Back to top

Reining in Federal Spending: Lessons from Social Security


Published September 16, 2020

Limiting the growth in federal spending is difficult, but history tells us it is not impossible. Changes to Social Security in the 1970s demonstrate that Congress can, with the right constraints, cut future spending. As the country rebounds from additional COVID-19 spending, it will be important to return the United States to a sustainable long-term fiscal path.

Discussion Questions

  1. Why is the federal spending so high?
  2. What can the government do to control its spending?

Additional Resources

  • Pick up a copy of The High Cost of Good Intentions: A History of U.S. Federal Entitlement Programs by John Cogan, winner of the 2018 Hayek Book Prize, available here.
  • Watch as John Cogan speaks with Peter Robinson on “Uncommon Knowledge” here.
  • Read John Cogan’s chapter “Entitlements and the Budget” in Blueprint for America, available here.
  • Watch the Blueprint for America video “Entitlements and the Budget” by John Cogan, available here.
  • Watch “Falling Short: Social Security, Medicare, and Payroll Taxes” by John Cogan, available here.
View Transcript

In writing the Constitution, the Founding Fathers allowed for the federal government to incur budget deficits. But they assumed this would be necessary only during wartime and national emergencies. They didn’t foresee, nor could they have foreseen, that elected leaders in Washington would have run annual deficits for nearly all of the last half century.

Recently, Congress has been spending money like there’s no tomorrow. Why should we care about this excess? Well, because there is a tomorrow and when it comes, the government will hand you and your children the bill.

Congress has two ways to finance this higher spending: taxes or borrowing. If it chooses higher taxes, the average household will see their tax bill rise by 50 percent. If instead, it chooses borrowing, about half of your future income taxes will go, not to national defense or programs to help the poor escape poverty, but to interest payments on the national debt. And, more than one-third of these payments will be shipped abroad to foreign debt holders.

To avoid these outcomes, we must reduce the growth in federal spending. But where to start? Well, to paraphrase the infamous bank robber Willie Sutton “Go where the money is!” In the near term, the massive four trillion dollars of coronavirus spending must be allowed to expire. It cannot become a permanent fixture in the budget. Over the longer run, after the pandemic has subsided, Social Security and Medicare will account for about 40 percent of all federal program spending, and soon thereafter, over half.

Most people don’t realize how generous these programs are. Today, the government promises the typical married couple that reaches retirement age benefits that have a present value of over one million dollars. That’s equivalent to handing each couple a check for a million dollars when they turn 66. The benefits promised to future retirees are even more generous, even after adjusting for inflation.

To slow the growth in these programs, Congress does not need to touch the benefits of current retirees. It needs only to limit the growth in future benefits to the inflation rate. This means benefits for future retirees would have the same purchasing power as today’s benefits.

You often hear that there’s just too much political opposition to reform these programs. Well, presidents from Ronald Reagan to Bill Clinton led successful efforts to control Medicare spending. Jimmy Carter and Ronald Reagan did the same for Social Security.

The Carter example is one to keep in mind. When he took office in 1977, the Social Security trust fund was approaching bankruptcy and he made saving the program a high priority. That year, Congress followed up with sweeping changes. These changes didn’t touch benefits for persons who were receiving Social Security in 1977. But they did reduce the benefits promised to persons who were age 60 and younger at the time by 10 percent or more.

This took a lot of courage. But voters agreed that the changes were necessary. In the elections the next year, congressional incumbents who voted for the changes were reelected at the same rate as in previous elections.

Although the 1977 changes were not enough, and additional actions were soon needed, the benefit reductions stand as a testament that Washington can overcome strong political opposition and put our nation’s senior citizen programs on a sustainable path.