At the end of the first fiscal quarter of 2018, the U.S. had a budget deficit of $804 billion. A big portion of this national debt comes from high government spending. Here is a list of three federally funded agencies that account for a large amount of the budget deficit and are also in jeopardy of going broke.
Medicare is made up of two separate trust funds. The first of these is the Hospital Insurance Trust Fund (HI) which encompasses Medicare Part A. The latter part is the Supplementary Medical Insurance (SMI) Trust Fund. This trust includes Medicare Parts B and D. According to a 2018 Annual Report by The Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, “trustees project deficits in all future years until the trust fund becomes depleted in 2026.” The main reason for this is Medicare Part A.
Financial Solvency Test
As the name suggests, the Hospital Insurance Trust Fund is medical insurance that helps pay for hospital-related costs. The ability to cover these expenses is based on an explicit test of short-range financial adequacy. There are two conditions that must be met in order to keep the fund solvent. The first requirement is that the trust fund ratio (assets/expenditures) needs to be over 100% at the beginning of the projection period, and needs to remain above 100% over the 10-year projection period. The second condition is that, if the fund is below the required threshold of 100%, then it needs to breach 100% within 5 years, and stay above that number for the rest of the 10-year period.
At the beginning of 2017, the HI fund had $202 billion, which is only 67% of the short-range financial adequacy stipulation. Moreover, the HI Trust Fund has not met the formal 100% requirement since 2003.
Medicare Costs Are Increasing
When Medicare was created, life expectancy was much lower than it is today. According to Dov Schwartzben, Senior Vice President at NewYork-Presbyterian Hospital, “if the claim number of enrollees now are living a longer period over the life of each claim, then Medicare costs will be much higher.” Essentially, the longer people live, the more Medicare will cost. Moreover, the amount of people who sign up for Medicare is increasing because baby boomers are reaching an advanced age.
“Technology in healthcare, unlike other industries, is traditionally cost raising, not cost saving,” said Schwartzben. Medical expenditures are becoming a bigger part of government spending, and the problem is only get worse. Under current law, Medicare is 3.7% of gross domestic product (GDP) spending and is estimated to increase to 5.9% by 2042 and 6.2% in 2092. Current law is very uncertain. There are impending changes due to Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and the Affordable Care Act (ACA). If these two acts are put into place, an alternative percent of GDP is presented as Medicare will account for 6.2% by 2042 and 8.9% by 2092.
Medicare is paid for by tax revenues collected by the government. Currently, that tax revenue is not covering the necessary costs associated with Medicare Part A and is expected to be depleted by 2026. Up until now, the government has never allowed the Hospital Insurance Trust Fund to run out of money.
2. Social Security
Social Security was founded in 1935 by President Franklin D. Roosevelt. The Great Depression heavily influenced the establishment of Social Security because it became apparent that there was a need for old age insurance. There are three different components of Social Security: Old-Age and Survivors Insurance (OASI), Disability Insurance (DI), and Supplemental Security Insurance (SSI). The two main parts that make up the Social Security trust are OASI and DI. These elements are then combined into one trust called OASDI.
The basic premise of Social Security is that there are contributions made by workers and employers, and these proceeds go to retirees. This has been an efficient system for a long time, but it seems as though Social Security is running out of money. The main reason for this is that the Baby Boomers are reaching retirement age at a quicker rate than low birth rate generations can support. In the 2017 fiscal year, the number of beneficiaries increased by 2.3%.
Financial Solvency Test
According to a 2017 annual report by The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, the OASDI trust fund will be depleted by 2034. This is based on the test of long-range close actuarial balance which states that the trust fund must satisfy two requirements. First, it has to meet the test of short-range financial adequacy (according to the same rules as Medicare’s short-range test), and second, the trust fund ratios must stay above zero throughout the duration of the 75-year projection period.
When OASDI runs out, only 77% of Social Security Benefits will be paid out. This means that millions of Americans will not receive much needed financial support when they retire. In order to combat this, The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds proposes a few options, although they require bipartisan legislative actions.
