The scale of Social Security & Medicare

The costs and benefits of NASA

Have you heard this fight before?  Maybe saw it online?

"NASA is a waste of money!  With the national debt rising, and the economy so sluggish, why spend SO MUCH just collecting space rocks!!"

Versus...

"NASA is so awesome!  Give them an even bigger budget!  They're unlocking the secrets of our universe/developing our understanding of existence/etc."

Both sides will argue vehemently about the value of what NASA produces, where the money could better be used, and so on.  Are those advancements worth the dent NASA puts in our nation's ledger?

Whether or not the US should continue to fund space exploration is a decision just like any other.  We have to evaluate the benefits, compare them to the costs and decide if the expense is worth it.

When I see the viability and value of NASA (or most other govt program, for that matter) debated in the public, it usually seems to be a "benefit" centric debate.  I don't think people understand enough about the cost end of the equation to feel confident debating it.

In reality NASA is such a tiny part federal expenses.  Dropping it won't even put us vaguely near being on-budget.  In fact, eliminating NASA entirely would only decrease the amount of borrowing necessary to fund the US govt by 1% this year.

So why the heck are people arguing about it!?  If you were thousands of dollars in debt, you'd worry about getting roommates, paying off credit cards, consolidating loans, or selling your car - not about collecting the change between the sofa cushions.

That's why those familiar with the US's financial position are not interested in the NASA vs No NASA debate.  Once you understand the context, once you get your head around how little a program like NASA costs in comparison to the major line items - like Social Security or Medicare - you'll too see the fight as sound and fury signifying nothing.

What is Social Security?

Social Security is the US's govt administered retirement pension scheme.  Whenever an American retires, they are entitled to a monthly sum of money from the govt for the rest of their lives.  Disabled people who are unable to work can also draw an income from Social Security, independent of age.

The amount paid out varies depending on your income at retirement, but on average, every American senior gets $1,300 a month from Social Security.

Its not meant to be the only thing you live off of during your retirement years, its supposed to just be a "supplementary" income.

What is Medicare?

In short, Medicare is a national health insurance plan for retirees and those disabled and unable to work.  Similar to Social Security, its not intended to be a retired persons sole healthcare option, but is supposed to help folks get health insurance once they are no longer working.

How are they funded?

Look at your last paystub.  You see a line that says "FICA"?  Or maybe it explicitly says "Social Security" and "Medicare"?  That dollar amount represents your generous contribution to the Social Security and Medicare coffers.

Contrary to popular belief, those who are on SS or Medicare are not recollecting money they put away when they were still working.

Every time a paycheck is cut in the US, the receiver of the check, and the issuer both have to cough but 7.65% of the check's value to the SS and Medicare fund.  Meaning every time anyone issues a paycheck in the US, 15.3% of that check's value will end up in the SS and Medicare fund.

So 2013's retirees are funded by 2013's workforce.  And when 2013's workforce reaches 65 and retires, it will be 2043's workforce that funds their retirements.  You are paying for your grandmother's groceries, and your grandchildren will be paying for yours.

The problem with this arrangement?

I bet you already see the problem with this.  If today's workers are providing today's retirees with their income, what happens when there are a lot of retirees and not a lot of people working?  Will the employed be able to provide for the retired when there are so many?

If you had that thought, you are already sharper then your elected leaders.  As more and more baby boomers retire, the cost of funding Social Security and Medicare grows.  The more the US has to dip into savings - or start to borrow - to fund them.

In fact, in 2011 the fed spent $786 billion on Social Security, and $480 billion on Medicare.  That's $1.3 trillion out of a $3.6 trillion budget.  That's THIRTY-SIX PERCENT of ALL expenses of the US govt.  (Sources)

One-third of the nation's expenses were caused by just two govt programs - Social Security and Medicare.  BY FAR they are the LARGEST expenses the US has.  So why the heck aren't we talking about them!?  ANY conversation about our nation's finances that does not involve Social Security and Medicare is a non-starter.

