budget briefing book: super committee edition

budget

Briefing

Bookletsuper committee edition

— October 19, 2011 —

http://issuu.com/action/download



WHAT’S INSIDE

BUDGET BRIEFING BOOKsuper committee edition04

A LOOK BACKfiscal year 201105

8 // INFOGRAPHIC

SUPER COMMITTEEwho are they?07

20 // INFOGRAPHIC

IN THE SPOTLIGHTmedicare18

15 ENTITLEMENT PROGRAMSmedicare, medicaid & social security

30 // INFOGRAPHIC

28 IN THE SPOTLIGHTsocial security

38 // INFOGRAPHIC

36 DEFENSE SPENDINGhow bloated spending is hurting our nation’s security

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BUDGET BRIEFING BOOKsuper committee edition

The economy is still struggling, due, in part, to uncertainty surrounding

Washington’s fiscal situation. Many scholars agree the federal debt, which is

nearly $15 trillion, is a significant roadblock to job creation. In the coming

weeks, the Joint Committee on Deficit Reduction (also known as the Super

Committee) has been tasked with finding ways to reduce the deficit. Where

should they look?

In this briefing book, we look at where the federal government gets its money

and how it spends it; we introduce you to each Super Committee member;

and we explore in detail the largest federal government expenditures.

04

A LOOK BACK fiscal year 2011 spending

WHERE DOES THE MONEY GO?

Ka-ching! American families have learned how to tighten their belts in the

turbulent economic climate. Congress, it seems, has refused to practice the

same discipline. Fiscal Year 2011 (FY11) just came to an end (it ran from

October 1, 2010 – September 30, 2011). Where did all the money go?

HOW DID WASHINGTON DO?

[1] A Year in Review

[2] Spotlight on Revenues

[3] Spotlight on Expenditures

A YEAR IN REVIEW1

Fiscal Year 2011 was marked by public scrutiny of the federal government’s

runaway excessive spending. After all the debate, how did the nation’s

checkbook fare? The Congressional Budget Office (CBO) recently reported

preliminary revenue and spending totals for FY11. Despite a year marked by

spending “cuts” and record low interest rates, spending still grew.

Total Revenue – $2.303 trillion (6.5% increase from FY10)

Total Spending – $3.6 trillion (4.2% increase from FY10)

Interest Payments – $266 billion (16.7% increase from FY10)

FY11 Projected Deficit (spending minus revenue) – $1.298 trillion

FY10 Deficit – $1.294 trillion

SPOTLIGHT ON REVENUES

Where did Washington get its $2.303 trillion in revenue this year?

Individual Income Taxes – $1.093 trillion (47% of FY11 revenue)

Social Insurance Taxes – $819 billion (36% of FY11 revenue)

Corporate Income Taxes – $180 billion (8% of FY11 revenue)

Other (tariffs, excise taxes, fees, etc.) – $210 billion (9% of FY11 revenue)

SPOTLIGHT ON EXPENDITURES

Where did the government spend all of our money?

Social Security Benefits – $720 billion (20% of FY11 spending)

Defense – $679 billion (19% of FY11 spending)

Medicare – $483 billion (13% of FY11 spending)

Medicaid – $275 billion (8% of FY11 spending)

Net Interest on Public Debt – $266 billion (7% of FY11 spending)

Unemployment Benefits – $123 billion (3% of FY11 spending)

Other Activities2 – $1.088 trillion (30% of FY11 spending)3

06

SUPER COMMITTEEwho are they?

[1] Legal Establishment

[2] Super Committee Members

[3] Members’ Key Votes

LEGAL ESTABLISHMENT

The additional deficit reduction called for in the Budget Control Act (BCA)

required the details be worked out by a Joint Selection Committee on Deficit

Reduction made up of equal representation of Republicans and Democrats

from the Senate and House. This committee is the so-called Super Committee.

The committee is tasked with finding a targeted $1.5 trillion in

savings over ten years4.

If no savings from the committee’s recommendations become law,

automatic across-the-board spending cuts take effect for both defense and

non-defense spending. Entitlement spending is protected somewhat from these

cuts. These automatic cuts must equal an estimated $1.2 trillion5.

THE SUPER COMMITTEE

Six Democrats and six Republicans (three each from the House and Senate) were

appointed to the committee. Who are they, and what are their backgrounds?

dave camp(mi)

superheroes of the super committee

jeb hensarling(TX)

fred upton(mi)

HOUSE SENATE

pat toomey *(PA)

jon kyl(AZ)

rob portman *(oh)

‘10 bushtax cuts

CASH FORCLUNKERS

‘09 obama stimulus

TARP

fannie/freddiebailout

‘06 tax cut extension

farmsubsidies

xavier bEcerra (ca)

CHRIS VON HOLLEN(MD)

patty murray(wa)

max baucus(mt)

john kerry(ma)

James Clyburn(SC)

* No recent key votes

support ofkey bills

HOUSE OF REPRESENTATIVES

DEMOCRATS

Xavier Becerra (CA-31)

Member of the Committee on Ways and Means; Democratic Caucus Vice

Chair; member of the National Commission on Fiscal Responsibility and Reform

Becerra tends to align with House Minority Leader Nancy Pelosi and is a

leader in setting Democrat policy stances. Additionally, he is an advocate

for lower taxes on the poor, a public option for health care, and immediate

withdrawal from Iraq and Afghanistan.6

James Clyburn (SC-6)

Assistant Democratic Leader; former member of the Appropriations Committee;

no current committee assignments

As the third-ranking Democrat in the House, Clyburn unites urban liberals and

rural blue-dog Democrats. He frequently counsels President Barack Obama.6

Chris Van Hollen (MD-8)

