Spending for Social Security and Major Health Care Programs in The Long-Term Budget Outlook

Posted by Xiaotong Niu on
August 1, 2016

Earlier this month, the Congressional Budget Office published The 2016 Long-Term Budget Outlook, describing the agency’s projections of federal spending, revenues, deficits, and debt over the next 30 years. Today and tomorrow we’ll highlight key factors underlying the projected growth in spending—today focusing on Social Security and the major health care programs. Tomorrow we’ll focus on interest costs.

CBO Projects Substantial Increases in Spending for Social Security and Health Care Programs
CBO projects that spending for Social Security would increase noticeably as a share of the economy—from 4.9 percent of gross domestic product (GDP) in 2016 to 6.3 percent in 2046—if current laws generally remained unchanged. Spending for the major health care programs is projected to grow even faster: Net outlays for those programs would increase from 5.5 percent of GDP now to 8.9 percent in 2046. (The major health care programs include Medicare, Medicaid, and the Children’s Health Insurance Program, as well as spending on subsidies for health insurance purchased through the marketplaces established by the Affordable Care Act and related spending.) About three-quarters of the increase in spending for the major health care programs would be for Medicare.

Continued growth in those programs would boost the already large share of the federal budget going to people who are 65 or older. By 2046, spending for Social Security and the major health care programs (mostly Medicare) for people 65 or older is projected to account for about half of all federal noninterest spending.

CBO’s projections incorporate the assumptions that the laws governing those programs will not change and that Social Security and Medicare will pay benefits as scheduled under current law regardless of the status of the programs’ trust funds. That approach is consistent with a statutory requirement that CBO’s 10-year baseline projections incorporate the assumption that funding for entitlement programs is adequate to make all payments required by law.

The Aging Population and Rising Health Care Costs Are Projected to Boost Spending for Those Programs
Two factors—the aging of the population and excess cost growth in health care—account for the projected rise (with respect to GDP) in federal spending on Social Security and the major health care programs. Excess cost growth is the extent to which health care costs per beneficiary, as adjusted for demographic changes, grow faster than potential GDP per capita.

Under current law, gross spending on Social Security and the major health care programs is projected to be 16.3 percent of GDP in 2046. (Gross spending on Medicare excludes the effects of certain Medicare receipts, mostly premiums paid by enrollees.) Without aging or excess cost growth, that amount would be 10.7 percent—compared with today’s value of 11.0 percent. Aging accounts for 3.3 percentage points, or roughly 60 percent of the difference. Excess cost growth accounts for the rest, 2.3 percentage points.

The Aging Population. The aging of the baby boomers and continued increases in life expectancy will substantially increase the share of the population that is 65 and older. Between 2016 and 2046, that share will increase from 15 percent to 21 percent.

Population, by Age Group

With more people over 65, there will be more Social Security beneficiaries and higher federal spending on benefits. That trend accounts for nearly all the projected long-term increase in Social Security spending as a percentage of GDP.

Aging also contributes to the projected increase in spending for the major health care programs as a share of GDP—particularly for Medicare. As the population ages, Medicare beneficiaries will make up more of the population. Beneficiaries will be older, on average, and older beneficiaries tend to have higher average spending. Both of those trends would increase Medicare spending. CBO estimates that aging explains just under half of the increase in spending for the major health care programs as a share of GDP between 2016 and 2046.

Key Factors Underlying Growth in Spending

Rising Health Care Spending per Beneficiary. Even though growth in health care spending has slowed in recent years, CBO projects that excess cost growth will be greater than zero, on average, over the next 30 years. For the major health care programs, excess cost growth accounts for just over half of the projected increase in spending as a share of GDP between 2016 and 2046. (Because such cost growth leads to higher federal debt—which slows the growth of GDP—it slightly raises projected spending for Social Security as a share of GDP.)

Xiaotong Niu is an analyst in the Long-Term Analysis Unit at CBO, and Julie Topoleski is chief of that unit.

Corrections: On August 1, 2016, two labels and one number in the figure on key factors underlying growth in spending were corrected.