The Biggest Budget Item You Never Think About Just Got Whacked

Quick: What federal expense costs more than food stamps and unemployment insurance combined—and nearly as much as Medicare? No, it's not Medicaid. 

It's pension and health benefits for retired federal employees and military veterans, which in 2010 totaled $268 billion, a figure surely higher this year. 
 
To put this number in perspective, the federal government spends more on its retired workers and warriors that it spends on education, infrastructure, and scientific research combined. This area of spending has grown rapidly in the past decade more than doubling, and we can thank two wars for much of that increase, along with the usual culprit of rising healthcare costs. 
 
However, as a result of yesterday's congressional budget deal, this area of number is set to shrink slightly over coming years. Is that a good thing? Just maybe. 
 
The full scope of federal pension and health spending for people no longer serving their country tends to be obscured by the way this spending is spread across various programs. In 2011, USA Today broke all the numbers down, coming up with the shocking figure of $268 billion in annual spending for 2010. 
 
Now, as to whether this area of spending needs to be cut, as Congress is likely to do. There's two sides to this issue. First, the great thing about federal pensions and veterans pensions (along with health benefits) is that these programs have been crucial in raising lower income Americans—particularly nonwhites—into positions of economic security in reward for decades of work. Federal and military jobs have been anchors of the black middle class especially, filling a void left by declining manufacturing. We don't want to mess with that success. 
 
But there's also a bigger issue at stake, which is ensuring that the United States invests in its future by building the human, physical, and knowledge capital needed to compete in a global economy where 2 billion new workers have arrived on the scene in the past two decades. Even as the competition intensifies, all budgetary trends suggest that future oriented investments will decline while spending on the old will skyrocket. This year, if you combine federal spending on pensions with the cost of Medicare and Social Security, total federal spending on old people will be around $1.5 trillion—nearly half of all non-interest federal spending. 
 
I know, I know: it's common to hear that hyping generational warfare is merely an excuse to butcher entitlement programs. But the fact is that every single advanced country in the world—all of which have aging populations—is dealing with some form of the same challenge. And lots of leaders in those countries well to the left are also wondering just what the right balance is between caring for the old and investing in the young. One thing is certain: more taxes are not the easy answer, because this same dilemma exists in higher tax nations and, at some core level, exists even if resources are ample. 
 
Fortunately, here in the United States, we do have one comparatively easy way to make progress, which is to better control healthcare costs, which will make caring for the old a lot less expensive. That can be done by building on Obamacare to impose greater government dominance of the healthcare sector.
 
Still, even as we do this, we need to ask some fundamental questions about what's the best way to use resources to ensure generational equity and future prosperity. 

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