Ranking Member of the Budget Committee; former Democratic Congressional

Campaign Committee Chairman; former member of the Committee on Ways

and Means

10

After serving as the man in charge of getting Democrats elected to Congress

several years ago, Van Hollen has quickly become a leader in Democratic

policy. He is an advocate for tax credits to advanced biofuel producers and

addressing the Alternative Minimum Tax (AMT), a tax that could potentially

impact many of his constituents.6

REPUBLICANS

Jeb Hensarling (TX-5) (Co-Chair of Joint Committee)

Vice Chairman of the Financial Services Committee; Republican Conference

Chairman; member of the National Commission on Fiscal Responsibility and Reform

As the number four Republican in the House, Hensarling rarely strays from the party

line. When he does, it is because he is even more conservative than the leadership.6

David Camp (MI-4)

Chairman of the Committee on Ways and Means; member of the National

Commission on Fiscal Responsibility and Reform

Camp, an expert in tax issues, is an advocate of cutting spending rather than

raising taxes to get the nation’s debt under control.6

Fred Upton (MI-6)

Chairman of the Committee on Energy and Commerce

Upton is known as a moderate Republican. During President George W.

Bush’s tenure, few Republican representatives broke from the White House

agenda more than Upton.6

SENATE

DEMOCRATS

Patty Murray (WA)

Up for reelection in 2016 (Co-Chair of Joint Committee)

Member of the Budget and Appropriations Committees; Chair of the Veterans

Committee; Democratic Senatorial Campaign Committee Chair; Democratic

Conference Secretary

Murray is a liberal voice in Congress for government involvement in the

economy. She is an advocate for infrastructure spending.6

Max Baucus (MT)

Up for reelection in 2014

Chairman of the Committee on Finance; member of the National Commission

on Fiscal Responsibility and Reform

Baucus has a history of working in a bipartisan fashion, including being one

of a select few of Democrats to work on the Republicans’ Medicare Part D

bill. He also supported President Bush’s 2001 tax cuts.6

John Kerry (MA)


12

Chairman of the Senate Committee on Foreign Relations

Kerry is a social liberal and foreign relations leader. He has experience

building consensus and moving bills through the Senate, such as the U.S.-

Russia Nuclear Arms Treaty.6

REPUBLICANS

Jon Kyl (AZ)

Retiring at the end of this Congress.

Republican Whip; member of the Committee on Finance

A leader in Republican thought, Kyl’s positions on foreign policy and tax

matters usually become the GOP position.6

Pat Toomey (PA)


Member of the Budget and Banking Committees (joined the Senate in 2010)

A senator who enjoys Tea Party support, Toomey is a strong believer in free

markets and limited government. He was once an investment banker.6

Rob Portman (OH)


Member of the Budget Committee (joined the Senate in 2010)

Portman brings true policy experience and expertise to the deficit negotiations.

He served both as U.S. Trade Representative and as director of the Office of

Management and Budget, both cabinet-level positions under President Bush.6

The Super Committee) has a responsibility to examine federal expenditures

and determine opportunities for cuts and reform. Social Security, Medicare,

Medicaid and the Department of Defense are the largest federal expenditures.

In Fiscal Year 2011, Social Security, Medicare and Medicaid alone consumed

41 percent of all federal spending9. In Fiscal Year 2011, defense spending

alone consumed approximately 19 percent of all federal spending10.

14

ENTITLEMENT PROGRAMSmedicare, medicaid & social security

On May 13, 2011, the Medicare and Social Security Boards of Trustees

released their annual reports on the financial status of both programs. These

reports made it clear that federal lawmakers must address the growing costs

associated with the two largest federal programs.

With Americans living longer lives, 10,000 baby boomers retiring a day11,

lower birthrates, and the ever-increasing cost of health care, the costs of these

programs will continue to grow.

Medicare and Social Security face an unfunded liability of $38.3 trillion over

the next 75 years. To put this number in perspective, in Fiscal Year 2010 the

federal government collected $2.2 trillion in taxes12.

TRUSTEES LEAN TOWARDS REFORM13

As the nation’s financial condition continues to deteriorate, government

programs, such as Medicare and Social Security, does too. According to

the trustees, these programs are now challenged with costs that are not

sustainable under current government financing; thus, in order to avoid an

added burden to both beneficiaries and taxpayers, or disruptions in the

program, modifications are needed.

WHAT ARE THE DRIVERS OF DEBT FOR THESE PROGRAMS?

+ The growing number of baby boomers entering retirement in comparison

with the lower birth-rate of younger generations.

+The rapid increase in health care costs per person.

Medicare and Social Security worked fine in previous years when there were

many more workers on the bottom of the pyramid than retirees on top. Given

the flip in the pyramid, overall increased health care costs and the impact of

longer life expectancies when the programs were created, it’s easy to see why

there are problems.

MEDICAID’S FISCAL HEALTH

Created in 1965, Medicaid is a federal and state partnership that provides

health benefits for poor individuals and persons with disabilities14.

+ In Fiscal Year 2010, 68.2 million Americans were on Medicaid15.

+ In Fiscal Year 2009, Medicaid spent $380.6 billion, of which $250.9

billion funded by the federal government16.

+ Individuals with disabilities make up 15 percent of Medicaid enrollees and

40 percent of all Medicaid expenditures17.

+ By Fiscal Year 2019, it is estimated Medicaid will spend $840 billion18.

16

Unlike Social Security and certain aspects of Medicare, there is no Medicaid

trust fund. Instead, its funds come from general revenue from the state and

federal government “on an as-needed basis19.”

+ Each state creates its own program, but federal rules require certain benefits.

+ Each state sets its own payment rates for providers20.

+ What the states pay for Medicaid and what the federal government pays

“is determined by a formula set in law that establishes higher federal shares

for states with per capita personal income levels lower than the national

average21.” Currently, the federal share runs from 50 percent to 75 percent22.

+ Medicaid is allowed to establish “nominal” service-related costs, however,

some types of Medicaid beneficiaries do not pay for anything23.

+ Nominal costs ranged from $.60 to $3.40 in Fiscal Year 2009.

