Mandatory Spending by a Broke Nation

Federal spending has two sides: mandatory spending and discretionary spending.  The biggest programs on the mandatory side are Social Security and Medicare.  These two programs are called "mandatory" because they are not subject to the budget process; spending is said to be "on autopilot."  Until recently, the two programs were entirely funded with the payroll tax.  But with the advent of the Great Recession and the retirement of the Baby Boom generation, the programs are also getting revenue from the general fund, as the revenue from the payroll tax is insufficient to pay benefits.

The discretionary side of the federal spending consists of those items that must be included in budgets and appropriations -- everything from Defense to Solyndra.

The federal budget also has two sides: the off-budget side and the on-budget side.  The biggest mandatory programs, Social Security and Medicare, are off-budget.  Each year from 1976 through 1984, Congress ran an off-budget deficit, resulting in the longest string of such deficits.  But in 1983, Congress passed a payroll tax hike, and the off-budget imbalance reversed.  According to Table 1.1 of the Historical Tables at the Office of Management and Budget, the feds have run off-budget surpluses each year since 1985.

The biggest off-budget surplus (2006) was $186 billion, and the biggest on-budget surplus (2000) was $86 billion.

The biggest off-budget deficit (1982) was -$7 billion, but the biggest on-budget deficit (2009) was 221 times larger: -$1,549 billion, or -$1.549T.

No matter how one looks at it, the off-budget side of the ledger has been healthier than the on-budget side -- the off-budget side usually runs a surplus, while the on-budget side almost invariably runs a deficit.  Over the last 52 years, Congress has run exactly two on-budget surpluses (1999 and 2000) -- which means they've run on-budget deficits more than 96 percent of the time since 1960.  One only has to casually eyeball Table 1.1 to suspect this, but using Microsoft Excel to sum both of the "Surplus or Deficit" columns from the beginning of the nation through 2011, one gets an off-budget aggregate surplus of +$2.64T, and an on-budget aggregate deficit of -$11.97T.

But isn't the national debt $15.5T, not the above number?  The higher figure is indeed the one that gets tossed around in the news, as well as at the U.S. Debt Clock.  What accounts for the discrepancy is that those handsome off-budget surpluses were "loaned" to the federal government, which promptly spent them.  It seems like it should be the other way around, but the mandatory has been bailing out the discretionary.

The reason to be concerned about the off-budget side of the budget is because since 2006, when the government ran its biggest surplus ($186 billion), the off-budget surpluses have been getting smaller.  In 2011, the off-budget surplus had shrunk to $67 billion, and the feds project that it will continue to get smaller.  On top of that, the unfunded liabilities of Social Security and Medicare total $118T, more than ten times the debt held by the public.

So, even if the off-budget "trust funds" for the mandatory programs actually had $2.64T (plus interest) of negotiable securities in them that could be sold on the market, the feds are still facing an explosion of mandatory spending, and we're already in debt up to our eyeballs.

What to do?  First, Congress should reset the "trust funds" to zero -- they don't contain anything real, anyway.  That the "trust funds" contain nothing was driven home during the debt limit debate last summer, when President Obama said he could not guarantee that Social Security checks would go out on time because "there may simply not be the money in the coffers to do it."  In "What Happened to the $2.6 Trillion Social Security Trust Fund?" at Forbes, Merrill Matthews wrote:

The answer is that the federal government has borrowed all of that trust fund money and spent it, exactly as Krauthammer asserted.  And the only way the trust fund can get some cash to pay Social Security benefits is if the federal government draws it from general revenues or borrows the money-which, of course, it can't do because of the debt ceiling.

That the trust funds are frauds was also revealed by the payroll tax holiday extension.  That temporary 2-percent cut in the payroll tax rate drove up the deficit by an estimated $70 billion for ten months alone (page 5).  If the trust funds were real, we'd simply draw them down during the tax holiday, and the deficit wouldn't be affected.

Second, to save Social Security and Medicare, Congress should put them on a strict pay-as-you-go basis -- which means that the outlays for those programs could not exceed the income from their dedicated tax, the payroll tax.  Also, there would be no more transfers of monies back and forth between the general fund and the "trust funds" for Medicare and Social Security.  For the first time, the two programs would be fiscally separate from the rest of the federal government.  They'd have to "live within their means," which would force a discipline that could serve as a model for reining in other federal spending.

This second reform is one tall order, as government has lied about entitlement programs from the beginning. America can no longer afford mandatory autopilot programs that do not have the discipline of a budget.  The headline of an article by Veronique de Rugy says it all: "Autopilot Programs Will Squeeze Out Everything Else."

Finally, Congress needs to clean up its nomenclature by dispensing with certain terms, like "mandatory."  There's nothing in the Constitution that mandates that we have Medicare and Social Security.  However, the Constitution does mandate that Congress produce a budget each year, and the Democrats have been failing on that score for a thousand days and counting.

Along with "mandatory," "discretionary" also needs to go.  Congress exercises discretion over mandatory programs all the time, as when they increase benefits, set payroll tax rates, reset the retirement age, etc.  But as for reforming our "mandatory" programs, it's doubtful that we can leave it up to the discretion of the autopilots currently in Congress.

Jon N. Hall is a programmer/analyst from Kansas City.