CHAPTER 1
HOW MUCH DOES THE NATION SPEND ON WELFARE?

The U.S. Social Security Administration defines social welfare expenditures as the cost of "cash benefits, services, and the administration of public programs that directly benefit individuals and families." This broad definition includes expenditures for social security (Old-Age, Survivor's, Disability, and Health Insurance, or OASDHI), health and medical programs, education, housing, veterans' programs, and public aid programs.

In fiscal year 2000 (the last year for which combined information on social welfare expenditures from all sources is available) federal, state, and local governments spent about $1.01 trillion on social welfare programs. According to the Treasury Department's 2002 Financial Report of the U.S. Government, the total expenditure for social welfare in 2002 was slightly over 4 percent of the gross domestic product (GDP), the monetary total of the domestic goods and services produced by the United States. This reflects a drop of nearly one full percentage point since 1980 and about .75 percent since the early 1990s.

While the Social Security Administration uses a broad definition of social welfare to categorize public expenditures, public welfare, or public aid, is generally taken to refer to cash or noncash assistance for low-income persons. This narrower definition excludes social insurance programs such as Social Security and Medicare, which are considered entitlement programs—that is, programs to which people have a right because of contributions they have made from their earnings.

In 2000 about 56 percent of social welfare expenditures was dedicated to such entitlements as Social Security and Medicare. About 43 percent of social welfare spending was directed toward means-tested programs, including Medicaid and Temporary Assistance for Needy Families (TANF). This volume focuses on welfare programs that provide benefits or services to persons who are determined to be eligible based on a test of their income or "means."

The federal government accounted for about 70 percent of total means-tested spending on social welfare, while state and local governments were responsible for the remaining 30 percent of means-tested expenditures in 2000. The proportion of expenditures at the federal and state level in each category of spending was very different, however. Outlays for medical benefits, primarily Medicaid, made up nearly half (43 percent) of federal welfare spending and about three-fourths (72 percent) of state and local welfare spending. On the other hand, expenditures on food assistance accounted for a little over 10 percent of the total federal welfare spending, while only 1.7 percent of state and local welfare costs funded food assistance programs. (See Table 1.1.)

Federal social welfare expenditures remained relatively stable from 1980 to 2002, making up between 49 and 60 percent of all federal spending. However, expenditures on social welfare have been increasing as a percentage of state and local government costs. State and local spending for social welfare programs continued to increase into the early twenty-first century. This constant rise in costs was a major reason for the severe budget problems faced by local and state governments during the early 1990s. The problem was relieved somewhat by the strong economy of the mid-1990s, which helped the states to absorb these costs. When the economy began to weaken in 2000, however, the problem resurfaced. In 2002 public assistance, Medicaid, and other social welfare programs accounted for about a third of all state outlays.

PUBLIC AID

Public assistance has usually included such programs as Aid to Families with Dependent Children/Temporary Assistance for Needy Families (AFDC/TANF), General Assistance, and Medicaid. In 2000 public assistance accounted for 43 percent of all public aid spending—a 48 percent increase since 1980. According to the U.S. Census

Bureau, by 2000 the cost of medical benefits had risen 69 percent since 1980, while the cost of cash aid programs increased by a third. In 1980 medical and cash aid programs accounted for 58 percent of public aid spending; in 2000 these programs absorbed 72 percent of public aid budgets. Table 1.1 breaks down all social welfare spending by specific categories and by state and federal spending.

The portion of the GDP spent on social welfare increased only moderately between 1975 and 2000. In 2000 public aid accounted for about 4 percent of the nation's GDP, an increase of approximately one percentage point from expenditures in the late 1970s and 1980s and one-half point since 1995. However, public health and medical costs nearly doubled in the twenty years from 1975 to 1995, from 3.2 percent of the GDP in 1975 to 6.1 percent of the GDP by the mid-1990s. (See Table 1.2.) This increase reflects, among many factors, the growing number of older Americans, who have greater need of medical services, as well as the increasing cost of medical care in general.

A rapid increase occurred in public spending on health and medical care between 1990 and 2000. (See Table 1.3.) In 1990 the government spent $282.5 billion on health care. Ten years later, government spending on health and medical care had more than doubled, to nearly $587.2 billion. Medicare and public assistance payments (primarily Medicaid) accounted for almost three-quarters of that sum. In 1990 the government paid about $110.2

billion for Medicare; in 2000 it spent $224.4 billion. Similarly, spending on public assistance medical payments (Medicaid) in 1990 reached $78.7 billion, but by 2000 Medicaid accounted for over $208.5 billion. These are huge changes involving enormous sums of money over a relatively short time. This situation helps to explain some of the problems governments face in trying to control their budgets and why health care has become a major national issue.

Welfare Payments

According to the U.S. Bureau of the Census, in 2000 the two major categories of public cash benefit payments paid out about $50 billion. Family assistance payments (primarily AFDC/TANF, not including Medicaid) totaled $18.3 billion, while $31.7 billion was paid out for SSI. Spending for SSI increased by 90 percent between 1990 and 2000. Much of this growth reflects the increase in the number of retired Americans, many of whom need Supplemental Security Income in order to live. By contrast, expenditures for family assistance declined by 4.7 percent during the same period. (See Table 1.4.)

