The Spending Outlook

Under an assumption that current laws and policies will remain in effect, the baseline projections prepared by the Congressional Budget Office for the next decade anticipate that, as it has for most of the past several years, mandatory spending will grow faster than the economy. In contrast, discretionary spending is projected to grow at the rate of inflation—and thus more slowly than the economy. Total outlays are projected to decline from 20.2 percent of gross domestic product in 2008 to 19.3 percent of GDP in 2018.

If current laws governing mandatory programs remain the same and if discretionary appropriations total $1,045 billion for fiscal year 2008—the amount provided thus far—outlays in 2008 will total $2.9 trillion, CBO estimates (see Table 3-1). Spending would grow by $143 billion—a 5.2 percent increase over 2007 (see Table 3-2). Excluding net interest, spending is estimated to rise by 5.9 percent in 2008. The increase for that category in 2007 was 2.7 percent, well below the average increase of 6.3 percent per year recorded between 1997 and 2006.

																	Total,	Total,
					Actual												2009-	2009-
					2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2013	2018


					In Billions of Dollars
Mandatory Outlays
	Social Security				581	611	646	682	719	761	807	856	908	965	1,027	1,092	3,615	8,464
	Medicare				436	454	485	512	561	565	629	671	719	803	841	879	2,752	6,666
	Medicaid				191	208	225	243	261	282	304	328	353	381	412	445	1,314	3,232
	Other spending				420	463	481	490	504	485	503	515	530	555	567	575	2,463	5,204
	Offsetting receipts				-178	-186	-183	-190	-200	-209	-220	-231	-241	-254	-268	-285	-1,001	-2,281

		Subtotal			1,450	1,550	1,654	1,737	1,846	1,884	2,022	2,138	2,270	2,451	2,578	2,706	9,142	21,285

Discretionary Outlays
	Defense				549	572	590	603	620	626	645	660	677	698	710	723	3,084	6,552
	Nondefense				493	517	531	542	550	560	571	583	596	610	624	637	2,754	5,804

		Subtotal			1,042	1,089	1,121	1,145	1,170	1,186	1,216	1,243	1,272	1,307	1,335	1,360	5,838	12,356

Net Interest					238	234	241	266	283	286	285	285	282	278	271	259	1,360	2,735

			Total		2,731	2,873	3,015	3,148	3,299	3,355	3,524	3,666	3,824	4,037	4,183	4,325	16,341	36,376
				On-budget	2,277	2,404	2,519	2,628	2,757	2,788	2,926	3,037	3,160	3,334	3,439	3,536	13,618	30,124
				Off-budget	454	469	496	520	541	568	597	629	664	702	744	789	2,723	6,251

					As a Percentage of GDP
Mandatory Outlays
	Social Security				4.3	4.3	4.4	4.4	4.4	4.4	4.5	4.5	4.6	4.7	4.8	4.9	4.4	4.6
	Medicare				3.2	3.2	3.3	3.3	3.4	3.3	3.5	3.6	3.7	3.9	3.9	3.9	3.3	3.6
	Medicaid				1.4	1.5	1.5	1.6	1.6	1.6	1.7	1.7	1.8	1.9	1.9	2.0	1.6	1.7
	Other spending				3.1	3.3	3.2	3.1	3.1	2.8	2.8	2.7	2.7	2.7	2.6	2.6	3.0	2.8
	Offsetting receipts				-1.3	-1.3	-1.2	-1.2	-1.2	-1.2	-1.2	-1.2	-1.2	-1.2	-1.3	-1.3	-1.2	-1.2

		Subtotal			10.6	10.9	11.2	11.1	11.2	10.9	11.2	11.3	11.5	11.9	12.0	12.1	11.1	11.5

Discretionary Outlays
	Defense				4.0	4.0	4.0	3.9	3.8	3.6	3.6	3.5	3.4	3.4	3.3	3.2	3.8	3.5
	Nondefense				3.6	3.6	3.6	3.5	3.3	3.2	3.2	3.1	3.0	3.0	2.9	2.8	3.4	3.1

		Subtotal			7.6	7.7	7.6	7.3	7.1	6.9	6.7	6.6	6.5	6.4	6.2	6.1	7.1	6.7

Net Interest					1.7	1.6	1.6	1.7	1.7	1.7	1.6	1.5	1.4	1.4	1.3	1.2	1.7	1.5

			Total		20.0	20.2	20.4	20.2	20.1	19.4	19.5	19.4	19.4	19.7	19.5	19.3	19.9	19.7
				On-budget	16.7	16.9	17.0	16.8	16.8	16.2	16.2	16.1	16.1	16.2	16.1	15.8	16.6	16.3
				Off-budget	3.3	3.3	3.3	3.3	3.3	3.3	3.3	3.3	3.4	3.4	3.5	3.5	3.3	3.4

Memorandum:
Gross Domestic Product
(Billions of dollars)					13,670	14,201	14,812	15,600	16,445	17,256	18,043	18,856	19,685	20,540	21,426	22,355	82,156	185,018

		Actual	Actual	Estimated	Projected^a	Projected^a
		1997 to 2006	2007	2008	2009	2010 to 2018


Mandatory Outlays		6.0	2.7	6.9	6.7	5.6
	Social Security	4.6	6.9	5.1	5.6	6.0
	Medicare	6.9	16.7	4.0	6.9	6.8
	Medicaid	7.0	5.5	8.9	8.3	7.9
	Other^b	7.2	-22.8	14.5	7.4	-0.3

Discretionary Outlays		6.7	2.6	4.5	2.9	2.2
	Defense	6.9	5.5	4.3	3.1	2.3
	Nondefense	6.4	-0.5	4.8	2.6	2.0

Net Interest		-0.6	5.0	-1.6	3.1	0.8

Total Outlays		5.5	2.9	5.2	4.9	4.1

Total Outlays Excluding Net Interest		6.3	2.7	5.9	5.1	4.3

Memorandum:
Consumer Price Index		2.6	2.3	3.2	2.3	2.2

Nominal Gross Domestic Product		5.4	4.6	3.9	4.3	4.7

Discretionary Budget Authority		7.2	6.4	-2.1	3.0	2.3
	Defense	7.7	11.8	-5.8	2.4	2.4
	Nondefense	6.6	-0.4	2.9	3.8	2.3

Note: The growth rates include the effects of shifts in the timing of some payments.

Additional funding is likely to be provided in 2008 for operations in Iraq and Afghanistan and for other activities associated with the war on terrorism, however, because the $88 billion in appropriations provided for such purposes so far is expected to cover costs for only part of the year. The Administration has requested an additional $105 billion for 2008 for operations in Iraq and Afghanistan and other activities related to the war on terrorism. That additional funding is not reflected in CBO’s baseline projections and would boost discretionary outlays for defense in 2008 by about $30 billion, to around $600 billion. As a result, total outlays in 2008 would be 6 percent higher than in 2007. (The remainder of the additional 2008 funds would be spent in future years.) Also, legislation intended to bolster a weakening economy through fiscal stimulus could lift spending in other areas of the budget.

