The fiscal outlook: Tough choices ahead
The long-term budget outlook for the federal government is bleak. What is surprising is that this is considered news.
The forces driving the U.S.’s long-term budget problem have been known for decades. We’ve also known for years that sometime in this decade, the outlook would begin to worsen considerably. And now it has. And no, the deteriorating fiscal situation has little to do with stimulus spending, bank or auto bailouts, or the wars in Iraq and Afghanistan.
Instead it has to do with the aging of the baby boom generation.
As boomers enter retirement, budget outlays will soar for Medicare, Social Security, and the part of Medicaid that helps pay for old-age nursing home care. The other factor is that health spending is growing faster than the economy, leading to spiraling costs in all health programs—whether for retirees, the working population, or children.
For full details, you can read the Congressional Budget Office’s long-term budget outlook. Here are two nuggets from page 10:
- All future growth in spending (other than interest on the debt) is due to growth in benefit programs. On the health side, that means Medicare, Medicaid, and (to a lesser extent) the new insurance exchanges. On the retirement income side, it means Social Security.
- Eighty percent of the increase in non-interest spending over the next 25 years is due to health programs. (Social Security is the other 20%.) Again, driving this is partly the aging of the population, and partly rapid growth in health costs.
Right now, the country is spending 10% of GDP on health programs and Social Security. By 2035, this figure will grow to 16% of GDP.
To pay for that increase solely through tax revenues, we would need to reverse the Bush-era tax cuts (which run about 2% of GDP) and then increase taxes by twice that amount. In other words, we’d need to “triple reverse” the tax cuts. Alternatively, we’d have to nearly double today’s 15% payroll tax for Social Security and Medicare (my estimates, using CBO data).
To pay for the increase solely with spending cuts, benefits under Medicare and Social Security would have to be substantially scaled back. For example, putting Social Security on a sound fiscal footing through spending cuts only would require a 20–25% benefit reduction.
This is why Congress is having such difficulty with the budget. Who wants to tell constituents that the great surge in benefits spending (particularly health spending) of the past 50 years has to slow? The choices are unappealing politically: benefit reductions, higher taxes, or a combination of the two.
Rapidly rising health costs threaten the fiscal stability of state and local governments, private employers, workers, and retirees. If we don’t “bend the cost curve,” health costs will threaten the federal government itself.
Under the CBO’s worst-case scenario, federal debt will exceed 200% of economic output by 2035. That’s definitely “Greek crisis” territory for the U.S.
Note: The link to CBO.gov will open a new browser window. Except where noted, Vanguard accepts no responsibility for content on third-party websites.
As usual the poor will suffer the worst of it. The affluent, even if more heavily taxed, will still have access to high-quality health care.
Paul Krugman said the opposite of all this just this week about social security! What is the old saying figures don’t lie but liers figures. What about stopping our endless wars and corporate welfare?
Why on earth did our Congress pass that health care bill last year? It has been known for more than a decade that our ability to pay for the medical insurance programs already existing was totally unrealistic– and they saddled us with more! We need to undo the so-called “reform” asap. Adding more entitlements now is national suicide; note today’s warning from Moody’s that the credit of the USA is facing impairment.
As for Medicare, we need to use a means-test, and probably reduce benefits or raise premiums. There are simply too many people getting these very generous benefits for too long to be supportable by the working population (which is much smaller than before). I say that even though my disabled husband is now one such recipient of the largess.
It is about time we elect some representatives that will actually deal with this. I obviously will have to pay more tax; I will have a reduction in my Social Security; and I will have to pay more when I receive Medicare. This isn’t so hard for the population to understand. I’d rather pay for a trip to Italy, a new flat screen and a Lexus. I know I need to make a mortgage payment and save for college tuition for my children. Most people know there isn’t a free lunch.
I would like to see younger workers seek retirement annuities through private insurer as an option to soc sec. Next get the gov’t out of health care. Let’s apply market place principles rather than constantly adjusting to bad plans.
We need term limits, and a audited federal – expense statement with a real annual budget that needs to balance spending to income by federal law.
With Social Security part of the general federal budget, rather than being accounted for separately, is the problem Aging Baby Boomers, or could it be something else like government accounting? In Paul Krugman’s 8/15/10 article “Attacking Social Security”, he observes that -
“So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.”
It is impossible to elect representatives that will deal with this. We have two choices on every ballot. Once choice is determined to raise taxes. One choice is determined to cut taxes. Both choices are equally determined to increase spending on their pet projects.
The US spends more on Military than the rest of the world combined. The US has ~20% of world GDP. About 1/2 or your Federal Income Tax goes for Military Spending(counting everything). We need to decide if we want this level of Military spending and if we do Social Security & Medicare must be cut or taxes raised.
The Health Care bill is supposed to “bend the health cost curve” by having everybody covered (remains to be seen if this works). Anyway we have hard choices to make about health care.
If I were in charge I would cut Military Spending, Cut SSI benefits some, raise retirement age and raise SSI taxes some. Might even be able to cut taxes slightly if you did all this.
Health care is really the big problem in my opinion.
