Congressional Budget Office
Director’s Blog

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.

In this year’s discussion of health reform, many people have put forth the goals of “bending the curve” of the federal budgetary commitment to health care, the federal budget deficit, or overall national health expenditures. Accordingly, Members of Congress are asking CBO to analyze the extent to which different health reform proposals meet these goals. Last month we wrote to Senator Conrad and Senator Gregg:  “CBO does not provide formal cost estimates beyond the 10-year budget window because the uncertainties are simply too great. However, in evaluating proposals to reform health care, the agency will endeavor to offer a qualitative indication of whether they would be more likely to increase or decrease the budget deficit over the long term.”  Let me explain our methodology for doing this and the limits of that methodology, beginning with the federal budget and then concluding with national health spending.

The health reform proposals being discussed this year generally include many specific changes to tax and spending policies. Although we and the staff of the Joint Committee on Taxation base our 10-year estimates of the budgetary effects of reform proposals on detailed examination of these changes, we cannot realistically conduct longer-term analysis at that level of detail. Therefore, we group the changes in a reform proposal into several broad categories and evaluate the rate at which the budgetary impact of each of those broad categories is likely to increase over time. Some elements of reform proposals, such as subsidies for people who purchase insurance through exchanges, tend to grow roughly in line with health care costs, although the allocation of those growing costs between enrollees and the government can push the growth rate somewhat higher or lower. Other elements of some proposals, like tax increases unrelated to health care, would generally grow along with increases in taxable incomes, although we aim to take into account specific aspects of legislation that can raise or lower that rate. Still other parts of proposals, such as changes in Medicare and Medicaid payment rates or practices, can have effects that increase at a range of rates at different points in time depending on the nature and extent of the changes. For all of these parts of reform proposals, we evaluate the impact of the legislation as written and do not assess the likelihood that policies will be changed later through subsequent legislation. 

After we have developed an estimate of the growth rate of the costs or savings in each broad category, we assess how those costs or savings would evolve from the end of the 10-year budget window through the following decade. The result is a very approximate sense of whether a piece of legislation is increasing or decreasing the federal budgetary commitment to health care or the federal budget deficit during the second decade and at the end of that decade.

We are very reluctant to extend these extrapolations further into the future, because the uncertainties surrounding them magnify considerably. Although we publish projections of the federal budget 75 years ahead, those projections are inherently uncertain and are designed to identify broad trends rather than to reflect specific pieces of legislation. Trying to project several decades ahead not just the evolution of the health care system under current law but also the effects on that system of a particular comprehensive and interacting set of reforms is extremely difficult. One particular challenge is that our long-term projections under current law incorporate changes that we expect would be made by state governments and the private sector in response to the growing burden of health care spending (responses which could occur under current federal law). Because that burden will mount over time, the responses will likely increase in intensity as well; as a result, determining whether reforms proposed in current legislation might ultimately have occurred through the actions of these other agents becomes increasingly complicated as the time horizon lengthens. Indeed, our Panel of Health Advisers has encouraged us to focus on estimating the effects of legislation during the next couple of decades and not to attempt to estimate effects further out.

So, how do we evaluate whether certain health reform proposals “bend the curve” in terms of the federal budgetary commitment to health care or the federal budget deficit? And what does “bend the curve” mean? If the projected budget deficit is lower 20 years from now under a reform proposal than it would be without any policy changes, then that curve is clearly being bent downward, on average, during the next twenty years; if the projected deficit is higher, then that curve is being bent upward. Would those downward or upward trajectories continue indefinitely?  That sort of extrapolation might seem natural, but we simply cannot tell whether it is appropriate. Although we think we can provide a rough indication of the level of federal health spending or the budget deficit 20 years ahead, we are not confident that we have an analytic basis for projecting their growth rates at that point, much less for evaluating whether those growth rates will continue in future years. Therefore, we are more confident talking about whether proposals would “lower” or “raise” the curve of the federal budget deficit or budgetary commitment to health care 10 to 20 years from now than we are discussing the shape of the curve in that time period or the level or slope of the curve beyond that period.