IN THE SPOTLIGHTmedicare

[1] Just the Facts: A Summery of Findings

[2] Medicare 101: What is Medicare

[3] Medicare Hospital Coverage Going Broke

[4] Medicare 201: What’s the Real Story with Medicare’s Other Finances

JUST THE FACTS: A SUMMARY OF FINDINGS

Medicare’s primary trust fund, which collects Medicare payroll taxes and

only funds in-patient hospital care and related hospital costs, will run out of

funds in 13 years - five years sooner than was projected in last year’s trustees

report. Additionally, the Congressional Budget Office estimates it will happen

even soon – in just nine years. Over the next 75 years, this trust fund faces

an unfunded liability of $3 trillion -meaning money will not in the trust fund to

cover benefits at this time.

Medicare’s other services, such as general doctor visits and prescription drug

coverage, are primarily funded by the general revenues collected by the U.S.

government. To be clear, they are not financed by the Medicare payroll tax.

+ Since this percentage of federal funding happens automatically each year,

the trustees found these parts of Medicare to be actuarially sound.

+ However, this assertion is misleading when put in context because over the

18

next 75 years these parts of Medicare face an unfunded liability of $28.8

trillion – meaning the federal government will have to find $28.8 trillion in

general revenues over the next 75 years to pay for the program.

MEDICARE 101: WHAT IS MEDICARE?24

+ Medicare, which was created in 1965, provides health care coverage for

individuals in the United States who are 65 and older until their death.

+ In 1972, Medicare was expanded to provide health care for disabled

Americans who are under 65 years old.

+ In 2006, the program was expanded for a third time to provide prescription

drug coverage for eligible participants (Pp. 249-250).

In 2010, 47.5 million individuals were covered by Medicare (P. 4).

According to the 2010 Census, the U.S. population stands at 308 million25.

This means that more than 15 percent of the U.S. population is currently

covered by Medicare.

MEDICARE PART D

pays private plans to provide prescription drug coverage

funded by: healthcare premiums & government money

$ outside of the

medicare tax

MEDICARE PART C

provides private insurance approved by medicare

funded by: money from parts a & b

MEDICARE PART B

covers doctor appointment costs & other related services

funded by: healthcare premiums & government money

MEDICARE PART A

covers in-patient hospital care & other related services

funded by: trust from medicare taxes on earnings*

again, $ outside of

the medicare tax

MEDICAREIN NEED OF A FISCAL CHECK-UP

SURGEON GENERAL’S WARNING: THE RAPID INCREASE IN HEALTHCARE COSTS COUPLED WITH THE NUMBER OF BABY BOOMERS ENTERING INTO RETIREMENT WILL CAUSE TRILLIONS IN UNFUNDED MEDICARE LIABILITIES.**NOTE – OKAY, NOT AN ACTUAL SURGEON GENERAL’S WARNING. BUT REALLY, THIS IS SERIOUS.

*note – the congressional budget office estimates that part a will run out of

money in 9 years. why? one reason is the projected beneficiary : worker ratios...

(year - 2010)

:(year - 2030)

:(year - 2085)

:

medicare beneficiary : workers paying into medicare

CURRENTLY,15% OF THEPOPULATIONIS COVEREDBY MEDICARE(47.5 MILLION INDIVIDUALS)

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

SOURCES: MEDICARE BOARD OF TRUSTEES // 2010 GOVT CENSUS // CBO

FY 2011 SPENDING

13%

MEDICARE($483 BILLION)

=

MEDICARE IS MADE UP OF FOUR KEY PARTS

MEDICARE PART A

Funded by federal payroll taxes26 on earnings, Medicare Part A provides in-

patient hospital care and other related services.

+ Funds collected from payroll taxes go into the Medicare Hospital Trust Fund.

+ For retired individuals who paid into the system27, there are no premium

costs for this service.

+ Currently, the Medicare payroll tax taxes earnings at “…1.45 percent for

employees and employers, each. The self-employed pay 2.9 percent “(P. 257).

+ “According to the trustees, this “…fund is not adequately financed over the

next 10 years” (P. 4).

MEDICARE PART B

Funded by health care premiums - monthly payments of the individuals enrolled

in the program - and federal revenue (in 2010, nearly 73 percent of the total

funding came from government money collected from general revenues).

+ Covers doctor appointment costs and other related services.

+ In 2011, the Part B monthly premium for most beneficiaries is

22

approximately $10028.

Medicare Parts A and B are considered “traditional” and “fee-for-service” Medicare.

MEDICARE PART C (I.E. “MEDICARE ADVANTAGE”)

Funded by money from Medicare Parts A and B, Medicare Part C is private

insurance approved by Medicare that is contracted “…to provide Part A and

Part B health services” (P. 4).

+ These plans may include prescription drug coverage as well.

+ The premiums vary greatly based upon the plan selected. There are many

different options to choose from.

+ For example, some Medicare Advantage plans may have the cost of a

gym membership included while others may not. In general, such features are

reflected in the price29.

If you have Medicare Part C, you do not have Medicare Part A or B, but you

may have Medicare Part D.

MEDICARE PART D

Funded by health care premiums and general revenue (in 2010, nearly 83

percent of the total funding came from government money collected from

general federal taxes).

+ The plan “pays private plans to provide prescription drug coverage” (P. 253).

+ Like Medicare Part C, there are many different options from which to choose.

+ In 2011, the average Part D monthly premium is approximately $4030.

MEDICARE HOSPITAL COVERAGE IS GOING BROKE31

Medicare Hospital Coverage is Medicare Part A. It receives funds from the

Medicare payroll tax (and trust fund reserves), which are used to pay for in-

patient hospital care and other related services (P. 252).

+ For the Medicare Trust Fund, money that is not used for current benefits

and administrative costs are invested in basic government bonds, which earn

interest for the trust fund (P. 259).

