Trying to make sense of the Federal Budget

Wednesday, 6 April 2011 04:00 by The Lunatic

Pop quiz: What percent of our federal budget goes to the military? 

If you look at the “official” budget numbers, the White House reports that Defense spending takes up just over 19% of our budget.

Here is what our government spent in 2010, as reported by the Office of Management and Budget and the Department of the Treasury:


At first glance, this looks like a reasonably balanced chart, without any single slice of the pie taking up too much of the available dough (the pun was intended, although the joke was – admittedly – kind of crusty).

However, there’s been an unfortunate trend which started sometime around the Reagan era, where they try to “de-emphasize” the amount we spend on Defense by including Medicare/Medicaid and Social Security in the budget numbers. They also play other games, like breaking “Veteran’s Benefits” out of the “Defense” category.

So what’s wrong with including Medicare/Medicaid and Social Security in the Federal budget numbers?

Social Security and Medicare are insurance policies. The policy premiums are automatically deducted from your paycheck, completely separate from income tax, and the money is paid into separate trust funds which are (theoretically) managed independently from all government operations.

From a legal standpoint, the money is formally entrusted to the “Federal Old-Age and Survivors Insurance Trust Fund” for Social Security, the “Federal Disability Insurance Trust Fund” for disability, and the “Federal Medical Insurance Trust Fund” for Medicare. These “Trust Funds” are separate legal entities, with financial accounts independent from the U.S. Treasury.

But the way it’s currently reported is like allowing a company to include employee’s pension contributions as income, and claiming retirement benefits paid out of the pension fund as expenses, on its corporate income statement! Ridiculous, right? A company’s pension plan and it’s operating accounts should be completely separate, with separate reporting. And absolutely no co-mingling of funds – that would be considered fraud.

Medicaid is administered under federal guidelines, but it’s actually a state-run program. If each individual state is responsible for collecting/managing/disbursing this money, why does it show up as an expense under the federal budget? (and yes, there is some federal contribution, but the numbers that get reported include the total collected by all 50 states, not just the federal amount.)

If we use all the exact same numbers from the chart above, but remove the Medicare/Medicaid and Social Security expenses, and merge Veteran’s Benefits into the Defense category, then the federal spending pie chart looks like this:


Now you get a more realistic picture of our spending – with almost 40% of our tax dollars going to the military. This is much more reminiscent of what the “official” reports used to look like, back before they started playing these games with the numbers (ok, we didn’t have the high percentage on Unemployment/Income Security back then – hopefully this will go back down).

And of course, I haven’t touched on the fact that our tax revenue doesn’t come anywhere near enough to pay for all this – so just like a company which “borrows” from its pension plan, the government has been raiding the Social Security fund for many years *. This is money that should be accounted for as debt, not as income. Likewise, any money the government puts back INTO social security should show up as debt re-payments, not as an operating expense. Unfortunately, that’s not how they’re doing it, and everyone suspects that there IS a co-mingling of cash between the federal coffers and the Social Security trust fund.  It’s one thing if the Social Security Fund invests in treasury bonds, it’s an entirely different thing if they just mix it all together.

Does anyone really know how much the Federal Government owes to Social Security? I sure don’t. That’s another number they manage to hide ... and it’s a big number.

I just wish our Federal Government was held to the same accounting and reporting standards that we expect of public companies on wall street.


* Despite all the news about Social Security going broke, they are STILL collecting far more in premiums than what is paid out in benefits – for now.

Comments (8) -

April 6. 2011 08:16

Too many people are dependent Medicare and Medicaid. At some point, something's gotta give.


April 7. 2011 06:59

The relationship between the federal budget and social security is indeed an interesting one.  There are those who feel that Bill Clinton didn't really balance the budget because he 'borrowed' from SS.  Of course, what that 'borrowing' really entailed was the fact that any surplus in Social Security is automatically reinvested in US Treasury securities.  Ideally this is an investment of course (and it certainly was with Clinton-era revenues) but with the  balance sheet we've had over the last 9 or so years it looks more like borrowing/raiding.

Ron Paul and the Fed

April 18. 2011 09:16

Thank you! It is so hard to find someone who realizes that SS and Medicare/Medicaid have absolutely no place in budget pie charts.


April 27. 2011 14:06

While SS, and Medicare/Medicaid are separate accounts, they're essentially treated like part of the treasury budget with an incredibly large amount of fluidity of funds between said accounts. Also, even though my W-2 goes to the trouble of splitting up my federal income tax vs. SS, it's still being taken from me, and the government still holds on to it, and they're still paying more than they're receiving. Again, it's all related, in that those funds have to come from somewhere.

Let's pretend, for a moment, that SS/Medicare/Medicaid isn't legitimately part of the pie chart. It makes sense for defense spending to be the largest single expenditure in our budget. It's the most important expense, and honestly the main reason that governments exist in the first place. The primary job of the government is to protect its people from internal and external threats. Everything past that is extra. It doesn't mean anything else is bad. Roads, diplomacy, radio signal organization, etc. are all services that the federal government can provide more efficiently than any individual state or private companies, therefore it makes sense for them to provide those. Everything that's less efficient for the federal government to provide such as social security (retirement funds), medicare/medicaid (health insurance), and other welfare (get a job) is better to be provided by individual states or private organizations.

Here's the wonderful thing about states providing services: there are 50 of them! That means if you want to live in the most libertarian, free, unregulated, empty state you can go somewhere like Wyoming or Montana. If you want extra rules, higher taxes, and loads of welfare, then go to New York or California. We all get to have our American dream, and we get to pick the individual dream too.


April 28. 2011 05:23

Hi Paul, thanks for the comment - I went to your website and greatly enjoyed your "Welfare State" article.  In general, I agree that welfare - as a form of public assistance - has been a complete and utter failure. On the other hand, Social Security (which is NOT a form of welfare) has actually been quite successful in it's primary goal: keeping the majority of elderly Americans off welfare. Yes, it has been mis-managed in the last 20 years, but that's a separate issue.

Regarding your suggestion above, about the different philosophies of the 50 states, my biggest concern would be the potential abuse - people would live in the "libertarian" states during their productive years, without "paying into the system" and then move to NY or California if they got disabled or sick, or needed extra services during retirement.

I'm curious if you've read the article I wrote last fall - "Tackling the Healthcare Issue". I'd be curious to hear your comments on that.

The Lunatic

May 1. 2011 10:50


I've recently written a post about voting on my blog, and I've decided I want to start a movement. The general premise is that I want to dismantle the two-party system, and I want people to stop compromising in the manner in which they choose to vote. I want people to vote for the candidates that they really, truly believe in, not just the "lesser of two evils." I've written about it here and would be honored to get your opinion on it, and if you're up to it, help on spreading this idea (if you agree that it is a good idea). Whether or not you'd be up for spreading this idea, I'd love to get your opinion on it.




May 16. 2011 19:51

Brilliant is what I would rate this information! It turned out well delivered and well received. It was easy to read and very much valued.  Many thanks!


September 20. 2012 10:00

Social Security, Medicare, and Medicaid aren't "insurance policies" in the classical sense.  They are taxes, and are treated as such legally.  Thus, Federal Government can spend the money however it wishes; thus, it makes sense to include these programs in both the income and the spending pie charts.

To further complicate matters, Social Security is now in the red, and if it's left unchanged, it will only grow worse.  Thus, even if Social Security taxes and expenditures in general are "improperly" included in the charts, at the very least, now that Social Security is cutting into regular federal revenues, that portion, at least, ought to be included in expenditures!

Social Security isn't an insurance program.  It's a Ponzi scheme.  And when it crashes, it's going to be bad for all of us.


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