SHORT-TERM GAINS AND LONG-TERM PAIN The History of US Entitlements
By Mark J. Higgins
“ It is not improper to observe, that pensions in all countries begin on a small scale, and are first generally granted on proper consideration, and then they increase till at last they are granted often on whim or caprice as for proper considerations … It will drain any treasury, no matter how full.”
— Nathaniel Macon, former Speaker of the House( January 1818)
On January 1, 2025, the gross federal debt of the United States exceeded 120 % of GDP, surpassing the previous all-timehigh of approximately 119 % set at the end of World War II. Recent projections by the bipartisan Congressional Budget Office( CBO) are even more alarming. As of March 2025, the CBO estimated that current spending and tax policies will cause the gross federal debt to rise steadily to 169 % of GDP by 2055. These estimates do not account for unforeseen crises, which make it conceivable that future debt levels will rise considerably higher.
The greatest financial challenge for the United States in the 21st century will almost certainly involve reining in the nation’ s unsustainable spending and debt accumulation. Solving this problem is difficult under any circumstances, but what makes it especially daunting is the fact that few politicians acknowledge that the primary cause is unsustainable spending on entitlements. In 2024, mandatory spending on programs, such as Social Security, Medicare, Medicaid, unemployment and other aid programs constituted roughly 55 % of non-interest, federal spending. In 2055, these programs are projected to absorb approximately 67 % of non-interest spending. The sheer magnitude of entitlement program costs makes it impossible to solve the nation’ s debt problem unless government policymakers commit to altering them in a meaningful way.
The Danger of Depleted Borrowing Capacity
“ Exigencies are to be expected to occur, in the affairs of nations, in which there will be a necessity for borrowing. That loans in times of public danger, especially from foreign war, are found an indispensable resource, even to the wealthiest of them … On the one hand, the necessity for borrowing in particular emergencies cannot be doubted, so on the other, it is equally evident, that to be able to borrow upon good terms, it is essential that the credit of a nation should be well established.”
— Alexander Hamilton, first US Secretary of the Treasury
The last time the credit of the United States was called into serious question was in 1790. At the time, many states had defaulted on bonds issued to fund the Revolutionary War. In extreme cases, some states even failed to fully compensate veterans for their service in the war. But the United States was fortunate that President George Washington appointed Alexander Hamilton to serve as the nation’ s first Secretary of the Treasury. In addition to creating the nation’ s first central bank, Hamilton consolidated the war debt of the states under the federal government and selectively raised tariffs to ensure adequate coverage of interest and principal payments. He also articulated two fundamental principles regarding the use of public debt in his First Report on the Public Credit. The first was that it should be used primarily to address public dangers, especially foreign wars. The second was that the debt should be extinguished when the danger subsided. In combination, Hamilton’ s programs and principles repaired the nation’ s credit and established a solid foundation for future economic growth.
The United States largely abided by Hamiltonian principles for approximately 150 years, thus ensuring adequate borrowing capacity to finance successful responses to public dangers, such as the War of 1812, the Civil War, World War I, the Great Depression and World War II. But emboldened by extraordinary post-World War II wealth and armed with the world’ s new dominant reserve currency under the Bretton Woods Agreement, Congress massively increased entitlement spending for the last 80 years. Now, in 2025, the debt reckoning of the United States has arrived, and Americans must choose whether to continue spending beyond their means.
This article focuses on a critically important issue related to the health of the nation’ s finances. It explains the history of US entitlement programs and how they have evolved and expanded over more than two centuries. The purpose is not to advocate for specific solutions, but rather to take the first step and explain the severity of the problem. Solutions will inevitably require painful sacrifices that will likely entail a distasteful combination of benefit reductions and tax increases. Many who are called to make such sacrifices will feel they are unfair— and, in many cases, they will be unfair. Perhaps understanding how the nation arrived at this point will help people appreciate why such sacrifices are necessary, nonetheless. The alternative is to saddle future generations with the debts of their ancestors, thereby condemning them to confront public dangers armed only with a maxed-out line of credit.
22 FINANCIAL HISTORY | Spring 2025 | www. MoAF. org