Welcome to part 1 of our 3 part US entitlements series: The Facts
Entitlements are guarantees to benefits by right or law. In the United States entitlements are Social Security, Medicare, Medicaid, Children’s Health Insurance Program (CHIP), Food Stamps, veterans benefits, Welfare, unemployment insurance, supplemental security income, student loan programs, school food programs etc… The list is huge. In general, if there is a program established and funded by the government that involves monetary payments to citizens, it is an entitlement.
How are entitlements funded?
It depends. Some entitlements, Social Security, Medicare, and disability, have earmarked taxes generated to help the government fund them. When you get back your pay-stub, you have probably noticed sections entitled Social Security and Medicare are on there. These are funds that go into the pool.
The majority of entitlements though do not receive earmarked tax funds, instead are paid through the general slush fund of the government. Social Security and Medicare are interesting exceptions to the general rule and I think it is important to look at them separately from other entitlements.
According to the Social Security Administration’s Trustees Report, Social Security and Medicare are primarily funded through these income tax earmarks. However, there exists a significantly large sum of money in what is called a “trust.” Essentially, the trust is where extra money that the administration receives gets funneled into the treasury. The treasury can use this money to pay for other things, but provides the trust with the guarantee of repayment plus interest. So essentially the government is borrowing from itself, adding liabilities from these entitlement programs.
When funds from income taxes are not sufficient to pay for the programs, the entitlement boards call in money from their trust to cover the difference. The size of the trusts are massive, but not enough to cover the costs of the program indefinitely. Currently the size of the trusts are roughly $3 trillion.
Roughly 60% of the revenue generated for these funds come directly from taxes, the rest comes from interest received from the trust (~10%), reimbursements (~8%) and premiums (~6%). The current rate we pay, in part due to payroll deductions is 15.3%, with half of it coming from businesses and the other from individuals (for 7.15% each).
How much do we spend on them?
Looking at just the main ones, Social Security, health insurance programs (Medicare, Medicaid, CHIP), federal retirees/veterans spending, and social safety net programs (Welfare, Food Stamps, etc.) – we spend about 61% of the federal budget on some sort of entitlements.
This figure is expected to increase as payments for Social Security, and health insurance programs are expected to increase.
Looking at Social Security and Medicare (we include survivors disability, and disability insurance as they share from the same pool), expenditures equal roughly 8.5% of GDP ($1.89 trillion) and are expected to reach 12.1% in 2035 and 12.8% in 2086. The share of taxable income to cover these expenditures would have to rise from the current 17.27% levels to 22-24% in these same periods.
What does the future look like?
Our next installment will cover this more in-depth, as we have some problems to tackle to fund these entitlement programs. But the future is bleak, short-term projections show a fund that will start spending more than it receives. The trust funds will sustain this deficit for the near future.
The programs in the mid-term are in a much more dire situation, that slightly improves in the long-term. (The next part will talk almost exclusively about the problems, and the final will talk about solutions.)
Here are the funds’ exhaustion dates:
Social Security: 2035
Social Security Survivors/Disability: 2033
Disability Insurance: 2016
Expenditures have/will exceed revenues:
Social Security: 2023
Disability insurance: 2009
Survivors disability: 2021
As you see, entitlements are a major part of our budget, and our economy. They take up significant resources that are set to expand into the near future before tapering off (~2050’s). Entitlements include a diverse range of programs from Social Security to disability, to food and education programs.
The two largest funds, Social Security and Medicare, have had surpluses, as revenues exceeded outlays, but that has ended or will end shortly. These funds are all set to exhaust, so if the government is to meet current obligations it will have to generate funding from additional sources.