President Trump and Speaker Paul Ryan have announced their intention to reform entitlement spending, the major driver of the nation’s deficit. For inspiration, Congress should look to the United Kingdom, which has successfully reduced entitlements and seen increased labor force participation.
Of the $4 trillion in federal spending in fiscal year 2016, $2.7 trillion was spent on social insurance, including Social Security, Medicaid and Medicare, unemployment insurance, and veteran benefits. Nearly 20 percent of Americans, or 74 million, use Medicaid. Although it was understandable for these benefits to increase during the recession and with the Affordable Care Act, spending on benefits has declined only slightly despite the impressive growth in the economy.
One of the reasons for the consistent level of benefits is declining participation in the US labor force for prime age workers. As illustrated in the two graphs above, since 2000 both the labor participation rates for men and women in the United States have been steadily declining, 3.5 percent and 3 percent respectively. In comparison, the labor force participation rate in the UK for men has remained relatively constant, increasing half a percent from 2000 to 2016, and has risen for women by 5 percent. In the UK, there is a notable jump, especially for women, between 2012 and 2013. This is potentially connected to the redesign of the UK welfare system. With Congress and the President seeking to reform entitlement spending, they should consider reforms such as those in the UK that might encourage labor force participation.
The UK overhauled its welfare system with the Welfare Reform Act 2012. This Act created one benefit, known as Universal Credit, while slowly eliminating various other programs, including the working tax credit, the child tax credit, housing benefit, income support, income-based job seeker’s allowance, and income-based employment and supportive allowance. In addition to simplifying the programs into one, the Act required claimants to agree to a “Claimant Commitment,” in which they sought the services of a work coach to improve their job prospects and get hired.
Often, people on benefits are discouraged from pursuing jobs because they fear losing their benefits once they improve their economic circumstances. However, employment can still be encouraged if the loss of benefits is gradual. In the UK, benefits are not reduced at a one-to-one ratio with an increase in wage, but rather benefits decrease by less than the increase in wage. Additionally, the UK government encourages employment by threatening the potential loss of benefits if a claimant refuses a job offer. However, certain people, such as single mothers with very young children, are exempt from this requirement.
Although the implementation of the Universal Credit program has not gone as smoothly as hoped, the program has led to an increase in UK labor force participation as well as a decrease in dependence on benefits. During the same period that the labor force participation rate in the U.S. declined from 84 percent to 82 percent for prime age workers, the rate in the UK increased from 84 percent to 86 percent. Of the 660,000 people currently enrolled in the Universal Credit program, 40 percent of them are employed.
Though combining all social benefit programs into one may not be the best option for the United States, Congress should follow the UK’s example and encourage larger participation in the labor force in order to receive benefits. By increasing the labor force participation rate, the United States could see a reduction in spending on welfare programs with the potential to see more economic growth. This year Congress should be ready to undertake entitlement reforms that will help long-term fiscal stability.
Emily Top is a research associate at Economics21.
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