Current Federal Mandatory Spending

The Federal Programs That Are Eating the Budget Alive

Mandatory Spending
Mandatory spending provides a safety net for the elderly and children. Photo: Jim McGuire/Getty Images

Current Mandatory Spending Hits New Record

Mandatory spending is currently estimated to be $2.606 trillion for FY 2017. That's nearly two-thirds of all federal spending and is a new record. It's also three times more than the military budget. Here's the breakout:

    How Is Social Security Funded?

    Social Security is funded through payroll taxes. Until 2011, Social Security collected more in tax revenues than it paid out in benefits.That's because there were 3.3 younger workers paying into the fund for every beneficiary taking out of the fund. 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 2035, the surplus will be depleted. The Social Security payroll tax will only be able to pay 75% 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 healthcare 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 2017, it's projected to be $266 billion. That's more than half the budget deficit.​

    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.

    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 federal 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 fewer 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 ten years.

    This contributes to higher healthcare 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 healthcare reform.

    Many people don't realize that the real benefits 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 healthcare. It also gives doctors current data on the most effective treatments.

    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. By 2025, those aged 65+ will comprise 20% of the population. As Boomers leave the work-force and apply for benefits, four things happen:

    1. The percentage of the labor force under age 55 does not provide enough income via payroll taxes to fund Social Security benefits.
    2. Economic growth slows as government spending becomes almost exclusively focused on paying benefits for these mandated programs.
    3. The U.S. debt comes closer to Japan's crushing burden of a 200% debt-to-GDP ratio.
    4. The dollar weakens as investors in Treasury bonds switch to currencies in countries with brighter growth prospects.

    Choices for FY 2017 and Beyond

    As a result, Congress will have to choose among the lesser of three evils, none of which are good for the economy:

    1. 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 a recession.
    2. 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.
    3. 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. 

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