high costs othese programs, which will be shouldered by the children and grandchildren o baby boomers, could easily lead to urther increases in dependence o uturegenerationswhich would be more likely to dependon welare during a slow economy. This snowball

ing o dependencecaused by automatic reliance onSocial Security, Medicare, and Medicaidcould easilysend the country past the tipping point o dependenceeroding civil society and endangering the unctioningo democracy itsel.

Additionally, the growing cost illustrates the budgetary problem o allowing dependence to expandunchecked. One reason this growth will be so signicant is that these programs increase on autopilot, whichurther perpetuates dependence, since these programsare not subject to regular debate and evaluation. Unlike

nearly all other ederal outlays, Social Security, Medicare, and Medicaid are mandatory spending programsthat operate outside the annual budget process. Thisexemption entitles these programs to call on all ederalrevenues rst, regardless o other budgetary prioritiesSubstantive policy reorm is required i this automaticdependence is to be halted. The solution is to turn theseprograms into 30-year budgeted programs, subjectingthe budgets to debate every ve years.

Millionaires collect the same benefts as do low-

income retirees.

Other policy reormsthat emphasize independence and sel-reliancemust also be part o addressing the problems inherent in these and other programsThe concept o a saety net ought to be restored to gearSocial Security, Medicare, and Medicaid toward those

8. Medicaid also provides health care or low-income, non-retired amilies.


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Index of Dependence on Government, 19622010

Sources: Heritage Foundation calculations sourced throughout the Index of Dependence on Government.

Table 1 SR-104 heritage.org

Year Housing Health andWelfare Retirement Education

Rural and

AgriculturalServices IndexValue

Annual Percentage

Change in IndexValue

1962 1 6 5 2 5 191963 1 6 5 2 6 21 11.721964 1 7 5 2 7 22 2.691965 2 6 6 2 6 22 0.551966 2 7 6 4 4 23 5.991967 2 8 7 7 5 28 22.181968 2 9 8 9 6 34 21.581969 2 10 9 7 7 36 4.891970 3 11 9 8 7 39 7.661971 4 14 11 7 7 43 12.141972 6 17 11 7 8 49 13.601973 9 16 13 7 8 52 4.721974 9 16 14 5 5 49 5.09

1975 9 21 15 7 5 57 17.151976 14 24 16 8 6 69 20.721977 20 24 18 9 9 78 13.421978 22 22 18 10 13 86 9.901979 26 22 19 12 12 91 5.041980* 30 25 20 15 10 100 10.451981 34 26 22 18 10 109 9.271982 34 25 23 14 10 106 3.311983 36 27 24 13 12 112 6.171984 38 24 25 13 8 108 3.551985 38 25 26 14 13 115 6.231986 38 26 27 14 14 118 3.011987 36 26 27 12 11 113 4.351988 38 27 28 13 8 114 0.241989 38 28 29 16 7 118 4.141990 39 31 30 16 7 123 3.81

1991 40 37 31 17 7 132 7.341992 42 45 33 16 7 143 8.211993 47 47 34 20 9 157 10.311994 51 49 36 11 8 154 1.851995 58 50 38 19 6 170 10.171996 56 50 39 16 6 167 1.911997 56 49 41 15 6 168 0.701998 57 50 41 15 6 171 1.601999 55 53 41 13 10 172 1.082000 56 55 42 12 13 179 3.762001 57 59 44 12 11 183 2.242002 62 68 46 20 10 206 12.602003 64 73 48 26 12 223 8.432004 64 75 49 28 8 224 0.392005 63 75 51 34 15 237 5.892006 62 73 52 52 21 261 9.80

2007 70 74 56 25 12 237 9.282008 67 81 57 23 10 239 1.122009 77 99 63 22 12 272 13.842010 87 112 65 20 10 294 8.11

* Base year


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who truly need these programs. This restoration can beaccomplished by relating benets to retirees incomeand encouraging personal savings during workingyears.

Even though many Members o Congress and otherlegislators show great hesitance in reorming thesebadly broken programs, good reormsthat preservethe basic commitments this country has made to itsretired and indigent populationsdo exist. The Her-itage Foundations Saving the American Dream planstrengthens the anti-poverty elements o these manda-tory programs while also protecting them rom nancialruin. Doing nothing, however, guarantees that seniorsone day will nd themselves largely without the ben-ets that currently play such an important part o theirretirement plans.

Growth in the Non-Taxpaying Population. The

challenges that Congress aces in reorming these enti-tlement programs are heightened by the rapid growtho other dependence-creating programs, such as sub-sidies or ood and housing and college nancial aid,and by the growing number o Americans who incur noobligations or receiving them. How likely is Congressto reorm entitlements in any meaningul way undersuch circumstances? Can Congress rein in the massivemiddle-class entitlements in an environment o ast-expanding dependence programs?

In 1962, the rst year measured in the Index o

Dependence on Government, the percentage o peoplewho did not pay ederal income taxes themselves andwho were not claimed as dependents by someone whodid pay ederal income taxes stood at 23.7 percent; itell to 12 percent by 1969 beore beginning a raggedand ultimately steady increase. By 2000, the percent-age was 34.1 percent; by 2009, it was 49.5 percent. 9 Inshort, the country is now at a point where roughly one-hal o taxpayers do not pay ederal income taxes,andwhere most o that same population receives generousederal benets. (See Chart 1.)

This trend should concern everyone who supportsAmericas republican orm o government. I the citi-zens representatives are elected by an increasing per-centage o voters who pay no income tax, how long

will it be beore these representatives respond more todemands or yet more entitlements and subsidies romnon-payers than to the pleas o taxpayers to exercisegreater spending prudence?

SECTION 1: THE PURPOSE AND

THEORY OF THE INDEXThe 2012 Index o Dependence on Government is

divided into our major sections. Section 1 explainsthe purpose o and theory behind the Index; Section2 reviews major policy changes in ve ederal-programareas; Section 3 eatures a methodology that describeshow the Index is constructed; and Section 4 discussesthe Index in terms o the number o Americans whodepend on government programs.

The Index o Dependence on Government isdesigned to measure the pace at which ederal gov

ernment services and programs have grown in areasonce considered to be the responsibility o individualsamilies, communities, neighborhood groups, churchesand other civil society institutions. By compiling andcondensing these data into a simple annual score (composed o the scores or the ve components in Section2), the Index provides a useul tool or analyzing dependence on government. Policy analysts and political scientists can also use the Index and the patterns it revealsto develop orecasts o trends and consider how thesetrends might aect the politics o the ederal budget.

The Index uses data drawn rom a careully selectedset o ederally unded programs. The programs werechosen or their propensity to duplicate or replaceassistance, such as shelter, ood, monetary aid, healthcare, education, or employment training, which wastraditionally provided to needy people by local organizations and amilies.

In calculating the Index, the expenditures or theseprograms are weighted to refect the relative importanceo each service (e.g., shelter, health care, or ood). Thedegree o a persons dependence will vary with respecto the need. For example, a homeless persons rst needis generally shelter, ollowed by nourishment, healthcare, and income. Analysts in The Heritage Foundations Center or Data Analysis weighted the program

9. IRS data rom Individual Income Tax Returns, Publication 1304, 19622009, Table 1.4 and other numbered tables rom thoseyears; Heritage Foundation calculations. It is true, o course, that many o these households paid payroll taxes. The point aboutthe political structure, however, is that nearly hal are not paying or the general government costs or a sizeable portion odependence-creating programs. Many workers see their payroll taxes as an investment in a uture income stream, which, again, isvery dierent rom paying or general government costs.


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expenditures based on this hierarchy o needs, whichproduces a weighted Index o expenditures centered onthe year 1980.

