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LONG-TERM BUDGETARY
PRESSURES AND POLICY OPTIONS
 
The Congress of the United States
Congressional Budget Office
 
 
NOTES
 
Unless otherwise indicated, all years are calendar years.
Numbers in the text and tables may not add to totals because of rounding.
National income and product accounts (NIPA) data for 1996 are consistent with CBO's economic forecast presented in
The Economic and Budget Outlook: Fiscal Years 1998-2007 (January 1997). That forecast was prepared before the advance estimates of gross domestic product and its components for 1996 were released on January 31, 1997.
 
Preface
The 10-year time frame used by the Congressional Budget Office (CBO) for preparing budget projections is not sufficient to show the dramatic effects on the federal budget of the projected long-term demographic changes in the U.S. population. Last year, CBO included a special chapter in its annual report--The Economic and Budget Outlook: Fiscal Years 1997-2006 (May 1996)--that focused on the outlook beyond the 10-year horizon. In addition, last year's report on Reducing the Deficit: Spending and Revenue Options (August 1996) included a final chapter on long-term options for containing spending on Social Security and Medicare.

The current report updates and extends those analyses to take into account the improvement in the near-term budgetary outlook and other developments. It also examines the potential long-term budgetary impacts of enacting the various Social Security and Medicare options. In accordance with CBO's mandate to provide objective and impartial analysis, the report contains no recommendations.

The analysis of the long-term implications of current fiscal policy presented in Chapter 1 was carried out by Douglas Hamilton, Benjamin Page, and John Sturrock of CBO's Macroeconomic Analysis Division, under the direction of Robert Dennis. Douglas Hamilton wrote the chapter, and Benjamin Page carried out the economic modeling. Kenneth Fears and Timothy Lasocki provided research assistance. The macroeconomic model was reviewed by CBO's Panel of Economic Advisers. CBO also received comments on the model from Herbert Stein. Despite the considerable assistance afforded by those outside advisers, the analysis in this report does not necessarily reflect their views.

Ralph Smith and Sandra Christensen of the Health and Human Resources Division prepared the analysis in Chapter 2 of options for slowing the growth in spending for Social Security and Medicare, respectively, under the direction of Joseph Antos. Julia Matson provided research assistance. The long-term Social Security estimates in Chapter 2 were made by the Social Security Administration, Office of the Actuary. CBO developed the long-term Medicare estimates using information provided by the Health Care Financing Administration, Office of the Actuary.

Paul L. Houts edited the report, and Marlies Dunson provided editorial assistance. Dorothy Kornegay, Linda Lewis, and Ronald Moore produced drafts of the report. Kathryn Quattrone and Jill Sands prepared the report for publication.

June E. O'Neill
Director
March 1997
 
Contents

SUMMARY
 

ONE        THE LONG-TERM BUDGET OUTLOOK

                The Aging of the U.S. Population
                The Continued Rapid Growth of Federal Health Expenditures
                The Long-Term Effects of an Aging Population
                Sustainable Budget Strategies
                Balancing the Budget by 2002
 

TWO      SLOWING THE GROWTH IN SOCIAL SECURITY AND MEDICARE             

                Social Security
                Medicare
 

THREE      THE LONG-TERM BUDGETARY IMPACT OF CONTROLLING THE GROWTH OF SOCIAL SECURITY AND MEDICARE             

                The Effects of Individual Options on the Long-Term Budgetary Outlook
                The Effects of Various Policy Packages on the Long-Term Outlook
                Conclusion
 

TABLES

S-1.         Population of the United States by Age, Calendar Years 1950-2050
S-2.         Projections of Federal Receipts and Expenditures, Using the Assumptions of the Base Scenario Without
                Economic Feedbacks, Calendar Years 1996-2050
S-3.         Projections of Real GNP per Capita Under Alternative Budget Strategies
S-4.         Effects of Four Illustrative Options for Reducing Growth in Spending for Social Security
S-5.         Effects of Three Illustrative Options for Reducing Growth in Net Spending for Medicare
1.             Population of the United States by Age, Calendar Years 1950-2050
2.             Average Annual Rates of Growth in Payments by Medicare and Medicaid
3.             Projections of the Deficit and Debt Held by the Public, Using the Assumptions of the Base Scenario, Calendar
                Years 1996-2050
4.             Projections of Federal Receipts and Expenditures, Using the Assumptions of the Base Scenario Without
                Economic Feedbacks, Calendar Years 1996-2050
5.             Projections of Federal Receipts and Expenditures, Using the Assumptions of the Base Scenario with Economic
                Feedbacks, Calendar Years 1996-2050
6.             Changes in CBO's Measure of the Long-Term Imbalance in the Federal Budget
7.             Projections of the Deficit and Debt Held by the Public Under Alternative Budget Strategies, Calendar Years
                1996-2050
8.             Projections of Real GNP per Capita Under Alternative Budget Strategies
9.             Projections of Federal Receipts and Expenditures, Assuming the Budget is Balanced by 2002, Including Economic
                Feedbacks, Calendar Years 1996-2050
10.           Increases in Normal Retirement Age Under Current Law and Two Illustrative Options
11.           Medicare Enrollment and Spending, 1975-1995
12.           Medicare Enrollment and Spending Projected to 2070, Under Current Law
13.           Medicare Enrollment and Spending Projected to 2070, Assuming Age of Eligibility Is Increased to 70 by 2032
14.           Medicare Enrollment and Spending Projected to 2070, Assuming Collections from Enrollees Are Increased to
                Cover 50 Percent of All Medicare Costs by 2010
15.           Medicare Enrollment and Spending Projected to 2070, Assuming an Annual Increase of 4.2 Percent in Medicare's
                Defined Contribution After 2010
16.           The Long-Term Budgetary Imbalance Under Various Options for Social Security
17.           The Long-Term Budgetary Imbalance Under Various Options for Medicare
18.           The Long-Term Budgetary Imbalance Under Various Policy Packages
 

FIGURES

S-1.         Number of Births in the United States, 1910-1995i
S-2.         Projections of Federal Debt and Real GNP per Capita, Using the Assumptions of the Base Scenario with
                Economic Feedbacks
S-3.         Projected Growth in Spending for Social Security and Medicare, Calendar Years 1995-2070
1.             Number of Births in the United States, 1910-1995
2.             Projections of Federal Debt and Real GNP per Capita, Using the Assumptions of the Base Scenario with
                Economic Feedbacks
3.             Projections of Nominal Interest Rates and Economic Growth, Using the Assumptions of the Base Scenario
4.             Projections of Revenues if Tax Increases Are Used to Achieve Budget Goals
5.             Projections of Noninterest Outlays if Spending Cuts a re Used to Achieve Budget Goals
6.             Growth in Social Security Outlays and Number of Beneficiaries, 1975-2070
7.             Primary Insurance Amounts in Relation to Average Indexed Monthly Earnings Under Current Law for Workers
                Who Turned Age 62 in 1996
8.             Illustrative Options for Reducing Growth in Social Security Outlays
9.             Net Medicare Spending as a Percentage of GDP Under Alternative Options
10.           Premiums as a Percentage of Enrollee Income Under Alternative Options
 

BOXES
 

1.             Aging of Populations and Its Effect on Government Budgets in Other Countries
2.             The Budget Assumptions in CBO's Long-Term Projections
3.             Statistical Evaluation of Alternative Assumptions About Population and Productivity
4.             The Administration's Proposal
5.             The Long-Term Outlook for Medicaid
6.             The Advisory Council's Plans for Balancing the Trust Funds
7.             Medicaid Supplements to Medicare

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