Federal Budget Cuts Social Security and Medicare $56 Billion in 2012

The U.S. Federal Budget for FY 2008 proposes dozens of program adjustments. (See OMB FY 2008 Budget, Table S-5. Mandatory Proposals for details). In FY 2008, the total savings is $9.7 billion, rising to $56 billion in 2012.

Of these, reforms to Medicare ($21.7 billion in savings by 2012) and the President’s Personal Savings plan ($29 billion in savings by 2012) are the largest. Although this is a lot of money, it is still only 3% of spending. Through 2012, the impact of the Budget’s savings proposals on the U.S. economy is negligible.

Long-term, however, the impact of doing nothing about these burgeoning unfunded mandates will be huge. The first Baby-Boomer turns 62 this year, becoming eligible for Social Security benefits. By 2025, those aged 65+ will comprise 20% of the population. Furthermore, those remaining in the workforce will have less earning capacity.

As Boomers leave the work-force and apply for benefits, three things happen:

1. The percentage of those under 55 in the labor force stops growing, providing less payroll taxes to fund Social Security.
2. GDP growth declines to less than 2%, thanks to fewer young workers.
3. By 2040, the Social Security Trust Fund goes bankrupt.

Understand how Social Security and Medicare are funded, and their impact on the U.S. Economy in U.S. Federal Budget - Mandatory Spending.