The Budget Crisis and the Civil-Military Challenge to National Security Spending
October 2, 2013
Perhaps the worst part of the debate that has led to the shut down of the federal government is its almost total irrelevance. It threatens both the US economy and US national security, but it doesn’t even begin to touch upon the forces that shape the rise in entitlements spending or their underlying causes.
The Congressional debate does not address the forces that have led to a form of sequestration that focuses on defense as if it were the key cause of the deficit and pressures on the debt ceiling. It does not address the irony that much of defense spending has direct benefits to the US economy and that the spending on foreign wars – the so-called OCO account – dropped from $158.8 billion in FY2011 to some $88.5 billion in FY2013, and is projected to drop to around $37 billion in FY2015.
Much of the debate focuses on the Affordable Care Act or “Obamacare” – a program whose balance between federal expenditures and revenues is sufficiently uncertain so the Congressional Budget office can only make limited forecasts, but whose net impact cannot come close to the cost pressures that an aging America and rising national medical costs have put on Federal entitlements in the worst case, and may actually have a positive impact in the best case.
The Burke Chair has developed a briefing that provides a range of estimates that address the real issues that are shaping the overall pressures that poverty, an aging America, and rising medical costs are putting on the US economy and federal spending.
This briefing is entitled The Civil-Military Challenge to National Security Spending, and is available on the CSIS web site at http://csis.org/publication/civil-military-challenge-national-security-spending. It draws on a range of sources to show how different estimates affect key trends, but focuses on data provided by a neutral arm of the same Congress that has paralyzed the US government and whose action threatens the funding of a viable national security strategy.
The key charts and tables in the briefing reflect serious uncertainties and problems in updating, but still broadly agree in showing that:
Managing the Domestic Economic and Social Forces that Drive the Rise in the Cost of Entitlements, and Federal Spending, Deficit, and Debt
The US does not face any foreign threat as serious as its failure to come to grips with managing the domestic economic and social forces that affect virtually all Americans and drive the rise in the cost of federal entitlement spending. (p. 4)
- The US economy is performing well under capacity although the overall burden of federal spending on the US economy has been dropping since FY2009. (pp. 5-6)
- Sequestration and present laws still leave the US facing a serious future deficit that spending for the Affordable Care Act cannot affect. (p. 7).
Entitlements, Not National Security, Drive the Deficit, Debt, and Rise in Federal Spending
The rises in the deficit and the debt are driven is driven almost exclusively by the rise is federal spending on major health care programs, social security, and cost of net interest on the debt. (pp. 9-10).
- Total defense spending was projected to drop well below 4% of the GDP by FY2015 even without Sequestration, and no remotely feasible cut in defense spending can do anything meaningful to compensate for the rising cost in entitlements spending. (pp. 11-12)
- The existing rise in entitlements spending since the end of World War II has already risen nearly11 times while the GDP has less than trebled. (p.13)
- The CBO projects the future cost of Social Security spending will rise from an average of 4.2% of the GDP in FY1973-FY2012 to 6.2% in FY2038. (p. 14)
- The cost of major health care programs (dominated by Medicaid and Medicare and not the Affordable Care Act) will rise from an average of 2.7% of the GDP in FY1973-FY2012 to 8.0% in FY2038 – more than twice the cost of all defense spending. (p. 14)
- All non-interest federal spending other than Social Security and Major Medical Programs will drop from an average of 11.2% of the GDP in FY1973-FY2012 to 8.0% in FY2038 to 8.0%, while interest on the federal debt – driven by entitlements – will rise from 2.2% to 4.9% of the GDP -- more than all national security spending. (p. 14)
- The rise in the debt, deficit, and interest is driven by tax cuts as well as arise in civil entitlement spending that is projected to reached levels approaching those during the worst years of World War II. (p. 15). though the overall burden of federal spending on the US economy has been dropping since FY2009.
The Underlying Cause of Federal Spending Crisis is a Failure to Save for Retirement and Impact of Rising Medical Costs
The rise in entitlement spending, however, is not driven by excessive spending on federal programs, but rather by far broader forces that affect all of American society and the entire economy.
- Poverty programs have accomplished a great deal, but at a high and rising cost. (pp. 18-19)
- Key shifts in income distribution have benefit the very rich but oput increasing pressure on the Middle Class (pp. 21-22)
- The real cost of poverty programs cannot be separated from Social Security and Federal medical programs which keep many Americans out of the poverty level, but drive the rise in Federal spending, entitlements costs, the deficit and Federal debt. (pp. 20, 23,)
- The two most critical factors are the fact an aging America lacks the resources for retirement and the rising national burden of medical care.
The Total and Federal Costs of an Aging America
There are significant debates over the overall impact of an aging America on Federal Spending, but the broad trends in such impacts seem clear. (p. 26) The Total and Federal Costs of An Aging America drive a key aspect of the rise in entitlements even through they do not approach a functional national solution to the problems involved.
The Lack of Saving and Pensions for An Aging Population Threatens National Security. (pp. 19-21.)
- In 1940, the life expectancy of a 65-year-old was almost 14 years; today it's almost 20 years. By 2036, there will be almost twice as many older Americans as today – from 41.9 million today to 78.1 million. (pp. 29-30)
- The level of poverty in elderly America already is a key problem. (p. 31)
- The proportion of Americans with a any pension plan with defined benefits is steadily shrinking, and the funding of such plans, adjustments for inflation, and medical coverage are highly uncertain. (p. 32)
- 401K and other programs are steadily losing employer contributions, and most Americans either do not fund them or fund them far below retirement level. (p. 33)
- There are currently 2.9 workers for each Social Security beneficiary. By 2036, there will be 2.1 workers for each beneficiary.