Putting that number into perspective 

Trillions, billions - what do those numbers even really mean?  How do I make sense of all these numbers that I don't use day to day?

Here's some original Economystified factoids to help you get your mind around the scale of the Social Security/Medicare.

- Last year, the US spent $1,266 billion on Social Security and Medicare.  The budget deficit that year was $1,300 billion. 
In fact, through out all the years of the Sequester, Fiscal Cliff, the Debt Ceiling, the Recession, the Financial Crisis we could have broken even or had a budget surplus if it wasn't for the costs associated with funding Social Security and Medicare.

- Last year the US made $786 billion in Social Security pay outs.  This sum is roughly equivalent to the entire GDP of Poland.

You want to know why we are in such a financial pickle?  You can't ignore the fact that we are funding a whole additional nation within our own borders.  Last year, the whole nation of Poland had an economic output totaling $801 billion (PPP), just $15 billion less than what the fed govt was on the hook for that year for Social Security payments.  

- Based on the income they receive from the govt alone (ie, not counting their personal savings of pensions), "retired Americans" would be the 21st largest economy in the world.  

Just beating out Argentina (GDP of $747 billion, PPP).

- More than a third of all federal expenses last year were Social Security and Medicare:

(Sources)

- One year of Social Security could fund the NSF for about 112 years.  It could fund NASA for 44 years.

What's my point?

Imagine someone says to you "the govt needs to spend less.  I think we should cut NASA out entirely!"

DO NOT launch into a diatribe about the merits of NASA.  Do not defend NASA.  Do not try to tell this person about all the good NASA does.  If you do, you're as much a fool as them.

Just say to this person "Ok, fine.  Let's drop NASA entirely.  Now where will you come up with the other $1,280 billion needed just to close the budget gap for 2013?"  I bet they won't have much of an answer.

Social Security and Medicare are such incredibly huge expense, it is arithmetically impossible to close the gaps in our yearly budget without addressing them.  The cost of these two govt programs is so huge, they will drown out any adjustment you make anywhere else in the budget.

So if you hear a talking head on TV start a sentence with "We cannot get out finances back on track unless we..." and end it without talking about Social Security or Medicare, you are under no obligation to listen.  

If you can't already tell, I get really worked up on this issue.  Politicians, commentators and pundits prey on the public's murky knowledge of national finance to advance all types of wacky policy measures.

They know that as long as they can say any number ending with the syllable "-illion" with enough emphasis, they can make anything sound "big."  Its the equivalent of telling someone with hundreds of thousands in debt to try to save $10 here and there.

But I guarantee you, national fiscal issues are not  hard to get your head around.  Check out sites like Khan Academy or the National Priories Project and educate yourself.  Otherwise, its all to easy to take advantage of you...


LAST NOTE - There is one other expense that approaches the magnitude of Social Security and Medicare, that is the Dept of Defense (ie "Military Spending").

In 2011, the DoD had a budget of about $678 billion.  However, $159 billion of that was funding explicitly for the war in Iraq.  As that war winds down, the DoD budget will be more in the $500 billion range.  Still a lot, but still less than half of Social Security & Medicare.

And keep in mind, as the war winds down, the DoD budget will decrease.  As more and more people retire, and the cost of living and healthcare increase over the years, the SS and Medicare expenses the US faces are only going up.

That, and SS and Medicare payouts are kind of locked in.  When you retire, you're promised your monthly amount for life.  Its a legal obligation of the US.  Plus, current retirees have planned their future lives with that income in mind.  Changing it or decreasing it now wouldn't go down well with them.  So they're tough programs to alter in the short run. 

Any major overhaul passed today would likely not apply to today's retirees.  They're more likely to apply the changes to any retiree going forward.  Meaning if we chose today to radically alter the program, it might be 20 or 30 years before the majority of retirees are affected.