Congressional Budget Office
Director’s Blog

On Friday CBO released a letter that discusses how the agency’s budget estimates reflect potential reductions in federal costs from improvements in health that might result from expanded governmental support for preventive medical care and wellness services.

Preventive medical care includes services such as cancer screening, cholesterol management, and vaccines. In making its estimates of the budgetary effects of expanded governmental support for such care, CBO takes into account any estimated savings to the government that would result from greater use of preventive care as well as the estimated costs of that additional care. Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs of the many who would make greater use of preventive care.

Of course, just because a preventive service adds to total spending does not mean that it is a bad investment. Experts have concluded that a large fraction of preventive care adds to spending but should be deemed “cost-effective,” meaning that it provides clinical benefits that justify those added costs.

Even in cases where the provision of preventive medical care saves money, potential savings from expanded federal support might be limited depending on how frequently that service is currently provided. Many studies of preventive care compare the costs and benefits of a preventive service to the costs and benefits of doing nothing; in practice, a great deal of preventive medicine is already being performed, and many insurance plans already cover certain preventive services at little or no cost to enrollees. So a new government policy to encourage prevention could end up paying for preventive services that many individuals are already receiving—which would add to federal costs but not reduce total future spending on health care.

Wellness services include efforts to encourage healthy eating habits and exercise and to discourage bad habits such as smoking. As with preventive care, CBO’s estimates of the budgetary effects of expanded governmental support for wellness services endeavor to account for any savings that would result from greater use of those services as well as the costs of those services. However, evidence regarding the effect of wellness services on subsequent health spending is limited, and CBO is continuing to evaluate the evidence that does exist.

Designing government policies that are effective at inducing people to be healthier is challenging. Even successful efforts might take many years to bear fruit and could involve significant costs. Moreover, many employers already support some wellness services for their employees, and new government efforts to encourage such services could end up paying for services that some individuals are already receiving—which would add to federal costs but not reduce total future spending on health care. As with preventive medicine, the net budgetary effect of government support for wellness services depends on the balance of two factors—the reduction in government health spending for people who reduce their future use of medical care, and the costs to the government of providing or subsidizing wellness services.

Although some case studies suggest that certain employer wellness programs reduce subsequent medical care, little systematic evidence exists. The findings from case studies may not be applicable to programs that would be implemented more broadly. Because the evidence about such programs continues to evolve, CBO will continue to examine that evidence closely in evaluating specific proposals—the effects of which could depend very importantly in the proposal’s design.

Today, CBO released an update of its long-term Social Security projections. The projections are qualitatively similar to those in previous CBO reports: Social Security’s annual revenues currently exceed its annual outlays, but as the baby-boom generation continues to age, growth in the number of Social Security beneficiaries will pick up, and absent legislative changes, outlays will increase much faster than revenues.

Total outlays (benefits plus administrative costs) equaled 4.4 percent of gross domestic product (GDP) in 2008, whereas the program’s dedicated revenues—from payroll taxes and from income taxes on the Social Security benefits of higher–income beneficiaries—equaled 4.8 percent of GDP. In the absence of legislative changes, spending for the program will climb to 6.1 percent of GDP by 2033, CBO projects.

The current recession is resulting in lower earnings and therefore lower Social Security revenues than would otherwise have occurred, but is not having as large an effect on benefit payments. Consequently, for the next few years, Social Security’s annual surpluses will be smaller or deficits larger than they would have been if economic growth had remained steady. In the long term, the recession will have little effect on revenues and outlays as a percentage of GDP, but the trust funds’ balances will be permanently lower. Primarily because of the worsened short-term economic outlook, CBO’s projection of the 75-year actuarial imbalance in the program is 0.5 percent of GDP, rather than the 0.4 percent we projected in 2008. As a share of taxable payroll, the projected shortfall is 1.3 percent. In other words, CBO estimates that if the Social Security payroll tax rate was increased immediately and permanently by 1.3 percentage points—from the current rate of 12.4 percent to 13.7 percent—the trust funds’ balance at the end of 2083 would equal projected outlays for the subsequent year.

