oversight

The Federal Government's Long-Term Fiscal Outlook: Spring 2012 Update

Published by the Government Accountability Office on 2012-04-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                            United States Government Accountability Office


GAO                                         The Federal Government’s
                                            Long-Term Fiscal Outlook
                                            Spring 2012 Update

 GAO’s Long-Term Fiscal                     Federal deficits and debt have reached historic highs in recent years.
 Simulations                                Congress has taken action to address the fiscal imbalance, but longer-
 Since 1992, GAO has published              term challenges remain. The Budget Control Act (BCA) of 2011 limits
 long-term fiscal simulations               spending over the next decade and leads to an improved fiscal outlook.
 showing federal deficits and debt          The act targets discretionary spending, and under both of GAO’s
 under different sets of policy             simulations, discretionary spending as a share of the economy would be
 assumptions. GAO developed its
 long-term model in response to a
                                            lower in 2022 than at any point in the last 50 years. Further, as the
 bipartisan request from members            economy recovers, revenue increases and spending decreases. While
 of Congress concerned about the            the BCA improved the outlook, it did not eliminate the longer-term
 long-term effects of fiscal policy.        challenge, in part because it did not focus on the fundamental drivers of
 GAO’s simulations provide context          the government’s future fiscal imbalances—a structural gap between
 for consideration of policy options.       revenues and spending driven by rising health care costs and
 They are not intended to suggest
                                            demographics. As our 2011 simulations showed, if the Patient Protection
 particular policy choices or to
 predict the economic impact of any         and Affordable Care Act (PPACA) is implemented as intended it would
 set of choices but to help facilitate      have a major effect on the gap but would not eliminate it. The aging of the
 a dialogue on this important issue.        population and rising health care costs will continue putting upward
 GAO regularly updates its                  pressure on spending. Assuming revenue in the long term returns to the
 simulations as new data become             40-year historical average and remains stable at that share of GDP, the
 available from the Congressional           imbalance between spending and revenues increases, resulting in
 Budget Office (CBO) and the                increasing levels of debt held by the public. A continuing increase in debt
 Social Security and Medicare
                                            as a share of GDP means the federal government is on an unsustainable
 Trustees (Trustees). This update
 incorporates CBO’s January 2012            long-term fiscal path and underscores the need for policymakers to act to
 budget and economic projections.           change the path. See figure 1.
 As in the past, GAO shows two
 simulations:
                                            Figure 1: Debt Held by the Public under Two Fiscal Policy Simulations
   The Baseline Extended
   simulation follows CBO’s January
   2012 baseline, which generally
   reflects current law, for the first 10
   years. The baseline includes the
   effects from the discretionary
   spending caps and automatic
   enforcement procedures put in
   place by the Budget Control Act
   (BCA). After the first 10 years,
   this fiscal constraint is
   maintained; revenue and
   spending other than interest on
   the debt and large entitlement
   programs (Social Security,
   Medicare, and Medicaid) are held
   constant as a share of gross
   domestic product (GDP). Over the
   long term, revenue as a share of
   GDP is higher and discretionary
   spending lower than historical
   averages.
                                            Note: Data are from GAO’s Spring 2012 simulations based on the Trustees’ assumptions for Social
                                            Security and the Trustees’ and the CMS Actuary’s assumptions for Medicare.


