The Size and Scope Of Means-Tested Welfare Spending

Introduction

The U.S. welfare system may be defined as the total set of government programs-federal and state-that are designed explicitly to assist poor and low-income Americans.

Nearly all welfare programs are individually means-tested.[[1]]Means-tested programs restrict eligibility for benefits to persons with non-welfare income below a certain level. Individuals with non-welfare income above a specified cutoff level may not receive aid. Thus, Food Stamp and Temporary Assistance to Needy Families (TANF) benefits are means-tested and constitute welfare, but Social Security benefits are not.

The current welfare system is highly complex, involving six departments: HHS, Agriculture, HUD, Labor, Treasury, and Education. It is not unusual for a single poor family to receive benefits from four different departments through as many as six or seven overlapping programs. For example, a family might simultaneously receive benefits from: TANF, Medicaid, Food Stamps, Public Housing, WIC, Head Start, and the Social Service Block Grant. It is therefore important to examine welfare holistically. Examination of a single program or department in isolation is invariably misleading. The views that I express in this testimony are my own, and should not be construed as representing any official position of the Heritage Foundation. In addition, the Heritage Foundation does not endorse or oppose any legislation.

The Cost of the Welfare System

The federal government currently runs over 70 major interrelated, means-tested welfare programs, through the six departments mentioned above. State governments contribute to many federal programs, and some states operate small independent programs as well. Most state welfare spending is actually required by the federal government and thus should considered as an adjunct to the federal system. Therefore, to understand the size of the welfare state, federal and state spending must be considered together. (A list of individual welfare programs is provided in Appendix B.)

Total federal and state spending on welfare programs was $434 billion in FY 2000. Of that total, $313 billion (72 percent) came from federal funding and $121 billion (28 percent) came from state or local funds. (See Chart 1.)

Welfare spending is so large it is difficult to comprehend. On average, the annual cost of the welfare system amounts to around $5,600 in taxes from each household that paid federal income tax in 2000. Adjusting for inflation, the amount taxpayers now spend on welfare each year is greater than the value of the entire U.S. Gross National Product at the beginning of the 20[th] century.

The combined federal and state welfare system now includes cash aid, food, medical aid, housing aid, energy aid, jobs and training, targeted and means-tested education, social services, and urban and community development programs.[[2]] As Table One shows, in FY2000:

· Medical assistance to low income persons cost $222 billion or 51 percent of total welfare spending.

· Cash, food and housing aid together cost $167 billion or 38 percent of the total.

· Social Services, training, targeted education, and community development aid cost around $47 billion or 11 percent of the total.

Recipients of Welfare Spending

As Chart 2 shows, nearly half (46 percent) of total means-tested welfare spending goes to families with children. Of the welfare spending going to families with children, roughly one quarter goes to married couples with children, while three quarters go to single parents and other broken families. Thus single parent and other broken families with children receive some 34 percent of aggregate means-tested aid. Overall families with children received some $200 billion in welfare aid in FY2000 of which roughly $148 billion went to single parent or other broken families.

The other half (54 percent) of means-tested aid goes mainly to the elderly and the disabled. Some 19 percent of total welfare spending goes to the elderly, while another 35 percent goes to non-elderly adults; the bulk of these individuals are disabled.

The Growth of Welfare Spending

As Chart 3 shows, throughout most of U.S. history welfare spending remained low. In 1965 when Lyndon Johnson launched the War on Poverty, aggregate welfare spending was only $8.9 billion. (This would amount to around $42 billion if adjusted for inflation into today's dollars.)

Since the beginning of the War on Poverty in 1965 welfare spending has exploded. The rapid growth in welfare costs has continued to the present.

· In constant dollars, welfare spending has risen every year but four since the beginning of the War on Poverty in 1965;

· As a nation, we now spend ten times as much on welfare, after adjusting for inflation, as was spent when Lyndon Johnson launched the War on Poverty. We spend twice as much as when Ronald Reagan was first elected.

· Cash, food, housing, and energy aid alone are nearly seven times greater today than in 1965, after adjusting for inflation;

· As a percentage of Gross Domestic Product, welfare spending has grown from 1.2 percent in 1965 to 4.4 percent today.

Some might think that this spending growth merely reflects an increase in the U.S. population. But, adjusting for inflation, welfare spending per person is now at the highest level in U.S. history. In constant dollars, it is seven times higher than at the start of the War on Poverty in the 1960's.

Total Cost of the War on Poverty

The financial cost of the War on Poverty has been enormous. Between 1965 and 2000 welfare spending cost taxpayers $8.29 trillion (in constant 2000 dollars). By contrast, the cost to the United States of fighting World War II was $3.3 trillion (expressed in 2000 dollars). Thus, the cost of the War on Poverty has been more than twice the price tag for defeating Germany and Japan in World War II, after adjusting for inflation.