Without changes in law, CBO expects that the Social Security trust funds will be exhausted in 2043. If that point is reached, the Social Security Administration will not have the legal authority to pay full benefits and the amounts that could be paid would be about 17 percent less than those scheduled under current law.

Many of the factors that will affect Social Security’s long-term finances are subject to significant uncertainty. Thus, a full exposition of projected finances includes both the expected outcomes and the inherent uncertainty surrounding such projections. In the report, CBO presents the range of outcomes for which there is an 80 percent chance that the actual value will fall within that range. For example, although CBO projects that Social Security outlays will equal about 6.1 percent of GDP in 2033, our uncertainty analysis indicates a 10 percent chance that outlays will be less than 5.4 percent of GDP in that year and a 10 percent chance that outlays will exceed 6.8 percent of GDP.

In addition to the more familiar projections of total Social Security outlays and revenues, the report includes analysis of the distribution of Social Security taxes and benefits. CBO groups individuals by their 10-year birth cohort—for example, people born in the 1940s—and by the quintile of their lifetime household earnings. (The top one-fifth of earners, for instance, compose the highest earnings quintile.) CBO analyzes the first-year annual benefit received, lifetime benefits received, the ratio of that benefit to average lifetime earnings, and lifetime taxes paid. CBO’s analysis indicates that, on average, future Social Security beneficiaries are likely to receive higher first-year annual benefits than today’s beneficiaries (adjusted for projected inflation). Additionally, CBO projects that each birth cohort will receive greater average lifetime benefits (the present value of all benefits that a worker gets from the program) than the preceding cohort. The analysis also shows that people with lower earnings have lower average benefits than do higher earners, but those benefits replace a higher portion of the average earnings for lower earners.

Today CBO released its estimates of federal revenues and outlays for the first 10 months of fiscal year 2009. The budget deficit through July 2009 reached $1.3 trillion, CBO estimates, close to $880 billion greater than the deficit recorded in the 10 months through July 2008. Outlays rose by almost $530 billion (or 21 percent) and revenues fell by more than $350 billion (or 17 percent) compared with the amounts recorded during the same period last year.

The estimated deficit reflects outlays of about $169 billion for the Troubled Asset Relief Program (TARP), recorded on a net-present-value basis adjusted for market risk, and net cash payments of $83 billion in support of Fannie Mae and Freddie Mac. CBO believes that Fannie Mae and Freddie Mac should now be considered federal operations and that the full scope of their activities should be incorporated in the federal budget. The Treasury statements, however, are just recording the cash infusions from the Treasury as federal outlays. CBO estimates that spending increases and revenue reductions stemming from the American Recovery and Reinvestment Act of 2009 (ARRA) have totaled more than $125 billion so far this year (excluding the impact on the budget from the effects that the legislation has had on the economy).

According to CBO’s estimates, receipts were about $8 billion (or 5 percent) lower in July 2009 than they were in July 2008, marking the 15th consecutive month in which receipts were lower than those in the same month of the previous year. Withholding for income and payroll taxes was about $11 billion (or 8 percent) less than that in July 2008, CBO estimates; about half of that decline resulted from provisions in ARRA, primarily the Making Work Pay tax credit.

Outlays were $71 billion higher this July than in the same month last year because of growth in spending and the effects of the calendar. August 1, 2009, fell on a weekend, which shifted about $24 billion in outlays from August to July. Without that timing shift, the growth in outlays this July would have totaled $46 billion (or about 18 percent). TARP spending of $22 billion was the largest contributing factor to that increase. In addition, unemployment benefits and Medicaid outlays rose by $8 billion and $5 billion, respectively, boosted by stimulus spending from ARRA.

For the first 10 months of the fiscal year, receipts from individual income and payroll taxes are down by almost $200 billion (or 12 percent) compared with collections during the same period last year. Receipts from corporate income taxes have declined by 57 percent. Spending for unemployment benefits is more than 2 1/2 times what was spent in the first 10 months of 2008, because of higher unemployment and legislated increases in the amount and duration of benefits. Medicaid outlays have risen by 24 percent, largely because of a provision in the stimulus bill that temporarily increases the federal government’s share of that program’s costs.

