Public Policy 8
As mentioned in previous classes, the mandatory spending of the federal government is far more than discretionary spending in the annual budget, making up almost 2/3 of all federal spending. Mandatory spending refers to spending on programs that are set at pre-determined levels that are, to some extent, outside the control of members of Congress and the executive branch.
Since the budget is highly politicized, I think it is clear, mandatory spending is meant to protect these programs from the political maneuverings so common in government. When talking about mandatory spending the most important programs are Social Security which was established back in 1935, and Medicare and Medicaid, both created in 1965. Given the shift in priorities in government since the 1980s, it is also quite clear that all these programs would have been defunded a long time ago had they been subject to the normal budget process. We already covered Medicare and Medicaid somewhat last class, so this class I will devote more time to talking about Social Security.
The Social Security Act was signed into law by President Franklin Roosevelt on August 14th, 1935, one of the signature policies and reforms of the New Deal, which guided American public policy, until the election of Ronald Reagan in 1980. At first, the program was quite limited, providing cash benefits to retired workers only. One of the first changes made to the program was in 1939, when it expanded to cover dependents and survivors of retired workers, mainly wives and widows of workers. In the following decades, the program became more ambitious and started expanding from its original purpose.
In 1956, the program was expanded to provide benefits to disabled people. Here, again, it was more limited than it was now, providing benefits to workers who were permanently disabled, and between the ages of 50 and 64. Today, more than 10.4 million Americans receive disability benefits including 8.7 million disabled workers, and 1.7 million children or spouses of disabled workers.
In 1972, SSI, or Supplemental Security Income, was signed into law. This program would provide benefits to disabled workers of limited income, or elderly adults, 65 or older, who have limited income. Today there are more than 8.2 million Americans receiving SSI, with about 1.2 million below the age of 18, 2.2 million 65 or older, and 4.8 million between 18 and 64, according to the website Motley Fool. However, average monthly benefits are fairly modest at $543 a month
https://www.fool.com/retirement/2017/11/22/social-security-history-8-pivotal-dates-for-americ.aspx
Whatever criticisms there are of the program it clearly has an effect in reducing poverty. According to most studies, it reduces the poverty rate among elderly people significantly:
Going back to the idea of mandatory v. discretionary spending for a moment, it should be clear that mandatory spending is relatively protected against politics in Congress. Although created by laws passed by Congress and the President, these are exceptional events compared to the annual budget process. Any changes to these programs would require legislation which would be sure to generate a lot of attention. In fact, many attempts have been made to reduce benefits, even by the Obama administration, but, so far, at least the public backlash this causes has forced politicians to abandon these plans. https://theintercept.com/2016/06/02/obama-wanted-to-cut-social-security-then-bernie-sanders-happened/
It still remains to be discusses how these programs are funded.
Given these expansions, and the number of people covered it is easier to see why Social Security is so expensive, spending over a trillion dollars every year on benefits. However, Social Security is actually a very well funded program. Social Security is funded primarily through payroll taxes, which as mentioned, are separate from income taxes. Workers pay 6.2 percent of their income every year, with employers paying another 6.2 percent (however employers also deduct this from their employees pay). For most of its existence it has run a surplus, meaning the money it takes in through taxes is more than what it pays out in benefits. In fact, the program has more than $3 trillion stored in a trust fund. It has run so much of a surplus that it is able to use the surplus to purchase bonds that accumulate interest. Between payroll taxes collected every year and the interest it earns on bonds, the program is able to pay out benefits without touching the trillions of dollars it has stored away.
Many measures have been introduced to keep Social Security financially solvent that are somewhat controversial. Reagan started taxing benefits, so the government gives you money, and then you give some of it back. Also, incentives were given to claim your benefits at a later age by giving you a higher benefit, or lower benefits if you claim earlier.
Over time, as the costs of Social Security increase, so will expenses. Eventually, payroll taxes and interest will not be enough to cover benefits, meaning that the trust fund will have to be tapped. It is projected that by 2035 the fund will be exhausted. Taxes will still be collected but only enough to cover about 80 percent of benefits. One of the problems with funding Social Security is that there is a payroll cap of $118,500, meaning people who make more than this pay the same. Obviously, this is a major loop hole for wealthy people who make seven or eight figure incomes. Removing this payroll cap would be necessary to address these financing problems.
Medicare and Medicaid make up the other large part of mandatory spending. They are also funded through payroll taxes. Medicare provides health insurance through the federal government to people over 65. Medicaid is a program partially administered by the federal government and partly by the states. Federal funding actually goes to states who then distribute the benefits to people in their states. Like Social Security, these programs have strong public support and are generally well regarded, but also have similar funding problems.
Given the large size of mandatory spending it is not surprising economists like Paul Krugman say the federal government is "like an insurance company with an army," meaning that most of its expenses basically go to paying out benefits for government run insurance programs (of course almost a third of the budget goes to military spending). During the Reagan administration and after, it became more common to demonize the government, but Krugman's comment is meant to suggest the day to day functioning of the government is less sinister than you may think. To be fair, Krugman probably underplays the seriousness of military spending and how much it distorts the priorities of the government. When a budget is measure in trillions of dollars, even a relatively small percentage of this is gigantic in most contexts.