Welfare spending has continued its rapid growth during the last decade. In nominal dollars (unadjusted for inflation), combined federal and state welfare spending doubled over the last ten years. It rose from $215 billion in 1990 to $434 billion in 2000. The average rate of increase was 7.5% per year. Part of this spending increase was due to inflation. But, even after adjusting for inflation, total welfare spending grew by 61 percent over the decade.

As Chart 3 showed, medical spending (mainly in the Medicaid program) grew most rapidly during the 1990's, but welfare cash, food, and housing spending grew as well. Adjusting for inflation, cash, food and housing assistance is 37 percent higher today than in 1990. However, the growth in these programs has slowed since 1995, increasing no faster than the rate of inflation. This recent slowdown in spending is, in part, the effect of welfare reforms enacted in mid-nineties.

Under President George W. Bush's proposed budget means-tested spending will grow at a rapid rate. Indeed, the rate of welfare spending growth in the Bush budget is virtually identical to that projected in the last Clinton budget. Projected welfare spending figures from the President's FY2002 budget are provided in Appendix A.[[3]] The rapid of growth in welfare spending is illustrated in Chart 4.[[4]]

Clearly, President Bush's budget plan does not require cuts in welfare spending or even a slowdown in the rate of spending growth. According to the current spending proposals:

· Total federal welfare spending is projected to grow from $316 billion in 2000 to $450 billion in 2006: an increase of 42 percent. The rate of spending increase is projected at 6 percent per year.

· Federal spending on cash, food, and housing aid is projected to grow from $142 billion to $174 billion: an increase of 23 percent. The annual rate of spending increase would be 3.6 percent, nearly 50 percent greater than the anticipated rate of inflation.

· Together, federal and state welfare spending would rise from around $438 billion in 2000 to $626 billion in 2006.

· Altogether, the United States will spend $3.6 trillion on means-tested welfare assistance over the next five years. This amounts to around $47,000 for each taxpaying household in the U.S.

The rapid projected rate of growth of future welfare spending can be illustrated by comparing welfare to defense. The President has promised to make defense spending a priority. Under his budget plan, nominal defense outlays would increase for the first time in a half decade. Defense spending would rise by 20 percent over five years from $301 billion in FY2000 to $362 billion in FY2006.

During the same period, however, welfare spending is scheduled to rise by 42 percent. As Chart 5 shows, the gap between welfare and defense spending will actually broaden during this period. Currently, the U.S. spends $1.45 on welfare for every $1.00 spent on national defense; by 2006, we will spend $1.78 on welfare for every $1.00 on defense.

Exaggerated Views of Poverty

Welfare spending advocates often paint very alarming pictures of poverty in the United States in order to promote even more rapid increases in welfare spending. To the average voter and the average politician the term poverty provokes images of destitution. In reality the typical "poor" person in the U.S. has standard of living far higher than our normal images and expectations for poverty.

According to the government's own data, the typical American, defined as poor by the government, has a refrigerator, a stove, a clothes washer, a car, air conditioning, a VCR, a microwave, a stereo and a color TV. (Half of the poor own two color TV's; a third have telephone answering machines.) By his own report, the typical poor individual is able to obtain medical care for himself and his family; he lives in a home that is in good repair and is not over-crowded. By his own report, his family is not hungry and in the last year he had sufficient funds to meet his essential needs. While this poor individual's life is certainly far from opulent, it is equally far from the popular images of poverty conveyed by activists and the press.

In 1996, Congress enacted a limited welfare reform; The Aid to Families with Dependent Children (AFDC) program was replaced by the Temporary Assistance to Needy Families (TANF) program. Critically, a certain portion of AFDC/TANF recipients were required to engage in job search, on the job training, community service work, or other constructive behaviors as a condition for receiving aid. The effects of this reform have been dramatic.

· AFDC/TANF caseloads have been cut nearly in half.

· TANF outlays have fallen substantially. (See chart 6.)

· The decline in the TANF caseload has led to a concomitant decline in Food Stamp enrollments and spending.

While critics predicted the reform would increase child poverty, the exact opposite has occurred. Once mothers were required to work or undertake constructive activities as a condition of receiving aid they left welfare rapidly.

· Employment of never-married single mothers has increased nearly 50 percent;

· The child poverty rate fell sharply from 20.8 percent in 1995 to 16.3 percent in 2000.

· The black child poverty rate and the poverty rate for children living with single mothers are both at the lowest points in U.S. history.

· When non-cash welfare aid such as the Earned Income Tax Credit, Food Stamps, and public housing are properly counted as income, the child poverty rate stands at 11 to 12 percent.

In the welfare reform of 1996 all sides came out as winners: taxpayers, society and children. By requiring welfare mothers to work as a condition of receiving aid, welfare costs and dependence were reduced. Employment increased and poverty fell. Moreover, research shows that prolonged welfare dependence itself is harmful to children; reducing welfare use and having working adults in the home to serve as role models for children will improve those children's prospects for success later in life.

