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Thursday, December 22, 2011

2012 US Federal Budget (part 2)

This post  is the second half of a two-parter on the Fiscal Year 2012 Federal Budget.  You’ll probably want to make sure you are familiar with the first installment before you jump in on this one, since I’ll be referencing the last post in here.

OK so here goes!

The Federal Budget - FY 2012

(Part Two of Two)

        Last post, we looked at the Fiscal Year 2012 Federal Budget.  The major take-aways from the last post were:

1)      As of now (Dec 2011), much of the Federal Government and its component departments and programs are operating without a budget, or have temporary budgets.  We were supposed to have a complete budget by this past October.  But Congress can’t agree on a spending plan, and we’re in limbo until they do.

2)     Although Presidents can make requests and suggestions on the budget – and Obama already has – they have no power when it comes to passing a budget.  It’s strictly a duty of the Congress.

        I also had left you looking at this chart, the 5 broadest categories I can come up with for the originally proposed Federal Budget (the ones the Dems proposed back in Feb of 2010). 

        Although the dollar amounts are not EXACTLY what we’re going to end up with in the final budget, the relative sizes of the slices aren’t going to change.  What’s big in here, is going to be big in 2012. 

        Heck, the big-ticket items shown here will be big-ticket items in 2013, 2014, 2015…unless something major happens at DC.

        Ok, so in this post, we’re going to look at each of the 5 slices one by one to get a more detailed understanding of the total Federal Budget.
(NOTE – The above dollar amounts are in billions)

Slice includes:

Social Security: Gives out checks to the elderly and the disabled who cannot work, providing an income for people not able to earn one.

Medicare: Pays for the health care of the elderly and disabled.

A bit about its funding:

        Social Security and Medicare are unique, in that there is a specific tax devoted especially to funding them.  It’s called the FICA tax, and if you work, you’re paying it.

        On your pay check there’s a line that says “FICA withholdings” (or sometime your check will have it itemized to say explicitly “Social Security Tax” and “Medicare Tax”).  That’s the amount you paid toward the tax that exclusively funds Social Security and Medicare.

        Every time a paycheck is issued in the US, 6.2% of the worker's pay is yoinked out and goes directly into the FICA kiddie.  The employer also has to cough up an amount equal to the employee's "contribution," for a total amount equal to 12.4% of every paycheck that is issued.

        (NOTE - These are FICA's normal rates.  At the time I'm writing this, the percents are being temporarily suppressed, so these numbers aren't exactly spot on right now.  The plan is for the 12.4% rate to come back soon.  But there's no debate right now about how FICA works, only the size of our contributions to it, so the rest of what I mention here is accurate as of now.)

        The SS administration pays out of the FICA kiddie every day, non-stop.  Money goes out as it comes in.  If there’s ever a surplus, the extra cash goes into a ginormous national savings reserve.  That account is tapped whenever there’s a deficit.

        The savings fund we have going for Social Security has been steadily building for a couple of decades.  But by 2030 or so we're going to need to start drawing from that account regularly - in addition to continuing to tax workers - just to make up the payouts we've promised for future retirees.

        Medicare’s trust fund started building up when it started in 1965.  But we’ve already had to start spending out of those savings.  Just to keep Medicare as it is afloat, we’re spending out of the savings account AND taxing the current workforce!  And ALL our Medicare savings will be completely depleted by 2020.

        Why are these two programs so difficult to afford?  You can see one weird issue with the design of the FICA system: its kinda dependent on there always being the same ratio of working-people to not-working-people in the population to remain stable.

        If you're working right now, you're FICA contributions are being channeled directly to a current retiree’s personal bank account.  And when you retire, your Social Security checks will be funded by people who are working at that time.

        In 1960, for every 8 American’s working, there was only one retiree receiving Social Security.  Now there are 3 per.  In the next few generations, as average age at death continues to rise, and our national median age increases, there will be even fewer workers supporting each retiree.

        These two programs are going to need a major structural overhaul soon if they’re going to survive in the long run.  Either SS benefits will have to be reduced or the working-age folks are going to have to pay a lot more in FICA taxes.
        Medicare is especially worrisome, since the double-whammy of having more people enrolled (as the population ages) AND the costs associated with each enrollee rising (the price of healthcare is growing at a rate that well exceeds the rate of inflation), is making this a particularly difficult program to sustain.

        Keep in mind these are not "projections" or "estimations."  We do a Census for a reason, folks...


(NOTE – The above dollar amounts are in billions)

Slice includes:

Unemployment/Welfare/Other mandatory spending:  aka “Entitlements.”  Money that the recipients are simply “entitled” to by law to be paid.

Medicaid and SCHIP:  Medicaid pays for the health care for the poor, SCHIP pays for health care for middle/lower income children who are particularly ill.