- The percentage of Americans in the private sector retiring with private pensions dropped from 84% in 1980 to 32% even before the current recession. (p. 31)
- By one estimate, the retirement risk index rose from around 31% in 1983 to 53% in 2010. (p. 32)
- Even today, roughly 17% of Americans over 65 -- who report any income -- are at the poverty level in spite of Social Security. Only 27% report something approaching a Middle Class income. (p. 33)
- In 2011, 9% of Americans over 65 had no retirement savings and did not receive Social Security benefits. Three out five families headed by someone over 65 had no retirement savings. (p. 34)
- In addition, 8.4 million disabled Americans and 2 million of their dependents (19% of total benefits) depended on Social Security, plus 6.3 million survivors of deceased workers (12% of total benefits). (p. 34)
- It is projected that there will be growth in the number of Social Security beneficiaries from 56 to 91 million between now and 2035. By 2033, only ¾ of benefits will be financed unless taxes are increased or the system is reformed.(p. 34)
- CBO estimates that 41% of the near term growth in federal medical expenditures will be driven by the cost of aging Americans. (p. 35)
- The aging of the population is the main factor driving the projected growth of Social Security spending as a percentage of GDP. Social Security as a share of GDP depends primarily on the ratio of the number of people of working age to the number of Social Security beneficiaries.
- The number of people of working age per beneficiary will decline significantly over the next quarter century—from about three in 2013 to about two in 2038—and then continue to drift downward. (p. 36)
- Americans are living 26% longer, But Social Security ‘retirement” age has iIncreased only 3% since Social Security was created in 1935. (p. 37)
- Unless a fundamental restructuring takes place in age of eligibility and cost, Social Security will move towards a permanent and growing annual deficit in FY2015. (p. 38)
- Even so, more and more Americans will not have pensions or meaningful 401Ks, and Social Security will leave than near or below the poverty level upon retirement. (p. 39)
The Total and Federal Impact of Rising Medical Costs
The Total and Federal Costs of American medical care drive another key aspect of the rise in entitlements even through they do not approach a functional national solution to the problems involved.
- Estimates differ, but the total cost of private and public health care – driven in part by age and poverty rose from under 5.5% of the US economy in 1950 to around 18% in 2013. (pp. 43-44)
- Experts differ, costs that rise far faster than the rest of the economy and an aging America are driving much of the burden on both the entire US economy and federal spending. (pp. 45-46.)
- The US spends a vastly larger part of its entire economy on medical care that other states, and more than four times as much as on all national security spending. (p. 48)
- In 2011, before the Affordable Care Act had any impact, public spending accounted for 47% of spending on national medical care, and private spending accounted for 53%. Rising costs, however, had sharply reduced the share paid by both employers and payments by private health insurers. (p. 48)
- The latest CBO projection of the share of federal health care spending as a percent of the GDP will go from some 3% in 2000 to close to 8.0% in 2035. (p. 49)
- There is a debate over just how much an aging America has driven total national and federal medical expenditures. (pp. 50-52). However, the CBO states that Medicare for the aging it's the key program cost shaping the rise in this aspect of entitlements spending:
- In 2013, federal spending for Medicare (net of offsetting receipts), Medicaid, and CHIP will amount to 4.6 percent of GDP, CBO expects—with net Medicare spending equal to 3.0 percent of GDP and federal spending on Medicaid and CHIP equal to 1.7 percent of GDP. (p. 48)
- Under CBO’s extended baseline, federal spending for those programs and for exchange subsidies would rise to 8.0 percent of GDP in 2038—with Medicare, net of offsetting receipts, accounting for 4.9 percent and Medicaid, CHIP, and the exchange subsidies, 3.2 percent.
- Gross Medicare spending is projected to increase from 3.5 percent of GDP in 2013 to 5.8 percent in 2038. (pp. 53-54)
- For all the furor over the Affordable Care Act, the CBO has consistently projected that the impact on the budget deficit would be a maximum of around $160 to $170 billion per year after full implementation. (pp. 58-59)
- Even these estimates ignore the fact that the, “legislation includes many other provisions that, on net, will reduce budget deficits. (pp. 57-58)
- Taking the coverage provisions and other provisions together, CBO and JCT have estimated that the ACA will reduce deficits over the next 10 years and in the subsequent decade.” (pp. 57-59)
- The Key problem is not its cost, but that it excludes so many Americans. (pp. 60-61)
- The key reason for the projected rise in federal spending for the major health care programs relative to GDP results expectation of continued faster growth in health care costs per beneficiary than in potential GDP per capita, although the impact of continued aging of the population, and an the expansion of federal subsidies for health care through Medicaid and the insurance exchanges, are also factors. (p. 63)
- This helps explain why cuts in national security spending and Sequestration has had no real impact on the trends in the deficit and Federal debt. No feasible way of cutting discretionary federal spending can begin to solve either the problem of the rise in entitlements or mandatory spending, or the much broader societal problems of an aging America and rising medical costs. (pp. 63-64)
The Congress as the Greatest Single Foreign and Domestic “Threat” to the US
Given these trends, one of the greatest ironies of the current Congressional budget debate is that it not only is essentially meaningless, and does great damage to national security, but that its failure to focus on the broader issues with any realism may well constitute a level of bipartisan failure that poses the most serious single that the US actually faces both in domestic terms and relative to any foreign danger.
Anthony H. Cordesman holds the Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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