CBO does not analyze national health expenditures (NHE) as closely as we analyze the federal budget (although we are working to enhance our capabilities in this area). Accordingly, we cannot provide precise quantitative estimates of the effect of health reform proposals on NHE even within the first 10 years. However, we will try to offer a qualitative indication of whether proposals would be more likely to raise or lower NHE during the next couple of decades.  Expanding insurance coverage would raise NHE, because insured people generally receive more medical care than do uninsured people (see CBO’s Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pages 71-76). Yet, the increase in NHE would be much smaller than the increase in federal spending because some of that additional spending represents a shift in costs from other payers to the government (for example, new subsidies for people who would have purchased insurance anyway). At the same time, changes in Medicare or Medicaid that reduce federal spending and do not merely shift health costs to other payers would generally reduce NHE. For specific pieces of legislation, we will try our best to provide a very approximate sense of balance between these two opposing forces.

In sum, as health reform legislation is considered by the Congress, CBO will endeavor to offer a qualitative indication of whether certain legislation would be more likely to increase or decrease the federal budgetary commitment to health care, the federal budget deficit, and national health expenditures in the decade beyond the 10-year budget window. Whether these effects would persist in more-distant decades is not clear, and that uncertainty is an inherent feature of policy changes that could have substantial effects on such a large and growing share of the U.S. economy.

Today I had the opportunity to testify before the Senate Budget Committee about CBO’s most recent analysis of the long-term budget outlook.

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Percentage of GDP)

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080 (Percentage of GDP)

Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. As shown in the figure below, between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

Today CBO delivered a letter to Representative Paul Ryan that responded to his request for an analysis of H.R. 2920, the Statutory Pay-As-You-Go Act of 2009. H.R. 2920 is virtually identical to the proposal recently advanced by the Administration. It would establish a new statutory form of pay-as-you-go (PAYGO) budget enforcement—which is generally intended to ensure that laws affecting direct (mandatory) spending or revenues are, in total, budget neutral.

That process, although similar to the statutory PAYGO system that was in place from 1990 through 2002, would differ from the former system in several significant ways. CBO’s analysis reviews the statutory PAYGO system that was enacted in 1990 and that remained in place until fiscal year 2002, and the current pay-as-you-go rules adopted by the House of Representatives and the Senate. It then presents an overview of the key features of H.R. 2920 and assesses the possible effects of the legislation on future budget deficits and control of the budget process.

In CBO’s view, the PAYGO process specified in H.R. 2920 includes some features—specifically, the statutory sequestration mechanism—that could enhance overall budget enforcement. However, the proposed process has other features—a proposed temporary rule to score certain changes in spending and revenues relative to “current policy” rather than current law; a modification of the baseline’s treatment of some expiring mandatory programs; and new procedures for scoring legislation that would convert programs’ spending from discretionary to mandatory—that could lead to greater spending or reduced revenues in the coming decade than would occur under the existing House and Senate rules. In addition, some features of the bill’s proposed sequestration mechanism would limit its usefulness in deterring increases in spending.

H.R. 2920 also would shift some control over the budget process from the Congress to the executive branch in ways that could effectively require lawmakers to vote on legislation without a clear indication of the potential impact of their decisions on the triggering of a future sequestration.

Yesterday CBO released a letter in response to a request for additional information regarding our analysis of provisions of the Affordable Health Choices Act that would establish a federal insurance program for long-term care. Those provisions are called the Community Living Assistance Services and Supports Act (the CLASS Act) and are currently under consideration by the Senate Committee on Health, Education, Labor, and Pensions.

Enrollment in the program would be open to noninstitutionalized individuals who are either active workers or the nonworking spouse of an active worker. Premiums would vary according to the person’s age at enrollment. The average premium would be limited to $65 per month in 2011 and indexed for inflation in subsequent years. The benefit would be at least $50 per day (indexed for inflation). To qualify for benefits, an enrollee would need to have paid premiums for at least five years and been actively working for at least three of those years; the enrollee also would have to be unable to perform at least two or three activities of daily living. The legislation would provide considerable authority to the Department of Health and Human Services (HHS) Secretary to adjust premiums and benefits to maintain the solvency of the program. The Secretary would be allowed to reduce all benefits to the daily minimum of $50 and, if that action was inadequate to avoid insolvency, to increase enrollees’ premiums.

CBO estimates that the proposal’s net effect on the federal budget would be to reduce the budget deficit by about $58 billion during the 2010–2019 period, including some effects on federal revenues and Medicaid spending. In CBO’s analysis, the real (inflation-adjusted) average monthly premium was assumed to be $65, and the real daily benefit was assumed to average about $75. The estimated reduction in the federal budget deficit over the next 10 years is chiefly the result of the five-year vesting requirement; the payout of benefits would not begin until 2016, five years after the initial enrollment in 2011.

