Major Entitlement Spending

Major Entitlement Spending

March 18, 2015
Major Entitlement Spending
require drastic reductions in all spending other than that for
The federal government faces long-term budget challenges.
Medicare, Social Security, and Medicaid, or reining in the
Some measures of fiscal solvency indicate that, under
costs of these programs. Under CBO’s extended baseline,
current policy, the United States faces a persistent future
maintaining the debt-to-GDP ratio at today’s level (74%)
budgetary imbalance. Projections show that this is largely
through FY2039 would require an immediate and
due to rising health care costs and the related increase in
permanent cut in noninterest spending or increase in
government-financed health care spending.
revenues or some combination of the two in the amount of
1.2% of GDP (or about $225 billion in FY2015 alone) in
Federal spending is divided into three broad categories:
each year. Maintaining this debt-to-GDP ratio beyond
discretionary spending, mandatory spending, and net
FY2039 would require additional savings. If policy makers
interest. Mandatory spending is composed of budget outlays
wanted to lower future debt levels relative to today, the
controlled by laws other than appropriation acts.
annual spending reductions or revenue increases would
Entitlement programs, such as Social Security and
have to be larger. For example, in order to bring debt as a
Medicare, make up the bulk of mandatory spending. In
percentage of GDP in FY2039 down to its historical
contrast to mandatory spending, discretionary spending is
average over the past 40 years (39% of GDP), spending
provided and controlled through appropriations acts. Net
reductions or revenue increases or some combination of the
interest spending is the government’s interest payments on
two would need to total roughly 2.6% of GDP (or $465
debt held by the public, offset by interest income that the
billion in FY2015 alone) in each year.
government receives.
Figure 1. Projections of Federal Spending
In FY2014, mandatory spending accounted for nearly 60%
(% of GDP)
of total federal spending and more than 12% of GDP.
Social Security alone accounted for 24% of total federal
Social Security
Medicare
All Other Spending
Net Interest
spending. Medicare accounted for 17% of total federal
spending. Over the next decade and beyond, mandatory
2014
4.9
2.9
11.2
1.3
spending is projected to continue rising as a share of total
federal spending and as a share of GDP.
2025
5.7
3.6
10.0
3.4
According to CBO’s extended baseline projection, federal
2039
6.3
4.6
10.2
4.7
mandatory spending on Medicare is projected to expand
from 2.9% of GDP in FY2014 to 3.6% of GDP in FY2025
2089
6.9
9.3
10.5
10.0
and to 9.3% of GDP in FY2089. Social Security is
projected to grow from 4.9% of GDP in FY2014 to 5.7% of