The workfare principles of the 1996 reform should be intensified and expanded. Work requirements in TANF should be strengthened. Similar work requirements should be established in the Food Stamp and public housing programs. Finally, because the reform has clearly succeeded in cutting welfare use, TANF outlays should be reduced by 10 percent in future years.

As noted previously, about half of all means-tested welfare spending is devoted to families with children. Of this spending on children, around three quarters goes to single parent families. For example, Chart 7 shows the percent of aid to children in major welfare programs which flows to single parent families. The single parent share is generally well above 80 percent.

Clearly, the modern welfare state, as it relates to children is largely a support system for single parenthood. Indeed, without the collapse of marriage which began in the mid-1960's, the part of the welfare state serving children would be almost non-existent.

The growth of single parent families, fostered by welfare, has had a devastating effect on our society. Today nearly one third of all American children are born outside marriage. That's one out-of-wedlock birth every 35 seconds. Of those born inside marriage, a great many will experience their parents' divorce before they reach age 18. Over half of children will spend all or part of their childhood in never-formed or broken families.

This collapse of marriage is the principal cause of child poverty and a host of other social ills. A child raised by a never-married mother is seven times more likely to live in poverty than a child raised by his biological parents in an intact marriage. Overall, some 80 percent of child poverty in the U.S. occurs to children from broken or never-formed families. In addition, children in these families are more likely to become involved in crime, to have emotional and behavioral problems, to be physically abused, to fail in school, to abuse drugs, and to end up on welfare as adults.

Since the collapse of marriage is the predominant cause of child-related welfare spending, it follows that it will be very difficult to shrink the future welfare state unless marriage is revitalized. Policies to reduce illegitimacy, reduce divorce and expand and strengthen marriage will prove to be by far the most effective means to:

· reduce dependence;

· cut future welfare costs;

· eradicate child poverty; and,

· improve child well-being.

Tragically, current government policy deliberately ignores or neglects marriage. For every $1,000 which government currently spends subsidizing single parents, only one dollar is spent attempting to reduce illegitimacy and strengthen marriage.

Fortunately, President's Bush's budget plan does propose a new program to "promote responsible fatherhood." This proposed program could become the seedbed for a broad array of new initiatives to strengthen marriage. Still, the money requested is pitifully small: only $64 million per year. This amounts to roughly one penny for each one hundred dollars in projected welfare spending. The budget allocation to the new fatherhood program in FY 2002 should be increased fivefold with the funds diverted from TANF outlays. Beyond FY 2000 some 5 to 10 percent of federal TANF funding should be devoted to pro-marriage activities.

When Lyndon Johnson launched the War on Poverty he did not envision an endless growth of welfare spending and dependence. If Johnson returned today to see the size of the current welfare state he would be deeply shocked.

President Johnson's focus was on giving the poor a "hand up" not a "hand out." In his first speech announcing the War on Poverty, Johnson stated, "the war on poverty is not a struggle simply to support people, to make them dependent on the generosity of others." Instead, the plan was to give the poor the behavioral skills and values necessary to escape from both poverty and dependence. Johnson sought to address the "the causes, not just the consequences of poverty."

Today, President Johnson's original vision has been all but abandoned. We now have a clear expectation that the number of persons receiving welfare aid should be enlarged each year, and that the benefits they receive should be expanded. This expectation is clearly reflected in the future spending projections in Appendix A. Any failure to increase the numbers of individuals dependent on government and the benefits they get is regarded as mean spirited.

Yet the expansion of the conventional welfare system is destructive. More than twenty years ago, then President Jimmy Carter stated, "the welfare system is anti-work, anti-family, inequitable in its treatment of the poor and wasteful of the taxpayers' dollars." President Carter was correct, yet today little has changed except that the welfare system has become vastly larger and more expensive.

This expansion of welfare spending has harmed rather than helped the poor. Instead of serving as a short-term ladder to help individuals climb out of the culture of poverty, welfare has broadened and deepened the culture of self-destruction and trapped untold millions in it.

Rather than increasing conventional welfare spending year after year, we should change the foundations of the welfare system. Policy makers should embrace three basic goals.

1. We should seek to limit the future growth of aggregate means-tested welfare spending to the rate of inflation or slower.

2. We should require all able-bodied welfare recipients to perform community service work as a condition of receiving aid along the lines of the TANF program operating in Wisconsin.

3. We should support programs which foster and sustain marriage rather than subsidizing single parenthood. In addition, we should reduce the anti-marriage penalties implicit in the welfare system.

These three goals are synergistic. They will operate in harmony and reinforce each other. In the long run, it will be difficult to control welfare spending merely by cutting funding. Rather, if we change the behaviors of potential recipients we will reduce the need for future aid. As the need for aid diminishes, spending growth will slow and then decline, and the well being of the poor and society as a whole will rise.

Robert E. Rector, is a Senior Research Fellow at The Heritage Foundation,