Tuesday, December 25, 2012


"An entitlement is  a guarantee of access to benefits based on established rights or by legislation. A "right" is itself an entitlement associated with a moral or social principle, such that an "entitlement" is aprovision made in accordance with legal framework of a society. Typically, entitlements are laws based on concepts of principle ("rights") which are themselves based in concepts of social equality or enfranchisement."  That is the WIKI definition -( http://en.wikipedia.org/wiki/Entitlement) and it is about as succinct at one can make it.  The chart at the right shows the growth in entitlement costs.

But there is a deeper issue here which the WIKI does not highlight enough.  There are two kinds of entitlements.   The first are created as if they were a traditional contract.   Social Security is an entitlement based on a series of direct payments over a lifetime of work.   It is pretty clear that Social Security and a number of other like minded systems (public pensions for example) are systems that could work if the recipients were willing to pay the appropriate amount to fund the projected benefits.   The problem is the political class is great at growing these things without regard to prudent thought about contributions versus future costs.

The second kind of entitlement is one created simply by one's membership in a society.   That entitlement is based on the notion of a merit good.   In essence, society will be better if we provide an adequate amount of something, for example like food to people who cannot afford it (in California now known as Cal Fresh but formerly called food stamps) or education for people who cannot afford it (Pell Grants).   Both of those entitlements are designed to make society a little better but they are open ended spending commitments.   In recent years these kinds of entitlements have grown tremendously.    It is hard to assume that the tremendous growth in the use of food stamps was caused entirely by the recession.  So the whole notion of entitlement may produce some deeper societal consequences.

As I have watched the discussions on the fiscal cliff develop I have thought a lot about both types of entitlements.   From my perspective both are corruptive to the creation of a just society.   It is easy to think about alternatives to the first kind of entitlements - Jose Piñera, the Chilean economist, gave us a map for improving Social Security and other programs like it decades ago.

Traditionally the second kind of entitlements can be controlled by two methods.   First, they can be budgeted on a traditional basis.  Figure out how much we want to spend on these programs and keep to that budget. In extraordinary times we could agree to spend a bit more, which might be paid back in flush times.  Second, the benefit could be divided by the number of applicants - in very tough times that would mean a small amount of benefit.

A better way to think about both kinds of entitlements would be to decide whether it is better to put the benefit on a sound financial basis that covers both current needs and appropriate actuarial assumptions in the future(like what is trying to be done for public employee pensions).    A second way to improve the current situation is to privatize the benefit and the financing.   Government serves as the rule maker, but not the administrator.   Many of the best proposals for Social Security are based on that principle.  Make the system more like an IRA, with a defined contribution level which is limited to an approved list of investments.   Make a separate provision for the small number of people whose benefits are not realized either because of bad luck or even imprudence.

The moral hazard of entitlements is that individuals begin to believe that simply by being a member of society they are due something.   That separates the concept of rights offered by society from the inherent responsibilities of being a member of society.  The President's rap (You did not build this) is an example of that separation.   But there is a second hazard.   Entitlements encourage politicians of all political stripes to use governmental authority to play one part of society against another with the idea that benefits will accrue to one group and costs will be borne by another.

No comments: