Mandatory spending is estimated to be $5.2 trillion for FY 2021. The two largest mandatory programs are Social Security and Medicare. That's 25% of all federal spending, two times more than the military budget.
Congress established mandatory programs under so-called authorization laws. These laws also mandated that Congress 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 (OMB).
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.
- Mandatory spending requires government expenses on programs mandated by law.
- Social Security and Medicare are the largest mandatory programs the U.S. government has to pay for.
- Congress establishes the mandatory programs. Only this body can reduce the mandatory expense budget.
- Interest on the national debt is not categorized as a mandatory expense, but as an obligated payment, it becomes part of mandatory spending.
Social Security is the single largest federal budget item, costing $1.135 trillion in FY 2021. 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.
The Social Security Trust Fund is made up of two parts: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).
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 2033, the OASI surplus will be depleted. Social Security payroll taxes and interest from the trust fund will only be able to pay 76% of the projected benefits. For DI, the surplus will be depleted by 2057, at which point only 91% of benefits would be covered. The rest would have to come out of the general fund. The 75-year shortfall could be covered by a 3.54% increase in payroll taxes.
Medicare will cost $709 billion in FY 2021. 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 mean that general revenues would have to pay for 49% of Medicare costs by 2034. As with Social Security, the tax base is insufficient to pay for this.
Medicaid costs will be $521 billion in FY 2021. The program 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 $621 billion. Most of these are income-support programs that provide federal assistance for those who can't provide for themselves. One group helps keep low-income families from starving. These include Food Stamps 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. The 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 Emergency Economic Stabilization Act of 2008. This was added to the mandatory budget in FY 2009 as the TARP program. 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 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, 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. In addition, technological breakthroughs allow for more diseases to be treated, although at a higher cost.
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 rather than paying them for each test and procedure. Third, it's helped move medical records onto an electronic database, which allows patients to be more involved in 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 the blind or veterans? In addition, many of these groups now have powerful lobbyists, like the AARP, who can sway elections and funding. It's easy, and politically rewarding, to mandate new programs. It’s politically damaging to eliminate them.
One good example is health care reform. It was passed in 2010 but at a great political cost. Many in Congress who voted for it lost their seats in the mid-term elections to candidates from the Tea Party, however.
The Mandatory Budget Dilemma
Demographics means that, at some point, Congress must amend the laws that created these mandatory programs. By 2030, those over 65 will compose 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 2021 and Beyond
To keep Social Security solvent, Congress must choose from the least of three evils. None of them would be 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, taxes would have to be raised, or the debt would have to be increased. Either would slow economic growth.
Third, decrease the benefit amount paid to retirees. This is the most likely scenario. It would force able-bodied older workers to continue working.
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 2021, it's projected to be $300 billion. That's nearly one third of the budget deficit of $944 billion.