Historically, individuals and local entities have pri-vately provided more assistance to needy members osociety than they do today. Particularly during the 20thcentury, government gradually oered more and moreservices that were previously provided by sel-help andmutual-aid organizations.10 Lower-cost housing is agood example. Mutual-aid, religious, and educationalorganizations long have aided low-income Americanswith limited housing assistance; ater World War II,the ederal and state governments began providingthe bulk o low-cost housing. Today, the governmentprovides nearly all housing assistance or the poor andlow-income.

Health care is another example o this pattern. Beore

World War II, Americans o modest income typicallyobtained health care and health insurance through arange o community institutions, some operated bychurches and social clubs. That entire health care inra-structure has since been replaced by publicly providedhealth insurance, largely through Medicaid and Medi-care. Regardless o whether the medical and nancialresults are better today, the relationship between thepeople who receive health care assistance and thosewho pay or it has changed undamentally. Few woulddispute that this change has aected the total cost o

health care, and the relationships among patients, doc-tors, and hospitals, negatively.

Financial help or those in need has also changedprooundly. Local, community-based charitable organi-zations once provided the majority o aid, resulting in apersonal relationship between those who received assis-tance and those who provided it. Today, Social Securityand other government programs provide much or allo the income to low-income and indigent households.Nearly all the nancial support that was once providedto temporarily unemployed workers by unions, mutu-al-aid societies, and local charities is now provided by

ederal income, ood, and health programs.

This shit rom local, community-based, mutual-aidassistance to anonymous government payments has

clearly altered the relationship between the receiverand the provider o the assistance. In the past, a personin need depended on help rom people and organizations in his or her local community. The communityrepresentatives were generally aware o the personsneeds and tailored the assistance to meet those needs

within the communitys budgetary constraints. Todayhousing and other needs are addressed by governmentemployees to whom the person in need is a completestranger, and who have ew or no ties to the communityin which the needy person lives.

Both cases o aid involve a dependent relationshipHowever, support provided by amilies, churches, andother civil society groups aims to restore a person to ullfourishing and personal responsibility, and, ultimatelyto be able to aid another person in turn. This kind oreciprocal expectation does not characterize the depen

dent relationship with the political system. The ormerrelationship is essential to the existence o civil societyitsel. The latter is usually based on one-sided aid without accountability or a persons regained responsibilityor sel and toward his community. Indeed, the successo such government programs is requently measuredby the programs growth rather than by whether it helpsrecipients to escape dependence. While the dependentrelationship with civil society leads to a balance betweenthe interests o the needy person and the communitythe dependent relationship with the government runsthe risk o generating political pressure rom interest

groupssuch as health care organizations, nonproorganizations, and the aid recipients themselvestoexpand and cement ederal support.

Nearly all the fnancial support that was onceprovided to temporarily unemployed workers byunions, mutual-aid societies, and local charities isnow provided by government programs.

The Index o Dependence on Government provides

a way to assess the magnitude and implications o thechange in government dependence in American societyThe Index is based principally on historical data romthe Presidents scal year (FY) 2012 annual budget pro

10. Mutual-aid societies consist o individuals who pledge to help each other with nancial, employment, and health challenges,setting up a low-cost mutual-insurance arrangement. Today, very ew mutual-aid societies exist in the United States. Perhaps thebest known is the Security Benet Association in Topeka, Kansas. See David Beito, From Mutual Aid to the Welare State: FraternalSocieties and Social Services, 18901967 (Chapel Hill, N.C.: University o North Carolina Press, 2000).


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posal.11 The last year measured in the 2012 Index is FY2010. The Center or Data Analysis (CDA) used a simpleweighting scheme and infation adjustment to restatethese publicly available data. CDA analysts encouragereplication o their work and will gladly provide thedata that support this years Index upon request. The

steps to prepare this years Index are described in themethodology in Section 3.

SECTION 2: THE FIVE

INDEX COMPONENTS

CDA analysts began by reviewing the ederal budgetto identiy ederal programs and state activities support-ed by ederal appropriations that t the denition odependenceproviding assistance in areas once con-sidered to be the responsibility o individuals, amily,neighborhood groups, churches, and other civil society

institutions. The immediate beneciary o the programor activity must be an individual. This method general-ly excludes state programs; ederally unded programsin which the states act as intermediaries are included.

Elementary and secondary education are the prin-cipal state-based programs that are excluded underthis stipulation. Post-secondary education is the onlypart o government-unded education included in theIndex.12 Military and ederal employees are also exclud-ed because national deense is the primary constitution-ally mandated unction o the ederal government andthus does not promote dependence as measured by theIndex.

CDA analysts then divided the qualiying programsinto ve broad components:

1. Housing

2. (a) Health Care and (b) Welare

3. Retirement

4. Higher Education

5. Rural and Agricultural Services

The ollowing sections discuss the pace and content

o policy changes in these ve components.

1) Housing.13 The Department o Housing andUrban Development (HUD) was created in 1965 byconsolidating several independent ederal housingagencies into one presidential Cabinet department. Thepurpose o the consolidation was to elevate the importance o government housing assistance within the con

stellation o ederal spending programs. At that time iwas believed that the destructive riots that broke outin many cities in the early 1960s were a consequenceo poor housing conditions and that these conditionswere contributing to urban decay.

HUD spending still largely refects that dual missionIn any given year, about 80 percent o HUDs budget istargeted at housing assistance, and the other 20 percentis ocused on urban issues by way o the CommunityDevelopment Block Grant (CDBG) program. Given thenature o these programmatic allocations, HUD budget

ary and sta resources are concentrated on low-incomehouseholds to an extent unmatched by any other ederal department.

Within the 80 percent o the HUD budget spent onhousing assistance are a series o means-tested housing programs, some o which date back to the GreatDepression. Typically, these programs provide lowincome people, including the elderly and disabled, withapartments at monthly rents scaled to their incomesThe lower the income, the lower the rent. TraditionallyHUD and the local housing agencies provide eligiblelow-income households with project-based assistance, an apartment unit that is owned and maintainedby the government.

Public housing projects have historically been themost common orm o such assistance, but they beganto all out o avor in the 1960s because o the rampantdecay and deterioration that ollowed rom concentrating too many troubled, low-income amilies in a singlecomplex or neighborhood. Periodically, new orms oproject-based programs are adopted as reorm, whichalso tend to all out o avor ater several years o disappointing results. HOPE VI is the most recent orm

11. Oce o Management and Budget, Historical Tables: Budget o the United States Government, Fiscal Year 2012, at http://www.whitehouse.gov/sites/deault/fles/omb/budget/y2012/assets/hist.pd(December 2, 2011).

12. The exclusion o elementary and secondary education rom the Index refects the CDAs determination that when it comes toelementary and high schools, aid historically provided by government probably has not crowded out aid once generally providedby civil society. However, ederally unded and guaranteed nancial aid or post-secondary education does compete with privatelyprovided nancial assistance.

13. This section was written by Ronald D. Utt, until recently Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. RoeInstitute or Economic Policy Studies at The Heritage Foundation.


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o project-based assistance, and high costs and lowbenets led the George W. Bush Administration toattempt, unsuccessully, to terminate the program in2006. Eorts are now underway by some in the ObamaAdministration to increase the programs unding.

HUD also provides tenant-based housing assis-tance to low-income households in the orm o rentvouchers and certicates. These certicates help low-income people rent apartments in the private sector by

covering a portion o the rent. The lower the persons oramilys income, the greater the share o rent covered bythe voucher or certicate. Vouchers were implementedin the early 1970s as a cost-eective replacement orpublic housing and other orms o expensive project-based assistance; vouchers still account or only a por-tion o housing assistance because o housing-industryresistance to terminating the lucrative project-basedprograms.