Beyond the 10-year budget window, the effects of the program could be quite different, and CBO expects that the HHS Secretary would need to reduce benefit payments and increase premiums to maintain the program’s solvency. Assuming that the premiums and daily benefit amounts were $65 and $75, respectively, CBO estimates that benefit payments would exceed premium income within the first decade after 2019, leading to depletion of previously accumulated premium reserves (and accumulated interest on those reserves). Although outcomes in the distant future are very uncertain, CBO expects that actions by the Secretary to reduce all benefits to the real daily minimum of $50 and raise the real average monthly premium for new enrollees to roughly $85 sometime during the first decade after 2019 would be adequate to ensure that the program could pay benefits through 2050.

Overall, CBO estimates, if the Secretary did not modify the program to ensure its actuarial soundness, the program would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window. If the Secretary did act to ensure the program’s solvency, the program and its effects on Medicaid spending and revenues might—or might not—add to future budget deficits, depending on the specific actions that were taken.

Last week CBO released the Long-Term Budget Outlook. Under current law, the federal budget is on an unsustainable path: projected spending rises well above projected revenue, producing growing budget deficits and accumulating debt. Almost all of the projected growth in spending relative to GDP (other than interest payments on the debt) is attributable to Medicare, Medicaid, and Social Security. For these three programs together, the two health programs account for 80 percent of spending growth over the next 25 years and 90 percent over the next 70 years.

Two factors underlie the projected increase in federal spending on Medicare, Medicaid, and Social Security as a share of GDP: rapid growth in health care costs and an aging population. To demonstrate the relative importance of these factors, CBO calculated how much of the projected increase in federal spending for the three programs would be attributable to aging and “excess cost growth” (growth in age-adjusted health care costs per person that exceeds the growth of per capita GDP) under the extended-baseline scenario (see my June 26 blog entry on the fiscal gap for a description of our long-term scenarios). CBO did so by comparing the outlays projected under that scenario with the outlays that would occur under two alternative paths: one with an aging population but no excess cost growth for health programs and one with no aging but with excess cost growth.

The interaction between the aging of the population and excess cost growth accentuates their individual effects. Higher spending per person has a larger influence as the number of beneficiaries in Medicare and Medicaid rises. Conversely, having more beneficiaries in those programs imposes a larger budgetary cost when health care costs are growing. That interaction can be identified separately, or it can be allocated according to the shares attributable to aging and excess cost growth.

Aging is the more important factor over the next 25 years or so. If the interaction is allocated between the two factors, aging accounts for about 64 percent of the projected growth in spending on the major entitlements by 2035.

That result is not surprising because the aging of the baby-boom generation significantly expands the number of Medicare, Medicaid and Social Security beneficiaries. Over the longer term, however, the situation reverses: 56 percent of the growth in total federal spending for those three programs by 2080 is attributable to health care costs per person rising more rapidly than per capita GDP. (Of course, the growth of health care costs has no effect on spending for Social Security.)

Identifying the interaction separately from the direct effects of aging and excess cost growth gives a slightly different perspective. By 2035, aging alone accounts for 56 percent of the projected growth in spending for the three entitlement programs. Excess cost growth accounts for another 32 percent, and the interaction between the two factors causes the remaining 11 percent. For the period through 2080, the picture changes, as aging accounts for 32 percent of the increase in spending, excess cost growth accounts for 41 percent, and the interaction effect contributes 26 percent.

Looking only at Medicare and Medicaid, excess cost growth is the primary factor driving the growth of federal spending, even over the intermediate term. By 2035, excess cost growth by itself accounts for 46 percent of projected growth in federal spending on those two programs. Adding in that factor’s share of the interaction raises the contribution of excess cost growth to 56 percent. The figure for excess cost growth alone is similar in the long term and in the intermediate term (49 percent by 2080 and 46 percent by 2035). But with its share of the interaction included, excess cost growth is responsible for 70 percent of the projected growth in federal health care spending by 2080.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security

(Percentage of gross domestic product)

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Yesterday CBO released the Long-Term Budget Outlook. Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.

How much would policies have to change to avoid unsustainable increases in government debt? A useful answer comes from looking at the so-called fiscal gap. The gap represents the extent to which the government would need to immediately and permanently raise tax revenues, cut spending, or undertake some mix of both to make the government’s debt the same size (relative to the size of the economy) at the end of a given period as prevailed at the beginning of the period.