The increase in outlays for 2008 is fueled by increases in both mandatory and discretionary spending. Mandatory programs are projected to grow by 6.9 percent, faster than the average annual rate from 1997 to 2006. Discretionary outlays are projected to increase by 4.5 percent (even without additional funding for operations in Iraq and Afghanistan), 2 percentage points above last year’s rate. However, funding for nondefense discretionary programs in 2007 was held well below the average increase over the previous 10 years because most agencies were covered by a continuing resolution that provided funding at or near the amounts provided for 2006. Lower payments for net interest, primarily because of lower interest rates, will partially offset other increases in outlays in 2008.

Under current law, overall federal spending is projected to grow slightly faster than the economy over the next two years: As a percentage of GDP, total outlays are projected to rise from 20.0 percent in 2007 to 20.2 percent this year and 20.4 percent in 2009 (nearly equal to the 20.6 percent average of the past 40 years). Those totals are likely to rise somewhat once additional funding to continue operations in Iraq and Afghanistan is enacted and if economic stimulus is provided.

For subsequent years, CBO estimates that total spending—under assumptions for the baseline—will grow slightly more slowly than the economy, and as a result, decline to 19.3 percent of GDP in 2018. In those projections, discretionary outlays, which grew by an average of 6.7 percent annually from 1997 to 2006, increase by 2.9 percent in 2009 and average just 2.2 percent annual growth from 2010 to 2018. (This chapter’s section on discretionary spending describes the likely outcomes of other possible assumptions about growth in spending that is governed by the annual appropriation process.) In contrast, over the same period, mandatory spending is projected to grow at more than double that rate—5.6 percent per year—slightly below the average annual rate recorded over the past decade. (See Box 3-1 for descriptions of the various types of federal spending.)

Box 3-1.

Categories of Federal Spending

On the basis of its treatment in the budget process, federal spending can be divided into three broad categories:

Mandatory spending consists primarily of benefit programs, such as Social Security, Medicare, and Medicaid. The Congress generally determines spending for those programs by setting rules for eligibility, benefit formulas, and other parameters rather than by appropriating specific amounts each year. In making baseline projections, the Congressional Budget Office (CBO) assumes that existing laws and policies for those programs will remain unchanged and that most expiring programs will be extended. Mandatory spending also includes offsetting receipts—fees and other charges that are recorded as negative budget authority and outlays. Offsetting receipts differ from revenues in that revenues are collected in the exercise of the government’s sovereign powers (for example, in the form of income taxes) whereas offsetting receipts generally are collected from other government accounts or from members of the public for businesslike transactions (for example, as premiums for Medicare or as rental payments and royalties for oil or gas drilling on public lands).

Discretionary spending is controlled by annual appropriation acts; policymakers decide each year how much money to provide for given activities. Appropriations fund all manner of government activities, such as those for defense, law enforcement, and transportation. They also fund the national park system, disaster relief, and foreign aid. Some fees and other charges that are triggered by appropriation action are classified as offsetting collections, which are credited against discretionary spending.

CBO’s baseline depicts the path of discretionary spending as directed by the provisions of the Balanced Budget and Emergency Deficit Control Act of 1985. The act stated that current spending should be assumed to grow with inflation in the future.¹ Although those provisions (contained in section 257 of the act) expired at the end of September 2006, CBO continues to follow their requirements in preparing its baseline for discretionary spending. Appropriations to date have provided a total of $1,045 billion in budget authority for fiscal year 2008: $586 billion for defense and $458 billion for nondefense activities.

In addition to spending from those appropriations, the baseline includes discretionary spending for highway infrastructure, highway and motor carrier safety, public transit, and airport infrastructure programs that receive mandatory budget authority from authorizing legislation. Each year, however, the annual appropriation acts control spending for those programs by limiting how much of the budget authority the Department of Transportation can obligate. For that reason, such obligation limitations are treated as a measure of discretionary resources, and the resulting outlays are considered discretionary spending. Transportation obligation limitations for 2008 total $54 billion.

Net interest includes interest paid on Treasury securities and other interest the government pays (for example, on late refunds issued by the Internal Revenue Service) minus interest that the government collects from various sources (such as from commercial banks that maintain Treasury tax and loan accounts). Net interest is determined by the size and composition of the government’s debt, annual budget deficits or surpluses, and market interest rates.

1. The inflation rates used in CBO’s baseline, as specified by the Deficit Control Act, are the employment cost index for wages and salaries (applied to expenditures related to federal personnel) and the gross domestic product price index (for other expenditures).

The differences in the projected growth of mandatory and discretionary spending stem largely from longstanding procedures for preparing baseline projections. CBO continues to follow now-expired provisions of the Balanced Budget and Emergency Deficit Control Act of 1985 that have governed its baseline procedures for more than 20 years. Therefore, CBO projects spending for mandatory programs under the assumption that they will continue to operate as currently specified in law and according to its estimates of various parameters that govern payments for those programs—including caseloads and benefit costs. For discretionary programs, the Deficit Control Act specified that estimates for the future should assume that current appropriations grow with inflation, which produces a significantly slower rate of growth than has actually occurred in most recent years; discretionary outlays have grown by less than the rate of inflation in just 1 of the past 10 years and in only 14 of the past 40 years.

The share of federal spending categorized as discretionary declined from almost 14 percent of GDP in 1968 to about 6 percent in 1999. Discretionary outlays began to rise in 2001, and they totaled 7.6 percent of GDP in 2007 (see Figure 3-1). Because discretionary funding in the baseline projections is increased only in line with inflation and not overall economic growth, the baseline projection for that category of spending falls to 6.1 percent of GDP by 2018. CBO estimates, however, that mandatory spending—which has more than doubled over the past 40 years as a percentage of GDP—will continue to increase over the next decade (led by growth in Medicare, Medicaid, and Social Security), climbing from its current share of 10.9 percent of GDP to 12.1 percent in 2018. The largest drivers of such growth are the rapid increase in the cost of health care and, to a lesser degree, the rising numbers of the nation’s elderly population.

In 1991, net interest as a percentage of GDP reached a 40-year peak (3.3 percent). It declined each year from 1996 through 2004, bottoming out at 1.4 percent in 2004 (because of lower interest rates and either declining deficits or budget surpluses in most of those years). Since 2005, however, interest payments have increased slightly, measuring 1.7 percent of GDP in 2007. Under assumptions for the baseline, net interest will change little as a percentage of GDP through 2013 and then fall as projected surpluses emerge.

Mandatory—or direct—spending makes up more than half of the federal budget. This category includes payments to people and entities such as businesses, nonprofit institutions, and state and local governments. In general, those payments are governed by statutory criteria and they are not normally constrained by the annual appropriation process. Offsetting receipts (certain types of payments that federal agencies receive from the public and other government agencies) are classified as offsets to mandatory spending. In 2007, mandatory outlays were $1.5 trillion, a figure that CBO projects will rise steadily to reach $2.7 trillion by 2018 (see Table 3-3).

