How did we get to this fiscal state? When did Congress’s irresponsibility with entitlement spending begin? When the federal government ran budget surpluses, how did that affect Congress’s decisions about entitlements? What president in the 20th century made a heroic effort to restrain entitlement spending and then, later, created the largest and most expensive such program in the century? What Republican president helped increase Social Security benefits by a double-digit percent? Finally, is there a way to rein in this spending in the future without kicking up such strong opposition that the restraints would be undone? Hoover Institution economist John F. Cogan answers these questions and more in his fact-filled, carefully researched book, The High Cost of Good Intentions. (Disclosure: John Cogan and I are colleagues at the Hoover Institution.)
Paying veterans / Subtitled A History of U.S. Federal Entitlement Programs, the book takes readers on a tour of federal spending programs from 1789 to today. I thought myself a sophisticated observer by knowing that federal government entitlements had started well before Franklin D. Roosevelt’s 1935 Social Security program. But I didn’t realize how early they started. I thought they began with payments to post–Civil War union veterans, but in fact they began with payments to veterans of the Revolutionary War. (See “The Sordid History of Veterans’ Benefits,” Fall 2017.)
Cogan tells the story of how the programs grew—a story that turns out to be virtually the same for each federal program, whether in the 19th or 20th century. Start with the aforementioned pensions for Revolutionary War veterans. The program started small. Congress passed a temporary law in 1790 and made the program permanent in 1792. It granted pensions to regular army officers, soldiers, and seamen, but only to those who had suffered injuries in battle and were impoverished as a result. The law excluded members of the state militias.
But from 1803 to 1806, the booming U.S. economy led to large budget surpluses for the federal government. Writes Cogan, “Advocates argued that military veterans were no less worthy of disability pensions than Continental Army veterans.” That argument won the day. In 1806, Congress extended pensions to volunteers, members of the militia, and state troops. Then, in 1809, the U.S. government’s embargo on British and French ships cut federal revenue by half. Although Congress responded responsibly by cutting overall spending substantially, it left veterans’ pensions untouched. This, points out Cogan, would be a pattern for virtually all future entitlements: (1) start small; (2) expand eligibility to those whom many consider “no less worthy,” especially when budget surpluses are large; and (3) protect entitlement spending from cuts even when budget deficits appear.
In 1816 and 1817, restored prosperity led once again to federal budget surpluses. With the March 1818 pension law, President James Monroe and Congress gave a lifetime pension to all veterans who had served in the Continental Army for at least nine months and were “in reduced circumstances.” Gone was the requirement that they had been injured.
Cogan shows that this law led to a result that became another repeated pattern for future entitlements: people came out of the woodwork to claim the benefits. Whereas the law’s proponents had estimated that fewer than 2,000 veterans would qualify for the benefits, more than 28,000 people applied and over 16,000 applications were approved. The number of applicants, writes Cogan, “exceeded the entire number of Continental Army veterans thought to be still alive.” Pension outlays rose from 1% of the federal budget from 1800 to 1811 to a whopping 11% after the law passed. In response to charges of fraud and to a recession-induced budget deficit in 1820, a May 1820 law imposed means testing. Veterans had to reapply, but only 17% of reapplicants were denied, and once federal revenues returned to their pre-recession level Congress restored benefits to the denied reapplicants.
One other early pension program set a precedent for how Social Security was funded in the 20th century: the Navy’s trust fund. In 1799 and 1800, Congress established a separate Navy pension program to provide benefits to Navy personnel who had suffered disabilities in the line of duty. These benefits were financed by a trust fund that, in turn, was financed by the sale of captured enemy and pirate ships and their contents. As the trust fund grew, so did Congress’s spending. In 1813, it granted pensions to widows and children of seamen who were killed in action or died from wounds received in the line of duty. Again and again, Congress relaxed the standards for who could get benefits, and the unsurprising result was that the trust fund went bankrupt in 1841. Congress, however, bailed out the fund with general revenues.
