What Is Mandatory Spending?:
- Social Security - $695 billion
- Medicare - $453 billion
- Medicaid - $290 billion
- All other mandatory programs - $571 billion. These programs include Food Stamps, Unemployment Compensation, Child Nutrition, Child Tax Credits, Supplemental Security for the blind and disabled, Student Loans, and Retirement / Disability programs for Civil Servants, the Coast Guard and the Military
How Is Social Security Funded?:
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 2040, the Social Security Fund will be depleted and income will be insufficient to pay benefits promised to, and earned by, retirees.
How Is Medicare Funded?:
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.
Most of the Budget Must Go to Mandatory Spending:
How Does Mandatory Spending Affect the U.S. Economy?:
In the long run, the high level of mandatory spending means rigid and unresponsive fiscal policy. This is a relentless drag on economic growth.
As Boomers leave the work-force and apply for benefits, three things happen:
- The percentage of the labor force under 55 stops growing, providing less payroll taxes to fund Social Security.
- GDP growth declines to less than 2%, thanks to fewer workers.
- By 2040, the Social Security Trust Fund goes bankrupt.
Choices for FY 2012 and Beyond:
- Devote more of the budget to pay Social Security benefits. However, to maintain current benefits, the federal budget will have to increase to 25% of GDP by 2045.
- To fund this increased budget, taxes would have to increase, further slowing the economy.
- Decrease the benefit amount paid to retirees. This would force able-bodied Boomers to continue working, and those who couldn’t work would provide a further drain on the economy.