																Total,	Total,
				Actual												2009-	2009-
				2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2013	2018


Social Security				581	611	646	682	719	761	807	856	908	965	1,027	1,092	3,615	8,464

Medicare^a				436	454	485	512	561	565	629	671	719	803	841	879	2,752	6,666

Medicaid				191	208	225	243	261	282	304	328	353	381	412	445	1,314	3,232

Income Security
	Supplemental Security Income			36	41	43	45	51	44	50	52	53	60	57	53	234	509
	Earned income and child tax credits			54	56	56	57	58	40	41	41	41	41	41	41	252	458
	Unemployment compensation			33	39	46	43	40	43	45	48	50	52	54	56	217	476
	Food Stamps			35	38	41	42	42	43	44	44	45	46	48	49	212	445
	Family support^b			24	24	24	24	24	24	24	25	25	25	25	25	121	246
	Child nutrition			14	15	16	16	17	18	18	19	20	21	22	23	85	190
	Foster care			7	7	7	7	7	8	8	8	9	9	9	9	37	81

		Subtotal		202	221	233	235	240	220	230	237	243	254	256	257	1,159	2,406

Other Retirement and Disability
	Federal civilian^c			72	75	78	82	85	89	92	96	100	104	107	111	426	945
	Military			44	46	49	50	51	53	54	55	56	58	59	61	257	546
	Veteran^d			36	40	41	42	47	42	46	47	49	54	52	49	218	470
	Other			8	9	8	9	9	10	10	10	11	11	11	11	46	99

		Subtotal		159	169	177	183	192	193	202	209	216	226	229	233	947	2,060

Other Programs
	Commodity Credit Corporation Fund			8	7	7	7	7	7	7	8	8	8	8	8	37	77
	TRICARE For Life			8	8	8	8	9	9	10	11	12	13	13	15	45	108
	Student loans			7	3	2	4	5	5	3	3	3	2	2	2	20	32
	Universal Service Fund			7	8	8	8	8	9	9	9	9	9	9	9	42	87
	State Children's Health Insurance
	Program			6	7	6	6	5	5	5	5	5	5	5	5	28	53
	Social services			5	5	5	5	5	5	5	5	5	5	6	6	26	53
	Other			18	34	35	33	31	31	31	29	30	32	38	40	161	329

		Subtotal		59	73	71	72	72	72	71	69	72	74	81	85	357	739

Offsetting Receipts
	Medicare^e			-66	-69	-74	-79	-84	-90	-96	-103	-110	-119	-129	-139	-423	-1,024
	Employers' share of
	employees' retirement			-48	-51	-55	-57	-59	-62	-64	-67	-70	-73	-82	-86	-297	-674
	Other			-64	-65	-54	-54	-56	-57	-60	-62	-61	-62	-57	-60	-282	-583

		Subtotal		-178	-186	-183	-190	-200	-209	-220	-231	-241	-254	-268	-285	-1,001	-2,281

			Total Mandatory Outlays	1,450	1,550	1,654	1,737	1,846	1,884	2,022	2,138	2,270	2,451	2,578	2,706	9,142	21,285

Memorandum:
Mandatory Outlays Excluding
Offsetting Receipts				1,628	1,736	1,836	1,927	2,046	2,092	2,243	2,369	2,511	2,705	2,846	2,991	10,143	23,566
Medicare Outlays Net of
Offsetting Receipts				370	385	411	433	477	475	533	569	609	684	712	740	2,329	5,642

Note: Spending for the benefit programs shown above generally excludes administrative costs, which are discretionary.

From 1997 to 2006, mandatory spending increased at an average annual rate of 6.0 percent. Increases in spending for health care programs, for the refundable portion of the earned income tax credit and the child tax credit, and for farm programs all contributed to the high rate of growth over the period. Also, 2006 witnessed particularly large increases in spending for flood insurance resulting from Hurricane Katrina and for the subsidy costs of student loans. In addition, several other federal agencies revised previous estimates of subsidy costs for loans and loan guarantees issued in the past, which also boosted 2006 outlays significantly.¹ Spending in all three areas returned to more typical levels in 2007.

As a result of those unusually high payments in 2006 and their return to more normal levels in 2007, mandatory spending in 2007 grew by only 2.7 percent. It is projected to return to a higher growth rate in 2008 and 2009, increasing by 6.9 percent and 6.7 percent, respectively. Over the following nine years, mandatory outlays are expected to climb at a faster rate than the economy—by 5.6 percent per year, on average—thereby increasing as a share of GDP from 10.6 percent in 2007 to 12.1 percent by 2018. Over that same period, Medicare and Medicaid outlays together are projected to increase from 4.6 percent of GDP to 5.9 percent; Social Security spending is expected to rise from 4.3 percent in 2007 to 4.9 percent of GDP by 2018. Outlays for other mandatory programs (under an assumption that the law does not change) are projected to decline as a percentage of GDP from 3.1 percent in 2007 to 2.6 percent in 2018.

Mandatory spending is dominated by income-support payments and health care programs for the elderly, persons with disabilities, and the poor. The three largest programs, Medicare, Medicaid, and Social Security, were responsible for nearly 75 percent of direct spending in 2007—$1.2 trillion (excluding income from offsetting receipts). Other income-security programs (such as the refundable portions of the EITC and the child tax credit, food assistance, Supplemental Security Income [SSI], and unemployment compensation) made up about 12 percent of direct spending ($202 billion); other retirement and disability programs (including federal civilian and military retirement and veterans’ compensation programs) made up almost 10 percent ($159 billion). All other mandatory programs (such as agriculture subsidies, health care benefits for retirees of the uniformed services, and student loans) made up less than 4 percent of mandatory spending, with outlays of $59 billion in 2007.

Taken together, gross federal outlays for the two major health programs, Medicare and Medicaid, totaled $627 billion in 2007, or 23 percent of all federal outlays. Spending for those two health programs is projected to grow briskly over the next decade—at an average rate of 7 percent and 8 percent per year, respectively.

Medicare. The larger of the two major health care programs, Medicare provides subsidized medical insurance for the elderly and some people with disabilities. Medicare has three programs: Part A (Hospital Insurance), Part B (Supplementary Medical Insurance), and Part D (the subsidy for outpatient prescription drugs).² People generally become eligible for Medicare at age 65 or two years after they become eligible for Social Security Disability Insurance benefits. In 2007, Medicare had about 44 million beneficiaries; it is expected to enroll 58 million by 2018.

Medicare spending will increase by about 4 percent in 2008, CBO estimates, a slower pace than in recent years. The slowdown has four main causes: First, spending under Part D will have been in place for nearly two years and will no longer be experiencing the rapid growth associated with the program’s introduction. Second, shifts in the timing of certain payments to providers at the beginning of 2007 boosted Medicare outlays in that year and thereby will reduce growth in 2008.³ Third, payments to prescription drug plans have been adjusted to reconcile estimated and actual costs for 2006. The initial payments to those plans were based on projected expenses. Actual prescription drug costs in 2006 were lower than projected, resulting in a reduction (of about $4 billion) in the net amounts paid to plans so far this year.