The experience with Civil War pensions for Union soldiers was similar to that with the Continental Army, with two new twists. First, because the war involved such a massive mobilization, the number of those who qualified for pensions, once all the expansions of eligibility had occurred, was massively greater than in the earlier case. The number of pensioners peaked at just under one million in the early 1900s, and in the mid-1890s spending on those pensions reached over 40% of the federal budget. The second twist was that, from the 1890s to the early 1900s, the Republican Party figured out how to use pensions to realign the electorate and get veterans’ votes. Later, the Democrats would use that same strategy with Social Security and Medicare.
One of the pleasant surprises in the book is FDR—at least early in his first term. He believed that military veterans did not deserve pensions simply by virtue of being veterans. In his first month in office, he persuaded Congress to pass the Economy Act of 1933, which gave him the power to set new eligibility rules. As Cogan notes, for the first time in U.S. history, a large entitlement had been repealed. On June 30, 1933, 412,482 World War I veterans with nonservice-connected disabilities received pensions. Just one year later, only 29,903 were on the rolls and they were all permanently and totally disabled.
Social Security / The bad news for those who dislike forced government redistribution is that in 1935 FDR introduced Social Security. Cogan refers to this as “The Birth of the Modern Entitlement State.” He tells how the dominant view before FDR was that the welfare of the poor and elderly should be taken care of by private institutions or by state and local government. FDR rejected that view, believing instead that welfare was a federal responsibility. The Social Security Act of 1935 created the program that we’re all familiar with, plus three new programs that entitled state governments to matching payments for state-run programs: Old-Age Assistance, Aid to Dependent Children, and Aid to the Blind. On top of that, it created a federal–state unemployment “insurance” program.
The Social Security benefit was financed with a payroll tax. Whereas in 1937 only 1.8 million households with income below $3,000 ($52,500 in 2017 dollars) paid any federal income taxes—the income tax at the time was referred to as the “class tax”—Social Security changed all that. With all employment income up to $3,000 subject to the payroll tax, Social Security forced 25.8 million workers to pay de facto income taxes. The 1935 law specified that Social Security benefits would start to be paid in 1942. But, naturally, the revenues coming in from the payroll tax led to pressures to start paying benefits earlier. So the feds began to pay benefits in 1940. Also early on, as Cogan explains in fascinating detail, the program became a pay-as-you-go scheme rather than one with a real trust fund containing real assets. He also tells how a challenge to the constitutionality of the law led the Supreme Court to find that Social Security and unemployment insurance were constitutional, even though its decision rested only on dicta in a decision 14 months earlier.
As revenues built up the “trust fund,” Congress and both Democrat and Republican presidents raised real benefits to retirees. In 1967, President Lyndon Johnson and Congress increased benefits by 25% for retirees with low earnings and 11% for those with high earnings. The average increase, 13%, was twice the growth in consumer prices that had occurred since the previous increase in benefits in 1965. Then, during the Nixon administration, benefits increased by 69% over their 1968 level. In a 1972 bill, Congress and Nixon raised benefits another 20% and began indexing. Benefits were indexed to the cost of living, while the ceiling up to which wages and salaries were taxed was indexed to wage growth.
Great Society / Social Security was not the only entitlement spending that grew. LBJ, declaring the War on Poverty in 1964, persuaded Congress to fund community groups to work with welfare recipients. He envisioned these groups helping people get off welfare. But hundreds of these groups had a very different vision. They used federal funds to hire lawyers to sue local, state, and federal governments for benefits. Writes Cogan, “Armed with federal funds, poverty lawyers brought lawsuits in federal courts on behalf of welfare recipients.… The poverty lawyers challenged virtually every welfare eligibility rule, including residence requirements, suitable home provisions, and willingness-to-work requirements.” The final result: “By 1970, the poverty lawyers had succeeded in fundamentally transforming welfare from an act of legislative charity—a government-granted gratuity—into an entitlement that ensured all eligible people a legal right to benefits.” This happened, he notes, “without any accompanying legislation.” In a 7–2 Supreme Court decision in 1969 that overthrew residence requirements for those on welfare, Justice William Brennan, who wrote the decision, argued that residence requirements for welfare violated the right to travel. Writes Cogan with wry humor, “The Court also concluded that although federal involvement in public welfare had never entered the founding fathers’ writings, the founders had meant to prohibit state welfare residence requirements.”