If changes are not made to Medicare Part A, there will be significant

disruptions in care because not enough money will exist in the program.

+ According to the trustees, this “…fund is not adequately financed over the

next 10 years” (P. 4).

+ The trustees now estimate that this trust fund will run out of funds in 13 years,

five years earlier than was projected in last year’s report (P. 4).

+ The Congressional Budget Office projects it will run out of funds even

sooner – in just nine years32.

Great changes in the number of taxpayers supporting beneficiaries have led

to the fund’s fiscal situation.

+ In 2010, there were about 3.4 workers paying into the Medicare Part A

system for every beneficiary.

24

+ In 2030, it is projected there will be 2.3 workers paying into the system for

every beneficiary.

+ By 2085, there is expected to be only two workers per beneficiary (P. 80).

What happens if the fund goes insolvent? No one knows for sure. “Neither

the Social Security Trust Fund nor the Medicare Trust Fund has ever run out

of money and there are no provisions…governing what would happen in

such event33.” According to the trustees, the current unfunded obligation for

Medicare Part A over the next 75-years is $3 trillion (P. 83).

+ Currently, the trust fund has $272 billion in funds (P. 4).

+ In 2010, since less was taken in from Medicare taxes than was paid in

benefits, Medicare was forced to take $32.3 billion from its trust fund.

+ In past years, when there were Medicare taxes exceeded the amount paid

in benefits, the remaining funds were invested in special U.S. government

bonds. Like the Social Security Trust Fund, the money from the Medicare Trust

Fund was used by the government for whatever expenses it had at the time.

+ In other words, this means that the government spent the “surplus” money

on general government operations while Medicare, in return, received a U.S.

government bond that earns interest.

MEDICARE 201:

WHAT’S THE REAL STORY WITH MEDICARE’S OTHER FINANCES34

According to the trustees, Medicare Parts B and D are “…adequately

financed over the next 10 years and beyond…” (Pp. 4–5). However, this

statement is misleading when put in context.

+ In 2010, 73 percent of the costs of Part B came directly from funds the U.S.

collects in general taxes (109).

+ Likewise in 2010, 83 percent of the costs of Part D came directly from

funds the U.S. collects in general taxes (P. 134).

+ Exactly how the government funds Parts B and D reflect complex formulas;

however, the federal government is the primary contributor for the costs and

will continue to be so in the future if the law remains unchanged.

Therefore, to conclude that Parts B and D are actuarially strong would be a

grave mistake. Unlike Medicare Part A, which collects the Medicare payroll

tax and has a trust fund for the excess funds it does not spend on benefits,

Medicare Parts B and D rely every year on general federal government

funding, which is not tied to the Medicare payroll tax.

+ In 2010, general revenue contributed $153.5 billion for Part B (Pp. 109).

According to the trustees, the current cost for Part B for the next 75 years will

be $18.9 trillion (P. 130). In its calculation, the trustees assumed that 73 percent

of Part B will be paid for by the federal government for the indefinite future.

+ In 2010, general government revenue contributed $51.1 billion for Part D

(Pp. 134). According to the trustees, the current cost for Part D over the next

75 years will be $9.9 trillion (P. 146). In its calculation, the trustees assumed

that 75 percent of Part D will be paid for by the federal government for the

indefinite future.

26

+ This equals $24.2 trillion in unfunded federal government liabilities for

Medicare over the next 75 years.

Additionally, the Trustees report is flawed because it does not take into

account the blocking of the sustainable growth rate (“SGR”) formula.

+ The SGR formula was put in place to control Medicare spending by the

Balanced Budget Act of 1997. If fully implemented, SGR would ‘control’

Medicare spending by mandating what doctors are paid for certain

Medicare services (Pp. 212-213).

+ Congress routinely blocks the SGR formula on a “temporary basis.” The

current block lasts until January 1, 2012. Why temporary? Because it “costs”

too much to eliminate the SGR on a permanent basis. Therefore, Congress

prefers blocking it on a short-term basis.

If enacted in 2012, payments to doctors for certain Medicare services would

immediately fall by 29.4 percent (P. 213). If this were to happen, many

believe that a large amount of doctors would stop seeing Medicare patients

altogether. Because it is almost certain to be “temporarily extended” beyond

January 1, 2012, the trustees note that the future costs for Medicare are likely

to surpass those shown by the current estimates in the report (P. 17).

Medicare Part C is funded by Part A and Part B trust funds (P. 192). Medicare

Part C is private insurance that is contracted “…to provide Part A and Part

B health services” (P. 4). Of the 47.5 million individuals were covered by

Medicare in 2010, 25 percent, chose Part C (P. 4). In 2010, Part A paid

$60.7 billion and Part B paid $55.2 for Medicare Part C (P. 199).

IN THE SPOTLIGHT: social security

[1] Just the Facts: A Summary of Findings

[2] Social Security 101: What is Social Security

[3] Social Security 201: The Truth about its Finances

[4] Two Prominent Views on the State of Social Security

JUST THE FACTS: A SUMMARY OF FINDINGS

The recent Social Security recent trustees report outlined the program’s fiscal health:

+ Social Security’s retiree income trust fund, which collects Social Security

payroll taxes35 and pays for retirees’ income, will run out of funds in 2036,

one year earlier than was projected in the previous year’s trustees report.

+ Social Security’s disability income trust fund, which pays disabled workers a

supplemental income, will run out of funds in seven years.

+ According to the trustees, the current unfunded obligation for Social Security

over the next 75 years is $6.5 trillion.

SOCIAL SECURITY 101: WHAT IS SOCIAL SECURITY36

Social Security was created in 1935 to create a “basic level of monthly

income” for individuals from normal retirement age until their death.

+ In 1939, the program was extended to give certain benefits to family

members when a parent or spouse who works dies.

28

+ In 1956, the program was extended again to provide income for workers (and

their dependents) who are unable, or partly unable, to work due to a disability.