Next class, we will talk about education. For the assignment, choose a quote from one of the links on blackboard.
Since the budget is highly politicized, I think it is clear, mandatory spending is meant to protect these programs from the political maneuverings so common in government. When talking about mandatory spending the most important programs are Social Security which was established back in 1935, and Medicare and Medicaid, both created in 1965. Given the shift in priorities in government since the 1980s, it is also quite clear that all these programs would have been defunded a long time ago had they been subject to the normal budget process. We already covered Medicare and Medicaid somewhat last class, so this class I will devote more time to talking about Social Security.
The Social Security Act was signed into law by President Franklin Roosevelt on August 14th, 1935, one of the signature policies and reforms of the New Deal, which guided American public policy, until the election of Ronald Reagan in 1980. At first, the program was quite limited, providing cash benefits to retired workers only. One of the first changes made to the program was in 1939, when it expanded to cover dependents and survivors of retired workers, mainly wives and widows of workers. In the following decades, the program became more ambitious and started expanding from its original purpose.
In 1956, the program was expanded to provide benefits to disabled people. Here, again, it was more limited than it was now, providing benefits to workers who were permanently disabled, and between the ages of 50 and 64. Today, more than 10.4 million Americans receive disability benefits including 8.7 million disabled workers, and 1.7 million children or spouses of disabled workers.
In 1972, SSI, or Supplemental Security Income, was signed into law. This program would provide benefits to disabled workers of limited income, or elderly adults, 65 or older, who have limited income. Today there are more than 8.2 million Americans receiving SSI, with about 1.2 million below the age of 18, 2.2 million 65 or older, and 4.8 million between 18 and 64, according to the website Motley Fool. However, average monthly benefits are fairly modest at $543 a month
https://www.fool.com/retirement/2017/11/22/social-security-history-8-pivotal-dates-for-americ.aspx
Whatever criticisms there are of the program it clearly has an effect in reducing poverty. According to most studies, it reduces the poverty rate among elderly people significantly:
Going back to the idea of mandatory v. discretionary spending for a moment, it should be clear that mandatory spending is relatively protected against politics in Congress. Although created by laws passed by Congress and the President, these are exceptional events compared to the annual budget process. Any changes to these programs would require legislation which would be sure to generate a lot of attention. In fact, many attempts have been made to reduce benefits, even by the Obama administration, but, so far, at least the public backlash this causes has forced politicians to abandon these plans. https://theintercept.com/2016/06/02/obama-wanted-to-cut-social-security-then-bernie-sanders-happened/
It still remains to be discusses how these programs are funded.
Given these expansions, and the number of people covered it is easier to see why Social Security is so expensive, spending over a trillion dollars every year on benefits. However, Social Security is actually a very well funded program. Social Security is funded primarily through payroll taxes, which as mentioned, are separate from income taxes. Workers pay 6.2 percent of their income every year, with employers paying another 6.2 percent (however employers also deduct this from their employees pay). For most of its existence it has run a surplus, meaning the money it takes in through taxes is more than what it pays out in benefits. In fact, the program has more than $3 trillion stored in a trust fund. It has run so much of a surplus that it is able to use the surplus to purchase bonds that accumulate interest. Between payroll taxes collected every year and the interest it earns on bonds, the program is able to pay out benefits without touching the trillions of dollars it has stored away.
Many measures have been introduced to keep Social Security financially solvent that are somewhat controversial. Reagan started taxing benefits, so the government gives you money, and then you give some of it back. Also, incentives were given to claim your benefits at a later age by giving you a higher benefit, or lower benefits if you claim earlier.
Over time, as the costs of Social Security increase, so will expenses. Eventually, payroll taxes and interest will not be enough to cover benefits, meaning that the trust fund will have to be tapped. It is projected that by 2035 the fund will be exhausted. Taxes will still be collected but only enough to cover about 80 percent of benefits. One of the problems with funding Social Security is that there is a payroll cap of $118,500, meaning people who make more than this pay the same. Obviously, this is a major loop hole for wealthy people who make seven or eight figure incomes. Removing this payroll cap would be necessary to address these financing problems.
Medicare and Medicaid make up the other large part of mandatory spending. They are also funded through payroll taxes. Medicare provides health insurance through the federal government to people over 65. Medicaid is a program partially administered by the federal government and partly by the states. Federal funding actually goes to states who then distribute the benefits to people in their states. Like Social Security, these programs have strong public support and are generally well regarded, but also have similar funding problems.
Given the large size of mandatory spending it is not surprising economists like Paul Krugman say the federal government is "like an insurance company with an army," meaning that most of its expenses basically go to paying out benefits for government run insurance programs (of course almost a third of the budget goes to military spending). During the Reagan administration and after, it became more common to demonize the government, but Krugman's comment is meant to suggest the day to day functioning of the government is less sinister than you may think. To be fair, Krugman probably underplays the seriousness of military spending and how much it distorts the priorities of the government. When a budget is measure in trillions of dollars, even a relatively small percentage of this is gigantic in most contexts.
Next class, we will talk about education. For the assignment, choose a quote from one of the links on blackboard.
Comments
Post a Comment