Our Biggest Budget Issue: Payments to Individuals

by: Mark J. Perry

I'm sure most of us are experiencing "debt ceiling overload" by now and will be happy that a deal was just reached (it's 8:50 p.m.). Over the last month, we've heard endless debates on federal spending, federal spending as a share of GDP, the $14 trillion ever-increasing federal debt, the the federal debt as a share of GDP, spending cuts as a condition to raise the debt limit, possible revenue/tax increases, a possible budget balanced amendment later, etc.

But there's an important issue about federal spending that's been pretty much completely overlooked in all of the debates, and it's an issue that was discussed on a CD post back in February. In that post, I featured an editorial by AOL opinion editor John Merline who pointed out "the biggest thing the federal government does these days is cut checks to individuals."

In 2010, the OMB reports (Table 6.1 Composition of Outlays, 1940-2016) that the federal government spent $3.45 trillion, and made about $2.3 trillion in "payments to individuals," which was about two-thirds (66.13%) of total federal spending last year, the highest ever in history (see top chart above). And that category was more than three times larger than the share of 2010 federal spending on defense (20.1%) and more than 11 times larger than the share spent on net interest (5.7%).

Where does all that money go? The bottom chart displays a percentage breakdown of the $2.3 trillion in payments to individuals for 2010, and shows that more than 76% of those payments were for Social Security and Medicare, about 14.4% was for spending on the poor (public assistance, food assistance, and housing assistance), 7% on unemployment insurance payments, and 2.4% on student assistance.
And John pointed out in his AOL editorial that "The biggest of these direct payment programs -- Social Security, Medicare and Medicaid -- are also the fastest growing in the federal budget."

So while it looks like the short-term problem has been temporarily fixed with an increase in the debt limit, the long term problem won't be fixed until we address the nation's most serious problem: we're increasingly becoming an "entitlement nation," with "payments to individuals" increasing both in absolute dollar amounts and as a share of total federal spending, or in the words of John Merline:

The federal government has over the years essentially turned into a gigantic wealth-transfer machine -- taking money from a shrinking pool of taxpayers and giving it out to a growing list of favored groups. This situation will make getting the federal budget under control increasingly difficult, since it will invariably involve pitting those writing checks against those cashing them.