Finally, HUD provides block grants to cities andcommunities through the CDBG program accordingto a needs-based ormula. Grant money can be spentat a communitys discretion among a series o permissible options. Among the allowable spending options isadditional housing assistance, which many communities use to provide assistance to a greater number olow-income households. Although HUD programs aremeans-tested to determine eligibility, they are not entitlements. As a result, many eligible households do no

receive any housing assistance due to unding limitations. In many communities, the waiting lists or housing assistance are several yearsand in some cases localhousing authorities no longer add new amilies to thelist because there is simply no prospect o new applicants receiving an apartment in the oreseeable uture.

Recognizing that HUD housing assistance can createdependence among those who receive its benets, someMembers o Congress have attempted to extend the

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$10

$20

$30

$40

$50

$60


Housing Assistance Breaks Record Second Year in a Row

Source: Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2012, 2011, Table 3.2, p. 57, and Table 12.3, p. 276.

Expenditures in Billions of 2005 Dollars

273% increasefrom 1975 to 1981



Year-to-Year Change

Increase Decrease

$59.4

$52.3


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work requirements o the 1996 Personal Responsibilityand Work Opportunity Reconciliation Act (PRWOR) toHUD programs. Advocates or the poor have thwartedthese eorts. To date, the most that can be required o aHUD program beneciary is eight hours per month ovolunteer service to the community or housing project

in which the beneciary lives.Ater a mid-decade jump refecting spending to

rebuild inrastructure destroyed by Hurricanes Katrinaand Rita, the housing component o the Index moder-ated, but in 2008 jumped signicantly as the ederalgovernment added several mortgage-bailout programsto its traditional low-income, housing-assistance ocus.Beginning in 2008, the ederal government took overthe operations o Fannie Mae and Freddie Mac andhas since then spent more than $150 billion to keepthem afoat and allow them to continue to provide

mortgage credit to nance home sales. More than 90percent o all single-amily residential mortgage creditis now provided by these two government-sponsored,government-controlled enterprises, thereby extendingdependence on ederal assistance to middle-class andupper-middle-class households.

According to the Centers or Medicare and MedicaidServices, by 2020, government spending on healthcare will represent 50 percent o total nationalhealth care expenditures.

2(a) Health Care.14 Increasing spending and enroll-ment in public health care programs, particularly Medi-care, Medicaid, and the Childrens Health InsuranceProgram (CHIP), is leading to greater dependence on

government. In 2010, total combined enrollment inthese three programs was roughly 98 million individuals32 percent o the entire U.S. population.15 Thethree programs accounted or $793.2 billion, or 5.5percent o GDP, in ederal spending, 238 percent morethan the $333.9 billion spent on these programs just a

decade earlier.16 According to the Centers or Medicareand Medicaid Services (CMS), by 2020, governmentspending on health care will represent 50 percent ototal national health expenditures.17

In its 2011 annual report on health insurance coverage, the U.S. Census Bureau published gures thatunderscore the current trend toward greater dependence on government health programs.18 The percentage o Americans in government health programsis rising aster than ever, in part due to a strugglingeconomy, Medicaid and CHIP expansions, and a rap

idly growing elderly population entitled to Medicarebenets. The consequences are greater dependence ontaxpayer-subsidized coverage, and a decline in privatehealth insurance.

Medicare. Congress established Medicare in 1965through Title XVIII o the Social Security Act. Medicarepays or health care or individuals ages 65 and aboveand or those with certain disabilities. Medicare enrollment has steadily increased since its enactment due toincreases in both population and individual lie expectancy. In 1970, 20.4 million individuals were enrolled

in Medicare.

19

By 2010, the number o enrollees hadmore than doubled to 47.5 million.20 Over the next 10years, the number o people enrolled in Medicare wilincrease dramatically. In 2011, the rst o 81.5 million baby boomers became eligible or Medicare.21 In2010, the size o the Medicare-eligible elderly popula

14. This section was written by Kathryn Nix, Policy Analyst in the Center or Health Policy Studies at The Heritage Foundation.

15. Centers or Medicare and Medicaid Services, National Health Expenditure Projections 20102020, Table 17, at http://www.cms.gov/NationalHealthExpendData/downloads/proj2010.pd(December 2, 2011).

16. Congressional Budget Oce, Budget and Economic Outlook: Historical Budget Data, January 2011, Table E-9, at http://www.cbo.

gov/tpdocs/120xx/doc12039/HistoricalTables[1].pd(December 2, 2011).17. Centers or Medicare and Medicaid Services, National Health Expenditure Projections 20102020.

18. U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010, September 2010, at http://www.census.gov/prod/2011pubs/p60-239.pd(December 2, 2011).

19. Kaiser Family Foundation, Medicare: A Timeline o Key Developments, 19701974, at http://www.k.org/medicare/timeline/p_70.htm (January 18, 2012).

20. Centers or Medicare and Medicaid Services,2011 Annual Report o the Boards o Trustees o the Federal Hospital Insurance andFederal Supplementary Medical Insurance Trust Funds, May 13, 2011, at http://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pd (December 2, 2011).

21. Lindsay M. Howden and Julie A. Meyer, Age and Sex Composition: 2010, 2010 Census Bries, Table 1, May 2011, at http://www.census.gov/prod/cen2010/bries/c2010br-03.pd(December 2, 2011).


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11

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$100

$200

$300

$400

$500

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$100

$200

$300


Medicare and Medicaid Costs Rapidly Increasing

MEDICARE

MEDICAID

Source: Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2012, 2011, Table 3.2, p. 57, and Table 12.3 p. 266.



Year-to-Year Change

Increase Decrease

Year-to-Year ChangeIncrease Decrease

$408

$246

$229

$392






15/34


12

tion was 21.5 percent the size o the non-elderly adultpopulation; the Congressional Budget Oce (CBO)predicts that by 2035, this proportion will grow to 36.4percent.22

The heavily taxpayer-subsidized Medicare coverageincreases overall demand or health care and places

upward pressure on health care pricing. Medicare ee-or-service is the primary source o coverage or ben-eciaries, but its gaps in coverage lead 90 percent oenrollees to carry supplemental plans, such as employ-er-provided retiree coverage, Medigap plans, or Med-icaid.23 Supplemental policies can result in little to nocost-sharing or seniors, shielding them rom the nan-cial eects o their health care decisions. TraditionalMedicares ee-or-service structure adds to rising costsby rewarding providers or higher volumes o services.

Growing enrollment and rising spending are quickly

leading Medicare to become an unsustainable program.The Medicare trustees 2011 annual report shows thatthe program aces $24.6 trillion in ununded obliga-tions under current law; under an alternative, evenmore plausible, scenario the estimate reaches $36.8 tril-lion.24 Medicare Part A is already running yearly decits,and according to the trustees, the Hospital InsuranceTrust Fund will become insolvent in 2024. Accordingto the CBOs alternative scal scenario, Medicares costswill have tripled by 2066, increasing rom 3.6 percento GDP in 2010 to 10.8 percent, continuing to risethereater.25

The last decade has seen a signicant expansion obenets provided by Medicare, including the new pre-

scription drug benet created under Medicare Part DFrom 2004 to 2010, Part D was responsible or $214billion in ederal spending.26 Though the role o competition in its dened-contribution model has causedestimates o its 10-year cost to drop 41 percent rominitial CMS projections, the program has added sub

stantially to health care entitlement spending.27 Additionally, the publicly unded Part D program hascrowded out private coverage alternatives. Research byeconomists Gary Engelhardt and Jonathan Gruber suggests that beore Medicare Part D was enacted, 75 percent o seniors currently receiving public coverage heldprivate drug coverage. Part D also increased averagespending on prescription drugs by seniors, an expensethat is unded by an increase in public spending o 184percent, accompanied by a reduction in seniors out-opocket spending o 39 percent and private insuranceplan spending o 37 percent.28

Medicaid and CHIP. Medicaid, the joint ederalstatehealth care program or specic categories o the poorwas also established in 1965, through Title XIX o theSocial Security Act. In 2010, 53.6 million Americanswere enrolled in Medicaid, an increase o almost 3 million individuals in just one year, and 20 million since2000.29 Medicaid serves a diverse population o thepoor, including children, mothers, the elderly, and thedisabled. Combined, the total national cost o Medicaidand CHIP in 2010 is estimated at $413 billion, and isprojected to rise to $914 billion by 2020.30

The generous, open-ended ederal reimbursementthat states receive or Medicaid spending has encour

22. Congressional Budget Oce, CBOs 2011 Long-Term Budget Outlook, June 2011, Figure 4-2, at http://cbo.gov/doc.cm?index=12212 (December 2, 2011).

