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This Halloween horror story considers the shocking truth about America’s entitlement programs. To best understand how much of a strain entitlements have posed on the federal budget, we turn to our model family of five, the Munsters.
They, like most other Americans, abide by the housing industry’s “30%” rule, which proclaims that housing costs for buyers and renters should represent 30% of their income. This frees them up to concentrate the majority of their finances elsewhere. The Munsters adhere closely to this standard, spending 32% of their income on their home at 1313 Mockingbird Lane.
Let’s imagine that the Munsters are spending more on their gorgeous Victorian Mockingbird Heights property. What would the lives of Herman, Lily, Grandpa, Eddie, and Marilyn be like if they were putting 96% of their income towards their mortgage?
Here’s the scary truth: It would be exactly like managing the federal budget.
Housing costs are to one’s personal finances what entitlement programs are to America’s finances – they’re by far the government’s largest cost-driver and they essentially determine how much we have left to spend on everything else. Only difference is, the U.S.’ mandatory spending budget (which includes funding for entitlement programs like Social Security, Medicare, and Medicaid) and net interest on the debt doesn’t represent a third of our government’s revenue. It represents 77%.
What’s even more haunting is that over the next decade, without entitlement reform, that number is on pace to reach 96%, which leaves a shrinking sliver of funding to cover the rest of our country’s expenses before running additional deficits.
By 2026, the federal government will have only 4% of its total revenue (see: tax dollars) to spend on initiatives such as the military (the bulk of the funding for which falls under discretionary spending), scientific research, education programs, and transportation repairs, not to mention paying roughly 2.7 million federal employees. That 4% slice of the pie would be down from 23% available for discretionary spending today and 42% available back in 2000.
To put that in context, let’s return to the housing scenario, step back from our classic sitcom family, and consider what managing your money would be like if your personal finances were as out of balance as our country’s finances. Using the calculator below, you can input your own (or your family’s) annual income to see what your monthly budget should look like today (based on average U.S. spending trends) versus what it would look like if 96% of your earnings were tied up by your rent or mortgage payments.
The next largest expense is food, which typically accounts for 19% of non-housing expenses. With the normal 68% of income available for discretionary spending, average Americans have around $19 per day to spend on food. But with only 4% of their finances freed up, the food budget plummets to $1.20 per day. That’s less than 40 cents per meal.
Starting to see just how impossible this whole 96? thing would be to sustain? Don’t forget: You would also owe taxes too.
It doesn’t get any easier budgeting for health care and insurance. Combined, Americans earning a median income would be expected to spend in the neighborhood of $801 on those two expenses. In our entitlements scenario, they would have $94. Similarly, the family’s entertainment budget would drop from $235 to $28, while the monthly clothing bucket shrinks from $188 to $22.
Hopefully, it’s becoming clear that you couldn’t stay afloat living in a house that costs you more than 90 cents of every dollar you earn. In fact, you would probably have to go into debt, just as our government has in order to run budget deficits.
So what makes us think our country can run that way?
Our entitlement programs are growing too quickly, to the point where they are crippling our government and forcing policymakers to compete over an increasingly small share of the federal budget to fund the programs and services that help keep our country running. It’s really no wonder we’re struggling to find the money to repair our failing transportation infrastructure or move forward with meaningful tax reforms when such a large share of our resources is tied up in entitlements.
Our country’s safety nets are vital, there’s no doubt about it. However, on their current path, not only will the entitlement programs themselves run out of money, they will bleed our federal budget dry in the process. Congress must pass entitlement reforms that ensure the sustainability of these important programs and keep our government from running on financial fumes.
Note: A version of this post was orginally published on February 11, 2016.