219 October 13, 1982 WELFARE NEED AND WELFARE SPENDING INTRODUCTION I How much does the government spend on welfare? How much should the government spend on welfare the answers to these questions-one of act, one of judgment-should dictate the course of fu ture welfare spending. Yet, despite intense debate on the cost of specific welfare benefits, neither the Reagan Administration nor its critics has come to grips with either of these basic questions.

Determining how much government spends on welfare should be easy, but it isn't. The public seems to believe that defense spending is increasing, welfare spending decreasing. This is wrong, although the error is understandable. The federal budget clearly identifies defense outlays 187.5 billion in FY 1982 221.1 billion in EY 19

83. But there are no comparable figures for welfare, not even for federal spending, much less for spend- ing at state and local levels. The budget contains no definition of welfare and there is no budget category with that name.

Instead, welfare costs are spread throughout the budget, in hundreds of line items funding specific kinds of benefits through income redistribution-is made up of 49 major national programs, ranging from those which everyone calls welfare, such as Aid to Families w ith Dependent Children (AFDC), Supplemental Security Income SSI and food stamps; through those whose service-oriented names disguise their welfare essence, such as Medicaid, the Comprehensive Employment and Training Act (CETA child nutrition, and homeowne r assistance; to those social insurance programs which none dare call welfare even though they are, such as social security and unemployment compensation. Welfare expendi tures for FY 1982 totaled $403.5 billion, more than twice the level of defense spendi n g And although the growth rate of The relationship between I The welfare system--government's attempt to alleviate poverty 2 welfare spending has been reduced, by the Reagan Administration we1far.e is not shrinking: total expenditures for FY 1983 are anti cipated to be $413.2 billion.

Knowing how much government spends on welfare, what can we infer about how much government should spend? From the taxpayers standpoint the obvious answer is: as much as is needed, and no more This is not a rhetorical answer: n eed can also be deter mined, but not by treating current spending as the true measure of that need. Each of the hundreds of welfare benefits has been designed to meet some particular Ifneedti for cash, subsidies or services Not only is the relationship of many of these tineeds'f to a condition of poverty questionable, but typically each benefit is funded as though it, and it alone, would have to meet completely that particular need. In fact, there may be several duplicative or complementary benefits from o t her programs available to the same group of recipients. Some recipients benefit enormously some hardly at all, from this compounding of benefits, but the budgetary effect has been to inflate both individual program and total spending to levels that far ex c eed demonstrable need. The Reagan Administration has begun to pare back duplicative benefits in a few programs, but so far the surface has barely been scratched A more accurate assessment of the dollar value of total welfare need can be obtained from a ca l culation of what it would take to lift the incomes of everyone the government defines as poor up to the federally defined poverty threshold. The thres hold may or may not provide the best measure of who is or is not actually poor, but it is the official m easure, and therefore the best available for comparing official need and official response.

