Mandatory Spending Hits New Record
Here's the breakout:
- Social Security - $896 billion
- Medicare - $526 billion
- Medicaid - $336 billion
- Federal Employee Retirement - $139 billion
- Veterans Pensions - $79 billion
- SNAP (Food Stamps) - $78 billion
- Earned Income Tax Credit - $58 billion
- Supplemental Income to disabled children and adults - $56 billion
- National Highways - $43 billion
- Child Tax Credit - $22 billion
- State Child Nutrition - $21 billion
- TANF (welfare) - $17 billion
- Veterans Education - $14 billion
- Mass Transit - $12 billion
- CHIP (Children's Health Insurance Program) - $11 billion
- Farm Subsidies - $11 billion
- Crime Victims Fund - $8 billion
- Foster Care - $7 billion
- TARP (home loan modification program) - $6 billion
- All other mandatory programs - $76 billion. (Source: OMB, FY 2015 Budget, Table S-5; Table 25-12)
How Is Social Security Funded?:
Social Security is funded through payroll taxes. Through 2017, Social Security collects more in tax revenues than it pays out in benefits because there are 3.3 younger workers for every beneficiary. This created a surplus in the Social Security Trust Fund.
However, in 2008 the first of 78 million Baby Boomers turned 62 and became eligible to draw down benefits. Over the next 30 years, there will be fewer and fewer workers per retiree to support Social Security via payroll taxes. By 2036, the surplus will be depleted. The Social Security payroll tax will only be able to pay 77% of projected benefits. The rest would have to come out of the general fund. However, the entire shortfall could easily be covered by an extra 2.22% increase in payroll taxes.
How Is Medicare Funded?:
Unlike Social Security, Medicare payroll taxes and premiums cover only 57% of current benefits. The remaining 43% is financed from general revenues. Because of rising health care costs, general revenues would have to pay for 62% of Medicare costs by 2030. As with Social Security, the tax base is insufficient to pay for this.
Medicare has two sections:
- The Medicare Part A Hospital Insurance program, which collects enough payroll taxes to pay current benefits.
- Medicare Part B, the Supplementary Medical Insurance program, and Part D, the new drug benefit, which is covered by premium payments and general tax revenues.
Interest on the Debt
Although not officially a part of the Mandatory budget, the interest on the national debt is also mandatory. For FY 2015, it's projected to be $251 billion.
How Does Mandatory Spending Affect the U.S. Economy?:
When so much of the budget goes towards fulfilling mandatory programs, the government has less to spend for discretionary programs. In the long run, the high level of mandatory spending means rigid and unresponsive fiscal policy. This is a long-term drag on economic growth.
Here's how mandatory spending has grown in recent years:
Why Mandatory Spending Keeps Growing:
Federal law dictates that all mandatory programs must be funded. For this reasons, they are outside of the annual budget process that governs discretionary spending. (Source: Congressional Budget Office, Mandatory Spending Control Mechanisms)
The Social Security Act of 1935 is the Federal law that set up the Social Security retirement program. The Federal government must, by law, pay retirees their benefits. Other Federal laws require the government to provide benefits to people with disabilities, people under a certain income level, and the unemployed. The mandatory portion of the budget simply estimates how much it will cost to fulfill these Federal laws.
It literally takes an act of Congress to change a mandated program. For example, Congress amended the Social Security Act to add Medicare. However, Congress has a difficult time reducing the benefits entitled under any mandated program. Most consider it political suicide because such cuts guarantee voter opposition by the group receiving less benefits. That's one reason mandatory spending continues to grow.
Another is the aging of America. As more people require Social Security and Medicare, costs for just these two programs will nearly double in the next 10 years.
This contributes to higher health care spending. In addition, technological breakthroughs allow more diseases to be treated. However, this comes at a higher cost. This is one reason President Obama asked for health care reform. This rewards doctors based on treatment outcomes, as opposed to paying them for each test and procedure.
The Mandatory Budget Dilemma:
Demographics means that, at some point, Congress must bravely bite the bullet and amend the laws that created these mandatory programs. The first Baby-Boomer turned 62 in 2008, becoming eligible to retire on Social Security benefits. By 2025, those aged 65+ will comprise 20% of the population. As Boomers leave the work-force and apply for benefits, four things happen:
- The percentage of the labor force under age 55 does not provide enough income via payroll taxes to fund Social Security benefits.
- Economic growth slows as government spending becomes almost exclusively focused on paying benefits for these mandated programs.
- The debt comes closer to Japan's crushing burden of a 200% debt-to-GDP ratio.
- The dollar weakens as investors in Treasury bonds switch to currencies in countries with brighter growth prospects.
Choices for FY 2015 and Beyond::
As a result, Congress will have to choose among the lesser of three evils, none of which are good for the economy:
- Allow the budget to grow to pay for Social Security benefits. This would force cuts in defense spending, the largest discretionary budget item. It would also constrain the government's ability to stimulate the economy in case of recession.
- Increase the overall size of the budget. However, to fund this increased spending, either taxes would have to be raised, or the debt further increased. Either would ultimately slow economic growth.
- Decrease the benefit amount paid to retirees. This is the most likely scenario. This would force able-bodied Boomers to continue working. However, it would require an Act of Congress to change the existing law. Article updated April 5, 2014
Understand the Current Federal Budget
- Economic Report of the President
- Current Federal Budget Breakdown
- Revenue and Taxes
- Current Deficit