Finally, Medicare’s payment rates for physicians are set to be reduced by about 10 percent in July 2008, and the baseline projections assume those reductions take effect. (Such a reduction was previously scheduled for January 2008 but was delayed by six months in recently enacted legislation.)

Under current law, additional cuts in the rates paid to physicians will follow for several years (as explained later in this chapter). Nevertheless, CBO anticipates that growth in Medicare outlays will average 6.8 percent annually, from 2009 to 2018, and it estimates that Medicare outlays as a share of GDP will rise from 3.2 percent this year to 3.9 percent in 2018. Over that period federal spending per beneficiary for Parts A and B will grow in nominal terms by more than 40 percent, from about $9,300 in 2008 to $13,200 in 2018. Gross Medicare outlays will total $879 billion in 2018, CBO projects. That amount does not include the effects of premiums and some payments from states, which are discussed in the section on offsetting receipts. Those receipts will total an estimated $139 billion by 2018.

Box 3-2.

Medicare’s Prescription Drug Benefit

In January 2006, Medicare began to subsidize prescription drug coverage under its new Part D program. Coverage comes from private prescription drug plans available to all enrollees in a geographic area, from managed care plans that participate in the Medicare Advantage program, and from employeror union-sponsored plans. Part D enrollment is voluntary, and participants pay premiums to cover a portion of the program’s cost. Part D also provides additional federal subsidies to cover the cost of drugs for some low-income Medicare beneficiaries.

During 2007, almost 30 million people—about 73 percent of all Medicare beneficiaries—were enrolled in the drug benefit, and Part D spent a total of $49 billion on prescription drug coverage. Those costs were partly offset by $2 billion in premiums withheld from some enrollees’ Social Security benefits (most enrollees pay their premiums directly to the plans), and by $7 billion in ’clawback’ payments from states, leaving a net cost of $41 billion (see the table). The state payments are intended to reflect the savings accruing to states from Medicare’s coverage of drug costs previously paid by Medicaid; they are based on historical Medicaid spending on prescription drugs for people who are eligible for both programs.

CBO’s Projections of Spending for Medicare Part D

(Billions of dollars)


				2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009- 2013	Total, 2009- 2018

Gross Medicare Part D Outlays				49	45	57	62	74	70	85	95	106	129	134	136	348	948

Offsetting Receipts
	Premiums			-2	-2	-2	-3	-3	-4	-4	-4	-5	-6	-6	-7	-15	-44
	Payments from States			-7	-7	-8	-9	-10	-10	-11	-12	-13	-15	-16	-18	-48	-122
		Subtotal		-8	-9	-10	-11	-13	-14	-15	-17	-18	-20	-23	-25	-63	-166

			Total	41	36	46	51	62	56	69	78	88	109	112	112	284	782

Memorandum: Net Part D Outlays Adjusted for the Timing of Certain Payments				41	36	46	51	56	62	69	78	88	98	110	124	284	782

Source: Congressional Budget Office.

The Congressional Budget Office (CBO) estimates that payments under Part D for prescription drugs will total $45 billion in 2008 and that they will reach $136 billion by 2018. The 2008 costs will be lower than those in 2007; the Centers for Medicare and Medicaid Services will collect more than $4 billion from drug plans because of lower-than-anticipated spending in 2006.

CBO also estimates that the federal government will collect $9 billion in offsetting receipts in 2008 from premiums and clawback payments. That amount will rise to $25 billion in 2018. Overall, by CBO’s estimates, net spending for Part D will increase from $36 billion in 2008 to $112 billion in 2018. (Spending appears relatively flat over the last three years of the projection period because the number of monthly payments in those years will drop from 13 in 2016 to 12 in 2017 and 11 in 2018 because of shifts in the timing of payments to drug plans.)

The current estimate for Part D spending is lower than CBO’s August 2007 estimate because bids that drug plans submitted to provide drug coverage in calendar year 2008 are lower than expected—on average, only about 2 percent higher than the 2007 bids. As a result, CBO reduced its projection of the per capita costs of providing drug coverage.

In 2007, the Medicare trustees issued a "Medicare funding warning" after projecting, for the second consecutive year, that payments from the general fund will account for more than 45 percent of total Medicare outlays within seven years. In accordance with the Medicare Modernization Act (Public Law 108-173), such a determination requires the President to submit to the Congress a proposal to reduce the payments from the general fund below the 45 percent threshold. The proposal would require Congressional action to become law.

Medicaid. Medicaid is a joint federal and state program that funds medical care for many of the nation’s poor, elderly, and people with disabilities. The federal government shares costs with states for approved services, but the proportion varies from state to state, averaging 57 percent nationwide. Federal outlays for Medicaid totaled $191 billion in 2007—about 12 percent of direct spending that year. Like Medicare, Medicaid has a history of rapid cost growth, with annual increases averaging 7.0 percent from 1997 to 2006, even though spending declined slightly in 2006. Medicaid outlays increased by 5.5 percent in 2007.

CBO estimates that Medicaid outlays will increase by 8.9 percent and 8.3 percent, respectively, over 2008 and 2009 and will average 7.9 percent annual growth over the remainder of the projection period. Medicaid had about 60 million enrollees in 2007; the program is expected to enroll 72 million by 2018. That increasing caseload and the states’ response to providers’ demands for rate increases are the primary drivers of the growth. (Because the federal government shares costs with the states, state spending for Medicaid will rise at similar rates.) CBO projects that federal spending for Medicaid as a share of GDP will rise from 1.5 percent in 2008 to 2.0 percent in 2018, reaching $445 billion in that year.

Social Security, which pays cash benefits to the elderly, to people with disabilities, and to their dependents, is the largest federal spending program. Social Security encompasses two programs: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). In 2007, Social Security outlays came to $581 billion, more than 20 percent of all federal spending and more than 35 percent of mandatory spending (excluding offsetting receipts). Spending for Social Security, currently about 4.3 percent of GDP, will increase steadily over the next decade (and beyond) as the nation’s elderly population increases. CBO expects that, between 2009 and 2018, the pool of recipients will grow by an average of 2.5 percent per year and that outlays will rise by an average of about 6 percent annually. By 2018, CBO estimates, Social Security will claim 4.9 percent of GDP.

Old-Age and Survivors Insurance. OASI, the larger of the two components, pays benefits to workers who reach a specific age (they become eligible for reduced benefits at age 62). It also makes payments to eligible spouses and children and to some survivors (primarily elderly widows and young children) of deceased workers. OASI benefits totaled $483 billion in 2007, a figure that will climb increasingly rapidly, reaching an estimated $918 billion by 2018. The growth in outlays for OASI is projected to average 6.1 percent a year between 2009 and 2018.

