Mandatory and discretionary Federal spending with plenty of charts and graphs and a look at Social Security.

1. Federal Spending Wait… the federal government spends money?

2. Money The Federal government spends a good deal of cash. Just to be clear, there is no such thing as “government money.” There’s only taxpayer money that the government has been entrusted to spend wisely for the benefit of the people. The 2009 Federal budget is estimated to wind up at about $4 trillion (up from about $3 trillion in 2008).

5. Spending Types Mandatory Spending What the government is legally required to pay. Social Security, Medicare, Medicaid, food stamps, pensions, interest on the national debt, etc. Discretionary Spending Government can determine how much to spend on various programs. Defense, education. Which variety of spending is more worrisome? Why?

6. Spending Types Probably the mandatory spending since it’s mandatory. The amount of mandatory spending tends to increase year after year as both the number of entitlements grow as well as how much is provided for the entitlement.

10. Mandatory Spending Some mandatory spending is currently unsustainable. Social Security is currently on a path to bankruptcy. It is a bit of a Ponzi Scheme, wherein payouts to beneficiaries are based upon a greater number of people paying more into the system than is being paid out. This has worked well for most of S.S.’s existence, but as baby-boomers retire, the ratio of workers to beneficiaries is shrinking. In 1950, 16.5 to 1. In 1975, 3.2 to 1. It’s been 3.2-3.4 to 1 since then. By around 2035, the ratio is expected to be close to 2 to 1. That means only 2 workers paying into the system for each beneficiary. The pyramid is contracting.

12. Mandatory Spending Some mandatory spending is currently unsustainable. Social Security is currently on a path to bankruptcy. Compounding the problem is how Social Security money has been used. For most of its years, SS has run a surplus – took in more than it paid out – and that surplus went into the Social Security Trust Fund. The government, however, can’t let good cash sit around being unspent and so it borrowed the money, replacing it with government bonds. This means the government essentially wrote IOU’s to itself (and counted it as revenue instead of debt).

13. Mandatory Spending This means the government essentially wrote IOU’s to itself… currently about $2.4 trillion worth that counts towards the national debt. Dandy, but starting in about 2015, SS will start taking in less money than it is paying out. When this happens, it will start cashing in those bonds which will have to be paid by general tax revenue or through further government borrowing. By 2035, the system will have cashed in all its bonds and be bankrupt since it will no longer have income to pay its benefits.

14. Mandatory Spending Some of the possible solutions are: Increase SS taxes from the current 6.2% of employee income and matching 6.2% employer contribution. Uncap (or raise the cap of) how much income can be taxed, currently at about $107,000. Reduce benefits. Raise the age at which benefits collections can begin. Some combination of the above. None of the options are very savory. Medicare is in a similar situation (but without the borrowing) and is on a path to insolvency.

16. Mandatory Spending Some have advocated privatizing Social Security, such that you can invest your withholdings in private investment accounts. Pros: Likely will have more money available for when you retire. Many people have a negative return on their SS investment and it’s getting worse. Could result in monthly payments 300% to 400% than with the current system.

18. Mandatory Spending Some have advocated privatizing Social Security, such that you can invest your withholdings in private investment accounts. Pros: Actually investing the money instead of it just going to pay current beneficiaries. Some argue that SS hurts the economy by reducing worker incentive, hurting businesses that have to match the 6.2% income contributions, reduces the incentive of people to save for retirement, and hurts the economy because money not saved and/or invested reduces the available capital.

19. Mandatory Spending Some have advocated privatizing Social Security, such that you can invest your withholdings in private investment accounts. Pros: You have some kind of control over the investment and accounts could even be inherited.

20. Mandatory Spending Some have advocated privatizing Social Security, such that you can invest your withholdings in private investment accounts. Cons: There would be an ugly transition period and could accelerate the current pressures on the system since fewer people would now be paying into the system for the current and about-to-be beneficiaries. Investments could be subject to market fluctuations (that would be a problem right now). Doesn’t allow for redistribution.

21. Discretionary Spending This covers items that can be adjusted on an as-needed basis. The biggest chunk of this is defense spending, though it’s share has decreased over time.