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Setting Our Priorities
Many seemingly important functions of government receive tiny portions of the total federal budget, while 65% of the current budget is virtually untouchable.
By Knight Kiplinger, Editor in Chief
From Kiplinger's Personal Finance magazine, March 2008
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If you really want to know what people value most, look at how they spend their money. This is true of individuals, households and whole nations.
In this national election year, you'll hear a lot of talk about reordering our priorities -- spending more tax revenue on this, less on that. As a useful prelude to this debate, let's see how Congress and the executive branch spend our federal revenues right now.
The first thing you need to know is that many seemingly important functions of government receive tiny portions of the total federal budget. Washington allocates 1% or less to environmental protection and natural resources, child-nutrition programs, research in the physical sciences (including space exploration), energy research and alternative fuels.
Each of the following receives 2%, more or less: aid to education, medical research and public health, support for state and local law enforcement, and homeland security. Transportation -- interstate highways, airports, port improvements and the like -- consumes about 3%.
Some things that Congress fights over with ferocity are really small crumbs on the banquet table, each getting 1% or less: farm subsidies, foreign aid, welfare and disaster relief.
The lion's share
All the functions listed above total about 14% of the federal budget. So where do the big bucks go? Well, about 9% of each year's spending goes to pay the interest on the accumulated budget deficits of the past half-century.
Then there is military spending, swelled these days by the wars in Iraq and Afghanistan. But the Pentagon's share of federal spending -- 21% -- is probably less than most Americans would guess. It's higher than in the 1990s, but lower than in 1983 (26%) and 1968 (46%), during the Vietnam War. Our division of the budget pie still hasn't accounted for even half of total federal spending. So where do the majority of your federal tax dollars go? To your fellow citizens, in direct payments and benefits.
All of these "transfer payments" combined -- for the elderly, civil-service and military retirees and poor people without medical insurance, and for orphans, the unemployed and the disabled -- make up about 56% of annual federal spending.
The lion's share of this -- about one-third of all federal spending -- goes out as Social Security benefits and Medicare payments. Medicare's budget share has more than doubled since 1983, to about 13% today. Health care for the poor -- Medicaid, a cost split with the states -- has tripled its budget share since 1983, to 7% today.
Pensions for federal civilian and military retirees, plus health care for veterans, consume a combined 6.6% of the budget. Besides Medicaid, other benefits for the poor (such as food stamps, housing vouchers and the low-income tax credit) total about 4%.
The vexing problem of reordering national priorities is that 65% of the current federal budget (56% in transfer payments and 9% in interest on debt) is virtually untouchable. Restraining entitlements would require a contentious overhaul of benefit formulas for Social Security, Medicare and Medicaid. Even if the Pentagon's budget share were cut in half, it would free up only 10% of federal dollars. And the problem will only get trickier as baby-boomers retire and the costs of Social Security and Medicare really soar.
Prioritizing
As a nation, we face tough choices: Do we allow entitlements -- especially health care -- to squeeze out funding for virtually every other function of government? Boost tax revenues to enlarge the budgetary pie? Reform entitlements to rein in future cost increases? Or do we map out a plan that combines all of these?
In the coming election, let's demand that the candidates give us some straight talk -- and clear thinking -- on these very difficult issues. And make your preferences known.
Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com.
Reader Comments (7)
Posted by: AG at 02/22/2008 08:52:22 AM
Where would you want the Federal dollars to be spent in the first place? To me it seems that education, health care and social security should be the primary spending. Isn't that what the government is already doing? The 56% money that is being spent on the items listed in the writeup seems to be going to the right place. Without that there would be widespread discontent, crime and suffering. It is ridiculous trying to justify the 21% defence spending on the grounds that in the past it was much higher. If anything, the government must try to live withing its means. Funding expensive wars and large military spending in research is sapping away the American wealth and resources. All the social security kitty has been emptied in the last 2 decades to fund politician's pet projects and now to call them enitlement payments is nothing short of callous.
Posted by: RM at 02/26/2008 07:16:23 AM
Right on AG! Why not reign in the drug companies like other governments do?
Posted by: By the numbers at 02/26/2008 11:00:32 AM
I don't think entitlesments are "untouchable." While some clearly are needed it doesn't mean that they couldn't be improved by reform. For example, why should anyone be "entitled" to receive payments just because they are old? I know that I'll be lucky to get back 2/3 of what I put into Social Security, never mind what I could have made on interest had I been able to invest it myself. And many of those collecting today are getting far more out than they ever put in...At the very least the old people with the most money could subsidize those who don't have it; get it off the backs of those of us still raising our families and trying to save money for returement because Social Security won't be there for us and we know it.
Posted by: BMD at 02/26/2008 04:31:48 PM
AG - nowhere in the U.S. Constitution is there a guarantee of healthcare, social security or even a free education...I do concur that a government must live within its means, something that the flat tax or fair tax would nearly immediately remedy. I also agree that pet projects, ear marks and pork barrel spending should be cut completely although it probably accounts for less than 1% of the total budget.
Posted by: No Name at 02/26/2008 05:25:32 PM
Agreed with AG's comment!
Posted by: RL at 02/26/2008 11:44:11 PM
BMD is correct. Nowhere in the constitution does it say anyone is "entitled" to anything except life, liberty, and the pursuit of happiness. Program reform is a must. FDR cursed us with unsustainable social programs (i.e., SS and Medicare), but a strong defense is necessary to maintain what we have. Other govts "reign in" drug companies because they can...the vast majority of drug R&D is done in the U.S..don't kill the golden goose, and let's not use emotion to solve a logical problem. The last thing we need is a repeat of FDR's New (Raw) Deal.
Posted by: AG at 02/27/2008 07:09:45 AM
I would still repeat my key question: Where would you want to Federal dollars to be spent in the first place? In any social system, around the globe, the cost to the society for education and healthcare is enormous...Social security kitty was created by tax payers. Politicians had no right to touch it and create the current crisis. As far as defense is concerned, a strong defense does not need humungous spending. If anything, our defense has weakened considerably to terrorist threats which are far more real than a nation attacking us. Terrorist threats cannot be eliminated by large scale investments in nuclear and other hi tech armaments. We have hardly invested in the kind of weapons needed to fight terrorism...Foreign wars which are making matters worse are costing us $2B a day with no end in sight. It has already been 1 trillion so far. Heavens know how many more trillions ahead.