About one-third of the growth in OASI is attributable to a rising caseload. About 40.9 million people received OASI payments in December 2007, and CBO estimates that some 54.2 million people will do so in 2018, an increase of nearly 33 percent. The oldest members of the baby-boom generation (those born in 1946) will qualify for initial OASI benefits in 2008, when they reach age 62. (Typically, 40 percent to 50 percent of retired workers claim their benefits at the age of 62.) The rate of growth in the population of OASI recipients is projected to jump from about 1.5 percent in 2008 to 2.1 percent in 2009 and to accelerate each year thereafter, rising to 3.0 percent by 2018.

The rest of the growth in spending for OASI stems from benefit increases, which are projected to average 3.4 percent per year over the coming decade. Initial benefits are based on a retiree’s lifetime wages, adjusted for overall wage growth in the economy. After a person becomes eligible, benefits also rise each year according to a cost-of-living adjustment (COLA). The January 2008 COLA is 2.3 percent, down from 3.3 percent in 2007. CBO projects that the COLA for Social Security programs will be 2.8 percent in January 2009, 2.3 percent in 2010, and 2.2 percent each year from 2011 through 2018.

Disability Insurance. Social Security’s disability benefits go to workers who suffer debilitating health conditions before they are old enough for OASI enrollment. (Payments also are made to the eligible spouses and children of those recipients.) In 2007, the government paid out nearly $97 billion in disability benefits. That figure will increase to $104 billion in 2008, CBO projects, and rise to $174 billion by 2018, an annual rate of increase of 5.3 percent.

As with OASI, burgeoning caseloads and rising average benefits (as a result of wage growth and COLAs) contribute to the increase in DI spending. Another factor is the continuing rise in Social Security’s "normal retirement age"—from 65 to 66 and eventually to 67. Because the age increase delays the reclassification of disabled workers as retired workers, older people with disabilities will receive DI benefits for a longer period before making the transition to OASI. That increase also lengthens the period during which workers can apply for DI benefits.

The federal government also provides payments to people and to other government entities through programs that assist various populations—people with disabilities, the poor, the unemployed, needy families with children, and children who have been abused and neglected. Federal spending for SSI, unemployment compensation, the EITC and the child tax credit, Food Stamps, family support, and foster care, among other services, totaled $202 billion in 2007, about 1.5 percent of GDP.

Under the assumptions for CBO’s baseline, spending for other income-security programs—in contrast to the rapid growth in spending for Medicare, Medicaid, and Social Security—will increase by just 1.5 percent per year, on average, and will constitute 1.2 percent of GDP by 2018. Outlays for some programs (SSI, unemployment compensation, Food Stamps, child nutrition, and foster care) will grow more quickly than the average for the category, but spending for family support will barely increase. EITC and child tax credit outlays are projected to decline over the next 10 years with the scheduled expiration of statutory provisions that affect those credits.

Supplemental Security Income. SSI provides cash benefits to low-income people who are elderly or have disabilities. SSI outlays totaled $36 billion in 2007, a year in which 11 (rather than 12) monthly payments were made because October 1, 2006, was a Sunday. Under the assumptions that govern the baseline, spending on SSI is projected to reach $41 billion in 2008 and to increase at an annual rate of 2.6 percent over the next decade. The program’s growth is driven mainly by COLAs and by a rise in the number of people with disabilities.

Earned Income and Child Tax Credits. The EITC and the child tax credit are partially refundable tax credits available to people who earn wages below an established maximum and to qualifying families with dependent children. Either credit can reduce a filer’s overall tax liability; if the credit exceeds the liability, the excess may be refunded to the taxpayer, depending on the filer’s earnings. The refundable portions (which are categorized as outlays) totaled $54 billion in 2007 and are projected to rise to $56 billion in 2008 and to $57 billion by 2010. In 2012—the first full fiscal year in which tax receipts will reflect the expiration of provisions initially enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001—the refundability of the child tax credit will be virtually eliminated under current law. In addition, scheduled higher tax rates will reduce the EITC’s refundable portion because more of the credit will offset tax liability and be reflected as a reduction in revenues. As a result, CBO estimates, outlays for those credits will decline—under current law—to $41 billion in 2018.

Unemployment Compensation. Outlays for unemployment compensation rose slightly last year, to nearly $33 billion, from $31 billion in 2006. CBO estimates that the unemployment rate will continue to rise throughout 2008, reaching 5.2 percent by the end of the fiscal year (up from an average of 4.5 percent last year). Consequently, spending for unemployment compensation will increase to nearly $39 billion in 2008. The unemployment rate is projected to rise again in 2009, to 5.3 percent, and then to fall over the next three years to 4.8 percent, where it is assumed to remain through 2018. As the unemployment rate rises, the proportion of people who are eligible for and collect unemployment benefits also rises. In addition, as the labor force increases, more people become eligible for unemployment compensation. And, although individual states are responsible for setting benefit amounts, benefit growth tends to reflect the growth in wages. CBO estimates that outlays for unemployment compensation will grow by more than 20 percent in 2008 and by over 15 percent in 2009 (reaching $46 billion). Such payments are projected to fall in 2010 and 2011 as a result of lower projected unemployment; between 2012 and 2018, they rise by an average annual rate of nearly 5 percent.

Food Stamps. CBO anticipates that outlays for the Food Stamp program will rise by more than 10 percent in 2008 (to $38 billion) and by nearly 7 percent the next year (reaching $41 billion). Much of that growth is the result of significant near-term increases that are anticipated in the cost of food at home. In 2006 and 2007, the average monthly benefit rose by 1.6 percent per year.⁴ The benefit is projected to rise by 6.2 percent in 2008 and by an additional 5.8 percent in 2009. Over the remaining nine years of its baseline period, CBO projects growth to slow to 2.2 percent annually. CBO expects participation to increase in 2008 and 2009—reflecting recent trends—and to average 27.3 million between 2008 and 2018. Overall, spending for the program will grow by 2.5 percent per year, reaching nearly $49 billion by 2018, CBO projects.

Family Support. Spending for family support programs—grants to states to help fund welfare programs, child support enforcement, and child care entitlements—is projected to remain fairly flat, rising from $24 billion in 2008 to $25 billion by 2018. The largest program in this category, Temporary Assistance for Needy Families (TANF), is capped by law at roughly $17 billion per year. TANF is authorized through 2010, but in keeping with rules governing the treatment of programs set to expire, CBO’s baseline assumes that TANF funding will continue at its most recently authorized level.

Child Nutrition and Foster Care. Spending for child nutrition, which provides cash and commodity assistance for meals and snacks through a variety of programs in schools, day care settings, and summer programs, is projected to rise by more than 4 percent annually through 2018. Outlays for child nutrition totaled $14 billion in 2007 and are projected to rise to $23 billion by 2018. Per-meal reimbursements for the school lunch program are projected to rise by 2.5 percent annually through 2018.