23. Kaiser Family Foundation, Examining Sources o Supplemental Insurance and Prescription Drug Coverage Among MedicareBeneciaries: Findings rom the Medicare Current Beneciary Survey, 2007, August 2009, at http://k.org/medicare/upload/7801-02.pd(December 2, 2011).

24. Centers or Medicare and Medicaid Services,2011 Annual Report o the Boards o Trustees o the Federal Hospital Insurance andFederal Supplementary Medical Insurance Trust Funds. The second estimate originates rom a memorandum on Medicare UnundedObligations rom John D. Shatto, director o the Medicare and Medicaid Cost Estimates Group, CMS Oce o the Actuary, toGregory DAngelo, sta o the Senate Budget Committee, June 22, 2011.

25. Congressional Budget Oce, CBOs 2011 Long-Term Budget Outlook, Figure B-1.

26. Centers or Medicare and Medicaid Services,2011 Annual Report o the Boards o Trustees o the Federal Hospital Insurance and FederaSupplementary Medical Insurance Trust Funds.

27. Ibid.

28. Gary V. Engelhardt and Jonathan Gruber, Medicare Part D and the Financial Protection o the Elderly, National Bureau oEconomic Research Working Paper No. 16155, July 2010, at http://www.nber.org/papers/w16155 (December 2, 2011).

29. Centers or Medicare and Medicaid Services, Data Compendium, 2010, Table IV.8, at http://www.cms.gov/DataCompendium/14_2010_Data_Compendium.asp#TopOPage (December 2, 2011).

30. Centers or Medicare and Medicaid Services, National Health Expenditure Projections 2010-2020.


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13

aged individual states to grow the program beyondwhat would be expected i state taxpayers unded theull cost. The structure o the Medicaid program variesrom state to state because states determine their owneligibility and benet levels ater meeting a minimumederal standard. States have used this fexibility to

expand eligibility urther up the income scale and tooer generous benet packages. Indeed, past researchhas shown that a majority o Medicaid expenditures areor optional services or groups.31

Incremental Medicaid expansions and the additiono the Childrens Health Insurance Program (CHIP)32have increased the number o individuals eligible orgovernment health programs. CHIP has led many work-ing amilies who would otherwise enroll their childrenin private coverage to opt or public coverage. The CBOconcluded that private coverage crowd-out rom CHIP

expansions ranges rom 25 percent to 50 percent.33

In2010, 5.8 million children were enrolled in CHIPanincrease o 500,000 children rom the year beore, and3.8 million rom a decade earlier.34

Impact of Obamacare. The Patient Protection andAordable Care Act (PPACA), enacted in 2010, relieson a massive expansion in Medicaid and the creationo a new income-related subsidy to purchase insurancethrough government-controlled insurance exchanges.Initially, the Congressional Budget Oce estimated that,by 2019, 19 million individuals would receive subsi-

dized coverage in the exchanges.

35

More recent surveysand estimates by independent analysts indicate that thisestimate is likely too conservative. Former CBO direc-

tor Douglas Holtz-Eakin nds that the true number oenrolled individuals in the subsidy program could betriple that o the CBO estimate, which would raise thecost o the program by roughly $1 trillion.

The CMS Actuary has also concluded that new Medicaid enrollment rom the PPACA could be much higherthan CBO predictions. The CBO estimated that 16 million people would be added to Medicaid and CHIP, andmore recent CMS estimates predict an expansion inenrollment o nearly 25 million.36

The Patient Protection and Aordable Care Actrelies on a massive expansion in Medicaid andthe creation o a new income-related subsidy to

purchase insurance through government-controlledinsurance exchanges.

To reduce the impact o these two costly provisionso the PPACA on the ederal decit, the legislationincludes $575 billion in cuts to Medicare.37 These savings should have been used to improve Medicares ownsolvency, not to und new health entitlement spendingMoreover, both the CMS Actuary and the CBO warnthat much o the spending reductions within Medicareare unlikely to materialize due to the eects they willhave on health care providers protability, and subsequently, seniors access to care.38

Conclusion. The growing dependence on government health programs, the result o recent legislationand other actors, will have a direct negative impact on

31. Kaiser Family Foundation, Medicaid: An Overview o Spending on Mandatory vs. Optional Populations and Services, June2005, at http://www.k.org/medicaid/upload/Medicaid-An-Overview-o-Spending-on.pd(December 2, 2011).

32. The State Childrens Health Insurance Program (SCHIP) was enacted in 1997 to provide ederal assistance to the states orproviding health insurance to uninsured children in low-income working amilies whose parents income was not low enough toqualiy or Medicaid. The name has since been changed to Childrens Health Insurance Program (CHIP).

33. Congressional Budget Oce, The State Childrens Health Insurance Program, May 2007, p. 12, at http://www.cbo.gov/tpdocs/80xx/doc8092/05-10-SCHIP.pd(December 2, 2011).

34. Centers or Medicare and Medicaid Services, Data Compendium.35. Congressional Budget Oce, H.R. 4872, Reconciliation Act o 2010, March 18, 2010, at http://www.cbo.gov/doc.cm?index=11355

(December 2, 2011).

36. Richard S. Foster, Chie Actuary, Centers or Medicare and Medicaid Services, The Estimated Eect o the Aordable Care Act onMedicare and Medicaid Outlays and Total National Health Care Expenditures, testimony beore the Health Subcommittee, Energyand Commerce Committee, U.S. House o Representatives, March 30, 2011, at http://republicans.energycommerce.house.gov/Media/

fle/Hearings/Health/033011/Foster.pd(December 2, 2011).

37. Richard S. Foster, Chie Actuary, Centers or Medicare and Medicaid Services, Estimated Financial Eects o the PatientProtection and Aordable Care Act, as Amended, April 22, 2010, p. 2, at http://www.cms.gov/ActuarialStudies/downloads/PPACA_2010-04-22.pd (December 2, 2011).

38. Ibid., p. 10.


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14

ederal and state taxpayers. Spending on Medicare andMedicaid, two o the largest entitlement programs, is ontrack to well surpass current levels. By 2020, Medicarespending will reach $922 billion, and total spending orMedicaid and CHIP will reach $914 billion, at whichpoint government spending will represent 50 percento all health care expenditures.39

2(b) Welfare.40 The 1996 Welare Reorm Act(PRWORA) replaced the decades-long Aid to Families

with Dependent Children (AFDC)which entitledrecipients to unconditional benetswith the Tem-porary Assistance or Needy Families (TANF), a blockgrant program. Enacted during the Great Depression,

AFDC, an old cash welare program, was intended toprovide nancial assistance to needy children. Over the

decades, the program swelled and added adults, suchas unemployed parents o enrolled children. Welarerolls peaked in 1994, reaching more than 5 millioncases14.2 million individual recipients. Beore welare reorm, one child in seven received AFDC.

An open-ended assistance program, AFDC grantedstates more money as their welare rolls continued toincrease. At the individual level, AFDC handed out benets without any expectations rom the recipients, who

were entitled to cash aid as long as they ell below theneed standards set by the states. The entitlement created perverse incentivesdiscouraging work amongable-bodied adults and discouraging marriage.

