CBO Testified on the Long-Term Budget Outlook

June 23, 2011

This morning I testified before the House Budget Committee on our long-term budget outlook that was released yesterday. In that testimony, I highlighted many of the points that were included in my blog post from yesterday. In this blog, I will discuss, in more detail, the main factors that account for the projected increases in outlays for Social Security, Medicare, and Medicaid: aging of the population and rising health care costs.

CBOs long-term projections highlight a key element underlying the fiscal challenges facing the United States. Those projections indicate that, if the governments programs and activities are maintained in their current form, spending for everything other than interest will rise to between 23 percent and 25 percent of GDP in 2035, compared with an average of 18.6 percent of GDP experienced over the past 40 years. Thus, providing the services and benefits that people are accustomed to will consume a greater share of the economy in the future than it did in the past.

Much of that increase will occur because, if current laws remained in place, spending on the major mandatory health care programs (Medicare, Medicaid, the Childrens Health Insurance Program, and the health insurance subsidies that will be provided through insurance exchanges) alone would grow from less than 6 percent of GDP today to about 9 percent in 2035 and would continue to increase thereafter. Spending on Social Security is projected to rise much less sharply, from less than 5 percent of GDP today to about 6 percent in 2030, and then to stabilize at roughly that level. (See CBOs publication, Social Security Policy Options, to learn more about ways to attain long-run sustainability for the program.) Altogether, spending on the major mandatory health care programs and Social Security would grow from roughly 10 percent of GDP today to about 15 percent of GDP 25 years from now.

Contributing to that growth is the aging of the population. The retirement of the large baby boom generation born between 1946 and 1964 portends a long-lasting shift in the age profile of the U.S. population. That shift will substantially alter the balance between the working-age and retirement-age segments of the population. CBO projects that the population age 65 or older will increase by almost 90 percent between now and 2035, compared with an increase of just 11 percent over that period in the number of people ages 20 to 64. Today, that older group is about one-fifth the size of the younger group; at those rates of growth, it will be more than a third the size of the younger group by 2035, as shown in the figure below.

The Population Age 65 or Older as a Percentage of the Population Ages 20 to 64

Equally important, spending for health care in the United States has been growing faster than the economy for many years, pushing up spending related to the major health care programs. Health care spending per person has grown faster than the nations economic output per person by an average of a little less than 2 percentage points per year during the past several decades. Key factors contributing to that faster growth have been the emergence and increased use of new medical technologies, rising personal income, and the expanding scope of health insurance coverage. Such rates of growth cannot continue indefinitely because if they did, total spending on health care would eventually account for all of the countrys economic outputan implausible outcome. Nevertheless, the factors that have contributed to such growth are likely to persist to some extent, and CBOs projections anticipate continued but gradually slowing growth in the per capita costs of health care.

That trend has significant consequences for the federal budget. Social Security and the major mandatory health care programs already account for about 46 percent of federal noninterest spending. Under current laws, that percentage will grow to nearly 60 percent by 2021 and to 67 percent by 2035, CBO projects.

The combination of the aging of the population and growing health care costs makes the budget outlook daunting, for both the coming decade and beyond. To keep deficits and debt from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.