Mandatory Spending: Evolution and Growth Since 1962

Publication Date: September 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Abstract:

Federal spending amounts to almost 20% of gross domestic product (GDP) and the federal deficit stands at nearly 4% of GDP. Projections suggest that with no changes in policy and the impending retirement of the large baby boom generation the United States is facing a long-term fiscal imbalance. Efforts to reduce the federal deficit and the long-term fiscal strain may include reductions in entitlement spending, a major component of mandatory spending. Mandatory spending is the government spending where the budget outlays are controlled by laws other than appropriation acts, and includes such popular programs as Social Security and Medicare. Other programs included in mandatory spending are temporary assistance to needy families (TANF), supplemental security income (SSI), unemployment insurance, veterans benefits, federal employee retirement and disability, food stamps, and the earned income tax credit.

The composition of mandatory spending has changed over the past 40 years. In 1962, before the introduction of Medicare, Medicaid, and SSI, mandatory spending accounted for less than 30% of all federal spending and Social Security accounted for half of all mandatory spending. By 2004, mandatory spending comprised over half of total federal spending and Social Security made up about 40% of mandatory spending. The fastest growing components of mandatory spending have been Medicare and Medicaid, which together accounted for over 36% of mandatory spending by 2004.

Mandatory spending has grown relative to GDP, with most of the growth occurring before 1975. Both Medicare and Medicaid have steadily grown relative to GDP from almost nothing in 1965 to about 3.8% of GDP in 2004. Social Security grew from 2.5% of GDP in 1962 to 4.3% in 2004. And lastly, SSI has been and is projected to continue to amount to between 0.2% and 0.3% of GDP.

The aging of the U.S. population, increasing life expectancy, and rising health care costs will put severe pressure on the federal budget over the next 75 years. Medicare and Medicaid are projected to amount to 5.3% of GDP by 2015 and to 18.9% in 2080. Social Security is projected to be 4.5% of GDP in 2015 and 6.4% of GDP by 2080.

With discretionary spending reduced to historic lows, any significant reductions in federal spending are likely to come from mandatory spending. Since most of the increases in federal spending occur in Social Security, Medicare, and Medicaid, these programs are likely to be targets for budget reductions. Focusing budget cuts on these three key programs, however, could compromise their goals and adversely effect the elderly and the poor. Over the next 75 years, the growth in Medicare and Medicaid are projected to be the largest contributors to the long-term fiscal shortfall. Fundamental reform of these programs may be proposed to eliminate the long-term fiscal strains while preserving the goals of these programs.

This report will be updated annually.