The Department of Defense’s (DoD’s) proposed budget for fiscal year 2010 includes a number of significant changes in planned military programs. Many of the issues addressed in the budget have been apparent for some time to analysts in CBO’s National Security Division. (J. Michael Gilmore led this division from 2001 until earlier this year; Matthew S. Goldberg is CBO’s Acting Assistant Director for National Security.) Indeed, many of the programmatic changes just proposed have been examined by CBO in recent publications, including:

• Budget Options, Volume II (August 2009)
• Options for Combining the Navy’s and the Coast Guard’s Small Combatant Programs (July 2009)
• The Effects of Proposals to Increase Cost Sharing in TRICARE (June 2009)
• An Analysis of the Army’s Transformation Programs and Possible Alternatives (June 2009)
• Alternatives for Modernizing U.S. Fighter Forces (May 2009)
• Options for Deploying Missile Defenses in Europe (February 2009)
• The Army’s Wireless Communications Programs (February 2009)
• Long-Term Implications of the Fiscal Year 2009 Future Years Defense Program (January 2009)
• Resource Implications for the Navy’s Fiscal Year 2009 Shipbuilding Program (June 2008)

Here are some examples of relevant CBO analysis:

• Based on the five-year plan that accompanied last year’s budget request, DoD was planning to expand the active Army from 42 combat brigades to 48 combat brigades by 2011. In a budget option that has long been under formulation (Option #050-1, page 6), CBO noted that the Army would probably be unable to identify 23,000 additional soldiers (beyond those already identified) to fully populate six new brigades under the current cap on total Army personnel. One option analyzed by CBO would explicitly relax the cap and add 23,000 soldiers to the force, at a total cost of about $16 billion over the next five years.
• The Army has been developing its Future Combat System (FCS) program which would encompass eight new models of manned combat vehicles as well as new unmanned aerial and ground vehicles, sensors, and munitions. All of these components would be linked by advanced communications networks into an integrated combat system. Starting with a report released in August 2006, CBO has evaluated several alternatives to the FCS program that would forgo the development of new combat vehicles and instead “spin out” FCS improvements in communications and other systems to upgrades of existing tanks and fighting vehicles. Most recently, CBO estimated in a budget option that these changes to the FCS program could save the Army roughly $5 billion in outlays over the next ten years (Option #050-4, page 10).
• CBO evaluated DoD’s practice of hiring contractors to provide decision-makers with analyses and various other support activities—so-called contract advisory and assistance services. CBO analyzed an alternative that, in conjunction with “spinning out” the FCS program and curtailing or cancelling selected other weapon-system procurements, would reduce the volume of advisory and assistance services by 20 percent. Along somewhat similar lines, Secretary Gates announced a plan to reduce the number of support service contractors from the current 39 percent of DoD’s total workforce to the pre-2001 level of 26 percent and replace them with full-time government employees.

CBO regularly presents compendiums of budget options to help inform Members of Congress about the effects that various policy choices would have on spending or revenues. For the current budget cycle, CBO has issued Budget Options in two volumes. The first volume, released in December 2008, focused on options regarding health care and its financing. The second volume, released today, includes options that address other areas of federal spending and revenues. Estimates for most of the revenue options were supplied by our colleagues at the Joint Committee on Taxation. In keeping with CBO’s mandate to provide objective, impartial analysis, these volumes make no recommendations.

Today’s report presents 188 illustrative options that cover an array of programs and policy areas—from defense to energy to entitlement programs to provisions of the tax code. The options include some changes that would decrease spending and others that would increase it, as well as some changes that would reduce revenues and some that would raise them. The options come from legislative proposals, the President’s budget, Congressional and CBO staff, other government entities, and private groups, among others. They are intended to reflect a range of possibilities, not a ranking of priorities, and the selection or omission of a potential policy change does not represent an endorsement or rejection by CBO.

