Entitlement Programs

What are entitlement programs and where did they come from?

Entitlements are government programs that have been created to take care of poor and elderly individuals, as well as those who are disabled. 

The three largest programs are Social Security, Medicare, and Medicaid. In addition to these, the federal government has a variety of smaller, more targeted welfare programs designed to offer financial or other forms of aid to individuals or groups who struggle to support themselves.

The idea of creating entitlement programs to provide for Americans in need goes all the way back to shortly after the founding of the United States. Thomas Paine, the author of the famed pamphlet “Common Sense,” which inspired American colonists to take up arms and fight against Great Britain, advocated in 1797 for a social insurance system that would provide for both the elderly and disabled as well as young people starting out in life. However it was not until the Civil War that any sort of centralized social insurance program began to take shape. During the war the federal government created pension plans for soldiers to entice new recruits. 

Early in the 20th century debates raged in the U.S. over whether to implement state and national old-age pension and workers’ compensation systems, but nothing gained enough political momentum until the stock market crash of 1929 triggered the Great Depression. Thousands of banks failed, economic output cratered, and the unemployment rate skyrocketed to nearly one in four Americans. These dire economic circumstances paved the way for President Franklin Delano Roosevelt’s New Deal and the Social Security Act of 1935. The new law gave benefits to retirees and the unemployed, and it provided a lump-sum benefit for survivors of beneficiaries upon that beneficiaries’ death. Over the next year and half, the new Social Security Board enrolled 30 million people into the system. 

Fast forward several decades to the presidency of Lyndon B. Johnson. In his 1965 State of the Union address, Johnson declared a “War on Poverty” and outlined a plan for creating Medicaid and Medicare as well as expanding Social Security. Johnson’s War on Poverty also included the Food Stamp Act of 1964, which made food stamps a permanent federal program, the Economic Opportunity Act of 1964, which established the Job Corps and a number of other initiatives, and the Elementary and Secondary Education Act which, among other things, established the Title I program to subsidize school districts with a large share of impoverished students.

At this point, all the key components of today’s entitlement programs were put in place. 

As of 2019, the major entitlement programs together consumed 51 percent of all federal spending. They are on track to take up an increasingly large portion of the budget as Baby Boomers age, skewing the overall age of the population older and increasing the obligations of these programs. 

How, exactly, do these programs work? Here’s an overview of the three biggest programs:

Social Security

Social security provides for the economic security of Americans by paying out retirement benefits to workers when they age into their sixties. The Social Security Administration funds these benefits by levying a 12.4 percent tax on earnings, half of which is paid by you and comes out of your paycheck. The other half is paid by your employer. These tax revenues are pooled into a large pot and paid out to workers who become eligible for them. In this “pay-as-you-go” system, any money paid into the system that is left over after paying out benefits goes into a Social Security Trust Fund for use in future years.

One way to think of Social Security is as a mandatory savings program. You pay into the system during your working years, and then those funds are paid back out to you when you retire. In many cases that’s basically how the system works, however there are some wrinkles that make it a little more complicated than that. Americans with disabilities that prevent them from working, for instance, can collect Social Security. A surviving spouse of a beneficiary who has died can also collect a portion of the deceased’s benefits, usually somewhere in the 75 to 100 percent range. Aside from that, you must reach a certain age before you can begin receiving benefits. 

It only takes about a decade of full-time work to qualify for Social Security benefits, but you cannot begin claiming benefits until you are 62 years old. The longer you wait into your sixties, however, the greater percentage of your entitled benefits you will be eligible to collect. If you opt to claim benefits at 62, you’ll only get 70 percent of your primary amount. At age 67 you receive the full amount. And if you wait later than that your payout will increase by eight percent every year until you turn 70. 

The base amount that you will receive is determined by how much you paid into the system during your career. For more details about how your specific retirement benefit is figured and how much it will be, see this guide from the Social Security Administration. 

It is important to note that Social Security benefits are not necessarily intended to be your sole source of income in retirement. The system is set up so that your benefits only replace about 40 percent of your pre-retirement income. Other dependable streams of retirement income like savings in a 401(k) or IRA, or annuities, are recommended to cover the gap necessary to live comfortably in retirement.

There are legitimate concerns about the long-term solvency of Social Security. According to the latest projections, the program should be able to pay full benefits until 2033. After this the reserves in the Social Security Trust Fund will be depleted and the program will only be able to pay out 76 percent of its promised benefits. There is a possibility of this happening, but given the program’s popularity it is likely that Congress will act in some way to keep Social Security from failing. 

Medicare

Medicare is a health insurance program available to individuals age 65 and up. It also covers younger people with disabilities or certain illnesses. The system was set up to manage and contain medical costs as Americans age, but it doesn’t cover everything. 

The program can be broken down into two main types: Original Medicare (Part A and Part B) and Medicare Advantage, which is obtained through private insurers and includes Original Medicare as well as additional benefits.

