Why you'll pay for federal spending cuts

Defense, Social Security and Medicare make up the bulk of government spending, and need to be cut if the nation wants to balance its budget.

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NEW YORK (CNNMoney.com) -- Slashing government spending is certainly a phrase that plays well on the campaign trail.

But real spending cuts won't mean fewer school administrators or less environmental red tape. Real cuts mean that you'll have to live with a smaller military, put off your retirement and pay more for your health care - and that's something neither presidential candidate seems willing to admit.

The government spends about $3 trillion a year, which is equivalent to about 23% of the nation's total economic output. Over half that $3 trillion is spent on three things: defense, Social Security and Medicare.

If the nation is going to seriously deal with its long-term budget problems - that could create a $52 trillion shortfall over the next few decades, 70 times larger than the current Wall Street bailout - it's going to have to cut spending in these three areas.

Experts say both presidential candidates have only offered vague promises that merely nibble at the problem.

"It's easy to go after the small things that don't have the big lobbying behind them," said Robert Bixby, executive director of the Concord Coalition, a non-partisan group advocating fiscal responsibility. "But that's not where the problem is. They both know where the money is, they just don't want to talk about it."

Except for paying interest on the national debt, nothing is inherently off the table when it comes to slashing spending, said Bixby.

But while both Barack Obama and John McCain have promised hundreds of billions in savings through cuts in government spending, neither has been particularly clear where that money will come from.

"Neither of them has put a lot of specifics on the table," said Bixby.

Bixby said the plans are so vague his group won't even attempt to forecast what effect the candidates' plans would have on the budget over the next few years.

Other groups have attempted to model the candidates' proposals, and the results are not heartening.

In the short run, both McCain's and Obama's budget have a similar effect on the deficit - they make it larger.

McCain's plan, which generally promises more spending cuts but also more tax cuts than Obama's plan, will increase the budget deficit by nearly 50%, or $217 billion dollars each year over the next four years, according to a recent report from the Committee for a Responsible Federal Budget, a non-partisan watchdog group.

Obama's plan, which basically promises more spending offset by targeted cuts and higher taxes on the rich, would increase the deficit by even more - $281 billion.

'It's pretty stunning," said Maya MacGuineas, the group's president. "We have to borrow that money, and there's a real risk the people who loan it to us will say we don't look like such a good deal anymore."

MacGuineas said these deficit estimates are even conservative, as the group took the candidates vague plans to cut spending at their word.

McCain's biggest spending cut, $114 billion, is characterized as "unspecified," according to the report. The next largest is achieved by reducing troops in Iraq.

Obama's biggest cut, $156 billion, comes from reducing troops in Iraq, followed by reductions in health-care costs.

But even these savings are questionable.

"None of these things are very realistic given the new economic environment," said MacGuineas.

So what is realistic, and is there any hope the next president can cut spending?

In the short run, probably not. The government will likely have to borrow more as it attempts to stimulate a sagging economy through spending plans and simultaneously deal with decreased revenues caused by a likely recession.

But long term, experts say getting a handle on spending is possible. Both George H.W. Bush and Bill Clinton get credit for reducing the deficit through a combination of mandatory spending caps and a growing economy.

Mandatory spending caps - like rules that require all new bills to be fully funded before they can be passed - are essential to getting a handle on spending, said Dave Walker, President of the Peter G. Peterson Foundation, an advocacy group, and a former U.S. comptroller general.

Walker also said Social Security must be reformed, with the reforms including an increase in the retirement age and a reduction in benefits for middle- and high-income people.

Health-care costs must be addressed, he said, through a combination of more competitive bidding, less litigation and a change in an incentive structure that encourages extensive testing, as well as Medicare reform that includes higher premiums for upper-income people.

"Both candidates have touched on the health-care issue, but not as comprehensively as they need to," said Walker. "Does either candidate have a plan for dealing with the large and growing budget hole? No."

The McCain campaign did not return a call and e-mail seeking comment.

The Obama campaign said they do have a plan.

"Obama has proposed a program that is paid for, in that it cuts the deficit from where it is under current policy," said Austan Goolsbee, Obama's senior economic advisor.

Goolsbee noted plans to cut spending by reducing payments to health-care companies working with Medicare recipients, eliminating the subsidies for private banks in the student loan program and cutting subsidies to high-income farms.

On the farm subsidy point, the Obama camp finds itself in agreement with an unlikely ally - the conservative Heritage Foundation.

Brian Riedl, senior budget analyst at Heritage, said the $25-$30 billion currently doled out in the form of agriculture subsidies is one area he'd cut.

Anti-poverty and education programs are funded at all time highs, said Riedl, and their growth should be slowed, along with growth in other areas of the budget.

But like the other experts, he said most of the savings are going to have to come from Social Security, Medicare and defense. He also sees little in the current campaign rhetoric that offer signs of hope.

"Neither candidate's budget has shown a blueprint for getting the budget under control," said Riedl. "If we don't reform the current spending trends, we will bankrupt the country. There is no way around it."