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This study analyzes three ways to realize budgetary savings by taxing or reducing benefits from entitlement programs considered as a group, rather than reducing benefits program by program. The Congressional Budget Office (CBO) prepared the study in response to requests from Members of Congress and others for an elaboration of the analysis presented on this subject in CBO's March 1994 volume Reducing the Deficit: Spending and Revenue Options. The study also examines the current distribution among family income groups of benefits from 11 major entitlement programs, in response to a request from Senator Alan K. Simpson and eight other Senators for information on current payments to individuals and families under these entitlements.

The specific options considered are taxing all entitlement benefits under the federal individual income tax, reducing benefits provided to middle- and high-income families, and denying benefits to families with the highest incomes. For each option, the study estimates budgetary savings and the distributional impact on families; it also discusses issues that would affect the options' administration and effectiveness. In accordance with CBO's mandate to provide objective and impartial analysis, this study contains no recommendations.

Roberton Williams of CBO's Tax Analysis Division wrote the study under the direction of Rosemary Marcuss and Frank Sammartino. Paul Cullinan of the Budget Analysis Division helped write the first draft of the study. Richard Kasten assisted in developing the micro-simulation model used to analyze the policy options. Roger Hitchner of the Natural Resources and Commerce Division drafted the discussion of agricultural subsidies. Many other CBO staff members provided comments including Robert Dennis, Nancy Gordon, Mark Musell, Neil Singer, Ralph Smith, David Torregrosa, and David Weiner. Eugene Steuerle and Patricia Ruggles offered useful comments on a late draft.

Leah Mazade edited the manuscript, and Christian Spoor provided editorial help during the production process. Simone Thomas produced drafts of the study. Martina Wojak-Piotrow prepared the study for publication.
 

Robert D. Reischauer
Director
September 1994
 
 

SUMMARY

ONE - INTRODUCTION

• The Major Entitlement Programs
• Approaches to Reducing Entitlement Spending

TWO - THE MAJOR ENTITLEMENTS: WHO GETS THEM AND SHOULD THEY BE MEANS-TESTED?

• Cash Social Insurance Programs
• Federal Civilian and Military Retirement Programs
• Means-Tested Income Support Programs
• Government-Sponsored Health Insurance
• The Distribution of All Entitlement Benefits

THREE - OPTIONS FOR CURTAILING ENTITLEMENTS AND THEIR EFFECTS ON THE BUDGET

• Make Entitlements Subject to the Individual Income Tax
• Reduce Entitlements for Middle- and High-Income Recipients
• Deny Entitlements to High-Income Recipients

FOUR - DISTRIBUTIONAL EFFECTS

• Effects on Different Types of Families
• Effects Among Programs

FIVE - IMPLEMENTING A GLOBAL MEANS TEST

• Administering Agency
• Should a Means Test Be Prospective or Retrospective?
• Type of Unit
• Measuring Resources
• Taxing or Reducing In-Kind Benefits
• Rate of Benefit Reduction

SIX - COMPARING THE POLICY OPTIONS

APPENDIXES

A - Calculating Budgetary Savings and Distributional Effects
B - Budgetary Savings and Distributional Effects of Options with Equivalent Budgetary Savings
 

TABLES
S-1.	Recipient Families by Income and Type, 1990
S-2.	Estimated Gains in Revenues and Reductions in Spending Under Three Policy Options to Cut Net Entitlement Costs, Fiscal Years 1995-1999
S-3.	Distribution of Losses of Benefits Among Recipient Families Under Three Policy Options to Cut Net Entitlement Costs, by Family Income and Type
1.	CBO Baseline Projections of Mandatory Federal Spending by Program, Fiscal Years 1993 and 1999
2.	Average Social Security and Railroad Retirement Benefits per Recipient Family Before and After Federal Income Taxes, by Family Income and Type, 1990
3.	Percentage of Families Receiving Cash Benefits, Average Benefits per Family, and Benefits as a Percentage of Family Income, by Program, Family Income, and Family Type, 1990
4.	Average Unemployment Compensation per Recipient Family Before and After Federal Income Taxes, by Family Income and Type, 1990
5.	Percentage of Families Receiving Federal Civilian and Military Pensions, Average Pension per Recipient Family, and Pensions as a Percentage of Family Income, by Program, Family Income, and Family Type, 1990
6.	Average Federal Civilian and Military Pensions per Recipient Family Before and After Federal Income Taxes, by Family Income and Type, 1990
7.	Percentage of Families Receiving Means-Tested Benefits, Average Benefits per Recipient Family, and Benefits as a Percentage of Family Income, by Program, Family Income, and Family Type, 1990
8.	Percentage of Families Receiving the Earned Income Tax Credit, Average Credit per Recipient Family, and Credit as a Percentage of Family Income, by Family Income and Type, 1990
9.	Percentage of Families Receiving Health Benefits, Average Value per Recipient Family, and Benefits as a Percentage of Family Income, by Program, Family Income, and Family Type, 1990
10.	Characteristics of Families Receiving Entitlement Benefits, by Family Income and Type, 1990
11.	Additional Federal Revenues from Broadening Taxable Income to Include Entitlements, Fiscal Years 1995-1999
12.	Budgetary Savings from Reducing Entitlement Benefits for Middle- and High-Income Recipients, Fiscal Years 1995-1999
13.	Budgetary Savings from Denying Entitlement Benefits to High-Income Recipients, Fiscal Years 1995-1999
14.	Percentage of Recipient Families Losing Benefits Under Three Policy Options to Cut Net Entitlement Costs, by Family Income and Type
15.	Distribution of Budgetary Savings Under Three Policy Options to Cut Net Entitlement Costs, by Family Income and Type
16.	Percentage of Average Benefits Lost by Families Losing Benefits Under Three Policy Options to Cut Net Entitlement Costs, by Family Income and Type
17.	How Three Policy Options to Cut Net Entitlement Costs Affect the Benefits Lost by Recipient Families, by Program
18.	Comparing the Effects of Three Policy Options to Cut Net Entitlement Costs
B-1.	Estimated Gains in Revenues and Reductions in Spending Under Three Policy Options Generating Equivalent Budgetary Savings in Net Entitlement Costs, Fiscal Years 1995-1999
B-2.	Percentage of Recipient Families Losing Benefits Under Three Policy Options Generating Equivalent Budgetary Savings in Net Entitlement Costs, by Family Income and Type
B-3.	Distribution of Budgetary Savings Under Three Policy Options Generating Equivalent Budgetary Savings in Net Entitlement Costs, by Family Income and Type
B-4.	Average Percentage of Benefits Lost by Families Losing Benefits Under Three Policy Options Generating Equivalent Budgetary Savings in Net Entitlement Costs, by Family Income and Type
B-5.	How Three Policy Options Generating Equivalent Budgetary Savings in Net Entitlement Costs Affect the Benefits Lost by Recipient Families, by Program
FIGURE
1.	Components of Federal Spending as a Percentage of Gross Domestic Product, 1962-2004
BOX
1.	Measuring the Distribution of Entitlements

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