CBO estimates that spending for foster care and adop-tion assistance, almost $7 billion in 2007, will increase by 3.3 percent annually, reaching about $9 billion by 2018. Income eligibility standards for federal foster care and adoption assistance are becoming more difficult to meet because they are not indexed for inflation; as a result, CBO anticipates that the foster care caseload will continue to decline but that the decline will be more than offset by increases in spending for average benefits, administration, and adoption assistance.

Benefits for federal civilian and military retirees and for veterans’ pension and disability totaled $159 billion in 2007—about 10 percent of gross mandatory spending and 1.2 percent of GDP. CBO projects those outlays will grow at a rate of 3.2 percent annually over the next 10 years, reaching $233 billion (but falling to 1.0 percent of GDP) by 2018.

Retirement and survivor benefits paid through the federal civilian retirement program (along with several smaller retirement programs for employees of various government agencies and for retired railroad workers) amounted to $72 billion in 2007. CBO projects such outlays will grow at an annual average rate of 4.0 percent over the projection period and total $111 billion by 2018. Growth in federal retirement benefits is attributable primarily to COLAs and to rising federal salaries, which boost future benefits.

One factor that restrains growth in retirement programs is the gradual replacement of the Civil Service Retirement System (CSRS) with the Federal Employees’ Retirement System (FERS). FERS covers employees hired after 1983 and provides a smaller defined benefit than that provided by CSRS. FERS recipients, however, are eligible to receive Social Security benefits through their federal employment (CSRS employees are not), and their contributions to the federal Thrift Savings Plan are matched in part by their employing agencies.

The federal government also provides retirement and disability benefits to retired military personnel and to veterans.⁵ Military annuities totaled $44 billion in 2007, and they are projected to rise to $46 billion this year and to grow by an average of 2.8 percent each year thereafter. Most of the growth in military retirement programs results from COLAs and other benefit increases. Mandatory spending for veterans’ benefits—disability compensation, pensions, life insurance, and dependency and indemnity compensation to surviving spouses and children—totaled $36 billion in 2007. Those payments are projected to grow by an average of 2.2 percent annually, again because of COLAs and other benefit increases. The veterans’ disability compensation caseload is projected to grow by about 1 percent annually.

Other mandatory spending programs include farm price and income support programs administered by the Commodity Credit Corporation (CCC), TRICARE For Life,⁶ student loans, the Universal Service Fund,⁷ and the State Children’s Health Insurance Program (SCHIP). Spending for this category was about $59 billion in 2007 and is projected to increase by almost 25 percent this year, to $73 billion. Revisions to previous estimates of subsidy costs for loans and loan guarantees (or "credit reestimates") account for almost $6 billion of that increase, and higher spending for disaster assistance (mostly for crops and livestock) accounts for another $3 billion. Outlays for the category will grow at a much slower average annual rate of 1.5 percent a year for the remainder of the projection period, CBO estimates.

CCC payments to agricultural producers totaled $8 billion in 2007, after varying between $9 billion and $30 billion in the preceding seven years. CBO estimates those outlays will range between $7 billion and $8 billion per year through 2018. The relatively low level of spending primarily reflects lower income-support payments to farmers because of historically high crop prices that are attributable in part to the strong market demand for ethanol (which is made from corn). Following directions established by the Deficit Control Act, CBO’s baseline assumes most major farm programs, which are set to expire on March 15, 2008, will continue in their current form throughout the 2008–2018 period. (For a more detailed discussion of agriculture programs, see Box 3-3.)

Box 3-3.

CBO’s Baseline Projections of Spending to Support Agriculture

The latest baseline projections of the Congressional Budget Office (CBO) anticipate significantly higher prices for most crops in 2008 and over the next decade than estimated in CBO’s August 2007 update of The Budget and Economic Outlook. Nevertheless, the current baseline contains projections of federal outlays for agriculture that are only 1 percent lower than those estimated in August (see the table).¹

Changes in CBO’s Baseline Projections of Agriculture Outlays

(Billions of dollars)


			2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	Total, 2008- 2012	Total, 2008- 2017

Commodity Credit Corporation and Other
	January 2008		17	14	14	14	15	15	15	15	15	15	75	150
	August 2007		18	16	16	16	16	16	17	16	17	18	81	165
		Difference	-1	-1	-1	-1	-1	-1	-1	-2	-2	-2	-6	-14

Crop Insurance
	January 2008		4	7	7	7	7	7	7	7	7	7	31	65
	August 2007		5	5	5	5	5	5	5	5	5	5	26	53
		Difference	*	2	1	1	1	1	1	1	1	1	5	12

Total Agriculture
	January 2008		21	21	21	21	22	22	22	22	22	22	106	215
	August 2007		22	21	21	21	21	22	22	22	22	23	106	218
		Difference	-1	*	*	*	*	*	*	*	-1	-1	-1	-2

Source: Congressional Budget Office.

In general, federal farm and income support programs guarantee the producers of a range of commodities a certain minimum price for their crops. When the prices in the marketplace top those amounts, federal spending falls for farm and income support programs. The higher prices for certain commodities assumed in the January baseline are the result of current and projected market conditions and a provision of the Energy Independence and Security Act of 2007 (Public Law 110-40) that requires increased use of alternative fuels for motor vehicles. That requirement will boost demand for corn and soybeans, which are the primary feedstocks used to produce biomass-based fuel. CBO therefore projects reduced spending on farm and income support programs over the next decade—about 9 percent less than it anticipated in August.

At the same time, however, higher commodity prices are leading to greater spending for the federal crop insurance program because of the increased value of insured crops. Under the terms of that program, the federal government pays administrative expenses and about 60 percent of the indemnity costs for producers who purchase coverage. The higher the value of those crops, the higher those costs. As a result, CBO’s forecast for lower-cost farm price and income support programs is mostly offset by higher government costs for crop insurance.

Many of the farm programs authorized in the Farm Security and Rural Investment Act of 2002 were set to expire at the end of 2007 but were extended through March 15, 2008. The House and Senate have passed different versions of legislation to amend and reauthorize farm income support, land conservation, trade, crop insurance, rural development, and nutrition programs.

1. CBO’s August 2007 projection of agriculture outlays from 2008 through 2017 were, in total, about 3 percent above its previous estimates, issued in March 2007. In 2007, federal outlays for agriculture totaled nearly $18 billion.

In 2007, federal student loan subsidies and administrative costs for the program totaled almost $7 billion. With interest rates that are more favorable to the government and with the implementation of major program reforms, CBO estimates that student loan costs will decline in 2008; outlays for student loans are estimated to fall to $3 billion in 2008 and to fluctuate within a range of $2 billion to $5 billion per year for the next decade as some program reforms are phased in and others are phased out.⁸

SCHIP is a federal and state program that provides health coverage to low-income children who are uninsured but are not poor enough to qualify for Medicaid. On average, the federal government pays about 69 percent of the program’s costs. SCHIP is authorized through March 2009 and total funding for the basic program is capped by law at $5 billion annually, with each state’s share determined by a formula. Consistent with the Deficit Control Act, CBO’s baseline assumes that SCHIP funding will continue at that level in later years. Since 2006, SCHIP also has provided extra funding to states that have exhausted their available funds, but those additional amounts are structured by law to be temporary and are not continued in CBO’s baseline.⁹ Federal SCHIP outlays totaled $6 billion in 2007 and are projected to rise to more than $7 billion in 2008 before gradually declining to $5 billion annually in later years.

