The Issue in Brief
Even as the current federal budget deficit soars toward a peacetime record, budget experts are focusing on the long-term fiscal outlook, in which the gap between projected revenues and expenditures rises to unsustainable levels over the next two decades. Unless we change course, we will be faced with three unpleasant options: record-high levels of taxation; abrupt and steep reductions in public programs; or printing money and borrowing massively from overseas. This bleak outlook presents a challenge that is moral and political as well as economic and fiscal.
Most economists and fiscal experts, conservative as well as liberal, agree that the current economic downturn requires that government use its spending power to boost demand and employment and to mitigate cuts at the state and municipal level. As a result, the federal government is all but certain to run record budget deficits for at least the next two years. At the same time, senior officials in both political parties have emphasized the need for longer-term restraint that will restore the balance between revenues and obligations, a goal that is bound to refocus attention on the largest and most rapidly growing domestic programs - such as Medicare, Medicaid, and Social Security - as well as on our deteriorating and outdated revenue base.
Over the past century, Americans have created their own distinctive social contract. For many reasons, programmatic as well as fiscal, this contract stands in need of fundamental revision. In that context, proposals to tie program benefits more closely to recipients’ income may well appear attractive as ways of reducing expenditures while honoring basic principles of social equity and decency. The issue addressed in this policy paper is whether strengthening the relation between need - as measured by income - and net benefits (that is, what individuals receive from social programs minus their contributions to them) could serve in practice as a building block of this revised contract. The principal conclusion is that U.S. social policy could move in this direction without undermining either key policy objectives or the political coalition that sustains our large social programs, but that the mechanisms selected for implementing this shift will make a considerable difference, programmatically and politically.
This paper was developed as part of the work of the Budgeting for National Priorities project with support from the Peter G. Peterson Foundation whose assistance is gratefully acknowledged. The author would like to thank members of the Brookings-Heritage Fiscal Seminar for many discussions of these and related issues. He would also like to thank the Brookings Governance Studies Program. This paper was also released as part of the “Issues in Governance Studies” series.