Based on the latest available census data 101.8 billion properly distributed, would have raised to the poverty threshold in 1982 the incomes of all Americans whose pre-welfare incomes were below the threshold. Allowing 1.5 percent-the Social Security Administration's rate--for administrative overhead it would have been possible officially to eliminate poverty in the United States at a cost of $103.3 billion, 25.6 pe r cent of what the government actually spend trying, but failing, to meet that goal Table 1 compares need based on the federal poverty threshold with actual welfare expenditures for the years 1979 through 1983 BACKGROUND The welfare system is 50 years old, b ut most of its growth has occurred in the past two decades. Total welfare expenditures for FY 1983 are anticipated to be $413.2 billion, up from $99.7 billion in FY 1971: an average annual increase of 12.3 percent. 3 H CI U 2 a OI Ln m 0 U d a a U U el a O I o m el Ln 0 a d m m m a 2 m OI Ln m el o a o el Ln el ul el s Ln el n 4 The average annual Consumer Price Index increase for the same period (last quarter of FY 1982 and all of FY 1983 estimated) was 8.6 percent. Thus in the past 12 years, average annua l welfare expenditure growth has been 43 percent greater than average annual inflation growth average annual welfare expenditure growth rate has slowed, but is still growing at 5.8 percent, with total expenditures rising from 369.2 billion in FY 1981 to an anticipated $413.2 billion in FY 1983 Under the Reagan Administration the The welfare system sustains a nationwide welfare industry of more than 5 million public and private workers to service 50 to 60 million recipients goal is not to eliminate poverty, b ut to expand welfare through increased spending, more benefits and programs, centralization of control in the federal government, and expanded employment in welfare-related services The industry has demonstrated that its With welfare benefits and programs diffused throughout the budget, welfare industry lobbyists and their supporters in Congress have successfully obfuscated the magnitude both of total welfare spending and of overspending by limiting spending discus sions to individual, programs and insisti n g that current spending levels be used as a point of reference in discussing future spending. By tacitly accepting these growth-inducing ground rules, the Reagan Administration has put itself at a disadvantage in trying to control welfare spending DETERMI N ATION OF WELFARE EXPENDITURES The primary source for the determination of welfare expendi tures in Table 1 was the Budget and Budget Appendix of the United States Government for the fiscal years 1972 through 1983 prepared by the Office of Management and B u dget and the Executive Office of the President. Other sources consulted were the Catalog of Domestic Assistance Programs prepared by the Office of Manage ment and Budget, and the United States Statistical Abstract compiled by the United States Department o f Commerce, Bureau of the Census. In addition, numerous interviews were conducted in the Office of Management and Budget and the departments of Health and Human Services, Education, and Agriculture As a general rule, IlTotal Program Costs Funded" or IITot a l Obligations1' budget line items were used to calculate welfare expenditures spent or obligated for each welfare program for a given fiscal year. Therefore, amounts borrowed from future fiscal year appro priations or obligated but carried over, were incl u ded in the fiscal year that the borrowing or obligating took place. On the other hand, unobligated appropriations carried over to the next fiscal year and obligated in that fiscal year were included-in that fiscal year's expenditures. Administrative costs , where The objective was to determine how much money was 5 identifiable, were included, as were'state and local government expenditures, but not fees, gifts, and required individual contri butions for services.

Although all but one of the major welfare pr ograms stem from federal law, state and local governments share in the costs of about half of the programs. In FY 1982, out of projected welfare expenditures of $403.5 billion, state and local governments spent 63.5 billion, or 15.7 percent of the total.

CALCULATING NEED BASED IN THE POVERTY THRESHOLD The poverty threshold is the official measure of need in the It was developed by the Social Security United States.

Administration in 1964 and was based on a 1955 Department of Agriculture food consumption survey showing that families of three or more.spend about one-third of their income for food.

The poverty threshold was initially set at three times the cost of the Department of Agriculture's 1961 economy food plan, and has been updated each year by the B ureay of the Census to reflect changes in the Consumer Price Index Calculations of the total dollar value of need in Table 1 were derived from Bureau of the Census data on families with before-welfare incomes below the poverty threshold of families of eac h family size, including unrelated individuals was multiplied by the average before-welfare income for that family size; the products were.summed; and the sum was subtracted from the summed products of the number of families of each size times the poverty t hreshold for that family size. The difference is the total amount of money which, if properly distributed would raise to the poverty threshold the incomes of everyone with before-welfare incomes below the poverty threshold. One and one-half percent was ad d ed for administrative overhead, based on the current overhead rate of the Social Security Administration the world's largest distributor of transfer payments The number The latest census data on family incomes available for these calculations were from 19 8 0: therefore FY 1979 and FY 1980 data are actuals; fiscal years 1981, 1982, and 1983 are inflated by the Consumer Price Index (fourth quarter of FY 1982 and all of FY 1983 estimated). Revised poverty threshold levels were released in the summer of 1982, a nd have been used, where app'licable in our calculations.

CONCLUSION The data in Table 1 are drawn from a comprehensive analysis of the welfare.system, its programs, and its costs from 1971 through 19

83. The data show that a federally controlled and admi nistered welfare system has not and cannot satisfactorily serve either the interests of the taxpayers or the needs of the 6 poor. What is needed is a total redesign of public assistance policy and administrative structure A major criterion of this redesig n would be the removal of incentives inherent in a federal system to create what Table 1 portrays: an overblown and ineffective response to a serious but solvable problem. When the U.S. is able to focus public assistance on the needs of the poor rather tha n on the expansion ary interests of a government-controlled industry, Americans will save enormous sums. of money, eliminate legions of bureaucrats and better serve the poor.

Prepared for The Heritage Foundation by Jonathon R. Hobbs This essay is based on a study in progress, Farewell To Welfare, by Charles Hobbs and Jonathon Hobbs, to be published by The Heritage Foundation.