Health Care Versus Aging

As we explained in our recent analysis of CBO's Long-Term Budget Outlook, the debt is on an unsustainable path. Only a decade from now, under their Alternative Fiscal Scenario, debt will surpass 100 percent of GDP. And by 2037, it will exceed 200 percent.

Driving this is the increasing cost of entitlement spending -- Social Security, Medicare, Medicaid and (to a lesser extent) other health spending. But what drives the growth of these programs?

There are two main factors that are increasing entitlement spending: the aging of the population -- caused by the retirement of the babyboomers and growing life expectancy, and excess health care cost growth -- the fact the health care grows faster than the economy. Aging leads an increased number of beneficiaries that collect Social Security and Medicare (and Medicaid for long-term care) while health care cost growth drives up per-person costs in Medicare and Medicaid (and, to a lesser extent, other heath programs).

Through 2035, aging will be the dominant force in entitlement spending cost increases. CBO projects that it will account for 64 percent of the growth in entitlement spending, when interactions are distributed proportionally. Even excluding Social Security, aging will account for about half of the growth in the health care programs.

Over the longer term, that trend reverses. By 2085, aging will account for 44 percent of cost growth, with excess health care cost growth accounting for the remaining 56 percent.                 

The fact that aging and health care play such a big role in entitlement cost growth -- which would actually decline in their absence -- suggests that these factors need to be taken seriously. This is especially true given that both factors will also hurt revenue (by reducing the size of the labor force and increasing the amount of un-taxed compensation, respectively) and could slow economic growth.

As policymakers enact deficit reduction measures in the coming months, they should pay special attention to those measures which can slow health care cost growth or mitigate the effects of population aging.