Table 1.5 uses fiscal year 2000 dollars to compare how federal funds have been divided among various types of income-tested benefits from 1968 through 2000. (See Table 1.5.)

STATE EXPENDITURES FOR SOCIAL WELFARE

In fiscal year 2002 state governments spent over $1 trillion, an increase of 5.7 percent over 2001. The largest specified expenditures were on elementary and secondary education (21.6 percent) and Medicaid (20.8 percent), followed by higher education (11.2 percent) and transportation (8.1 percent). (See Figure 1.1.) About 2.1 percent went for public assistance to the needy, which totaled $23 billion. About one-third (32.6 percent) went to the "all other" category.

As increased demands were made on state and local funding, much of the impetus for welfare reform came at the state level before federal welfare programs were overhauled in 1996. Furthermore, welfare reform became a key

goal for President Bill Clinton. In August 1996 he signed into law the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA; PL 104-193). This controversial law repealed the sixty-year-old program that provided Aid to Families with Dependent Children (AFDC) and created the block grant program known as Temporary Assistance for Needy Families (TANF). Though states must comply with federal time limits, work requirements, and child protection guidelines, they were given the flexibility to design their own welfare programs. Each state was required to submit a complete plan of implementation no later than July 1, 1997.

Prior to the passage of Public Law 104-193, forty-three states were granted federal waivers to set aside federal regulations and guidelines to introduce their own reform proposals. For example, in March 1996 a Texas plan was approved limiting benefits to a maximum of three years but allowing the recipients to hold more assets, including up to $2,000 in savings, without reducing welfare benefits. Under the TANF law signed on October 1, 2003, states may continue operating under federal waivers that exempt programs from meeting the mandates of the new law.

The state and federal governments jointly fund cash assistance. In 2000 the federal government provided more than half (60.7 percent) of the funding while the states funded the rest, mostly from general funds. (See Figure 1.2.) Spending for cash assistance took 2.1 percent of total state expenditures: 1.3 percent was for cash assistance under TANF and the remainder was for other cash assistance programs. The federal government paid a larger proportion of TANF (38.5 percent) than it did for all other state cash-assistance programs. State spending on cash assistance under TANF and other cash welfare programs dropped following the enactment of welfare reform legislation in 1996; expenditures remained stable between 2001 and 2002.

Medicaid

The National Association of State Budget Officers observed in the 2000 State Expenditure Report (Washington, DC, 2001), "Medicaid expenditures have escalated and are consuming a greater portion of states' budgets." As a percent of total state expenditures, Medicaid spending increased from 10 percent in 1987 to 14 percent in 1991 and 19.5 percent in 2000. Two factors that help explain this dramatic increase are the rate of inflation for

medical goods and services and the increased number of persons eligible for Medicaid.

In 2002 the federal government paid 55.8 percent of Medicaid expenditures, and the states paid the remaining 44.2 percent. (See Figure 1.3.) That year the states spent $112 billion on Medicaid, more than triple the 1990 amount. In 2003 state Medicaid spending was estimated to rise to $122 billion. (See Figure 1.4.)

PRIVATE WELFARE EXPENDITURES

The private sector is an important source of social welfare funding. These expenditures can be grouped into four program categories: health and medical care, welfare services, education, and income maintenance. Welfare services funded by private sources include:

• Individual and family services (counseling and referral services for families and children, family service agencies, adoption services, emergency and disaster services, child day-care services, and senior citizen services).
• Residential care (group foster homes, halfway homes, and housing and shelter for the homeless).
• Recreation and group work (YMCA, YWCA, Boy Scouts, and Girl Scouts).
• Civic, social, and fraternal organizations.
• Job training and vocational rehabilitation, such as sheltered workshops, vocational rehabilitation agencies, and skill-training centers.

WELFARE-REFORM LEGISLATION

The intent of the Personal Responsibility and Work Opportunity Reconciliation Act of August 1996 (PRWORA; PL 104-193) was to reduce future welfare expenditures by changing provisions and requiring work from welfare recipients. The 1997 Balanced Budget Reconciliation Act modified some provisions of PL 104-193 and restored and even added funding for certain programs.

TANF legislation brought about sweeping changes in the welfare system, and the "work first" emphasis of the new programs resulted in a significant reduction in welfare caseloads. While welfare reform advocates claim that the new system has lifted former welfare recipients out of poverty and into gainful employment, critics argue that changes have pushed those who left welfare for work deeper into poverty.

A five-year reauthorization of TANF was scheduled to take place in 2001. However, by late 2003 funding was being extended without a major revision of the law having been enacted. A comprehensive TANF bill, H.R. 4, was passed by the House of Representatives and sent on to the Senate Finance Committee, which reported that a substitute bill for H.R. 4, bearing the same name, was adopted. The House bill would increase the workweek for TANF recipients from thirty hours to forty hours and require states to increase work participation from 50 percent to 70 percent of all TANF recipients. The Senate version of H.R. 4 proposed a tiered approach to work participation requirements. A single parent with a child under six years of age would be required to work a twenty-four-hour week to maintain TANF benefits; a single parent with children over age six would need to work a thirty-four-hour week; two-parent families would be required to work thirty-nine hours per week; and two-parent families receiving federally funded child care would have to maintain a workweek of fifty-five hours. By early summer 2004 a comprehensive TANF reauthorization plan still had not been adopted, but funding of current TANF and related programs was extended through September 2004.