Federal entitlement reform and the states.

• Author: Zimmerman, Christopher

Federal entitlements must be tackled if the federal fiscal house is to be put in order. States are wary that such reform may shift greater financial and political burdens to them.

In budgetary politics federal entitlements have become the 800-pound gorilla sitting in the corner--something impossible to ignore, but no one wants to disturb it. The U.S. deficit is approaching $4.5 trillion, growing by $1.25 billion a day. We spend $276 billion on Social Security, $200 billion on Medicaid and Medicare, $54 billion on welfare and social services, $19 billion on farm supports. Sacrosanct? Up to now, yes, but politicians are eyeing them more seriously than ever.

Several broad proposals, such as spending caps, means-testing, an administrative cost ceiling and health care reform, have been advanced as ways to cut entitlements and reduce the deficit.

The proposal to impose a "cap" on entitlement spending has perhaps the greatest potential to achieve savings. This is the mandatory spending analog of an across-the-board cut in appropriations. It was advocated by President Bush and New Mexico Senator Pete Domenici, and has enjoyed some support among conservative Democrats. Under this approach, there would be a statutory cap on entitlement spending. If the cap were breached, uniform cuts would be made to all entitlement programs.

Well, almost all. As was the case with Gramm-Rudman-Hollings (which required across-the-board spending cuts if a deficit target was exceeded), significant exemptions are envisioned by most advocates. The Domenici proposal exempted Social Security, deposit insurance and, of course, interest on the debt. Increases in the cap would be allowed for growth in the beneficiary population, the consumer price index and an additional fixed factor.

The full ramifications of a cap on entitlement spending are not at all clear. By definition, an entitlement grants individuals a legal right to obtain funds or services from the government; a person denied payment can sue to compel a government agency to make good on the obligation. What happens if a cap or spending limit is reached, and there are qualified individuals who are not served? Do they sue? If the state is the delivery agent for an entitlement program, will the state be subject to a court order requiring payment to individuals whom the federal government will no longer serve?

A second approach to reforming entitlements is to subject more of them, or even all of them, to a means test...