+ In 2011, the average Social Security payment for a retired person is

$1,177 per month37.

In 2010, 54 million individuals were covered by Social Security38. According

to the 2010 Census, the U.S. population stands at 308 million39, which means

that nearly 18 percent of the U.S. population is currently covered by Social

Security. Since the program has more retirees being added to the system and

fewer and fewer workers paying into it, legislative changes are required to

keep Social Security operating without substantial disruptions to the program40.

20% Social Security$720 billion=

LAST YEAR’S SPENDING

SOCIAL SECURITYa snapshot of its �nances

† ° ¢

OUT OF FUNDS IN 2036Currently, 54 million people are covered by Social Security. The funds will run out in 2036, despite a 1.2 trillion dollar surplus from 1984-2009.

† ¢

That surplus money was spent on other general government expenses. So what’s sitting in the “lockbox”? Not cash, but bonds – that the government borrowed against itself. Which begs the question –

WHEN YOU’RE TRILLIONS OF DOLLARS IN DEBT, SHOULD YOU BE BORROWING FROM YOURSELF?

(sur

plus

$ in

bill

ions

)

‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09$0

$20$40$60$80

$100

}# }#

SOURCES: CRS // THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUND // CBO

http://issuu.com/action/openurl?url=http://aging.senate.gov/crs/ss3.pdf

20% Social Security$720 billion=

LAST YEAR’S SPENDING

SOCIAL SECURITYa snapshot of its �nances

† ° ¢

OUT OF FUNDS IN 2036Currently, 54 million people are covered by Social Security. The funds will run out in 2036, despite a 1.2 trillion dollar surplus from 1984-2009.

† ¢

That surplus money was spent on other general government expenses. So what’s sitting in the “lockbox”? Not cash, but bonds – that the government borrowed against itself. Which begs the question –

WHEN YOU’RE TRILLIONS OF DOLLARS IN DEBT, SHOULD YOU BE BORROWING FROM YOURSELF?

(sur

plus

$ in

bill

ions

)

‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09$0

$20$40$60$80

$100

}# }#

SOURCES: CRS // THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUND // CBO

HERE ARE THE FACTS:

+ From 1974 to 2008, there were between 3.2 and 3.4 workers paying

Social Security taxes for every beneficiary.

+ In 2010, there were 2.9 workers paying Social Security taxes for

every beneficiary41.

+ By 2035, it is projected there will be 2.1 workers for every beneficiary. With

individuals living longer lives than they did in 1935, and with fewer workers

paying into the system due to lower birthrates, the system is going broke.

An individual qualifies for Social Security retirement benefits if they work at

least 10 years and contribute to the program with payroll taxes. Currently, the

Social Security taxes earnings at 6.2 percent for employees and employers,

each. The self-employed pay 12.4 percent42. The Social Security payroll tax

only applies earnings up to $106,80043. Social Security also is financed

by income taxes on Social Security benefits and interest income earned from

the trust fund.

To get full Social Security benefits, an individual must have reached normal

retirement age:

+ For those born in 1937 or earlier, the normal retirement age in 65. This

age is gradually increasing over time to 67. Those born in 1960 and after

will have to wait until 67 to receive full benefits.

32

+ Individuals can opt to get early retirement benefits at 62; however, their

benefits are permanently reduced. Exact benefits are calculated by using a

complex formula. The benefit formula provides more benefits relative to wages

for low-income earners while providing high-income earners a degree of

equity since they have higher lifetime earning.

SOCIAL SECURITY 201: THE TRUTH ABOUT ITS FINANCES44

Social Security receives its funding from the Social Security payroll tax. These

payroll taxes are deposited into separate trust fund accounts in the Department

of Treasury.

+ Excess funds not immediately spent to pay benefits are invested in special

U.S. government bonds (P. 221).

+ From 1984 until 2010, the Social Security Trust Fund ran a surplus,

meaning more money was taken in through taxes than was paid out in

benefits (Pp. 142-143).

+ By law, when the program was running a surplus, the surplus was “…credited

to the Social Security trust funds in the form of U.S. government securities.

The money itself, however, [was] used to pay for whatever other expenses

the government…” had at the time45. In other words, this means that the

government spent the “surplus” money on general government operations while

Social Security, in return, received a U.S. government bond that earns interest.

SOCIAL SECURITY HAS TWO SEPARATE TRUST FUNDS

OLD-AGE AND SURVIVORS INSURANCE TRUST FUND (commonly referred

to in the public as the “Social Security Trust Fund”) – pays retirement income

for qualified retirees (and their dependents) (Pp. 222). Is expected to run out

of funds by 2036, one year earlier than originally projected in last year’s

trustees report.

DISABILITY INSURANCE TRUST FUND – pays income for disabled workers

(and their dependents) who are unable, or partly unable, to work due to a

disability (Pp. 222). This fund is expected to run out of money by the year 2018.

At the end of 2010, the balance of both Social Security trust funds was $2.6

trillion. According to the trustees, the current unfunded obligation for Social

Security over the next 75 years is $6.5 trillion (P. 12).

TWO PROMINENT VIEWS ON THE STATE OF SOCIAL SECURITY46

How bad is the financial situation with Social Security? Is the money in the

trust funds really there? Well, it depends how you view the situation. Here are

two different takes:

Sen. Bernie Sanders (I-VT) “…We keep hearing that the Social Security

trust fund has a pile of worthless IOUs. The fact is, Social Security invests

the surplus money it receives from workers, from the payroll tax, into U.S.

34

Government bonds, the same bonds China or anybody else purchases.

These bonds are backed by the full faith and credit of the U.S. Government.

And in our entire history—and many of us want to make sure this continues—

the U.S. Government has never defaulted on its debt obligations. The point

is, to say these are worthless IOUs is not dissimilar to saying: Guess what.

