FY 2014 Mandatory Spending Highest Ever:
Here's the breakout:
- Social Security - $860 billion
- Medicare - $524 billion
- Medicaid - $304 billion
- All other mandatory programs - $621 billion. These programs include TARP, Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, Supplemental Security for the Disabled and Student Loans. (Source: OMB, FY 2014 Budget, Table S-5)
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 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 shortfall could be covered by an extra 2.22% increase in payroll taxes.
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.
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 long-term drag on economic growth.
Why Mandatory Spending Keeps Growing:
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. As a result, mandatory spending continues to grow.
Here's an example of recent years. Mandatory spending was:
The Mandatory Budget Dilemma:
- 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 2014 and Beyond::
- Devote more of the budget to pay Social Security benefits. This would reduce 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 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. Article updated April 10, 2013
Understand the Current Federal Budget
- Economic Report of the President
- Current Federal Budget Breakdown
- Revenue and Taxes
- Current Deficit