First, the fund can reduce the number of beneficiaries who are eligible to apply for Social Security. If the fund wanted to maintain its test of long-range close actuarial balance, it would need to reduce the number of people applying for Social Security by 17%. Another option is that the fund may increase the age requirement for retirement. There have already been steps towards this as retirement age is scheduled to increase to 67 for those born after 1960. Both of these options are focused on reducing the amount of money Social Security pays out.
According to an anonymous, highly-placed former government official, the best way to implement change is by “increasing revenues into the system, not benefits out of the system.” In order to add additional revenue, Social Security has two options. Either the fund can increase the amount of income that can be taxed, or it can increase the percentage at which income is taxed. The former government official says that “it should be largely revenue based. The best way to increase revenue is by raising the threshold of income subject to social security tax.” The reason for this, according to the former official, is that “raising payroll taxes will tend to put more pressure on lower occupations.” Social Security reforms have reflected just that. The taxable income went up from $118,500 in 2016, to $127,200 in 2017, and finally to $128,400 in 2018. On the other hand, the tax rate for Social Security has remained at 6.2% for workers and 6.2% for employers for a grand total of 12.4% since 1990. (For More: Why People are Delaying Retirement)
Social Security is quickly running out of money to support the influx of retirees due to the Baby Boomer generation. Since the program is set up as an entitlement, Social Security will be in unfamiliar territory without proper funding. Therefore, it is necessary to have legislative actions put in place in order to prevent OASDI from being depleted by 2034.
The Federal Emergency Management Agency (FEMA) is a government agency that has been under the umbrella of the Department of Homeland Security (DHS) since March 1, 2003. FEMA became a very important organization following Hurricane Katrina in 2005. As a result of the disaster, Congress put into law the Post-Katrina Emergency Management Reform Act of 2006 (Post-Katrina Act). In response to this act, the DHS decided it needed a better dispersal method for much-needed preparedness grants. This management system came in the form of the Grant Programs Directorate. FEMA’s mission statement is “helping people before, during and after disaster.”
In 2017, the U.S. was hit with Hurricanes Harvey, Irma, and Maria. This caused FEMA to go into deep financial trouble as a result of its backing of the National Flood Insurance Program (NFIP). FEMA is allowed to borrow $30.43 billion from the Treasury each year to cover flood insurance claims and expenses related to NFIP. As of September 30, 2017, FEMA had borrowed all of that money and was unable to repay its debt. That is when, on October 26, 2017, Congress enacted a supplemental appropriation for disaster relief which directed the Treasury to cancel $16 billion of its debt to NFIP. As stated by Dr. Steven Craig, professor at the University of Houston Department of Economics, “FEMA should be like an insurance policy as the taxes you pay act like a premium. The problem with FEMA is that we are constantly going over that premium budget.”
On May 21, 2018, Secretary of Homeland Security, Kirstjen M. Nielsen, announced that there will be $1.6 billion in funding for eight Grant Program Directorate. The grant is supposed to be used for our “nation’s immediate security needs and ensure public safety in our communities.” In particular, FEMA is required to allocate 25% of these funds towards State Homeland Security Program (SHSP) and Urban Area Security Initiative (UASI). The goal of these grant programs is to fund different local governments and organizations to improve their overall preparedness for and recovery from terrorist attacks, natural disasters and other emergencies.
FEMA is working to find ways to mitigate costs related to terrorist attacks, natural disasters, and other emergencies. In the wake of the 2017 hurricanes, one of the main focuses of FEMA is to increase the number of properties with flood insurance. 39% of the total U.S. population lives in coastal areas. From the years 1970-2010, there was a 40% increase in shoreline populations. From 2016-2020, that number is estimated to jump an additional 8%. A 2018 study done by the National Institute of Building Sciences found that, for every $1 dollar invested in prevention services by the federal government, taxpayers will save about $6 when disaster strikes. A huge problem with FEMA is that, “if we subsidize flood insurance, more people will be incentivized to live in coastal areas” said Dr. Craig. This will only exacerbate the problem for FEMA.
The Bottom Line
These are just three of the many agencies that the federal government support. According to a 2016 study done by GAO, U.S. federal spending outpaces revenue by $587 billion in one year alone. This makes it very hard to maintain financial stability for the plethora of agencies backed by the U.S.government. The future of many government agencies rests in policy reforms and legislative actions.