The budgetary effects shown for each option span the 10 years from 2010 to 2019 (the period covered by CBO’s March 2009 baseline budget projections). Some options would have significant effects beyond that horizon. For each option, a table shows its estimated effect on spending or revenues in each year from 2010 to 2014 and summary projections for 5 and 10 years. The accompanying discussion provides background, describes the policy change envisioned in the option, and summarizes arguments for and against the change.

Today CBO released a brief that discusses how activities with emissions that are not subject to limits in a cap-and-trade program might lower the burden of reducing the concentration of greenhouse gases (GHGs) in the atmosphere. Both existing climate policies, such as the European Union’s Emission Trading System, and policies under consideration, such as the American Clean Energy and Security Act (ACESA) of 2009, which was recently passed by the House of Representatives, have recognized the potential for actions— such as disposing of waste in different ways, changing methods of farming, and reducing deforestation— to “offset” the extent to which the use of fossil fuels must be reduced to meet a chosen target for total GHG emissions.

If such offsets—which can be defined as reductions in GHGs from activities not subject to limits on emissions—are less expensive than reductions from limiting the use of fossil fuels, they can reduce the overall economic cost of meeting a target for emissions. But the difficulty of ensuring that offset activities result in verifiable, permanent and incremental reductions in global emissions raises concerns about whether the specified emissions target will actually be met. Those concerns may be especially acute when, as under ACESA, allowable offsets include actions taken outside of the country setting the target for emissions.

Although experience with offsets is not extensive, preliminary evidence suggests that they can significantly lower the economic cost of a cap-and-trade program, even after accounting for the costs of steps taken to increase confidence that the use of offsets represents true incremental reductions in GHGs. CBO estimates that the average annual savings from offsets could be about 70 percent under ACESA. Of course the intended environmental benefit would be fully realized only if the offsets provided the full reduction in global emissions of GHGs for which they are credited.

Today CBO released an evaluation of the accuracy of its economic forecasts by comparing those forecasts with the economy’s actual performance and with the projections of other forecasters. The study examines the two-year ahead forecast accuracy and the five-year ahead forecast accuracy for a variety of macroeconomic variables, such as real GDP, inflation, and interest rates. Thirty-two CBO forecasts, those made early each year from 1976 to 2007, are included in the study.  Such evaluations help guide CBO’s efforts to improve the quality of its forecasts and also assist Members of Congress in their use of CBO’s estimates.

Since publishing its first macroeconomic forecast in 1976, CBO has compiled a forecasting track record that is comparable in quality with that of the Administration and that of the Blue Chip consensus. In particular, the accuracy of CBO’s two-year forecasts between 1982 and 2007 paralleled that of the forecasts published by the Blue Chip consensus and the Administration over the same period. The accuracy of CBO’s five-year projections also generally corresponded to that of other forecasters, although the Administration’s projections of types of income (such as wages and salaries, and profits) as a share of national output had slightly smaller errors. Comparing CBO’s forecasts with those of the Blue Chip consensus suggests that when the agency’s predictions of the economy’s performance missed by the largest margin, those errors probably reflected problems shared by other forecasters in predicting turning points in the business cycle.

CBO’s forecasting record provides a measure of the uncertainty underlying forecasts under normal circumstances. However, the current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts exceeds the historical average.

Today CBO released a letter that contains an estimate of the change in federal costs, adjusted for the cost of market risk, that might result from enactment of the President’s proposal to prohibit new federal guarantees of student loans and to replace those guarantees with direct loans made by the Department of Education. The Federal Family Education Loan Program provides federal guarantees for loans made to students by private lenders and is the predominant source of loans for higher education; CBO projects that, under current law, guaranteed loans will account for 70 percent of all new direct and guaranteed student loans made over the next 10 years. Under the President’s proposal, the Department of Education, through the William D. Ford Direct Loan Program, would provide federal support for student loans only by lending money directly to students.