Because we have a deep deficit and a deep national debt, we don’t have

any money to fund equipment for soldiers who are in the field in Afghanistan

or Iraq. They are just worthless IOUs, and we can’t fund them. That is, of

course, nonsense.”

Sen. Tom Coburn (R-OK) “…The flaw in the argument given by my colleague

from Vermont (Senator Sanders) is the assumption that the IOU at the Treasury

for Social Security is good. It is good as long as people will loan us money.

It is not any good if they will not…And having looked at every aspect of

Social Security, I can tell you if we are not able to borrow the $2.6 trillion, the

benefits will not be there. The money has been stolen. There is no trust fund.

There is no money there. Congresses, under both Republican and Democratic

control, both Republican and Democratic Presidencies, have stolen money

from Social Security and spent it. The money is gone…The question is, does

this Congress owe… [it] back to Social Security? Yes. But where do we get

the money to repay it?”

DEFENSE SPENDINGhow bloated spending is hurting our nation’s security

“The biggest threat to our national security is our debt.”

Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff47

Washington’s unsustainable spending has stifled an already weak economy,

and is making the country less secure over time. As the U.S. debt continues to

grow, it makes the U.S. more dependent on foreign countries, such as China,

which finance the federal government’s growing appetite for deficit spending.

THE DEPARTMENT OF DEFENSE (DOD): A DRIVER OF THE

NATION’S DEBT

[1] Defense: A Driver of Federal Debt

[2] Duplication and Waste

[3] The Conflict

DEFENSE: A DRIVER OF FEDERAL DEBT

In Fiscal Year 2011, defense spending consumed nearly 19 percent of total

federal spending48. Defense spending is by far the largest component of

discretionary spending, which is generally anything that is funded by yearly

appropriations acts (funding for things like Social Security benefits occurs

automatically and is therefore outside of the appropriations process).

+ Defense spending consumes more than 50 percent of all discretionary spending49.

+ Since 2001, funding for national defense has nearly doubled50.

36

The recently passed Budget Control Act, which increased the debt ceiling and

capped the rate of federal discretionary spending growth, reduces the growth

of defense spending over 10 years by $350 billion51.

No other nation comes close to matching the U.S. in defense spending.

+ Last fiscal year, the U.S. spent nearly $700 billion on national defense, 43

percent of total defense spending among all countries in the world52.

+ The other top defense spenders are53:

– China (seven percent of world spending)

– Russia (four percent of world spending)

– The United Kingdom (four percent of world spending)

– France (four percent of world spending)

Quite simply, the world’s other top defense spenders are nowhere close to

spending what Washington does on defense.

+ In Fiscal Year 2011, virtually all areas of discretionary spending saw

modest spending decreases but not defense spending. It was the only

discretionary spending area that can make such a claim54.

The leaders of our nation’s armed services recognize that defense cuts are

necessary in order to tackle our nation’s budget deficit.

TOP 5 COUNTRIES RANKED

BY DEFENSE SPENDING

frA

4 %

4 3 %

usa 4 %

RUS

7 %

CHI

4 %

UK

8 0 64 4 4

2 96

War On Terror[SPENDING IN BILLIONS]

IRAQ

AFGHANISTAN

ENHANCED SEC.

UNALLOCATED

TOTAL 1283 billion

9

WAR SPENDING

AS A PERCENT

OF THE DEBT

* IN MILLIONS ADJUSTED FOR INFLATION

*TOTAL

DISCRETIONARY

NATIONAL DEFENSES P E N D I N G S I N C E 9/11

1000000

0

2000000

3000000

4000000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

S U P E R P O W E RS U P E R P O W E RWouldn't it be cheaper to just buy

the Chinese military? Maybe not,

but the U.S. has increased defense

spending exponentially over the past

10 years. China, Russia, the United

Kingdom and France all pale in

comparison to U.S. spending on

defense.

SOURCE: SIPRI Defense Fact Sheet

SOURCE: CRS Total War Spending: Table 1

SOURCE: OMB Defense Outlays and Discretionary Outlays: Tables 3.1 and 8.7

[ FY 2010 numbers ]

“It is no secret that the United States faces a serious fiscal predicament that

could turn into a crisis—of credit, of confidence, of our position in the world

– if not addressed soon…as a matter of simple arithmetic and political reality,

the Department of Defense must at least be part of the solution.”

– Robert Gates, Former Secretary of Defense55

DUPLICATION AND WASTE

A Government Accountability Office (GAO) report released in March

2011 found several areas of duplication and waste within the Department

of Defense56. Here are some samples findings and recommendations from

GAO’s report:

+ There are 31 entities that provide warfighter urgent needs – opportunities

for consolidation exist.

+ DoD and Veterans Affairs could use joint contracting for prescription drugs

to lower costs.

+ Since there are about 2,300 investments in DoD business systems,

opportunities exist to streamline and lower costs.

More recently, the Commission on Wartime Contracting in Iraq and

Afghanistan found at least $31 billion in waste. The commission’s co-chair said:

40

“We have found billions of dollars of waste stemming from a variety of

shortcomings—poor decision making, vague contract requirements, lack

of adequately trained federal oversight people in the field, duplicative or

unnecessary work, failure to revise or recompete contracts, unsustainable

projects, inadequate business processes among contractors, and delayed

audits. There are many causes, and no simple solution57.”

No-bid contracting is a process through which the government grants a

contract without opening it up for public bids. Reforming or eliminating this

practice could also save money.

+ The Center for Public Integrity recently reported that in 2010 there were

$140 billion in no-bid contracts, up form $50 billion in 20058.

SPENDING ON THE WAR ON TERROR

As of March 18, 2011, federal spending on the War on Terror totaled

$1.283 trillion59.

THE CONFLICT

While no one questions the need to protect and support our troops in conflict,

the question is: should Washington pursue further military commitments and

projects, or focus on bringing down our enormous debt so that tomorrow’s

troops will have the tools they need?