A bit about its funding:

        So remember how Social Security and Medicare had the FICA tax to fund them?  They're the only budget items that have their own designated funding source.  All other Fed activities are funded out of the Federal Government’s general coffers. 

        Any tax paid to the Fed – individual income taxes, capital gains taxes, corporate taxes, customs duties, inheritance taxes, whatever – are all pooled together, then programs and departments have their funding doled out from the shared pool.  When that pool is to small, we borrow cash and toss it in with everything else. 

        So it’s not like food stamps are paid for with individual’s income taxes or corporate income tax.  Its funded by both pooled together. 

        Both Medicaid and the Entitlements are funded out of this general cash pool.  As a matter of fact, all of the budget items I mention from here on out will be funded from that big collection plate.

        However, the total cost of Medicaid is not reflected in the pie above.  This is because its only partially funded by the Federal Government.  Every state gets a contribution from the Fed to help pay for Medicaid in that state.  But the individual are responsible for coming up with the rest.  Most states make up their contributions to Medicaid through the collection of state income taxes.

        What you are seeing in the pie is the total amount of federal money that is earmarked to go to the 50 states to help them run their Medicaid.  For us to know the absolute total cost of Medicaid, we’d also have to add in what each state is paying as well.  (But for today, we’re only worried about the Fed’s budget, so let’s skip it).    

        Now, as for the “Unemployment/Welfare/Other mandatory” slice, these are what are popularly known as “Entitlement" programs.

        When people talk about “Entitlements,” they are referring to any program that “supplement” the incomes of those who we’ve deemed to have incomes that are “too low.”  It includes stuff like TANF and EBT, food stamps, and even farm subsidies.

        Now, how low an income is “too” low?  Honestly, its completely subjective.  Of course, most of us would subjectively judge a poor family with children as deserving of food stamps.  But a multimillion dollar corn grower who receives a farming subsidy?  That’s kind of a gray area.

        Entitlements are spending that as a society we have judged as necessary.  There’s no specific economic reason/contingency for them.  Even if our economic position remains static, if social values change in the next generation, so too will these entitlements.


        Congratulations!  You’re halfway through!

        Also, we’re kind of at a little border.  The previous four mentioned budget items – Social Security, Medicare, Medicaid and the “Entitlements” – are all “mandatory spending” items.  "Mandatory spending" are any budget item whose intakes, expenditures, funding and structures are all dictated by law.  Congress has to fund and administer these programs exactly as law stipulates.

        Of course, they could change the laws that govern the funding of these programs, if they wanted.  They could pass a law increasing your Social Security contributions, or decreasing Medicaid pay-outs, or alter eligibility requirements for any entitlement program.  They’re Congress, they make the rules, right?

        Well, technically yes.  Through the legislative process, Congress does control mandatory spending (that’s why I’m including it in the overall budget story).  But when it comes to the mandatories, their control is pretty limited in practice.   
        Since a specific law would be needed to make alterations to these programs, they aren’t altered often.  It takes a lot of political capital and will to make it happen.  Changes to these programs are rare simply because they’re hard to pull off.  So those big 4 -  Social Security, Medicare, Medicaid and the “Entitlements” – you should view them a little differently than the rest of the Fed's activities.

        OK.  SO!  Change gears: The next 26 budget items mentioned in this post will be items from Congress’s “discretionary” budget.  These items change every year, and are subject just to an up or down vote.  There are no "on the books laws" controlling their size and structure.

        Discretionary items are still funded out of that big general pool of tax revenue.  But their up for review every year, and have been known to change on the fly.  These are the Federal government’s on-the-fly, trillion dollar petty cash drawer, always changing and developing programs.


(NOTE – The above dollar amounts are in billions)

Slice includes:

Department of Defense: Army, Navy, Marines, Air Force and a ton of science/technology research.  Does not include the Coast Guard and Border Patrol (which are part of the Dep’t of Homeland Security) or the National Guard (which is funded by the states).

Overseas Contingency Operation: Current foreign military operations.  To be precise, this is money that’s been allotted for the wars in Iraq and Afghanistan.

A bit about its funding:

        The Department of Defense contains our "standing military," military assets and people not being actively utilized or serving.  The OCO is the expenses associated with our "actively serving force”.  It’s the cost of fielding a combat force.

        If both wars ended completely tomorrow and every single American in Iraq and Afghanistan came home all at once, we’d still be paying the DoD’s $553 billion.  Remember, that DoD price tag is the cost of just a non-active, standing military.

        Of course, when we ARE at war, our standing military MUST expand.  When the US is at war, the DoD needs to be constantly getting things ready in the wings, preparing people and equipment to be mobilized for overseas missions.

        For example, soldiers typically serve for only 1 year at a time in combat, meaning every year you basically have to put together a whole new army worth of combatants.

        Well, if it takes, say, two years to fully train a soldier, you'd need to have a "standing army" twice the size of the current actively serving force at any given time just to cover your turnover, right?