With respect to the social security problem, I am very surprised (and angry) by the free pass given to congress (past and present) by the press and various financial publications. Until this year, social security has always had a surplus paid in to the system (trust fund). An actuarian (Penn State Univ.) on the government’s social security reform committee has stated that had the trust fund surplus been allowed to accumulate, we would have had another 27 years to reach the point where the system is at presently. But congress has over the years spent that money on other programs. The only thing sitting in the social security trust fund today is is a government I.O.U. And again, we the taxpayers are going to be responsible for shoring up a system that has been weakened by fiscally irresponsible politicians.
Social Security should have about $2.5 trillion in surplus, but the politicians have dipped into the “trust fund” and spent it. Congress left IOUs in the place of the money. Doesn’t this borrowed money have to be paid back? If instead, Congress cuts benefits, can it also break its promise to pay back bond holders? What is the difference?
I think Steve should have taken into account the enormous amount we are all paying for the seemingly endless wars and military expenditures. How many billions are we handing over every month to fight in places that we are simply not wanted? Congress keeps doling it out. I’d rather have that money go to an all-encompassing health plan. Sure, that would be expensive but at least our money would be going to help our country.
It may be time to take a long look in the mirror. The baby boomers are collaborating with their abult children to make the tax supported health care cost escallation problem much worse than it really is. Medicaid cost increases are a very big part of the growing annual federal deficit primarily because of the misuse of the Medicaid program to fund nursing home care for otherwise wealthly elders who are persuaded to transfer their substantial financial assets to their expectant, anxious and demanding adult children. The Medicaid program was never intended to be an estate planning loop hole for well to do elders who are willing or forced to step into voluntary poverty and saddle the tax payers with their nursing home cost burden that their own assets (now given away to their children) should be paying for over their final years of life. The rise of elder law specialists guiding adult children to strip their aging parents of their assets for the surviving children’s personal benifit is the prime source of the Medicaid cost escallation. What tax payers need to confront is the growth in the elder law niche industry. Conveyance of the elder parent’s assets to their adult children for the purpose of qualifying for Medicaid payment of nursing home care is the major but unspoken generational theft.
Regarding the comment from August 26: it is my understanding that the government can look back at transactions over the past five years to see if an elderly person is truly indigent or has simply transferred assets to others in order to appear indigent.
Also, the problem of false indigence is basically theft of government funds (by those who are relatively wealthy and not supposed to qualify for those funds). But intergenerational theft is a different concept. Intergenerational theft is when the people allow the Congress to rack up exorbitant levels of debt that will have to be repaid primarily by our children, grandchildren, etc.
Most incumbents are fiscally irresponsible, participating in racking up an absurd level of national debt, and we need to throw them out of office.
Funny how the rest of the industrialized world can provide its citizens with national health care, free education through college, plus generous leave, vacation and early retirement benefits. Their taxes may be higher but the benefits accrue back to their more informed citizens, not to rich industrialists and bankers. And when you figure our college and medical costs as a tax, our taxes are the ones that are highest. They beat us in measures of health by a long shot (infant mortality, life expectancy) and have on average higher standards of living and by most measures happier citizens. These are the well-documented facts.
Why is this so? Because they don’t squander untold billions on foreign wars that are fought under false pretenses and for econonic reasons, nor do they maintain 700+ military bases in 100 foreign countries to protect U.S. corporate business interests around the world. And they have fully functioning democracies, not two-party lobbyist and special interest bought duopolies as their form of governance.
We must look to our own definition of high quality healthcare.
The GP that knows you and your family history can do much to prevent unnecessary or redundant ‘testing’, which is a major revenue source for hospital systems trying to stay afloat. Malpractice fear or threat leads MDs to prescribe testing that is not necessary to support their diagnosis.
As far as I can tell as a nurse visiting hospice patients in the hospital, every hospital admission involves IV antibiotics ‘just in case’, which are more and more costly with each generation of medicine; when in truth, most of the bacteria exists within the hospital and is rarely a factor in the patient’s presentation of illness unless they are unfortunate enough to remain in the hospital setting. We want ‘everything done’ because we no longer have a relationship with a primary care MD whose opinion, experience and advise we trust.
Once upon a time, the Social Security surplus was not part of the “headline” deficit figure.
In order to conceal from the public (or at least the naive among them- which is the majority) the cost of the Vietnam War, Lyndon Johnson decided that the deficit engendered thereby would be offset by the Social Security surplus. SS was a young program then,less than 30 years old ,and was beginning to receive the contributions of the baby boomers, so that made a big dent in the deficit.
I have often wondered why the press went along with this. They could have continued to empasize the general fund position, even if thry had to dig a bit for it.
I suspect that something would have been done about the deficit long ago, were it not for this bookkeeping trick.
jan 13 2011-11.05 am—the original philosophic and archetypal orientationof the u.s. is simply coming to fruition-long ago the choice was made for cheap labor over the welfare of your own people-. Europeans have a sense of their shared identity,responsibility, ancient history and all the sacrifices their ancestors have made. What is a nation? More than a self predatory vending machine, I would think.