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Entitlement Spending: Expenses Up 169%
Over Past 15 Years, While Dedicated Funding Up Only 70%**

F1995 ... F2000 ... F2005 F2006 F2007 F2008 F2009 F2010
Entitlement Revenue ($B) $484 $653 $794 $838 $870 $900 $891 $865
Y/Y Growth -- 7% 8% 6% 4% 4% -1% -3%
Social Security $351 $481 $577 $608 $635 $658 $654 $632
% of Revenue 72% 74% 73% 73% 73% 73% 73% 73%
Medicare $96 $136 $166 $177 $185 $194 $191 $180
% of Revenue 20% 21% 21% 21% 21% 22% 21% 21%
Medicaid $0 $0 $0 $0 $0 $0 $0 $0
Unemployment Insurance $29 $28 $42 $43 $41 $40 $38 $45
% of Revenue 6% 4% 5% 5% 5% 4% 4% 5%
Other* $8 $9 $9 $9 $9 $9 $8 $8
% of Revenue 2% 1% 1% 1% 1% 1% 1% 1%
Entitlement Expense ($B) $788 $937 $1,295 $1,357 $1,462 $1,582 $1,834 $1,984
Y/Y Growth -- 5% 6% 5% 8% 8% 16% 8%
Social Security $336 $409 $523 $549 $586 $617 $683 $707
% of Expense 43% 44% 40% 40% 40% 39% 37% 36%
Medicare $160 $197 $299 $330 $375 $391 $430 $452
% of Expense 20% 21% 23% 24% 26% 25% 23% 23%
Medicaid $108 $118 $182 $181 $191 $201 $251 $273
% of Expense 14% 13% 14% 13% 13% 13% 14% 14%
Unemployment Benefits $24 $23 $35 $34 $35 $45 $123 $160
% of Expense 3% 2% 3% 2% 2% 3% 7% 8%
Other* $161 $189 $256 $264 $275 $328 $347 $392
% of Expense 20% 20% 20% 19% 19% 21% 19% 20%
Entitlement Surplus / Deficit ($B) -$304 -$284 -$501 -$519 -$592 -$682 -$943 -$1,119
Net Margin (%) -63% -43% -63% -62% -68% -76% -106% -129%

Note: USA federal fiscal year ends in September; Medicaid is jointly funded by federal and state governments, and as a social welfare program (unlike a social insurance program like Medicare), there is no dedicated trust fund. *Other expenses include family & other support assistance, earned income tax credit, child tax credit and payments to states for foster care / adoption assistance. **We exclude Social Security & Medicare Part A trust funds interest income as they are accounting gains rather than real revenue. Source: White House Office of Management and Budget.
KP
CB www.kpcb.com
USA Inc. | Income Statement Drilldown 75

Entitlement Spending: Observation About Social Security & Medicare
Part A Trust Fund – More Like Accounting Values Than Real Dollars

• Social Security Trust Fund balance (accumulated annual surpluses + interest income) = $2.5 trillion as of 2009; Medicare Part A Trust Fund balance = $304 billion as of 2009. These surpluses were invested in a special (non-marketable) series of U.S. Treasury securities, which were then used to finance budget deficits in other parts of USA Inc. like Medicaid & Nutrition Assistance.

• As a result, many observers have argued that Social Security and Medicare Part A Trust Funds’ balances are no more than accounting gains on paper owing to: 1) no ‘real’ assets (such as tradable stocks / real estates…) in these Trust Funds as the special U.S. Treasury securities are non-marketable and 2) the Treasury Department needs to raise taxes / cut other programs’ spending / borrow more money in the future to meet any withdrawal requests.

• We think that for Social Security and Medicare Part A programs, their Trust Funds’ balances have legal value as USA Inc. is legally obliged to repay the principal and interest on the Treasury securities held in respective Trust Funds.

• However, we think that these Trust Fund balances have NO economic value as these cumulative surpluses have been spent by USA Inc. to reduce the borrowing need in the past. When Social Security & Medicare begin net withdrawal from their Trust Funds (likely in 2017E), USA Inc.’s debt levels + interest payments growth could accelerate, owing to the double whammy of: 1) loss of revenue source (previous surpluses) and 2) additional Treasury redemption costs related to Trust Funds’ withdrawal requests.

• Consequently, we exclude Social Security and Medicare Trust Funds’ balances and interest income from our financial models and calculate their liabilities on a net basis.

Data source: Social Security Administration, Dept. of Health & Human Services, CBO. Note: the economic value of Social Security Trust Fund is subject to debate, for a different perspective, refer to Peter Dimond and Peter Orszag, “Saving Social Security: A Balanced Approach,” p51 Box 3-5.
KP
CB www.kpcb.com
USA Inc. | Income Statement Drilldown 76

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