The fiscal gap is a present-value measure of the nation’s fiscal imbalance. A present-value calculation adjusts future payments for the time value of money to make them comparable with payments today. CBO calculates the present value of a stream of future revenues by taking the revenues for each year, discounting each value to 2009 dollars, and then summing the resulting series. The same method is applied to the projected stream of outlays. CBO also computes a present value for future gross domestic product (GDP) so it can calculate the present value of outlays and revenues as a share of the present value of GDP.

CBO performed such calculations for two different scenarios that represent, in different ways, a continuation of current policies. The “extended-baseline scenario” adheres most closely to current law and assumes that many policy adjustments that lawmakers have routinely made in the past will not occur. The “alternative fiscal scenario” represents another interpretation of what it would mean to continue today’s underlying fiscal policy; it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past. For example, under the latter scenario, the changes in tax rates enacted in 2001 and 2003, now scheduled to expire in December 2010, would be extended and the alternative minimum tax would be indexed to inflation.

Under the extended-baseline scenario, the fiscal gap would amount to 2.1 percent of GDP over the next 25 years and 3.2 percent of GDP over the next 75 years. In other words, under that scenario (ignoring the effects of debt on economic growth), an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2 percent of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century. (That amount would come to about $450 billion in 2009.) If the policy change was not immediate, the required percentage would be greater.

Under the alternative fiscal scenario, the fiscal gap is greater: 5.4 percent of GDP over the next 25 years (equivalent to about $750 billion in 2009) and 8.1 percent over the next 75 years.

Today CBO released the Long-Term Budget Outlook.  Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario. Unless tax revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States.

Keeping deficits and debt from reaching levels that could cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy.  Although the policy choices that will be necessary are difficult, CBO’s long-term budget projections make clear that doing nothing is not an option: Legislation must ultimately be adopted that raises revenue or reduces spending or both. Moreover, delaying action simply exacerbates the challenge, as is discussed in the report.

For decades, spending on the federal government’s major health care programs, Medicare and Medicaid, has been growing faster than the economy (as has health care spending in the private sector). CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from almost 5 percent of GDP today to almost 10 percent by calendar year 2035 and to more than 17 percent of GDP by 2080. That projection means that in 2080, if there are no changes in policy, the federal government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.  Constraining the costs of those health care programs will be a key to developing a sustainable fiscal policy. Social Security has a smaller effect on the budget outlook: CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that rate through 2080.

The current recession contributes to the long-term fiscal imbalance by raising the debt burden of the federal government and shortening the period during which policymakers can enact measures that would correct the imbalances.  CBO estimates that in the next two years, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. The higher debt results in permanently higher spending to pay interest on that debt (unless the debt is later paid off).

Today CBO delivered letters to Senators Kent Conrad and Judd Gregg that respond to their request for information about the features of health care reform proposals that would affect federal spending on health care over the long term. In the absence of significant changes in policy, rising costs for health care will cause federal spending to grow much faster than the economy, putting the federal budget on an unsustainable path. To elucidate the possible effects of major legislation affecting health care and health insurance on the federal budget, CBO’s analysis examines the budget outlook under current law; the likely budgetary effect of efforts to expand the scope of insurance coverage; the potential for reducing health care spending; the likely impact of specific changes in the health system; and mechanisms for engendering efficiency gains in health care over time.

The federal government’s budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009.  Many proposals to significantly expand health insurance coverage would add to federal costs by providing large subsidies to help lower-income individuals and families purchase insurance.  Such proposals could permanently boost the government’s budgetary commitments to health care by something in the vicinity of 10 percent.  Improving the long-term budget outlook would require addressing that added cost in addition to the budgetary strains anticipated under current law.  Health care legislation might include provisions that would make it budget neutral over the first 10 years, but such legislation might nevertheless add to budget deficits in later years.

Many experts believe that a substantial share of spending on health care contributes little if anything to the overall health of the nation. Therefore, changes in government policy have the potential to yield large reductions in both national health expenditures and federal health care spending without harming health. Moreover, many experts agree on some general directions in which the government’s health policies should move—typically involving changes in the information and incentives that doctors and patients have when making decisions about health care.