Welare reorm eectively altered the undamentapremise o receiving public aid and ended it as an entitle

39. Centers or Medicare and Medicaid Services, National Health Expenditure Projections 20102020.

40. This section was written by Christine C. Kim, Policy Analyst in the Domestic Policy Studies Department at The HeritageFoundation.

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$200

$400

$600

$800

$1,000

$1,200


Welfare and Low-Income Health Care Assistance Surges

Source:Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2012, 2011, Table 3.2, p. 57, and Table 12.3, pp.265, 266, 271, and 299.


Year-to-Year ChangeIncrease Decrease


39% increase from 2008 to 2010

$1,027$907

62% increasefrom 1990 to

1996

62% increasefrom 1990 to

1996


18/34


15

ment. Receiving assistance became temporary and tiedto demonstrable eorts by the recipients to nd workor take part in work-related activities. Sel-suciencybecame the goal. The successes o welare reorm areundeniable. Between August 1996 and December 2010,welare caseloads declined by 57.5 percent, rom 4.4

million amilies to 1.9 million amilies. The legislationalso reduced child poverty by 1.6 million children.41

The successes o welare reorm are undeniable.Between 1996 and 2010, welare caseloads declinedrom 4.4 million amilies to 1.9 million amilies.Welare reorm also reduced child poverty by 1.6million children.

The initial years ater welare reorm brought sig-

nicant progress. By the late 1990s, most states hadmet the PRWORAs work goals, and motivation toreduce dependence and encourage work among recipi-ents even more began to wane. The national TANFcaseload has fatlined in recent years, and the percent-age o TANF amilies who worked at least 30 hours perweek (20 hours or those with young children) neverrose above the 38.3 percent attained in 1999, and hashovered near 30 percent in recent years.

In February 2006, ater our years o debate, Con-gress reauthorized TANF under the Decit Reduction

Act. The new legislation reiterated the need to engagerecipients in acceptable work activities, moving themto sel-suciency. Once again, states were required toincrease work participation and to reduce their wel-are caseloads, using the lower 2005 caseload levels asthe new baselinewhich essentially restarts the 1996

reorm. As required by Congress, the Department oHealth and Human Services also issued new regulations to strengthen work-participation standards.

The 2006 TANF reauthorization also contained anotable measure that began to rectiy the inattentionto the other two 1996 welare reorm goals: reducingunwed childbearing and restoring stable amily ormation.42 The erosion o marriage and amily is a primarycontributing actor to child poverty and welare dependence, and it gures signicantly in a host o socialproblems. A child born out o wedlock is seven timesmore likely to be poor than a child raised by marriedparents, and more than 80 percent o long-term childpoverty occurs in broken homes or homes where theparents never married. Moreover, unwed parents andthe absence o athers in the home negatively aect achilds development, educational achievement, and

psychological well-being, as well as increasing propensity toward delinquency and substance abuse.43

For the past our decades, the unwed birth rate inAmerica has been rising steadily, rom 5.3 percent in1960, to 41 percent in 2009.44 Among blacks, 72.8percent o children born in 2009 were to unmarriedparents; among Hispanics, the percentage was 53.2 percent. Although the pace o growth in the proportions obirths to unmarried women slowed in the immediateyears ater welare reorm, more recently, it has risenrapidly. From 2002 to 2009, the share o non-marital

births increased by one-th.In 2009, 1.7 million children were born to unmar

ried parents. Contrary to popular conception, thetypical single mother is not a teen, but in her twenties

Whereas in 1970, one-hal o all out-o-wedlock births

41. Original Heritage Foundation research in Christine Kim and Robert Rector, Welare Reorm Turns Ten: Evidence ShowsReduced Dependence, Poverty, Heritage Foundation WebMemo No. 1183, August 1, 2006, at http://www.heritage.org/Research/Reports/2006/08/Welare-Reorm-Turns-Ten-Evidence-Shows-Reduced-Dependence-Poverty .

42. In the opening section o PRWORA, Congress states that: (1) Marriage is the oundation o a successul society, and (2) Marriageis an essential institution o a successul society which promotes the interests o children. Congress then states that the increasein the number o children receiving public assistance is closely related to the increase in births to unmarried women. Between1970 and 1991, the percentage o live births to unmarried women increased nearly threeold, rom 10.7 percent to 29.5 percent.Public Law 104193, 101.

43. Robert Rector, Marriage: Americas Greatest Weapon Against Child Poverty, Heritage Foundation Backgrounder No. 2465,September 16, 2010, at http://www.heritage.org/Research/Reports/2010/09/Marriage-America-s-Greatest-Weapon-Against-Child-Poverty, and Patrick Fagan, Robert Rector, Kirk Johnson, and America Peterson, The Positive Eects o Marriage: A Book o Charts(Washington, D.C.: The Heritage Foundation, 2002), at http://th_media.s3.amazonaws.com/2002/pd/positive_eects_o_marriage.pd

44. Brady E. Hamilton, Joyce A. Martin, and Stephanie J. Ventura, Births: Preliminary Data or 2009, National Vital Statistics Reports,Vol. 59, No. 3, December 21, 2010, at http://www.cdc.gov/nchs/data/nvsr/nvsr59/nvsr59_03.pd(December 2, 2011).


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16

were to teens, in 2009, births to girls younger than 18years o age comprise only 7 percent o such births.Sixty percent o out-o-wedlock births occur to womenin their twenties.45 Nor is the typical unwed mother aMurphy Brown-type. About 43 percent are high-schooldropouts, and 36 percent are high-school graduates.

Eighteen percent have had some college education;only 2 percent have a college degree.46

In the TANF reauthorization, Congress, or the rsttime, enacted a healthy-marriage initiative, allocating$100 million in TANF unds per yearless than 1 per-cent o total TANF expenditures in FY 2006to localorganizations that provide voluntary marriage-centeredservices and skills training to recipients.

The nation spends more on welare than onnational deense.

Yet, in February 2009, the Democrat-controlled Con-gress and the new Obama Administration enacted legis-lation that essentially overturned the scal oundationo welare reorm and reverted to an AFDC-style und-ing scheme. States now receive cash bonuses when theyswell the welare rolls. Moreover, covering 80 percento the cost o new welare caseloads, the ederal gov-ernment is giving states much more money than it didunder the old welare program. The legislation clearly

undercuts the incentives wrought by welare reorm tomove individuals into work and sel-suciency.

Comprehensive welare reorm is ar rom achieved.Todays welare system is a convoluted machinery o70 programs, six ederal departments, and a volumi-nous collection o state agencies and programs. Over-

all, the welare system amounts to almost $900 billionin spending per year. A typical welare recipient amily could receive assistance rom six or seven programs(e.g., TANF, Medicaid, ood stamps, public housingHead Start, and the Social Services Block Grant) administered by our dierent departments.47

Since President Lyndon Johnson declared the Waron Poverty in 1964, the ederal government has spentapproximately $16 trillion on means-tested welare aidToday, means-tested assistance is the astest-growingpart o government, with the nation spending moreon welare than on national deense. In the past twodecades, growth in means-tested welare spending hasoutpaced that o Social Security, Medicare, educationand deense. Under the Obama Administration, welare spending has increased dramatically. For examplebetween FY 2008 (the last scal year under the Bush

Administration) and FY 2011, the average per capitabenet or the Supplemental Nutrition Assistance Program (SNAP), ormerly the Food Stamp Program, nearlydoubled rom $39.3 billion to $75.3 billion (in constant 2011 dollars).48 Food-stamp outlay or FY 2011is estimated at $78.5 billion.49 Over the next 10 yearswelare spending is projected to cost taxpayers $10.3trillion.The Obama Administration has worked rapidlyto expand the welare state urther.50 Such growth isclearly unsustainable.

