US spends too little on social welfare: Fact or fiction?

As we had alluded to previously (see comments section here), we have been hearing the argument “we don’t spend enough money on social services in the US” for quite some time now. So, let’s dissect this argument one step at a time.

First, what exactly do we mean by social spending and how does the US compare with other developed nations? Since good international comparative data on the topic of social spending are hard to find, it is very easy to adjust available data to suit one’s argument. Thus, rather than trying to come up with a single definition and measure of social benefit expenditures, below we highlight some key categories of spending that fit (at least in our minds) into the broad definition of social welfare expenditures.

In the US, it is politically correct and convenient to count social spending as only public/ government spending. Taking the OECD definition of social expenditures, which includes the following social benefit areas:

“old age, survivors, incapacity-related benefits, health, family, active labour market programmes, unemployment, housing and other social areas…public spending on early childhood education and care up to age 6”

and looking at public expenditures as a percentage of GDP, we find that the US ranks #24 out of 35 OECD members, but still above both Australia and Canada, countries often cited as doing more for their citizens than the US (see Figure 1 here). Moreover, when looking at sub-categories of general government spending, we find that in 2015, US spending as percentage of GDP is ranked (among OECD members) as 1st in health; 2nd in defense; 7th in public order and safety; 8th in education – quite a bit better than our overall ranking.

Moreover, social spending is actually more than public/ government spending alone. Interestingly, when both public and private social spending (as defined above by OECD) are accounted for and include the full range of social benefit transfers, the US ranks second only to France in total net social spending as a percentage of GDP (see Figure 4 in same OECD report).

Since spending on health is included in the OECD definition of social expenditures and the US is a known outlier in terms of healthcare spending, a follow up argument we often hear is: “We spend too much on healthcare and not enough on other social services.” While we absolutely agree that US healthcare is in dire need of improvement (both in terms of effectiveness and efficiency), a look at the available data shows that even if we subtract out healthcare expenditures, total spending on “other” social services in the US stands at roughly 13% of GDP and again above some comparison countries (Australia, Canada, Switzerland).

So, maybe the question we should be asking ourselves is not, “are we spending enough on social services?”  Maybe what we should be asking instead is, “are we getting what we are paying for in social solutions?” This is a question of value, that in many ways parallels the one being asked about the state of US healthcare.

Unfortunately, whether one uses broad measures (e.g., overall social spending vs. income inequality) or more specific examples (e.g., spending on education vs. secondary and tertiary graduation rates), Figures 7 and 9 here suggest that we are not getting good value for all the money we spend. Moreover, while the US government spends more on public safety as a percentage of GDP than many OECD nations or the EU28 (see Table 1 here), our rates of incarceration are some of the highest in the world, with some US states spending more money on incarceration than higher education. And while directing some of the “waste” away from healthcare into other social services seems like a sound idea, simply pouring more money into the existing system without any regard for how it is being spent, is unlikely to generate better social outcomes whether the benefit in question is education or income assistance programs.

Rather than spending more money, the US has to look at existing social expenditures as an INVESTMENT and manage these expenditures on an ongoing basis to continuously improve social outcomes, by relentlessly learning from both international and within-US success stories (does that sound familiar?). Social spending needs to be built into a balance sheet (which the US does not currently keep), otherwise everyone will continue to ignore how the funds are managed with no expectations for measurable ROI. This, in turn, will require a shared vision, a shared reality that recognizes the evidence above, and strong leadership from policy makers – all sorely missing in Washington, DC at this time.

Coming to grips with the value of social welfare expenditures is particularly important due to the profound demographic shifts happening around the world over the coming decades. As the OECD social spending report highlights (see Figures 1 and 2) – the vast majority (79%) of public social spending comes in two categories: health and pensions, both heavily influenced by demographics. Thus, rather than focusing simply on the absolute levels of social spending, both the US (with its aging Baby Boomer population) and the EU27 (projected to see a 68% increase in the number of adults over age 65 over the next 50 years) could benefit from a closer evaluation of: a) the sustainability of government social welfare expenditures, given that working age populations will be increasing much less than the older beneficiaries and b) what we get in return for the significant funds already being spent on social welfare.

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