LBJ’s other contribution to entitlements, of course, was his initiation of both Medicare and Medicaid. This happened in 1965, after many more Democrats, riding on Johnson’s coattails in his landslide defeat of Goldwater in 1964, had been elected. That dramatically changed the ideological composition of Congress. Cogan tells the story well, but could have incorporated the masterful analysis by Boise State University economist Charlotte Twight. (See “Medicare’s Origins: The Economics and Politics of Dependency,” Cato Journal, Winter 1997.) Medicare spending, which in 2016 was $595 billion, is now second only to Social Security (at $916 billion) as the government’s largest expenditure program.
Reagan reforms / From 1983 to 1985, Cogan was an associate director of the Office of Management and Budget under director David Stockman, all under President Reagan. Probably for that reason, he gives a lot of detail about Reagan’s success in slightly reducing the growth rate of entitlement spending. He also points out that in May 1981, Reagan tried to do too much too soon by proposing a 31-percent cut in Social Security’s early retirement benefit, which would have taken effect in January 1982. Democratic and Republican members of Congress almost uniformly opposed such a large almost-immediate cut, and Reagan quickly withdrew his proposal.
Instead, he and Congress kicked Social Security reform to a commission headed by Alan Greenspan, which, in January 1983, came out with its proposals for shoring up finances. Virtually none of the proposed changes, though, were to reduce the growth of spending. Instead, the commission recommended bringing new federal employees into the program, getting rid of exemptions for nonprofits, hastening an already-legislated increase in the payroll tax rate, and taxing Social Security benefits for higher-income people. Congress implemented virtually all of those proposals.
Only one major reform occurred on the spending side: a gradual increase in the age at which one could receive full benefits, from 65 to 67 by the year 2027. But this reform was not one proposed by the Greenspan Commission. Instead it was the handiwork of Jake Pickle, a Democratic congressman from Texas, whose mentor, interestingly, had been LBJ. Cogan mentions the age increase but does not specify Pickle’s role or the fact that the Greenspan Commission had recommended no such age increase. He does point out, though, that “remarkably, the slowly increasing retirement age since 2000 has occurred with little or no controversy.”
Cogan also doesn’t mention that in pushing for a cut in the early retirement benefit, Stockman had focused on short-run rather than long-run savings. When asked in a famous 1981 interview why he had done so, Stockman answered, “I’m just not going to spend a lot of political capital solving some other guy’s problem in 2010.” Because of his short-run thinking, Stockman successfully killed a competing bipartisan Senate proposal that would have raised the age for full Social Security benefits to 68 by the year 2000. My back-of-the-envelope estimate is that this proposal would have saved the feds, by now, well over $1 trillion more than the current policy has saved.
Cogan does draw the right conclusion from the 1981 debacle: it’s very hard to cut benefits for current recipients or for those who are about to become recipients. What the age 67 policy shows, though, is that it’s much easier politically to cut benefits prospectively with lots of lead time for people to adjust. And given that the even bigger problems with entitlement spending are in the future, cutting future benefits would be responsive to what otherwise might be the nightmare in our future. But we had better start soon.
People often wonder how “the land of the free” acquired such a huge government that interferes with so many parts of our lives. Cogan has shown how that happened with entitlement programs, which are a huge part of government. In his 1987 book Crisis and Leviathan, economic historian Robert Higgs showed how three crises—World War I, the Great Depression, and World War II—led to more regulation, higher taxation, and higher government spending, including spending on entitlements. Someone who wants to understand the growth of government in America would do well to read Cogan’s and Higgs’s books in tandem.