As Gordon Adams and Matthew Leatherman recently wrote in Foreign Affairs,

“The U.S. Government’s ambitions now outstrip its capacities… abroad” in

respect to defense spending60.

The U.S. is currently fighting several conflicts in foreign countries, retains

troops in dozens of countries throughout the world, and is involved in

peacekeeping and nation-building missions across the globe. The simple

fact is that the U.S. level of debt is so burdensome the country cannot afford

to keep defense spending off the table when it comes to debt reduction61.

Lawmakers must have an honest intellectual conversation about which -- if any

-- of these commitments actually make the U.S. safer.

42

1All numbers taken from this source, unless otherwise stated: CBO: Monthly Budget Review. October 7, 2011. http://www.cbo.gov/ftpdocs/124xx/doc12461/2011_10_07_MBR.pdf

2“Other activities” include everything from education to transportation funding.

3This does not include TARP money, which was -$39 billion for the fiscal year.

4White House: Fact Sheet: Bipartisan Debt Deal. July 31, 2011. http://www.whitehouse.gov/the-press-office/2011/07/31/fact-sheet-bipartisan-debt-deal-win-economy-and-budget-discipline

5White House: Fact Sheet: Bipartisan Debt Deal. July 31, 2011. http://www.whitehouse.gov/the-press-office/2011/07/31/fact-sheet-bipartisan-debt-deal-win-economy-and-budget-discipline

6All member biographies are from CQ.com’s Full Member Bio subscription service. Becerra: http://www.cq.com/person/H0411 Clyburn: http://www.cq.com/person/H3673 Van Hollen: http://www.cq.com/person/H1712 Hensarling: http://www.cq.com/person/H4520 Camp: http://www.cq.com/person/H1932 Upton: http://www.cq.com/person/H1872 Murray: http://www.cq.com/members/card.do?personId=S0943 Baucus: http://www.cq.com/members/card.do?personId=S0510 Kerry: http://www.cq.com/members/card.do?personId=S0421 Kyl: http://www.cq.com/members/card.do?personId=S0051 Toomey: http://www.cq.com/members/card.do?personId=H3492 Portman: http://www.cq.com/members/card.do?personId=H30217Voting Records 2006 Capitol Gains, Dividends, & AMT Tax Cut Extension: U.S. Senate Roll Call Vote, H.R. 4297. May 11, 2006. http://www. senate.gov/legislativeLIS/ roll_call_lists/roll_call_vote_cfm.cfm?congress=109&session=2&vote=00118 and U.S. House of Representatives Final Vote Results Roll Call 135. May 10, 2006. http://clerk.house.gov/evs/2006/roll135.xml. Upton flip flop vote 621. December 8, 2005. http://clerk.house.gov/evs/2005/roll621.xml.

Farm Subsidies: U.S. Senate Roll Call Vote, H.R. 2419. May 22, 2008. http:// www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=11 0&session=2&vote=00140 and U.S. House of Representatives Final Vote Results Roll Call 346. May 21, 2008. http://clerk.house.gov/evs/2008/roll346.xml

Fannie and Freddie Bailout: U.S. Senate Roll Call Vote, H.R. 3221. July 26, 2008. http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congre ss=110&session=2&vote=00186 and U.S. House of Representatives Final Vote Results Roll Call 519. July 23, 2008. http://clerk.house.gov/evs/2008/roll519.xml Tarp: U.S. Senate Roll Call Vote, H.R. 1424. October 1, 2008. http://www.

senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&sessi on=2&vote=00213 and U.S. House of Representatives Final Vote Results Roll Call 681. October 3, 2008. http://clerk.house.gov/evs/2008/roll681.xml

Obama Stimulus: U.S. Senate Roll Call Vote, H.R. 1 Conference Report. February 13, 2009. http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm? congress=111&session=1&vote=00064 and U.S. House of Representatives Final Vote Results for Roll Call 70. February 13, 2009. http://clerk.house.gov/evs/2009/ roll070.xml

Cash for Clunkers Refill Funding: Library of Congress: U.S. Senate Roll Call Vote,H.R. 3435. August 6,2009. http://www.senate.gov/legislative/LIS roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=1&vote=00270 and U.S. House of Representatives Final Vote Results for Roll Call 682. July 31, 2009. http://clerk.house. gov/evs/2009/roll682.xml

2010 Bush Tax Cut Extension: Library of Congress: U.S. Senate Roll Call Vote, H.R. 4853. December 15, 2010. http://www.senate.gov/legislative/LIS/ roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=2 &vote=00276 and U.S. House of Representatives Final Vote Results for Roll Call 647. December 17, 2010. http://clerk.house.gov/evs/2010/roll647.xml

8Obama Debt Commission Recommendations: Fiscal Commission Member Statements. December 3, 2010. http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/MemberStatements.pdf

9CBO: Monthly Budget Review. October 7, 2011. http://www.cbo.gov/ftpdocs/124xx/doc12461/2011_10_07_MBR.pdf

10CBO: Monthly Budget Review. October 7, 2011. http://www.cbo.gov/ftpdocs/124xx/doc12461/2011_10_07_MBR.pdf

11Pew Research Center:10,000 Baby Boomers Retire. http://pewresearch.org/databank/dailynumber/?NumberID=1150

12CBO. An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012. Pp. 2. http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf

13Social Security and Medicare Board of Trustees: Status of the Social Security and Medicare Programs: A Summary of the 2011 Annual Reports. http://www.ssa.gov/oact/trsum/index.html

14Congressional Research Service: Medicaid: A Primer. July 15, 2010. Pp 1 – 2. http://aging.senate.gov/crs/medicaid1.pdf.

15Congressional Research Service: Medicaid: A Primer. July 15, 2010. P. 13. http://aging.

senate.gov/crs/medicaid1.pdf.

16https://www.cms.gov/actuarialstudies/downloads/MedicaidReport2010.pdf. P. Executive Summary.