The 1996 Welare Reorm Act was the rst phase o

meaningul welare reorm; the next phase should ocuson the ollowing: First, since means-tested welarespending goes to more than 70 ederal programs, Congress should require the Presidents annual budget todetail current and uture aggregate ederal means-testedspending. The budget should also provide estimates ostate contributions to ederal welare programs. Second

45. Stephanie J. Ventura, Changing Patterns o Nonmarital Childbearing in the United States, National Center or Health StatisticsData BrieNo. 18, May 2009, at http://www.cdc.gov/nchs/data/databries/db18.htm (December 2, 2011).

46. Sara McLanahan et al., The Fragile Families and Child Wellbeing Study: Baseline National Report, March 2003, at http://www.ragileamilies.princeton.edu/documents/nationalreport.pd(December 2, 2011).

47. Robert Rector, Means-Tested Welare Spending: Past and Future Growth, Heritage Foundation Testimony, March 7, 2001, athttp://www.heritage.org/Research/Welare/Test030701b.cm .

48. U.S. Department o Agriculture, Food and Nutrition Services, Supplemental Nutritional Assistance Program Participation andCosts, January 5, 2012, at http://www.ns.usda.gov/pd/SNAPsummary.htm (January 18, 2012).

49. Oce o Management and Budget, Historical Tables: Budget o the U.S. Government, Table 11.3, p. 248

50. Katherine Bradley and Robert Rector, Conronting the Unsustainable Growth o Welare Entitlements: Principles o Reorm andthe Next Steps, Heritage Foundation Backgrounder No. 2427, June 24, 2010, at http://www.heritage.org/ Research/Reports/2010/06/Conronting-the-Unsustainable-Growth-o-Welare-Entitlements-Principles-o-Reorm-and-the-Next-Steps, and Welare Reorm: TheNext Steps, Heritage Foundation Fact Sheet No. 82, March 17, 2011, at http://www.heritage.org/Research/Factsheets/2011/03/Welare-Reorm-The-Next-Steps.


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continuing reorm should rein in the explosive growthin spending. Once the current recession ends, that is,when unemployment reaches 6.5 percent, aggregatewelare unding should be capped at pre-recession (FY2007) levels plus infation. Third, building on the suc-cessul 1996 model, urther reorm should continue topromote personal responsibility by encouraging work.For example, SNAP, one o the largest means-testedprograms, should be restructured to require recipientsto work, or prepare to work, in order to be eligible orood stamps.51

In March 2011, Representative Jim Jordan (ROH),chairman o the Republican Study Committee, intro-duced the Welare Reorm Act o 2011. The legislation

seeks to reverse the undoing o TANF reorm underthe Obama Administration; require able-bodied adultmembers o ood-stamp-recipient amilies to work oractively seek employment; reward states or reducingood-stamp caseloads below 2006 levels and or reducing poverty and government dependence; require thePresident to include total means-tested welare spending in his annual budget; and require Congress to deneand establish an aggregate cap or means-tested welarespending in its budget.52

3) Retirement.53 Since the time o President Franklin D. Roosevelt, the American retirement system hasbeen described as a three-legged stool consisting oSocial Security, employment-based pensions, and per

51. Welare Reorm: The Next Steps, Heritage Foundation Fact Sheet No. 82.

52. H.R. 1167: Welare Reorm Act o 2011, 112th Congress, 20112012, at http://www.govtrack.us/congress/bill.xpd?bill=h112-1167&tab=summary (January 18, 2012).

53. This section was prepared by David C. John, Senior Research Fellow in retirement security and nancial institutions in theThomas A. Roe Institute or Economic Policy Studies at The Heritage Foundation.

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$200

$400

$600

$800

$1,000

$1,200


First of 78 Million Baby Boomers Retiring

Source: Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2012 , 2011, Table 3.2, p. 57.

Social Security Expenditures in Billions of 2005 Dollars

$1,023

$1,053Year-to-Year Change

Increase Decrease

0.5% decreasefrom 1998to 1999

(only decrease)

0.5% decreasefrom 1998to 1999

(only decrease)


21/34


18

sonal savings. The reality is quite dierent. Almost halo American workers (about 78 million) are employedby companies that do not oer any type o pension orretirement savings plan. This proportion o employer-based retirement savings coverage has remained rough-ly stable or many years, and experience has shown that

ew workers can save enough or retirement withoutsuch a payroll-deduction savings plan. For workerswithout a pension plan, the reality o their retirementis closer to a pogo stick consisting almost entirely oSocial Security.

Since 1935, Social Security has provided a signi-cant proportion o most Americans retirement incomes.The program pays a monthly check to retired workers,and benets to surviving spouses and children underthe age o 18.54 Monthly benets are based on theindexed average o a workers monthly income over a

35-year period, with lower-income workers receivingproportionately higher payments and higher-incomeworkers receiving proportionately less. The lowest-income workers receive about 70 percent o their pre-retirement income, average-income workers receive 40percent to 45 percent, and upper-income workers aver-age about 23 percent.

However, the demographic orces that once madeSocial Security aordable have reversed, and the pro-gram is on an inexorable course toward scal crisis. Tobreak even, Social Security needs at least 2.9 workers

to pay taxes or each retiree who receives benets. Thecurrent ratio is 3.3 workers per retiree and droppingbecause the baby boomers produced ewer childrenthan their parents did and are now nearing retirement.The ratio will reach 2.9 workers per retiree around2015 and drop to two workers per retiree in the 2030s.

Current retiree benets are paid rom the payrolltaxes collected rom todays workers. Due to the eectso the recent recession, Social Security has not collectedenough taxes to pay or all its promised benets since2010. Both the Social Security Administration and theCBO say that these decits are permanent.

From 1983 to 2009, workers paid more in payrolltaxes than the Social Security program needed in orderto pay benets. These additional taxes were supposed tobe retained to help nance retirement benets or babyboomers. But the government did not save or investthe excess taxes or the uture. Instead, the governmentused the money to nance other government programs.

In return or the diverted revenue, Social Securitys trustund received special-issue U.S. Treasury bonds. Nowthat Social Security has begun to spend the interest thatis accumulating on those Treasury bonds and will soonbegin to redeem them, the ederal government will berequired to raise the money through higher taxes or

massive borrowing.Social Securitys uncertain uture is a problem or all

workers, and especially or roughly hal the Americanworkorce that has no other retirement program. Few othese Americans have any signicant savings, and theywill depend heavily on the government or their retirement incomes.

This dependence is largely the result o governmenpolicies. By soaking up money that should have beeninvested or the uture, Social Securitys high tax ratemakes it much harder or lower-income and moderate

income workers to accumulate any substantial savingsComplex government regulations also discourage the

expansion o occupational pensions to cover a higherproportion o the workorce. Over the past ew decadesthe costs o traditional pension plans have skyrocketed, and thousands o them have shut down. Eorts todevelop innovative hybrid pension plans stalled whenconusing laws and regulations resulted in lawsuits.

While most large employers now oer denedcontribution plans, such as 401(k), these plans aresubject to the Employee Retirement Income Security

Act (ERISA). ERISA regulations are especially onerousor smaller employers, who usually lack the necessary expertise to comply with the acts complex legalrequirements. As a result, small businesses hesitate tooer retirement savings plans to their workers or earo either accidentally violating a regulation or acing thecost o hiring an outside expert.

Social Securitys uncertain uture is especiallyproblematic or roughly hal the American workorcethat has no other retirement programand no

signifcant savings. These Americans will depend onthe government or their retirement incomes.

