An article earlier this week focused on the revenue side (taxes) of the federal government. Revenues account for $2.3 trillion for fiscal year 2011, but spending accounts for $3.6 trillion during the same timeframe. Since revenue raising is only part of the way Congress can influence the budget deficit, we offer this space to capture the current state of how those revenue dollars (and then borrowing) are spent.
In 2011, the top five expense categories were:
• Healthcare (Medicare, Medicaid, and CHIP): $769 billion (21%)
• Social Security: $731 billion (20%)
• Defense: $718 billion (20%)
• Safety net programs: $466 billion (13%)
• Interest on national debt: $230 billion (6%)
That’s right, approximately 80% of the federal budget was consumed under these categories. Did you notice items like transportation/infrastructure, education, and benefits for veterans and federal retirees aren’t even listed? Let’s explore the top three categories in more depth.
As we look at healthcare from a macro perspective, the OECD Health Data from 2012 indicates the US spends $8,233 per capita on healthcare expenses, totaling 17.6% of GDP. This amount is astonishingly high in comparison to other countries. The second highest country on a per capita dollar basis is Norway at $5,388 and the Netherlands takes second place at 12.0%, as a percentage of GDP. Clearly there is an endemic problem occurring in this country and the government’s spending is a major contributor to the issue. Healthcare spending is by far the largest single threat to our fiscal future and jeopardizes our current way of life for future generations. An even worse statistic is that the cost of Medicare per beneficiary (person eligible for Medicare) is approximately $12,000 per annum. Yet Medicare Part B premiums varies (part A is free) from a minimum of $1,199 per year for 2012 to the wealthiest of retired beneficiaries maxing out at $3,836 per annum. So per person, Medicare must pay anywhere from just under $11,000 per recipient (99% of the beneficiaries) to a minimum of $8,163 for the wealthiest of Medicare recipients. To put this in perspective, a near minimum wage earner at McDonald’s is paying about 1.5% of his wages to subsidize Warren Buffet’s Medicare costs.
If that does not sound totally ludicrous to you then this will. As a result, the US government has to come up with $544 billion per year to fund the difference between Medicare revenue and Medicare costs. As the number of Medicare beneficiaries rises this amount grows ever larger! According to the 2012 Medicare Trustees’ Report, current deficits in the Medicare account are so large that the accumulated surplus in the trust fund will be depleted in a short twelve years. That means that Medicare goes bankrupt by 2024. Naturally that will only occur if there are not any major changes in policies between now and 2024. With over 50 million voters on Medicare currently, and that number is expected to grow as the baby boomers continue to enroll in Medicare at about 64,000 per day, the assumptions that there will be no changes is wrong. However, the changes may all occur on the revenue and borrowing side as spineless politicians fear angering such a large percentage of the electorate.
Medicaid, which is jointly funded by state and federal governments, has further plagued our fiscal health causing states to bear a greater portion of the cost, simply shifting expenses from the federal to state level, rather than addressing the underlying issue.
Moving to the next category, Social Security looks like the “perfect child” in comparison to Medicare. Based on the 2012 Social Security Trustees’ Report, beginning in 2010, the combined Social Security program started paying out more in benefits and expenses than it received in payroll taxes, adding to the federal deficit. The trust fund is expected to decline in size starting in 2013 with exhaustion anticipated to occur in 2033, three years earlier than projected in the 2011 report! To make matters worse, the report indicates the Social Security program is underfunded by about $8.6 trillion today. This represents the amount that has been promised in benefits to people now alive that will not be funded by the expected payroll tax revenue.
The combined costs of Social Security, Medicare, Medicaid and the other health systems paid for by the government is $1.5 trillion per year. Specific taxes to support the programs are $818 billion a year. The difference of $682 billion a year must be made up with borrowing or higher taxes. Just this year, the President proposed and Congress agreed to reduce the taxes supporting these programs (the payroll tax) so the finances are even shakier today than before.
As you may know, The Budget Control Act of 2011 set up a bipartisan “super committee” that was supposed to find up to $1.5 trillion in savings over the fiscal years 2012-2021. These savings equate to 10% of the deficit projected during the same period, so the borrowing of the US government will grow even if these “fixes” were implemented. Incentivized to compromise or face automatic sequestration totaling $1.2 trillion, in typical Congressional fashion, the committee failed miserably. Scheduled to occur starting in January 2013 and to cover the period through 2021, the sequestration requires $984 billion in budget cuts (assuming those savings will reduce interest payments by $216 billion bringing the total up to $1.2 trillion). The resultant is $109.3 billion per year of budget cuts, which will be divided equally between the “national defense” budget and all other budget areas.
The defense cuts will occur through across-the-board, proportional reductions in the funding provided for the Department of Defense. Non-defense cuts will come from both mandatory and discretionary programs, with most of the mandatory programs having limits imposed, such as Medicare’s 2.0% cap. In percentage terms, the sequestration on average produces the following reductions: 7.5% in defense and 8.4% in discretionary programs. If Congress does not act prior to January 2, 2013 these reductions, while necessary, will most certainly rock the economy and have a significant effect on the Washington, DC metro area.
While national defense is expressly provided under the preamble to the US constitution, nothing in the constitution requires us to spend more on our national defense than the next 14 nations combined! Just as our health care system is the most expensive in the world, so is our defense spending. The real question is, as with health care, do we receive enough benefit for all the expenses we are incurring. The Department of Defense as turned into a bureaucratic entity that thrives on the perceived importance of policing the world. These “wars” we continue to wage around the globe cost taxpayers trillions of dollars and rarely lead to more “safety.” It should be noted that it won’t do any good to be a military superpower if the country is bankrupt.
In closing, it’s interesting to open our awareness to notice how our frame of reference influences our thoughts and decisions. Washington’s spending has recently been higher as a percentage of GDP than any time since World War II and employment is lower than any time since the Great Depression! Our regulatory agencies are showing that they are not solving problems, but rather masking problems until the disaster is too big to conceal from the public (e.g. Savings & Loan crisis of early 1990s, Enron & Worldcom crisis of early 2000, the housing crisis of 2007and the financial meltdown of 2008). We cannot blindly continue to mount debt and push the problem onto future generations. While spending cuts might be painful in the short term, at some level this needs to occur to ensure long term economic viability. Our leaders need to come together to solve this problem rather than putting their own interests before the country’s prosperity.
http://www.cbpp.org/cms/?fa=view&id=3635
http://www.whitehouse.gov/2011-taxreceipt
http://www.cbpp.org/cms/index.cfm?fa=view&id=1258
http://www.socialsecurity.gov/OACT/TRSUM/index.html
http://www.oecd.org/els/healthpoliciesanddata/oecdhealthdata2012-frequentlyrequesteddata.htm
http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures
http://www.factcheck.org/2011/07/fiscal-factcheck/
