The Actual Budget Problem

Social Security and Medicare make up a huge portion of the Federal budget, but if Social Security is 100% funded by dedicated SS taxes, it seems that it is not part of our current deficit. Is Medicare paid for through dedicated Medicare taxes?

My question is, if we removed those portions of the budget that are already balanced, what does that leave us with in regards to the remaining budget items. Are transfer payments still the biggest portion of the budget, or does it become defense. How much would we need to cut the budget to not add to the debt, never mind pay it down.

Let’s keep it to facts and figures. I posted to GQ for a reason.

Here’s a rough outline of the budget… where the money comes from and where it goes. It’s a graphic by the Washington Post based on data from the OMB.

Social Security and Medicare payroll taxes generate $934 billion. Those two programs (plus Medicaid) cost $1.518 trillion. That difference alone accounts for almost half of the deficit.

We’d have to cut the budget by roughly a third to eliminate the deficit. More precisely, $1.27 trillion from $3.83 trillion of spending. The interest on our debt each year is $251 billion.

Social Security has never run a deficit (though it probably will this year). Its pay-roll tax has historically brought in more then they paid out, and in 2009 was probably pretty close to even. As the OP says, it hasn’t contributed anything to the current deficit, and indeed has reduced it by something like three trillion dollars due to its surpluses being used to buy treasuries to help the General Fund.

Medicaid costs the feds something like 300 billion, but isn’t funded through pay-roll taxes.

Medicare funding is complicated. It has a dedicated tax to cover the Hospital insurance part, which like Social Security has never run a deficit until last year. There’s also the recently added perscription drug benefit that costs something like 50 billion a year and is paid by the general fund. Finally, there’s the general medical fund, which has some sort of hybrid funding I’ve never been able to figure out that draws from the General Fund, treasury bonds, premiums and the payroll tax. But just summing the numbers from anson’s chart, the total unfunded cost of that must be something like 200 billion.

So to summarize, SS breaks even, Medicaid costs 300 billion, Medicare costs 250 billion including the Prescription drug benefit.

So left in the budget and not paid for by dedicated texes, you have 900 billion military, 400 billion stimulus spending, 300 billion medicare, 250 billion interest payments and 500 billion discretionary stuff.

One of the problems is this is not correct. FICA is the combined tax for SS and Medicare. Just going off of DanBlather’s link total payroll taxes will equal $934 billion and SS + Medicare will equal $1.221 Trillion. So there is a quarter of the deficit right there.

The real problem is here is how the budget(this provides a breakdown of the budget by percentages)breaks down:
34.4% - Welfare for Seniors (SS + Medicare)
19.1% - Other Major Welfare (Medicaid + Unemployment Insurance + Other Minor Programs)
9.5% - Interest on Debt
All of this is mandatory spending, meaning it would take an active act of congress to change this. That is we already have laws that we are going to spend that much. And there isn’t a lawmaker who is willing to touch them. No one is going to vote to cut SS benefits, or eliminate Unemployment Insurance (which is one of those very few things that really is paid for). And of course stopping payment on the debt interest would be to commit economic suicide.

So we have 65% of the budget that are in sacred third rails of politics. All of which would require an active vote against them. No cutting will happen there.
24.3% - Defense (Defense + Homeland Security + “War on Terror” + VA)
And here is another protected third rail. We spend roughly as much as the rest of the world combined on “Defense.” And yet cutting anything from that budget is all but impossible. Remember that then Secretary of Defense Dick Chaney cut the Osprey program out of the pentagon’s budget back in 1989. And yet those determined congress-critters put it right back in. It finally flew its first combat mission just two months ago. And that is hardly the only such program. For example despite being intended to fight the Soviets in Germany, and being cut by Rumsfeld in 2002, Crusader is still going strong (just re-branded as NLOS-C) the first units are to be delivered in April 2010. So I don’t expect that any real cutting will happen in Defense spending.

So there we have it. 89% of the budget is in programs that can’t or won’t be cut. And a balanced budget requires that we cut 33%. Cut every last little thing completely, except the four groups above, and we will still have a budget deficit of around $840 Billion. There are only three things we can do to balance the budget: Cut Welfare - Cut Defense - and/or Raise Taxes. And I don’t see any of them happening in the current political environment.

See my post above. It’s not SS + Medicare. SS has been covered completely by payroll taxes, as is Medicare part A. So it’s Medicare B, D that are the current causes of the 250 billion gap between payroll taxes and Social safety net spending.

Not so grim as that. Much of the current deficit is driven by the Stimulus (about a third of the deficit) and the fall in revenues due to the recession (another third). Given that both of these will wind down means you’re actually looking at something like a 500 billion a year deficit, and then at least part of the Bush tax-cuts expire, so revenue will rise further (no estimate on the size of this, though I’d be interested if someone else has one). So in the short term the deficit will largely cut itself, to the point where it isn’t so inconceivable that cuts in spending and tax-hikes could lower the deficit to a point where its smaller then the yearly increase in GDP.

At least until the ever increasing cost of medical spending eats up those gains and we’re back to running serious deficits.

Aren’t the seniors paying a premium to have Medicare B and/or D? If so, does that do anything to close the gap between income and outgo?

If I read that chart correctly, it suggests that payroll tax is about 90% as big as the income tax. Soc Sec tax only applies to wages under $106K, so that means people who make under that amount pay almost as much in payroll tax as everyone pays in income tax. Can that be true?

Medicare is part of the payroll tax and isn’t capped.

curlcoat, I think the deficit number I gave is after premiums are put in, but I’m hardly certain. As I said, the funding sources of Medicare part B is complicated and I’m not sure I understand it.

I can’t speak to Medicare D, so I won’t attempt to. Medicare B, however, does require a payment by the recipient; I believe it is in the neighborhood of ~$110.00 per month at the moment. BUT, this cost hinges on one signing up for Medicare B as soon as one is eligible at age 65. IF, for whatever reason, one doesn’t sign up as soon as one is eligible, then one is penalized a certain percentage for every year past 65 one delays signing up. I am currently in just that situation, for personal reasons I don’t want to talk about. Since I am 69, I am facing a potential penalty of a ~40% increase in my monthly premium. However, there are some potentially mitigating circumstances that might or might not reduce the amount of penalty I have to pay. My case is currently under review and I really have no idea what I will end up paying. If payments for Medicare B significantly close the gap, as asked by the OP, I can only hope the government doesn’t try to hold me responsible for closing all of that gap.

Good point, but Medicare tax is 2.9% (1.45 by employer and employee).