A simpler, less-regulated account suitable to smallebusinesses would go a long way toward increasing thenumber o workers with retirement savings. Simpliedautomatic enrollment procedures, automatic invest

54. Social Security also has a separately nanced disability program that is beyond the scope o this discussion.


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19

ment choices, procedures that allow savings to ollowthe worker rom employer to employer, and better annu-ity choices would also help. The Automatic IRA, whichincorporates these eatures and has been endorsed bypublications as diverse as National Review and The NewYork Times,is one such simple retirement savings plan.It would increase the proportion o Americans able tosave or retirement rom roughly 50 percent to about90 percent.

Until such policies move rom theory to reality,Americans ace increased dependence on a govern-ment-managed Social Security system that cannot pos-sibly meet their needs. This dependence is likely toincrease i millions o Americans ail to save enough

or a comortable retirement since such a developmentwould put pressure on legislators to provide additionataxpayer-nanced income programs.

4) Higher Education.55 Federal post-secondaryeducation spending continues to grow at a rapid paceDuring the 20102011 school year, total ederal spending on student aid programs (including tax credits anddeductions, grants, and loans) was $169 billion56making total ederal aid 142 percent higher than orthe 20002001 school year (infation-adjusted). In the20102011 school year, ederal grant aid increased to$49 billion, a 16 percent increase over the previousyearwell ahead o the infation rate.57

55. This section was written by Lindsey Burke, Senior Education Policy Analyst in the Domestic Policy Studies Department at TheHeritage Foundation.

56. College Board, Trends in Student Aid: 2011, at http://trends.collegeboard.org/downloads/Student_Aid_2011.pd(January 17, 2012).

57. Ibid.

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$10

$20

$30

$40

$50


College Education: Dependence on Government Doubles

Source:Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2012, 2011, Table 3.2, p. 57, and Table 12.3, p. 265.

Higher Education Expenditures in Billions of 2005 Dollars

Average,

19792001:$13.7 billion

$18.5

$49.3

Year-to-Year Change

Increase Decrease

Average,20022010:$26.2 billion



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20

Over the past decade, growing ederal higher-edu-cation subsidies have increased the number and per-centage o post-secondary students who depend ongovernment aid. In the 20102011 school year, 9.1million students received Pell Grant scholarshipsmore than double the number o students who receivedPell Grants in the 20002001 school year.58 Moreover,about 34 percent o all undergraduates take out ederalStaord Loans. In all, ederal borrowing increased by

2.5 percent rom 2010 to 2011.59

Both ederal spending and students dependenceon government are likely to rise in 2012. In seeking tomake the United States the country with the highesproportion o college graduates in the world by 2020,President Obama has pushed or signicant increases inederal subsidies.60 The Presidents 2012 budget requestincreases unding or ederal grants, loans, and workstudy programs to $167 billiona 14 percent increaseover the $146.5 billion spent in 2010.61 Moreover, the

administrations budget would provide a record $28.6

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

$0

$20

$40

$60

$80

$100


The Era of Big Farming

Source:Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2012 , 2011, Table 3.2, pp. 56 and 57, and Table 12.3,pp. 265 and 270.

Rural and Agricultural Expenditures in Billions of 2005 Dollars


$18

$62

$90.1

$45.5

Year-to-Year Change

Increase Decrease


Average,19881998:$31

billion


Average,19881998:$31

billion

58. Ibid.

59. Ibid.

60. Press release, Remarks by the President at Carnegie Mellon Universitys National Robotics Engineering Center, The White HouseJune 24, 2011, at http://www.whitehouse.gov/the-press-ofce/2011/06/24/remarks-president-carnegie-mellon-universitys-national-robotics-engineer (January 17, 2012).

61. U.S. Department o Education, Fiscal Year 2012 Budget Summary, February 14, 2011, at http://www2.ed.gov/about/overview/budget/budget12/summary/edlite-section1.html(December 12, 2011).


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billion in Pell Grants to nearly 9.6 million students dur-ing the 20122013 award year.62

Increases in ederal student aid subsidies over theyears have done nothing to mitigate ever-rising collegecosts. Tuition and ees at public and private our-yearinstitutions rose by 7.9 percent and 4.5 percent, respec-tively, ater adjusting or infation, rom the 20092010academic year to the 20102011 academic year. In thedecade rom 2002 to 2011, tuition and ees rose by anaverage annual rate o 5.6 percent at public universi-ties.63 Since 1982, the cost o college tuition and eeshas increased by 439 percentmore than our timesthe rate o infation.64

Decades-long increases in ederal subsidies or col-lege have led to increases in college tuition and eesbecause universities know that more aid makes stu-dents less sensitive to rising college costs. Economist

Richard Vedder argues that some o these [ederal]nancial aid programs have contributed mightily to theexplosion in tuition and ees in modern times.65 Thereis little reason or the ederal government to be in thestudent lending market at all. Vedder also notes that Itis not clear that higher education has major positivespillover eects that justiy government subsidies in therst place, and the private loan market that can handleanything rom automobile loans to billion-dollar gov-ernment bond sales can handle nancial assistance tostudents i necessary.66

Instead o continuing to expand the governmentsrole in student lending, ederal subsidies should be limited to those students with the greatest nancial needLimiting the number o years that students are ableto receive ederal subsidies would also likely begin totackle the college cost problem.67

5) Rural and Agricultural Services.68 Much othe rapid increase in rural and agricultural assistancedependence is rooted in arm subsidy programs. A multitude o arm subsidies (i.e., direct payments, countercyclical payments, market assistance loans, andnon-recourse loans) generally work together to compensate armers or low crop prices. The governmentmakes conservation payments to armers as an incentive to armers to initiate conservation projects or tosimply stop arming their land. Export subsidies eectively lower the price o American products so that they

can undercut international competitors.69

Supporters o arm subsidies oten describe armers as impoverished victims o unpredictable weatherand large global economic orces. In reality, American armers are doing quite well. In 2009, the averagearmer had a net worth o $915,01970 (159 percent othe national average o household wealth); in 2010an annual income o $84,44071; while living in a ruralarea with a signicantly lower cost o living than that osuburban and urban areas. The ailure rate or arms isabout one-sixth the rate o other businesses.72

62. Ibid.

63. College Board, Trends in College Pricing: 2011, at http://trends.collegeboard.org/college_pricing(January 17, 2012).

64. Dan Lips, Ways to Make Higher Education More Aordable, Heritage Foundation WebMemo No. 2785, January 29, 2010, athttp://www.heritage.org/research/reports/2010/01/ways-to-make-higher-education-more-aordable .

65. Richard Vedder, The Real Costs o Federal Aid to Higher Education, Heritage Foundation Lecture No. 984, January 12, 2007, athttp://www.heritage.org/Research/Lecture/The-Real-Costs-o-Federal-Aid-to-Higher-Education.

66. Ibid.

67. Ibid.

68. This section was prepared by Patrick Tyrrell and budgetary policy expert Brian M. Riedl beore Mr. Riedls departure rom The

Heritage Foundation.69. For more inormation on arm subsidies, see Brian Riedl, How Farm Subsidies Harm Taxpayers, Consumers, and Farmers, Too,

Heritage Foundation Backgrounder No. 2043, June 20, 2007, at http://www.heritage.org/Research/Agriculture/bg2043.cm.

70. U.S. Department o Agriculture, Farm Household Economics and Well-Being: Assets, Debt, and Wealth, August 31, 2010, athttp://www.ers.usda.gov/Briefng/WellBeing/armnetworth.htm (December 12, 2011).

71. U.S. Department o Agriculture, Farm Household Economics and Well-Being: Farm Household Income, Median and Mean FarmHousehold Income Up in 2010, November 29, 2011, at http://www.ers.usda.gov/briefng/wellbeing/armhouseincome.htm(January 17, 2012).

