In our series on the long-term budget outlook, we covered how debt projections would change if some of CBO's economic and technical assumptions turned out differently. Uncertainty is clearly a factor in any budget projection and especially so for 75-year estimates. But CBO also points out that there are ways for policymakers to remove or lessen this uncertainty by changing federal policies, including by reducing federal debt to lessen the risk of negative revisions to projections.
Recall that the four parameters for which CBO evaluated alternate assumptions were mortality, productivity, interest rates, and health care cost growth. While it is difficult to insulate the budget from productivity shocks, government policy can mitigate the effect of shocks for the three other variables on the budget.
While lower mortality is clearly a good thing for the country, it is not the case for the budget, since it raises spending on retirement and health care programs (although it also can raise the number of years a person remains in the labor force). One way to make a positive development less negative for the budget is to index retirement ages, particularly for Social Security, to longevity. This would mean that the ratio of years worked versus years receiving federal retirement benefits for the average person would remain constant over time, rather than increasingly continuously as it does now. Alternatively, current Council of Economic Advisers chair Jason Furman wrote in a 2007 Brookings Institution paper that policymakers should focus on the concept of "robust solvency" for Social Security, by making it solvent enough to be robust to changes in demographics or other projections. As an example, he showed the effect of "dependency indexing" the payroll tax rate or the benefit formula, or changing those factors based on the projected ratio of workers to beneficiaries.
Health Care Cost Growth
This week, CRFB President Maya MacGuineas appeared on Bloomberg Television to discuss the CBO's Long-Term Budget Outlook and how imperative it is for lawmakers to address our nation's fiscal challenges.
Debt is basically twice the historical post war average, so that is much too high. But even more troubling is looking forward, the debt is growing and that its going to be the size of the entire economy by 2036.
You have a lot of troubling benchmarks along the way... the [disability insurance] trust fund's going to be running out of funds in a couple of years. By 2030, the combined trust funds of Social Security and Medicare Part A will have run out of reserves. There are so many warning signs that we need to be making changes, and yet you look at what's going on in Washington and we're not making a bit of progress on all these challenges that are so clearly laid out by the CBO.
The Congressional Budget Office's (CBO) Long-Term Budget Outlook shows a clearly unsustainable debt path over the long term, one that policymakers will have to address to avoid economic damage. While lawmakers may see the projections and think that getting debt under control is a daunting task, they should keep in mind that the longer they wait, the more difficult it will be to do so. This is true for both the Social Security program and the broader budget. CBO points out in the report that "waiting for some time before reducing federal spending or increasing taxes would result in a greater accumulation of debt ... and would increase the size of the policy changes needed to reach any chosen target for debt."
Quantifying the cost of waiting can be done by estimating the fiscal gap, or the amount of non-interest spending and revenue changes necessary to keep debt stable (or reduce it to some other level) over a period of time. In the report, CBO shows that closing the 25-year fiscal gap, either by keeping debt stable or reducing it to its 40-year historical average share of 39 percent of GDP, would require a reduction in non-interest spending and/or an increase in revenues of 1.2 and 2.6 percent of GDP, respectively, if implemented today. Those changes would grow considerably larger if policymakers waited five or ten years to take action.
One of the biggest stories of last year's long-term outlook was the deterioration in Social Security's financial picture. Largely due to CBO's expectation that people will live longer, its estimate of the 75-year shortfall grew by more than half from their 2012 outlook – from 2.1 percent of taxable payroll to 3.4 percent (1.2 percent of GDP). CBO predicted that the combined Social Security trust funds would run out of money by 2031, two years earlier than predicted by the Trustees. This year's projections show a further deterioration in Social Security's financial situation, with the 75-year shortfall now projected at 4.0 percent of payroll (1.4 percent of GDP) and the trust fund expected to be exhausted by 2030. The Disability Insurance trust fund faces a more immediate issue, with its exhaustion date set for FY 2017.
This year's change is not due to demographics – which look similar to last year – but two broader economic factors: lower interest rates and slower short-term economic growth. CBO has revised its estimate of long-term interest rates down by about 0.5 percentage points. Lower interest rates mean lower debt payments and are actually good for the budget overall but cause estimates to place a greater weight on later years when Social Security is running greater deficits. Thus, the higher weight placed on later years worsens the actuarial balance (and creates a lower return to the assets in the Trust Fund) and is responsible for about half of the change.
The second major change is from changes in ten-year projections since last September, mostly from the February 2014 outlook when CBO revised down its economic growth projections. The resulting forecast had less income tax and payroll tax revenue, which contributed to the worsening Social Security balance by reducing Social Security payroll tax revenue by $230 billion over ten years. This factor represents about 0.2 percentage points of the change in the actuarial shortfall. The remaining 0.1 percentage point comes from technical factors that CBO does not specify.
|Change in Social Security Long-Term Projections
|75-Year Change (Percent of Payroll)
|September 2013 Shortfall||3.4%|
|Economic Projections (Interest Rates)||+0.3%|
|Ten-Year Projections (Revenue)||+0.2%|
|July 2014 Shortfall
CBO's Long-Term Budget Outlook is a long and detailed 140-page document – filled to the brim with facts, figures, scenarios and assumptions – and comes with a spreadsheet with even more data. To help people navigate the report and pull out its key takeaways, we've boiled down the document into a concise 6-page analysis with all the key facts and findings.
Earlier today, the Congressional Budget Office (CBO) released its latest Long-Term Budget Outlook. Although CBO normally makes ten-year projections, it also occasionally shows 25- and 75-year projections that highlight our long-term fiscal challenges. As the report states clearly, the fiscal situation is unsustainable, and within the next quarter century, growing debt levels will "push federal debt held by the public to a percentage of GDP seen only once before in U.S. history."
Under CBO's projections, debt will rise from 74 percent of GDP in 2014 (a post-war record high), to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. The projections are modestly higher than last year's over the next three decades but somewhat lower over the very long term. As expected, the growing debt is largely the result of the rapidly growing costs of Medicare, Medicaid, and Social Security – and the failure of revenue to keep up.
Importantly, those projections assume that Congress follows current law, letting several provisions (such as the tax extenders and doc fix) expire, allowing revenue to grow far above historical levels, and allowing discretionary spending to fall far below historical levels. Under CBO's more pessimistic Alternative Fiscal Scenario (AFS), debt will reach nearly 90 percent of GDP by 2025, 170 percent by 2040, and exceed 250 percent beyond 2050.
The Senate Finance Committee held a hearing May 6th titled, “New Routes for Funding and Financing Highways and Transit.” During the hearing Senators and witnesses covered a range of topics including the consequences of the impending insolvency of the Highway Trust Fund (HTF), the Administration’s four-year transportation proposal, and other budgetary, economic, and administrative issues with transportation funding.
CBO’s latest budget outlook contained good news and bad news for some of the federal government’s largest trust funds. First, the bad news: CBO continues to predict that without legislative action, the Highway trust fund and Social Security’s Disability Insurance (DI) trust fund will be exhausted in the next few years. The good news, however, is that CBO's Hospital Insurance (HI) outlook is far more optimistic than the projections in their February baseline.
Shortly after the President's budget was released, we suggested CBO might be somewhat more pessimistic in its debt projections than OMB. Specifically, we predicted CBO would estimate debt on a slight upward path by the end of the decade, reaching 73 percent of GDP by 2024; by comparison, OMB estimated that debt would be on a downward path, falling to 69 percent of GDP by 2024 under the President's budget.