Medicare Part A is hospital insurance. It covers inpatient care in hospitals or skilled nursing facilities. This includes hospice care and some parts of home care, but it does not cover long-term “custodial care,” like help with daily activities such as bathing and dressing. This part of Medicare is free if you or your spouse has worked and paid Medicare taxes for at least 10 years. Those who have paid into the program for less time must pay a premium. 

Medicare Part B provides coverage for outpatient services like doctor visits, some preventative services, ambulance services, and durable medical equipment. It also covers mental health services and some prescription drugs. The program comes with a standard monthly premium of $148.50, but those with higher incomes pay more. 

Medicare Part C, or Medicare Advantage, is another option entirely for getting health insurance. In addition to all the benefits of Original Medicare, most of the plans in this category cover additional services like dental, vision, hearing, and prescription drugs. Unlike Original Medicare, which has no spending limit protections, Medicare Advantage plans cap your total health care spending at $6,700 each year for in-network coverage.

Medicare Part D is available as a stand-alone, supplemental prescription drug plan outside Original Medicare (Parts A and B). It helps cover the cost of prescription drugs. The national base premium for this part of the program is $33.06.

Finally, there are also supplemental plans that Americans can enroll in called Medicare Supplement Insurance, or Medigap for short. Private insurers offer these plans to help cover costs that Original Medicare does not help with, like deductibles and copayments. 

The best time to sign up for Medicare is during the six-month window surrounding your 65th birthday. You can read more about this process, see more details about how Medicare in general works, and compare available plans at Medicare.gov. 

Medicaid

Not to be confused with Medicare, Medicaid is a welfare program that provides health insurance to eligible low-income adults, children, pregnant women, elderly adults and people with disabilities. It differs from the two other major entitlement programs in that it is jointly funded by states and the federal government. The federal government holds ultimate control over Medicaid, but it is administered by the states. As of 2020, more than 72 million Americans from birth through age 65 and older received health benefits from the program. According to data from the Kaiser Family Foundation, “Medicaid programs represent $1 out of every $6 spent on healthcare in the U.S.”

Part of the reason this figure is so high is that Medicaid has evolved and expanded over time to cover more and more people. The most significant change in recent years happened in 2010, when the Affordable Care Act loosened adult eligibility requirements to those earning up to 138 percent of the Federal Poverty Level (FPL). Prior to that adult eligibility had been at or below 100 percent of the FPL. 

Two guarantees undergird the Medicaid entitlement. First, every American who meets eligibility requirements is guaranteed coverage. Second, the federal government promises to match each state’s financial contributions without a cap for qualified services provided to eligible enrollees. For most Medicaid enrollees, a formula in the law provides that the federal government will match each state’s contribution dollar for dollar. For poorer states that figure is even higher, and the federal government can fund up to 73 percent of Medicaid service costs.

It is impossible to quickly summarize the details of Medicaid coverage here because there isn’t just one type of Medicaid. It is administered differently in every state, and most states have several different Medicaid programs that target different needs and demographics. The regular program serves low-income adults, but there are also poverty-level programs for the aged, blind, and disabled. The largest of these programs is Institutional Medicaid, which covers more than 60 percent of nursing home residents in America. Medicaid also covers more than half of the nation’s long-term care claims, so it is a critical part of the federal budget and healthcare industry. 

Individuals can apply for Medicaid through the Healthcare Marketplace or their state’s Medicaid agency. You must meet certain financial and/or medical eligibility requirements to qualify, such as income and asset limits. In the case of some benefits, applicants must need a nursing facility level of care (NFLOC), which is determined by a functional needs assessment rating their health and capacity to perform everyday tasks. 

Given that Medicaid is for those who have limited financial resources and in many cases exceptional medical needs, in most cases it has no premiums or deductibles. Some states, though, require sharing costs depending on your income. Medicaid offers coverage similar to Medicare Parts A and B, and states have the option to offer additional benefits, including dental, vision, and more. There are some things Medicaid does not cover, like services that are unreasonable or medically unnecessary, charges that were improperly bundled or billed through another allowance, or providers that were reimbursed through another program.

To find out where to apply for coverage and learn more about the details of the program and available benefits, go to Medicaid.gov.

Unemployment and Welfare Programs

The U.S. offers seven major welfare programs with eligibility determined by income and local poverty levels. Usually funded by taxpayers, these programs are distinct from entitlements like Social Security and Medicare in that they only subsidize low-income families and individuals. Everyone can access entitlement benefits if they have contributed to the program, but to receive welfare benefits, you must prove your income falls below a certain target.

These major welfare programs are:

• Medicaid (covered above)
• Temporary Assistance for Needy Families (TANF) 
• Supplemental Nutrition Assistance Programs (SNAP or "food stamps") 
• Supplemental Security Income (SSI) 
• Earned Income Tax Credit (EITC)
• Child’s Health Insurance Program (CHIP)
• Housing assistance

The benefits from these programs vary from state to state, and they don't necessarily go straight to recipients as financial relief. Sometimes they are applied individually as tax credits, food stamps, or vouchers, and in other cases they are distributed to the public through federal grants to states and local municipalities. You can read more about each of these programs in these summaries from The Balance and Investopedia.