72. Barry K. Goodwin, Vincent H. Smith, and Daniel A. Sumner, American Boondoggle: Fixing the 2012 Farm Bill, AmericanEnterprise Institute, July 12, 2011, p. 3, at http://www.aei.org/fles/2011/11/03/-americanboondoggle_174848782104.pd(December 12, 2011).


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Yet, arm subsidies have become one o Americaslargest corporate welare programs. The majority osubsidies go to commercial arms, which report aver-age incomes o $200,000 and net worths o nearly $2million.73 The bottom 80 percent o armers receive justone-th o the subsidies.

Chart 9 shows that arm household income beganto eclipse that o all other U.S. households in the mid-1990s, and is now a seasoned trend. In act, averagearm income leapt by $7,271 in 2010, while that oall U.S. households ell by $500.74 Still, arm subsidiesremain higher than they were in the early 1990s whenarm-household income and that o the rest o Americawere roughly equal.

Farm subsidies have become one o Americaslargest corporate welare programs.

Instead o being related to need, arm subsidies arebased on two actors: which crops are grown, and howmuch o them are grown. Approximately 90 percent oall arm subsidies go to growers o just ve crops: wheat,corn, cotton, soybeans, and rice. Growers o most othercrops are ineligible or most subsidy programs, regard-less o need.

Farmers who plant more crops receive larger sub-sidies. This is where the economic logic o arm subsi-

dies alls apart. Subsidies are intended to compensatearmers or low prices that result rom an oversupplyo crops, but granting larger subsidies to armers whoplant the most crops merely encourages them to plantyet more crops, driving prices even lower and leadingto calls or larger subsidies. Furthermore, while pay-ing some armers to plant more crops, the Conserva-tion Reserve Program pays other armers to plant ewer

Rural and Agricultural Expenditures,in Billions of 2005 Dollars

Average Household Income


Farm Subsidies and Farmer Income

Sources:Office of Management and Budget, Historical Tables: Budgetof the United States Government, Fiscal Year 2012, 2011, Table 3.2, pp.56 and 57, and Table 12.3, pp. 265 and 270; U.S. Department ofAgriculture, Farm operator household finances, 20062011, athttp://www.ers.usda.gov/Briefing/WellBeing/Data/Farm%20operator%20household%20finances%202006-2011f.xls(February 3, 2012); and U.S. Census Bureau.

$0

$25,000

$50,000

$75,000

$100,000

$0

$25

$50

$75

$100

In the early 1990s, U.S. farming income was close tothe national average. In the late 1990swhenfarming income surged above the national averagethe government raised farming outlays by more than

67 percent.

1988 1990 1995 2000 2005 2010

1988 1990 1995 2000 2005 2010

Average,19992010:$51.9billionAverage,

19881998:$31

billion

FarmOperators

All U.S.

$65,500

Average,19992010:$51.9billionAverage,

19881998:$31

billion

FarmOperators

All U.S.

$65,500

$84,400$84,400

73. Brian M. Riedl, How Farm Subsidies Harm Taxpayers,Consumers, and Farmers, Too, Heritage FoundationBackgrounder No. 2043, June 27, 2007, at http://www.heritage.org/research/reports/2007/06/how-arm-subsidies-harm-taxpayers-consumers-and-armers-too.

74. Agricultural Resource Management Survey, ERS and NASS,USDA and CPS, U.S. Census Bureau, http://www.ers.usda.gov/Brietry/WellBeing/Data/Farm%20Operation%20household%20

fnances%202006-2011.xls


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crops. One analyst accurately describesU.S. arm policy as one oot on the brake,one oot on the accelerator.75

In 1996, Congress acknowledged theailures o centrally planned agriculture.That years Federal Agricultural Improve-ment and Reorm Act76 (also known asthe Freedom to Farm Act) was designedto phase out arm subsidies by 2002 andallow the agricultural sector to operate asa ree market. Ater spending just $6.2 bil-lion on what is called arm income stabi-lization in 1997hal the amount thatwas spent in 1992Congress overreactedto a temporary dip in crop prices in 1998(resulting rom the Asian economic slow-down) by passing the rst in a series o

annual emergency bailouts or armers.By 2000, arm income stabilization

spending hit a record $33.4 billion. Farm-ers quickly grew accustomed to massivegovernment subsidies, and competition orthe arm vote induced a bipartisan biddingwar on the eve o the 2002 elections. Thatsame year, lawmakers gave up on reormand enacted the largest arm bill in Ameri-can history, projected to cost at least $180billion over the ollowing decade. Despite

escalating costs and negative economiceects, arm socialism continued to be the overwhelm-ing preerence o Congress and the White House.

Farms dependence on government will almostcertainly continue. Policymakers mistakenly see armsubsidies as the solution to, not a signicant cause o,low crop prices. Expensive disaster payments are doledout whether the weather is bad (crops are destroyed)or good (oversupply lowers prices). Finally, arm sub-sidies have created an entitlement mentality among aclass o armers who will likely punish any politicianwho pursues reorm. Currently, there are no plans to

move armers toward sel-suciency.

Rather than x this broken system, the 2008 armbill made it worse.77 Congress ignored President George

W. Bushs call to subsidize only those armers who earnless than $200,000 a year, which would have eectivelyended subsidies or corporate arms, and repealed keylimits on the subsidies a armer may receive. The billcreated a permanent new disaster program, increasedsubsidy rates, and used gimmicks to cover up a spending increase o approximately $25 billion over 10 yearsEven corn armers, who already benet rom soaring prices resulting rom ederal ethanol policies, willcontinue to receive billions in annual subsidies. Theseanti-trade policies will also likely lead to retaliation by

Americas trading partners, harming American armersand consumers. Congress overrode President Bushsveto o the arm bill, guaranteeing at least six moreyears o destructive arm policies.

75. James Bovard, The 1995 Farm Follies, Regulation, Vol. 18, No. 3 (Summer 1995).

76. 7 U.S. Code 7201.

77. Brian M. Riedl, Seven Reasons to Veto the Farm Bill, Heritage Foundation Backgrounder No. 2134, May 12, 2008, at http://www.heritage.org/research/agriculture/bg2134.cm.

I. HousingMortgage creditHousing assistanceCommunity development block grants

Urban development action grantsSubsidized housing programs

II. Health and Welfare

Health care servicesHealth research and trainingConsumer and occupational health

and safetyUnemployment compensationFood and nutrition assistanceOther income securityDisease control (preventive health

care services)Health resources and servicesSubstance abuse and mental health

services

Grants to states for MedicaidChild nutrition programsFood stamp programsFamily support payments to statesSocial services block grantsChildren and families service

programsTraining and employment servicesUnemployment trust fund

III. RetirementMedicareSocial SecurityGeneral retirement and disability

insurance

IV. EducationFederal higher educationState higher education

V. Rural and Agricultural ServicesFarm income stabilizationAgricultural research and servicesCommunity developmentArea and regional developmentDisaster relief and insuranceRural community advancement

programHomeland Security disaster relief

heritage.orgTable 2 SR-104

Programs Used to Calculate Index Values

Source:The Heritage Foundation


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SECTION 3: THE METHODOLOGY

Ater identiying the government programs thatcontribute to dependence, the Center or Data Analy-sis urther examined the data to identiy the compo-nents that contributed to variability. Relatively smallprograms that required little unding and short-termprograms were excluded. The remaining expenditureswere summed up on an annual basis or each o the vemajor categories listed in Table 2.78 The program titlesare those used by the Oce o Management and Bud-get or budget unction and sub-unction in the budgetaccounting system.

The CDA analysts collected data or FY 1962 throughFY 2010. Defators centered on 2005 were employed toadjust or infation.

Indices are intended to provide insight into phe-nomena that are so detailed or complicated that sim-plication through arbitrary but reasonable rules

Documents

The 2012 Index of Dependence on Government