GDP in FY2025 and to 6.9% of GDP by FY2089.
Source: Congressional Budget Office, Updated Budget Projections:
2015 to 2025, March 2015, and The 2014 Long-Term Budget Outlook,
Meanwhile, spending on all other federal noninterest
July 2014.
programs, including other mandatory programs, is projected
to fall from 11.2% of GDP in FY2014 to 10.0% of GDP in
Social Security
FY2025 before increasing slightly to 10.5% of GDP in
FY2089. Although these forecasts are highly uncertain, it
Social Security provides monthly cash benefits to retired or
seems probable that spending on large mandatory programs
disabled workers and their family members and to the
will rise as a share of GDP over time.
family members of deceased workers. Of the 59 million
beneficiaries, approximately 81% are retired or disabled
In addition, growing debt and rising interest rates are
workers and 19% are family members. Among retired-
projected to cause interest payments to consume a greater
worker beneficiaries, for example, the average annual
share of future federal spending. Under current law, CBO
benefit is about $16,000. In 2014, the program paid $848
projects that spending to service the federal debt (net
billion in benefits.
interest payments) will grow rapidly from 1.3% of GDP
today to 3.4% of GDP in FY2025 and to 10.0% of GDP in
Workers become eligible for benefits for themselves and
FY2089. By FY2089, interest payments are projected to be
their family members by working in Social Security-
slightly higher than total Medicare spending and only
covered employment. An estimated 94% of workers in paid
slightly lower than all other noninterest, non-Social
employment or self-employment are covered (168 million
Security, non-Medicare spending.
workers), and their earnings are subject to the Social
Security payroll tax. Employers and employees each pay
Keeping future federal outlays at 20% of GDP, or
6.2% of covered earnings, up to an annual limit on taxable
approximately at its historical average, and leaving fiscal
earnings ($118,500). Dedicated payroll tax revenues are the
policies unchanged, according to CBO projections, would
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Major Entitlement Spending
primary source of funding for the program (86% of total
financed through a combination of monthly premiums paid
income). Social Security also receives income from federal
by current enrollees and general revenues. Income from
income taxes that some beneficiaries pay on a portion of
these sources is credited to the SMI trust fund. Beneficiaries
their benefits and interest earned on accumulated assets
can choose to receive all their Medicare services, except
(Treasury securities) held by the Social Security trust funds.
hospice, through managed care plans under the MA
In 2014, the program received $884 billion in total income.
program; payment is made in appropriate parts from the HI
and SMI trust funds.
On a combined basis, the Social Security trust funds have
accumulated assets of nearly $3 trillion (i.e., the Old-Age
In 2015, 55 million (1 out of 6) Americans are enrolled in
and Survivors Insurance [OASI] Trust Fund and the
Medicare. CBO estimates that federal spending for
Disability Insurance [DI] Trust Fund combined). The Social
Medicare benefits and administration will reach $534
Security Board of Trustees (the trustees) projects that
billion in FY2015, and grow to almost $1 trillion by
incoming receipts and accumulated trust fund assets will
FY2025. Over the same period, federal spending for
allow the program to pay benefits scheduled under current
Medicare is projected to increase from 2.9% to 3.6% of
law (in full and on time) until 2033. Over the next 75 years
GDP.
on average, however, the trustees project that Social
Security expenditures will exceed income by about 21%
Since the program was enacted in 1965, the Medicare
under the program’s current financing and benefit structure.
program has faced significant financial challenges. In an
The projected long-range financial imbalance is attributed
attempt to control spending, Congress has made numerous
largely to demographic factors and to some extent program
changes to the program, such as increasing payroll taxes
design features.
and changing how health care providers are reimbursed
under the program. For example, during the 111th Congress,
Social Security is an issue of interest to many lawmakers.
the Patient Protection and Affordable Care Act (ACA; P.L.
For some, the focus is on restoring long-range solvency to
111-148 and P.L. 111-152) made numerous changes to the
the trust funds. For others, the focus is on constraining the
Medicare program that modify provider reimbursements,
projected growth in spending for Social Security and other
provide incentives to increase the quality and efficiency of
entitlement programs in the context of broader efforts to
care, and address fraud and abuse. However, in the absence
reduce growing federal budget deficits. The Social Security
of further congressional action, the Medicare program is
debate reflects other policy objectives as well, such as
expected to be unsustainable in the long run. The 2014
improving the adequacy and equity of benefits, and
Medicare Board of Trustees report estimates that the HI
different philosophical views about the role of the Social
trust fund will become insolvent in 2030. Because of the
Security program and the federal government in providing
way that it is financed, the SMI fund cannot face
retirement income. As such, Congress may consider a range
insolvency; however, the trustees project that SMI
of policy options.
expenditures will continue to grow rapidly, and thus place
increasing demands on Medicare beneficiaries and all
On a more immediate basis, interest among lawmakers has
taxpayers. As such, Congress may consider a range of
focused on the projected insolvency of the DI trust fund in
Medicare reform options, from making changes within the
late 2016. (Separately, the OASI trust fund is projected to
current structure, including modifying provider payments
be exhausted in 2034.) The trustees project that, following
and revising existing oversight and regulatory mechanisms,
DI trust fund exhaustion in late 2016, continuing income to
to restructuring the entire program.
the DI trust fund would be sufficient to pay about 80% of
scheduled benefits. Stated another way, full payment of DI
The 113th Congress did not take major action to address the
benefits beyond 2016 requires some form of legislative
long-term fiscal situation, or the current or future solvency
action. As the trustees point out, one option that Congress
issues related to Social Security and Medicare.
may consider is a reallocation of payroll taxes from the
OASI trust fund to the DI trust fund. Congressional debate
For more information, see CRS Report R43933, The
on the topic reflects differing views on whether any payroll
Federal Budget: Overview and Issues for FY2016 and
tax reallocation should be considered as a stand-alone
Beyond, by Mindy R. Levit, CRS Report R42035, Social
change, or in combination with other program changes
Security Primer, by Dawn Nuschler, and CRS Report
designed to improve the system’s overall financial outlook.
R40425, Medicare Primer, coordinated by Patricia A.
Davis and Scott R. Talaga.
Medicare
Mindy R. Levit, mlevit@crs.loc.gov, 7-7792
Medicare is the nation’s health insurance program for
Dawn Nuschler, dnuschler@crs.loc.gov, 7-6283
individuals aged 65 and older and certain disabled persons.
Patricia A. Davis, pdavis@crs.loc.gov, 7-7362
Medicare consists of four distinct parts: Part A, or Hospital

Insurance (HI); Part B, or Supplementary Medical
Insurance (SMI); Part C, or Medicare Advantage (MA); and
IF10153
Part D, the outpatient prescription drug benefit. The Part A
program is financed primarily through payroll taxes levied
on current workers and their employers; these are credited
to the HI trust fund. The Part B and D programs are
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