In both presentations I described CBO’s updated outlook for the federal budget under current law (based on An Update to the Budget and Economic Outlook: 2014 to 2024) and the sharp shift in the composition of federal spending that is occurring:
- The retirement of the baby boomers will increase the number of Americans age 65 or over from about 46 million today to about 61 million ten years from now. As a result, spending for Social Security is projected to rise relative to the size of the economy, from 4.9 percent of GDP in 2014 to 5.6 percent in 2024, under current law.
- The expansion of federal subsidies for health insurance, rising health care costs per person, and the retirement of the baby boomers will push up federal spending for the major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies being provided through insurance exchanges. Such spending (net of premiums paid by Medicare beneficiaries and some other offsetting receipts) is 4.9 percent of GDP in 2014 and under current law will be 5.9 percent in 2024, CBO projects.
- The strengthening economy will generate a marked increase in interest rates during the next few years, CBO expects. That rise in rates, along with growing federal debt, causes net interest payments by the federal government to jump from 1.3 percent of GDP in 2014 to 3.0 percent in 2024 in CBO’s baseline projections.
- However, the improvement in the economy and limits set by law on the annual funding that can be provided for defense and for a range of nondefense activities (including highways, elementary and secondary education, housing assistance, veterans’ health care, and more) will cause spending for other programs to increase much more slowly than the economy. All federal spending apart from that for Social Security, the major health care programs, and net interest is 9.3 percent of GDP in 2014 and 7.3 percent in 2024 in CBO’s baseline projections. That latter amount is the smallest figure for that category since at least 1940, the earliest year for which comparable data have been reported.
Those paths for the broad components of federal spending, combined with CBO’s projections of federal revenues under current law, would lead federal debt held by the public to rise from 74 percent of GDP this year—the highest percentage since 1950—to 77 percent of GDP in 2024, according to CBO’s projections. And beyond the next 10 years, debt would continue to increase faster than the size of the economy unless current laws are changed. CBO projects that, by 25 years from now, rising budget deficits would push federal debt held by the public to more than 100 percent of GDP, a level seen only once before in U.S. history, just after World War II.
To put the budget on a sustainable path, lawmakers will need to cut benefits from some large programs relative to current law, raise tax revenue above its historical percentage of GDP to pay for the rising cost of those programs, or adopt a combination of those approaches. Moreover, the changes in federal spending or revenues that would be required to achieve certain possible objectives for federal debt are substantial. To illustrate this point, I highlighted some estimates from The 2014 Long-Term Budget Outlook:
- Suppose that lawmakers wanted debt in 25 years to be roughly the same percentage of GDP as today, which is quite high by historical standards. They could reach that goal by reducing deficits gradually by an amount that cumulated to about $2 trillion (excluding savings on interest payments) over the coming decade and then continuing that reduction as a percentage of GDP after 2024.
- Suppose instead that lawmakers wanted debt in 25 years to be roughly the same percentage of GDP that it has been on average during the past 40 years (39 percent). They could reach that goal by reducing deficits gradually by an amount that cumulated to about $4 trillion (excluding savings on interest payments) over the coming decade and then continuing that reduction as a percentage of GDP after 2024.
I also noted that, if lawmakers wanted to raise federal spending for programs other Social Security and health care closer to its historical percentage of GDP, then changes in the large benefit programs or revenues would need to be even greater to reach any chosen goal for federal debt.
For a discussion of criteria that might be used to evaluate possible changes in fiscal policies—including the implications of those illustrative goals or alternative goals for federal debt—see Choices for Deficit Reduction: An Update.