        In 2000, when the US was not involved in any big military operations, the DoD budget was $260 billion.  By 2010 it passed $550.  So our standing military expenses doubled as our active force abroad engaged in a war.

        When the two wars finally draw to a close, our immediate cost savings will only be the value of the OCO ($118 billion).  Ideally, when both wars are over, we could start winding down the DoD to a smaller, "peace time size," somewhere back in the old $250ish billion range.

(NOTE – The above dollar amounts are in billions)

        Every month you get in the mail a pesky letter from your credit card company demanding that you make a payment on that jacket you bought over the winter, or the repairs on your computer you had done 6 months ago. 

        Make the payments in full and on time, or they’ll tick your credit score and your interest rates will be higher when you start hunting for a loan for a house or a nice car.

        Similarly, the US pays back in regular installments money its borrowed (the debt the Federal Government racks up is called the “National Debt.”  I sometimes wish we’d drop the term “National Debt” and start calling it “Federal Government Debt,” since that IS what it IS.) 

        Over FY 2012, we have $242 billion worth of these payments coming up.  We can of course skip any one of those bills.  But if we do, it sends a bad signal to lenders, and will make it difficult to borrow again in the future.

        I’m not going to go too much into the National Debt itself (you can check out my post on it here).

        I'll mention one thing though.  Ever wonder who we borrow that money from?  

        The US National Debt right now is up to $15 trillion.  $4.4 trillion is money we owe to people, businesses and governments in other countries.

        $4.7 trillion is intragovernmental debt, money owed by one part of the government to another.  For example, the social security savings account “owes” money to the social security administers.  (It’s debt that’s not really a financial burden in the way the rest of it is.)

        And the rest?  It comes from us.  Whenever a person or a company or a city or any other entity buys a US savings bond, they are making loans to the Federal Government.  And right now, the Fed owes $5.9 trillion to all of those bond holders.

        American public funds its government through taxes.  And when the government overspends that funding, we loan them most of the difference.  We're their principle funder and their bigger creditor too!

HOMESTRETCH PEOPLE!!  Here's the last "major slice" of the budget pie...!


Slice includes:

See above.  In a nutshell, "dude, its like, a bunch of stuff!"

A bit about its funding:

        The general federal coffers pay for these remaining  21 items.

        And there you have it!  ALL other things the Fed does, from launching space probes to maintaining interstate highways to setting national education standards.  It's all part of what I'm calling the "Other Duties As Needed" slice of the total annual budget pie.

        Yeah, each one of those "sub-slices" is pretty small.  In fact, they're more like slivers or shavings than a proper slice of a pie.  Even the infamous Department of Homeland Securities annual budget is only $43 billion, or 1.2% of Fed's yearly spending! 

        Anyone of these particular departments - let alone the projects and programs they conduct - make up miniscule amounts of our national government's gross expenses. 

        Ironically, however, it's these guys whose budgets are often the most contentiously debated.  Why?  Because they are part of that Congressional "discretionary spending" and their funding is much easier to change then any of the ginormous "mandatory spending" items. 

        In one fell swoop, the chambers could elect to cut all funding to NASA, or double the size of the Dep't of State.  And there's always someone trying to do stuff like that, believe me. 

        But to make any changes to the big items, the ones that cause the most financial woes (SS, Medicare, Medicaid and the "Entitlements"), a specific law would need to be passed.  So the expensive items tend to sit static, while the cheaper ones are fought over year in and year out.  Weird, huh?

        (One exception, however military spending.  The DoD and the OCO are funded at Congresses discretion.  They are huge expenses, but Congress can alter them at any time.) 

Closing Remarks

        It costs a lot to run a reliable and helpful Federal Government.  That's a reality that transcends parties and ideologies.  I like the society I live in.  And I think a lot of what our Federal Government does is exciting, progressive and truly beneficial.  But I also understand that its not a cheap operation.

        Any Congress truly serious about reducing our national expenditures and debts MUST be ready to make difficult decisions about our nations biggest expenses - Social Security, Medicaid, Medicare, the social safety net and the military.  And probably raise our taxes too.

        For years now, politicians have continuously promised us that under their auspices we can have cake and eat it too.  And we've eagerly bought the line.  Its time for all of us to grow up and face the facts.  Either we all up our offerings to the public coffers, or learn to live just with what we have.  Otherwise our national debt will only continue to balloon, and we will pitch our own nation deeper and deeper into debt.  Our current system is simply not sustainable in the long-run. 

        One day, a Senator or Representative will be brave enough, and adult enough to acknowledge this reality.  They'll ask us to stop trying to find "someone else, anyone else" to shoulder the costs of this society.  They will say: "I know it'll suck, but I'm going to raise your taxes and cut your benefits.  I'm sorry.  Vote for me."  

        It's up to you to be brave enough, and adult enough to reward that person with your vote.

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