Elmendorf: Health Care, Social Security, and Interest Spending Will Consume More of the Budget

In a recent presentation at Cornell University, CBO Director Doug Elmendorf explained how the budget is projected to change over time. More resources will go toward health care programs, Social Security, and interest spending, while the portion flowing to everything else will decline.

Elmendorf noted two features that distinguish the current and future federal budget from previous ones: Federal debt will be much higher than at almost any other point in history, and spending on health care and retirement programs will take up a greater share of spending. In addition, as a result of mounting debt and rising interest rates, interest spending will climb significantly over the next ten years to a level rarely seen in modern history.

The growth of those three categories – health care, Social Security, and interest – is quite stark over the next decade, representing 85 percent of total spending growth over that time, in nominal dollars. The three factors will increase from 54 percent of total spending currently to 66 percent by 2024. Elmendorf attributed their growth to four factors:

• The aging of the population
• The health insurance expansions in the Affordable Care Act
• The growth in per-capita health care costs
• The rise of interest rates

^Source: CBO

As these programs increase as a share of GDP, other categories will decline, including defense spending, non-health care safety net programs, and other non-defense spending such as education, infrastructure, and research and development. Discretionary spending in particular will reach a 40-year historical low as a share of GDP by 2023, and as a result, total spending on investments will also fall to levels not seen in modern history.

^Source: CBO

Elmendorf does not judge whether this shift in resources is appropriate or not, but he notes the seeming lack of deliberate decision-making on where federal dollars go:

However, many observers worry that we have not explicitly decided as a society to make those changes. Rather, we seem to be drifting into the changes because spending for the largest benefit programs is determined by formulas for benefits per person that allow spending to grow without explicit action, whereas spending for many other federal activities is set through annual appropriations and requires explicit action each year.

His presentation concluded with the observation that to slow the long-term growth of debt, policymakers will have to address the growth of health care and retirement programs, raise taxes, or do both. Elmendorf's presentation offers strong support for the idea that the solution to our long-term debt problems can be found in both entitlement and tax reform.