However, large reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care. The government could spur those changes by transforming payment policies in federal health care programs and by significantly limiting the current tax subsidy for health insurance. Those approaches could directly lower federal spending on health care and indirectly lower private spending on it as well. Yet, many of the specific changes that might ultimately prove most important cannot be foreseen today and could be developed only over time through experimentation and learning. Modest versions of such efforts—which would have the desirable effect of allowing policymakers to gauge their impact—would probably yield only modest results in the short term.

CBO has analyzed a number of reform options in its recent publications, including creating so-called accountable care organizations, bundling payments to hospitals and other providers, providing additional information about effective medical treatments, expanding the use of preventive and wellness services and primary care, increasing cost sharing by patients, and modifying the tax treatment of employment-based health insurance (Key Issues in Analyzing Major Health Insurance Proposals & Budget Options, Volume I).  When CBO evaluates policies, the agency aims to reflect the middle of the range of expert opinion about likely outcomes. For any particular policy option, CBO carefully reviews the relevant empirical evidence and examines the incentives that would be created to control costs and the factors that might limit the success of those incentives.  At this point, experts do not know exactly how to structure such reforms so as to reduce federal spending on health care significantly in the long run without harming people’s health.

Therefore, one broad long-range approach for reform that has drawn interest recently would combine specific policy actions—to generate near-term savings and provide experience that would lay the groundwork for future savings—with a mechanism or framework to impose ongoing pressure on the health care system to achieve efficiencies in the delivery of health care. That path would require tough choices to be made, and its effectiveness would depend ultimately on the willingness of federal policymakers to maintain significant and systemic pressure over time. Without meaningful reforms, the significant costs of many current proposals to expand federal subsidies for health insurance would be much more likely to worsen the long-run budget outlook than to improve it.

At a meeting of the Social Security Advisory Board, on April 21st, CBO staff presented four charts comparing our March 2008 and March 2009 projections of the income and spending of the Social Security trust funds. Those baseline projections cover 10 years and assume no changes in current law. (This summer, CBO will issue new projections of the long-term budget outlook, spanning 75 years.)

Over the 10-year period from 2009 through 2018, projected income and outlays have both declined significantly from our projections of a year ago—income is down by about $1.2 trillion (about 11 percent) and outlays are down by about $250 billion (about 3 percent) for that 10-year period (see Chart 1). Nearly all of the adjustments stem from changes in CBO’s economic forecast: our projections for inflation, real GDP, and interest rates have all declined relative to those underlying our March 2008 baseline. Lower inflation affects both revenues and outlays through lower payroll taxes and smaller cost-of-living adjustments (COLAs). Similarly, lower real GDP would imply lower real wages—and therefore less revenue from payroll taxes and, over time, a lower initial benefit amount for new beneficiaries. Finally, because projected interest rates are lower, the trust funds are expected to earn less interest income. Outlays projected for the first few years are now higher than we estimated in 2008 because of the larger-than-expected COLA (5.8 percent) that took effect in January 2009. (For a discussion of CBO’s projected COLA increases, see my recent blog. ) The decline in projected income and outlays has affected our projections of the trust funds’ annual surpluses and balances (see Charts 2-4). 

Current projections of total surpluses of the two trust funds—for Old Age and Survivors Insurance (OASI) and Disability Insurance (DI)—are much lower than last year’s estimates (see Chart 2). In 2018, for example, the trust funds are now projected to record a surplus (total income less expenditures) of $133 billion, compared with last year’s estimate of a $246 billion surplus.

The trust funds’ total surplus includes interest credited to the trust funds, based on the balances accumulated over many years.  That interest is an intragovernmental transaction and doesn’t affect the budget deficit. Another measure to assess the financial condition of the program is the primary surplus, which excludes interest credited to the trust funds. The projected primary surplus dips to $3 billion in 2010, recovers for the next several years, and then falls below zero beginning in 2017 (see Chart 3). When the primary surplus disappears, Social Security benefits exceed Social Security’s income from the public, and the operations of the Social Security system increase the federal deficit.

The projected balance in the OASI trust fund continues to grow throughout the 10-year period, albeit at a slower rate than CBO projected a year ago, reaching $3.9 trillion by 2019 (see Chart 4). In contrast, we expect that the DI trust fund balance will decline each year. CBO now anticipates that the DI trust fund will be exhausted in 2019, with available funds falling $29 billion below projected expenditures. At that time, absent a change in law, Social Security could not pay DI beneficiaries the full benefits to which they are entitled under the Social Security Act.