In its cost estimate last week for the Student Aid and Fiscal Responsibility Act of 2009, as approved by the House Committee on Education and Labor, which would incorporate the President’s proposal, CBO estimated that replacing new guarantees of student loans with direct lending would yield gross savings in federal direct (or mandatory) spending of about $87 billion over the 2010–2019 period. (Mandatory spending is governed by existing provisions of law and does not require future appropriations.) About $7 billion of those savings would represent a reduction in the administrative costs of the guaranteed loan program, which are recorded in the budget as mandatory spending. In contrast, most of the administrative costs for the direct loan program are funded in appropriation bills and recorded as discretionary spending. Thus, of the $87 billion reduction in direct spending, roughly $7 billion would be offset by an increase in future appropriations for administrative costs, for an estimated net reduction in federal costs from the President’s proposal of about $80 billion over the 2010–2019 period.

Those estimates follow the standard loan-valuation procedure called for in the Federal Credit Reform Act of 1990 (FCRA). The law specifies that the cost of federal loans and loan guarantees be estimated as the net present value of the federal government’s cash flows, using the Treasury’s borrowing rates to discount those flows; that calculation does not include administrative costs, which are recorded in the budget year by year on a cash basis (that is, undiscounted). The FCRA methodology, however, does not include the cost to the government stemming from the risk that defaults will exceed the estimated rate, especially at times of market stress. CBO found that, after accounting for the cost of such risk, the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010–2019 period—about $33 billion less than CBO’s estimate under the standard credit reform treatment.

Today CBO released a letter responding to a request from the Ranking Members of four House committees for additional information about the effects of health insurance coverage specifications reflected in the America’s Affordable Health Choices Act, which was released by the House Committee on Ways and Means on July 14, 2009. (For regular readers of our analysis, it’s been a busy weekend.)

CBO and the staff of the Joint Committee on Taxation (JCT) released a preliminary analysis of the provisions of this legislation related to health insurance coverage on July 14 and then released a further analysis that took into account the other parts of the legislation on July 17. Among other things, the coverage specifications would establish a mandate for most legal residents to obtain health insurance, significantly expand eligibility for Medicaid, regulate the pricing and terms of private health insurance policies, set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to reduce the cost of purchasing insurance, and offer a “public plan” option similar to Medicare through those exchanges. For reasons outlined in those earlier letters, our analysis to date does not represent a formal or complete cost estimate for the draft legislation.

Congressmen Camp, Barton, Kline, and Ryan asked a number of questions regarding the proposal. In response, today’s letter discusses: the effects of the proposal on enrollment in private coverage, in the new public plan, and in Medicaid; the effects of the proposal on private-sector insurance premiums and the labor market; the longer-term cost of the proposal; and the allocation of the proposal’s net budget impact between outlays and revenues. I won’t try to summarize the discussion here because the issues are complex and not conducive to a brief blog. The letter is, like all of our products, available on CBO’s web site.

Yesterday CBO released a letter to House Majority Leader Steny Hoyer analyzing some possible approaches for giving the President broad authority to make changes in the Medicare program. Under those approaches, any changes the President decided to implement would be based on recommendations from an advisory council and subject to Congressional disapproval. Expanding the authority of the President to effect change in the Medicare program might lead to significant long-term savings in federal spending on health care but would also entail shifting some power from the Congress to the executive branch.

In the letter CBO reviewed draft legislation transmitted to the Congress by the Administration on July 17, 2009, titled the Independent Medicare Advisory Council Act of 2009. CBO estimates that enacting the proposal, as drafted, would yield savings of $2 billion over the 2010–2019 period (with all of the savings realized in fiscal years 2016 through 2019) if the proposal was added to H.R. 3200, the America’s Affordable Health Choices Act of 2009, as introduced in the House of Representatives. This estimate represents the expected value of the 10-year savings from the proposal: In CBO’s judgment, the probability is high that no savings would be realized, for reasons discussed in the letter, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

The letter also identifies ways in which such proposals could be structured to garner significantly more savings—especially in the years beyond 2019. In particular, if legislation were to provide an independent advisory council with broad authority, establish ambitious but feasible savings targets, and create a clear fall-back mechanism for instituting across-the-board reductions in net Medicare outlays, CBO believes such a council would identify steps that could eventually achieve annual savings equivalent to several percent of total spending on Medicare.