Excluding offsetting receipts, CBO projects that mandatory spending will total $1.7 trillion in 2008 and that it will grow faster than the economy over the coming decade. By 2018, $1.3 trillion will be added to annual mandatory spending. Several factors account for that growth, mainly COLAs, other benefit increases, and rising caseloads (see Table 3-4).

					2009	2010	2011	2012	2013	2014	2015	2016	2017	2018


Estimated Spending in 2008					1,736	1,736	1,736	1,736	1,736	1,736	1,736	1,736	1,736	1,736

Sources of Growth
	Cost-of-living and other automatic adjustments
		Medicare			6	12	21	31	41	53	67	81	98	120
		Social Security			13	29	43	59	75	91	107	123	139	156
		Other programs^a			9	18	26	33	41	49	57	67	75	82

			Subtotal		28	59	91	123	157	193	230	271	312	358

	Other changes in benefits
		Medicare and Medicaid			27	53	81	113	151	183	220	267	315	368
		Social Security			10	18	26	37	50	66	84	106	131	159
		Other programs^a			5	6	7	-7	-5	-2	1	4	7	11

			Subtotal		42	76	114	143	196	247	305	376	454	538

	Increases in caseloads
		Medicare and Medicaid			16	28	41	59	79	101	124	149	176	205
		Social Security			11	25	38	54	70	88	107	126	146	166
		Other programs^a			7	5	3	6	7	9	10	10	12	15

			Subtotal		34	58	82	118	156	198	240	285	334	387

	Shifts in payment dates^b				0	0	25	-25	0	0	0	36	3	-38

	Other				-3	-2	-2	-2	-3	-4	-1	1	8	11

				Total	100	191	310	356	507	634	775	969	1,110	1,255

Projected Spending					1,836	1,927	2,046	2,092	2,243	2,369	2,511	2,705	2,846	2,991

COLAs and Other Automatic Adjustments. Annual changes in benefits that are pegged to inflation and other automatic adjustments account for more than one-quarter of the projected growth in mandatory spending. All major retirement programs grant automatic COLAs (the 2008 adjustment is 2.3 percent). CBO estimates that the consumer price index (the economic indicator of inflation to which COLAs are tied) will increase by 2.8 percent in 2009, by 2.3 percent in 2010, and by 2.2 percent annually from 2011 through 2018. The Food Stamp program and the EITC are indexed to other measures of inflation. In total, automatic adjustments for inflation in programs other than Medicare are projected to raise mandatory outlays by $22 billion in 2009 and by $238 billion by 2018, accounting for 19 percent of the growth in mandatory spending estimated for the period.

Payment rates for many Medicare services also are adjusted annually to reflect changes in the costs of goods and services used by providers and changes in economic factors such as GDP and productivity. The effect of those automatic increases on Medicare spending is dampened by the sustainable growth rate (SGR) formula, which is used to establish a fee schedule for physicians’ services. The SGR formula sets a cumulative spending target for payments to physicians and for services related to medical visits (such as laboratory tests and drugs administered by physicians).

Left unaltered, the SGR formula ultimately recoups spending that exceeds the cumulative target by reducing payment rates for physicians’ services or by holding increases below inflation (as measured by the Medicare economic index).¹⁰ Under an assumption that current law remains in effect, CBO anticipates that the SGR formula will reduce payment rates for physicians’ services by about 10 percent beginning in July 2008 and by approximately 5 percent annually for much of the rest of the 2009–2018 period. At the end of that time, cumulative Medicare spending measured under the SGR will be nearly back in line with the formula’s cumulative targets, but payment rates for physicians in 2018 will be less than three-quarters of what they will be in 2008.¹¹

When combined, the indexing and the SGR adjustments to Medicare payment rates result in increases of $6 billion in 2009 and $120 billion in 2018, relative to spending in 2008, and make up about 10 percent of projected growth in mandatory spending.¹²

Other Changes in Benefits. Other factors that contribute to rising benefits account for more than 40 percent of the increase of $538 billion in mandatory spending over the projection period. About two-thirds of that figure (and 29 percent of all increases in mandatory spending) is attributable to growth in spending for Medicare and Medicaid that cannot be tied to statutory adjustments in payments or to the rising caseload. Increased use of services—more frequent visits to doctors, for example—contributes to growth, as does increased use of costly medical technology. Federal Medicaid costs also rise as states expand coverage of services—for example, by raising limits on the number of home health visits the program will cover.

Benefits for other programs also experience growth beyond the automatic adjustments. Growth in wages, for example, affects Social Security benefits, federal retirement benefits, and unemployment compensation.

Wage growth also affects refundable tax credits. Outlays for the EITC and the child tax credit will shrink relative to payments made in 2008, CBO projects, because rising wages will reduce eligibility and increase the proportion of credits that will offset taxes rather than be refunded. Beginning in 2012, expiring provisions first enacted in EGTRRA also will affect the EITC and the child tax credit by reducing the refundable portion of those credits. If current tax law remains unchanged, outlays for those tax credits in each year from 2012 to 2018 will be well below outlays in 2008.

Increases in Caseloads. A rise in the number of people who will be eligible for and claim benefits will add $387 billion to mandatory spending by 2018, CBO estimates. The three largest mandatory programs (Medicare, Medicaid, and Social Security) will be responsible for $372 billion—more than 95 percent of that total. In 2008, CBO estimates, 50 million people will collect Social Security benefits. By 2018, that number will be 64 million. Projected increases in Medicare caseloads are similar, rising from about 44 million in 2008 to 56 million in 2018 (see Figure 3-2). Changes in caseloads for all major benefit programs will contribute about 30 percent to the growth in mandatory spending from 2008 to 2018.

Shifts in Payment Dates. The timing of outlays for some mandatory programs depends on whether October 1, the first day of the fiscal year, falls on a weekday or on a weekend. If it falls on a Saturday or a Sunday, some benefits are paid at the end of September, increasing spending for the preceding year but decreasing outlays for the forthcoming year. SSI, veterans’ compensation and pension programs, and Medicare payments to managed care plans and Part D plans are affected by such calendar shifts. Those programs can make 11, 12, or 13 monthly payments in a fiscal year. Irregular numbers of benefit payments will affect mandatory spending in 2011, 2012, 2016, 2017, and 2018.

