Current Federal Mandatory Spending
Mandatory spending is estimated to be $2.841 trillion for FY 2020. The two largest mandatory programs are Social Security and Medicare. That's 60% of all federal spending. It's almost three times more than the military budget.
Congress established mandatory programs under so-called authorization laws. These laws also mandated that Congress must appropriate whatever funds are needed to keep the programs running. The mandatory portion of the U.S. budget estimates how much it will cost to fulfill these authorization laws. These estimates are made by the Office of Management and Budget.
Congress can only reduce the funding for these programs by changing the authorization law itself. That requires a 60-vote majority in the Senate to pass. For example, Congress amended the Social Security Act to create Medicare. For this reason, mandatory programs are outside the annual budget process that governs discretionary spending. Since it is so difficult to change mandatory spending, it is not part of the discretionary fiscal policy.
Social Security is the single largest federal budget item. The FY 2020 budget, Table S-4, estimates it will cost $1.102 trillion. The Social Security Act of 1935 guaranteed that workers would receive benefits after they retired. It was funded by payroll taxes that went into a trust fund used to pay out the benefits.
At first, there were more healthy workers paying into the fund than retirees taking benefits. This allowed Social Security to also provide training and funds to the blind and disabled in the Supplemental Security program.
Social Security is funded through payroll taxes. Until 2010, Social Security collected more in tax revenues than it paid out in benefits. That's because for every beneficiary withdrawing from the fund, there were 3.3 younger workers paying into it. Over the years, this created a surplus in the Social Security Trust Fund.
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 2034, the surplus will be depleted. Social Security payroll taxes and interest from the trust fund will only be able to pay 79% of projected benefits. The rest would have to come out of the general fund. The entire shortfall could easily be covered by an extra 2.22% increase in payroll taxes.
Medicare will cost $679 billion in FY 2020. It subsidizes health care for those over age 65. 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. Payroll taxes and premiums cover only 57% of benefits. The remaining 43% is financed from general tax revenues.
That means Medicare contributes to the budget deficit. Rising health care costs means 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.
Medicaid costs will be $418 billion in FY 2020. Medicaid provides health care to those with low incomes. It's funded by general revenue from both the federal and state governments. It is administered by the states.
Other Mandatory Programs
All other mandatory programs will cost $642 billion. Most of these are income support programs provide federal assistance for those who can't provide for themselves. One group helps keep low-income families from starving. These include Food Stamps, Child Tax Credits, and Child Nutrition programs.
These are just three of the welfare programs which also include TANF, EITC, and Housing Assistance. Almost all of them are permanent, but there are exceptions. For example, the Food Stamp program requires periodic renewal.
There's also unemployment benefits for those who were laid off. Student Loans help create a more highly skilled workforce. Other retirement and disability programs are for those who were former federal employees. These include civil servants, the Coast Guard, and the military.
In FY 2009, Congress passed the Economic Stimulus Act. This was added to the mandatory budget in FY 2010 as the TARP program, and as homeowner assistance in FY 2011. In FY 2010, the Patient Protection and Affordable Care Act became law. It phased in new health care benefits and costs that year. It extended coverage to those with pre-existing conditions, children, and those who were laid off.
It also gave subsidies to small businesses and seniors with high prescription drug costs and provided funding to ease the shortage of doctors and nurses. The ACA’s mandatory costs that are offset by higher payroll taxes, fees to prescription drug companies, and lower payments to hospitals.
How Mandatory Spending Affects the U.S. Economy
When so much of the budget goes toward fulfilling mandatory programs, the government has less to spend on 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.
Why It Keeps Growing
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 fewer benefits. That's one reason mandatory spending continues to grow.
Another reason is the aging of America. As more people require Social Security and Medicare, costs for these two programs will almost double in the next 10 years. At the same time, birth rates are falling. As a result, the elder dependency ratio is worsening.
This contributes to higher health care spending. In addition, technological breakthroughs allow more diseases to be treated. This comes at a higher cost. This is one reason President Obama asked for health care reform.
Many people don't realize that the real benefit of the Affordable Care Act is lower costs. First, it pays for preventive care, treating Medicare and Medicaid recipients before they require expensive emergency room treatment. Second, it rewards doctors based on treatment outcomes, as opposed to paying them for each test and procedure. Third, it's helped move medical records onto an electronic database. That allows patients to take more ownership of their health care. It also gives doctors current data on the most effective treatments.
It's difficult for any elected official in Congress to vote for a reduction in these benefits. Who can vote for cutting off the income of Grandma, the blind or a veteran? In addition, many of these groups now have powerful lobbyists, like AARP, who can sway elections and funding. It's easy, and politically rewarding, to mandate new programs. It’s political suicide to eliminate them.
A good example of this is health care reform. It was passed in 2010 but at a great political cost. Many of the Congressmen who voted for it lost their seat in the mid-term elections to candidates from the Tea Party. This is despite its promise to actually reduce the mandatory budget by cutting health care costs and charging the health care industry more for Medicare and Medicaid.
The Mandatory Budget Dilemma
Demographics means that, at some point, Congress must bite the bullet and amend the laws that created these mandatory programs. By 2025, those over 65 will comprise 20% of the population. As boomers leave the workforce 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 U.S. 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 2020 and Beyond
To keep Social Security solvent, Congress must choose from the lesser of three evils. None of them are good for the economy. First, allow more of the budget to go toward 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 a recession.
Second, increase the overall size of the budget. To fund this increased spending, either taxes would have to be raised or the debt further increased. Either would slow economic growth.
Third, decrease the benefit amount paid to retirees. This is the most likely scenario. This would force able-bodied boomers to continue working. It would require an Act of Congress to change the existing law.
Interest on the Debt
Although not officially a part of the mandatory budget, the interest on the national debt is also a mandated expense. For FY 2020, it's projected to be $479 billion. That's almost half of the budget deficit of $1.1 trillion.