17Congressional Research Service: Medicaid: A Primer. July 15, 2010. P. 13. http://aging.

senate.gov/crs/medicaid1.pdf.

18Department of Health & Human Services: 2010 Actuarial Report on the Financial Outlook for Medicaid. Executive Summary. https://www.cms.gov/actuarialstudies/downloads/MedicaidReport2010.pdf.

19Department of Health & Human Services: 2010 Actuarial Report on the Financial Outlook for Medicaid. Pg. 3. https://www.cms.gov/actuarialstudies/downloads/MedicaidReport2010.pdf.

20Congressional Research Service: Medicaid: A Primer. July 15, 2010. P. 11. http://aging.senate.gov/crs/medicaid1.pdf.




24In general, unless otherwise noted, information in this section is found in the 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance Fund and Federal Supplemental Medical Insurance Trust Funds. https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf

25Census Bureau: U.S. Census Bureau Announces 2010 Census Population Counts. December 21, 2010. http://2010.census gov/news/releases/operations/cb10-cn93.html

26For the purposes of this document, “payroll tax” also includes Medicare self-employment taxes, which are triggered if you work for yourself instead of an employer.

27In general, for the purposes of being “paid into the system,” it means working 10 or more years. https://questions.medicare.gov/app/answers/detail/a_id/2305/~/medicare-premiums-and-coinsurance-rates-for-2011

28Medicare: FAQ. November 5, 2010. https://questions.medicare.gov/app/answers/detail/a_id/2307/~/will-my-medicare-part-b-premium-increase-in-2011%3F

29This information was found by researching various Medicare Part C policies on the internet.

30Kaiser Family Foundation. “Medicare Part D Spotlight.” http://www.kff.org/medicare/upload/8107.pdf


32Congressional Budget Office. March 2011 Medicare Baseline. http://www.cbo.gov/budget/

factsheets/2011b/medicare.pdf

33CRS: Medicare: History of Part A Trust Fund Insolvency Projections. May 2009. Pg. 3. http://aging.senate.gov/crs/medicare14.pdf


35For the purposes of this document, “payroll tax” also includes Social Security self-employment taxes, which are triggered if you work for yourself instead of an employer.

36In general, unless otherwise noted, information in this section is found in the GAO Social Security Reform Answers to Key Questions. May 2005. http://www.gao.gov/new.items/d05193sp.pdf

37Social Security Online: FAQ’s. April 28, 2011. http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/13/~/average-monthly-social-security-benefit-for-a-retired-worker

382011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. P. 2. http://www.ssa.gov/oact/tr/2011/tr2011.pdf

39U.S. Census Bureau: U.S. Census Bureau Announces 2010 Census Population Counts. December 21, 2010. http://2010.census.gov/news/releases/operations/cb10-cn93.html

40Status of the Social Security and Medicare Programs, A Summary of the 2011 Annual Reports. Social Security and Medicare Board of Trustees. http://www.ssa.gov/oact/trsum/index.html

412011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. P. 10. http://www.ssa.gov/oact/tr/2011/tr2011.pdf

42Social Security Administration: Social Security & Medicare Tax Rates. http://www.ssa.gov/oact/progdata/taxRates.html

43Social Security Administration: Contribution and Benefit Base. http://www.ssa.gov/oact/COLA/cbb.html#Series

44In general, unless otherwise noted, information in this section is found in 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. http://www.ssa.gov/oact/tr/2011/tr2011.pdf.

45CRS: “Social Security: Trust Fund Investment Practices.” October 2010. http://aging.senate.gov/crs/ss5.pdf

46Congressional Record – Senate. March 16, 2011. Accessible by searching http://thomas.loc.gov/home/LegislativeData.php?&n=Record.

47Joint Chiefs of Staff: National Debt Poses Security Threat, Mullen Says. http://www.jcs.mil/newsarticle.aspx?ID=360

48CBO: Monthly Budget Review. October 7, 2011. http://www.cbo.gov/ftpdocs/124xx/

doc12461/2011_10_07_MBR.pdf

49Foreign Affairs: A Leaner, Meaner Defense. January/February 2011. http://www.foreignaffairs.com/articles/67145/gordon-adams-and-matthew-leatherman/a-leaner-and-meaner-defense


51White House Fact Sheet: Bipartisan Debt Deal. July 31, 2011. http://www.whitehouse.gov/the-press-office/2011/07/31/fact-sheet-bipartisan-debt-deal-win-economy-and-budget-discipline

52Stockholm International Peace Research Institute: Background paper on SIPRI military expenditure data. April 2011. http://www.sipri.org/research/armaments/milex/factsheet2010

53Stockholm International Peace Research Institute: Background paper on SIPRI military expenditure data. April 2011. http://www.sipri.org/research/armaments/milex/factsheet2010

54CQ Weekly: 2012 Appropriations – Defense: Parties Unite to Increase Pentagon Budget. May 30, 2011. http://www.cq.com/doc/weeklyreport-3879408?wr=U2ZyOGV0Ymg1TTNTcnVnN2hZdip0Zw

55The American: Gates at AEI: Strategy Must Drive Budget Decisions. May 24, 2011. http://blog.american.com/2011/05/gates-at-aei-strategy-must-drive-budget-decisions/

56GAO: Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. March 2011. http://www.gao.gov/new.items/d11318sp.pdf

57Commission on Wartime Contracting in Iraq and Afghanistan: Press Release. August 2011. http://www.wartimecontracting.gov/index.php/pressroom/pressreleases/203-cwc-nr-49

58Center for Public Integrity: Windfalls of War. August 29, 2011. http://www.iwatchnews.org/2011/08/29/5989/windfalls-war-pentagons-no-bid-contracts-triple-10-years-war/

59CRS: The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11. March 2011. http://www.fas.org/sgp/crs/natsec/RL33110.pdf



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