Offsetting receipts—which are recorded as negative spending—are certain payments made to the federal government by citizens, businesses, or other federal agencies. They include beneficiaries’ premiums for Medicare, federal agencies’ retirement contributions, and payments for harvesting timber or extracting minerals from federal lands. In 2007, offsetting receipts totaled $178 billion—about 11 percent of gross mandatory spending and 1.3 percent of GDP (see Table 3-5). Offsetting receipts are expected to climb by nearly 4.4 percent on average over the next 10 years, primarily because of Medicare Part B premiums. By 2018, offsetting receipts will equal 1.3 percent of GDP, CBO estimates, about the same as in 2008.

																Total,	Total,
				Actual												2009-	2009-
				2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2013	2018


Medicare^a				-66	-69	-74	-79	-84	-90	-96	-103	-110	-119	-129	-139	-423	-1,024

Employers' Share of Employees'
Retirement
	Social Security			-12	-13	-14	-15	-16	-17	-17	-18	-19	-20	-21	-22	-78	-180
	Military retirement			-14	-16	-18	-18	-19	-19	-20	-20	-21	-22	-22	-23	-93	-201
	Civil service retirement and other			-21	-22	-23	-24	-25	-26	-27	-28	-30	-31	-39	-41	-125	-293

		Subtotal		-48	-51	-55	-57	-59	-62	-64	-67	-70	-73	-82	-86	-297	-674

TRICARE For Life				-12	-11	-11	-12	-12	-13	-14	-15	-16	-17	-18	-19	-62	-145

Natural Resources-Related Receipts^b				-13	-18	-17	-18	-19	-19	-21	-21	-21	-22	-21	-23	-93	-201

Electromagnetic Spectrum Auctions				-14	-11	-2	*	*	*	0	0	0	0	0	0	-3	-3

Other				-26	-25	-24	-25	-25	-25	-25	-26	-24	-23	-18	-19	-124	-234

			Total	-178	-186	-183	-190	-200	-209	-220	-231	-241	-254	-268	-285	-1,001	-2,281

Medicare Premiums and Payments From States. Offsetting receipts for Medicare totaled $66 billion in 2007—about 35 percent of all offsetting receipts. Over the coming years, those receipts will grow substantially, to about $140 billion in 2018. The bulk is from premiums paid by beneficiaries, but the amount also includes payments made by states and recoveries of overpayments made to providers.

Prior to 2007, nearly all Medicare premiums were paid by people enrolled in Part B, the Supplementary Medical Insurance program, which covers physicians’ and outpatient hospital services. Starting in 2007, premiums for prescription drug benefits under Part D of Medicare began to account for a significant share of Medicare’s premium receipts. (Although collection of Part D premiums began in 2006, 2007 was the first full year of operation of Part D.) Part B premiums for some higher-income enrollees also were raised above the standard premium. CBO estimates that premium payments for Medicare will rise from $53 billion in 2008 to $106 billion in 2018.

The annual premium amount for Medicare’s Part B is announced in the fall of each year. Because those annual premiums are supposed to offset about 25 percent of projected spending for Medicare Part B, legislation to increase spending in Part B that is enacted after the premium is announced (for example, by increasing fees paid to physicians) tends to result in premium revenue that is a lower percentage of Part B spending than that assumed by the program’s trustees when the premium was calculated initially. That will occur in 2008. In subsequent years, however, premiums will be increased so that—overa period of several years—standard premiums will, in fact, offset about 25 percent of Part B spending.

Medicare now pays some of the cost of providing prescription drug coverage for low-income enrollees. Previously, Medicaid covered that cost, which was split between beneficiaries’ states and the federal government. A portion of the savings accruing to the states from that cost shifting is returned to the federal government and credited to the Part D program, and those payments from states are reflected in the budget as offsetting receipts. CBO expects that those payments will grow—primarily because of increases in the cost of prescription drugs—from $7 billion in 2008 to $18 billion in 2018.¹³

Other Offsetting Receipts. Other offsets to mandatory spending involve payments made by federal agencies to employees’ retirement plans, proprietary receipts from royalties and other charges for oil and natural gas production on federal lands, sales arising from harvested timber and minerals extracted from federal land, and various fees paid by users of public property and services.

In 2007, $48 billion in offsetting receipts came in the form of intragovernmental transfers from federal agencies to employees’ retirement plans (mostly trust funds for Social Security and for military and civil service retirement). CBO estimates that such payments will grow by about 5.3 percent annually, reaching $86 billion by 2018. Intragovernmental transfers also are made to the Uniformed Services Medicare-Eligible Retiree Health Care Fund under the TRICARE For Life program; those payments totaled $12 billion in 2007. CBO projects that rising health care costs will cause TRICARE For Life payments to rise by more than 5 percent each year, to $19 billion by 2018.

CBO projects that the Federal Communications Commission’s auctions of licenses to use the electromagnetic spectrum will boost offsetting receipts by $11 billion in 2008 and by another $2.9 billion over the 2009–2012 period. That total includes proceeds from the 2008 auction of licenses to use some of the frequencies currently used for television broadcasts as well as other auctions expected to occur before the agency’s auction authority expires at the end of 2011.

In keeping with precedents established by the Deficit Control Act, CBO’s baseline projections assume that some mandatory programs will be extended when their authorization expires, although the assumptions apply differently to programs created before and after the Balanced Budget Act of 1997. All direct spending programs that predate mid-1997 and that have current-year outlays above $50 million are assumed to continue. For those established after 1997, continuation is assessed program by program, in consultation with the House and Senate Budget Committees. Smaller programs—those with current annual outlays below $50 million—are assumed to expire as authorization lapses. CBO’s baseline projections therefore assume continuance of the Food Stamp program, TANF, SCHIP, rehabilitation services, child care entitlement grants to states, federal unemployment benefits and allowances (also known as trade adjustment assistance for workers), child nutrition, and family preservation and support programs. Most CCC farm subsidies are assumed to continue.¹⁴ In addition, the Deficit Control Act directed CBO to assume that a cost-of-living adjustment for veterans’ compensation is granted each year. The assumption that expiring programs will continue accounts for outlays of nearly $4 billion in 2008 and $870 billion between 2009 and 2018 (see Table 3-6).

													Total,	Total,
													2009-	2009-
		2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2013	2018


Food Stamps
	Budget authority	n.a.	41.1	41.8	42.4	43.2	43.8	44.4	45.2	46.5	47.8	49.2	212.3	445.4
	Outlays	n.a.	41.0	41.7	42.4	43.2	43.8	44.3	45.2	46.4	47.8	49.2	212.1	444.9

Temporary Assistance
for Needy Families
	Budget authority	n.a.	n.a.	n.a.	16.8	16.8	16.8	16.8	16.8	16.8	16.8	16.8	50.3	134.2
	Outlays	n.a.	n.a.	n.a.	11.6	16.8	16.8	16.8	16.8	16.8	16.8	16.8	45.2	129.1

Commodity Credit
Corporation^a
	Budget authority	0.4	8.2	8.3	9.8	10.5	11.1	11.8	12.0	13.8	15.7	17.6	47.9	118.8
	Outlays	0.1	8.2	8.3	8.8	9.7	10.5	11.4	11.7	13.7	15.7	17.6	45.5	115.5