GAO-12-521SP
  In the Alternative simulation,                       The pace at which deficits grow and the resulting debt buildup vary
  expiring tax provisions are                          depending on the assumptions used: deficits and debt grow less rapidly in
  extended to 2022   2022,and  andthethe
                                                       the Baseline Extended simulation than under the Alternative simulation,
  alternative minimum tax (AMT)
  exemption amount is indexed to                       which has both lower revenues and higher spending levels than the
  inflation through 2022.  2022; For revenues
                                            the        Baseline Extended simulation. Under the Baseline Extended simulation,
  are then
  first 10 years,
               brought discretionary
                            back to the                debt held by the public would exceed its post–World War II historical high
  historical average
  spending       reflects the as aoriginal
                                      share caps
                                               of      of 109 percent of GDP by 2048; under the Alternative simulation it would
  GDP.
  set  by For
           the theBCA  first
                          but10 notyears,
                                      the lower        cross this threshold by 2026.
  discretionary
  caps   triggeredspending
                         by the automatic
                                      reflects
  the original caps
  enforcement         procedures.
                            set by the    Over
                                             BCA
  but long
  the   not theterm,
                   lowerdiscretionary
                            caps triggered
                                                       The growing fiscal imbalance is driven on the spending side by rising
  by the automatic
  spending       and revenueenforcement
                                     are held at       health care costs and the aging of the population. The oldest members of
  procedures.
  historical    averages.
                     Over the long term,               the baby-boom generation are already eligible for Social Security
  discretionary spending and                           retirement benefits and for Medicare. The Social Security program, which
The Baseline Extended simulation
  revenue are held at historical                       historically ran large cash surpluses that helped reduce the need to
follows the Trustees’ 2011
  averages.                                            borrow from the public to finance other programs, is now projected to pay
intermediate projections for Social
The Baseline
Security             Extendedand
            and Medicare             simulation
                                           CBO’s       more in benefits than it receives in tax income each year into the future. 1
follows
June      the long-term
        2011     Trustees’ 2011  projections           Although health care spending growth recently slowed, it has been
intermediate
for                 projections
     Medicaid adjusted                for Social
                                  to reflect           growing faster than the overall economy and is expected to continue to
Securitycost
excess      andgrowth
                    Medicare        and CBO’s
                              consistent       with
June
the     2011 long-term
      Trustees’      projections.projections
                                        In the
                                                       grow at an increased rate as more members of the baby-boom generation
for Medicaidsimulation,
Alternative         adjusted to       reflect
                                   Medicare            become eligible for federal health programs. As shown in figure 2, the
excess cost
spending           growthon
              is based        consistent
                                  the Centers  with    number of baby boomers turning 65 is projected to grow in coming years,
the Medicare
for   Trustees’ &Medicare
                       Medicaidprojections.
                                       Services        averaging about 7,600 per day in 2011, and about 11,400 per day by
In the Alternative
Office   of the Actuary’s  simulation,
                                   (CMS                2029.
Medicarealternative
Actuary)       spending is        based on that
                               projections       the
Centers for
assume            Medicare
            reductions        in &   Medicaid
                                  Medicare
Services Office
physician      rates do of the
                             not Actuary’s
                                   occur as
(CMS Actuary)
scheduled        under alternative
                          current law and
projections
that  certain thatcost-assume
                          containment reductions
in Medicare physician
mechanisms          intended rates to slow dothe
                                               not
occur as
growth    ofscheduled
               health careunder  cost current
                                          are not
law and that
sustained       overcertain
                       the longcost- term. GAO
containment
also   shows the    mechanisms
                        outlook using    intended
to slow long-term
CBO’s      the growthprojections
                             of health care  for
cost are
Social      not sustained
         Security       and theover  major the
long term.
health          GAO alsothe
         entitlements;          showsresultstheare
outlook using
consistent      withCBO’s
                        GAO’slong-term
                                   simulations
projections
based largely     foron
                      Social     Security and
                          the Trustees.
the major health entitlements; the
results are consistent with the
Additional   information on the fiscal
other simulations.
outlook and federal debt is available at
Additional information on the fiscal
www.gao.gov/special.pubs/longterm/.
outlook and federal debt is available at
For  more information, contact Susan J.
www.gao.gov/special.pubs/longterm/.
Irving at (202) 512-6806 or                            1
For more information,  contactJ.Susan J.                Social Security trust fund assets and reserves are used to make up the annual cash
irvings@gao.gov   or Thomas      McCool,
Irving at 512-2642
at (202)  (202) 512-6806 or
                   or mccoolt@gao.gov.                 deficit. The Trustees project that trust fund reserves will be exhausted by 2036. See the
irvings@gao.gov or Thomas J. McCool,                   Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability
at (202) 512-2642 or mccoolt@gao.gov.                  Insurance Trust Funds, The 2011 Annual Report of the Board of Trustees of the Federal
                                                       Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds
                                                       (Washington, D.C.: May 13, 2011).

                                                       Page 2                                 GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
Figure 2: Daily Average Number of People Turning 65 Each Year




Note: Data are from the U.S. Census Bureau’s National Population Projections. For this analysis, we
used data from the low net international migration series.


Several provisions of PPACA were designed to control the growth of
health care costs. The full implementation and effectiveness of these
cost-control provisions, which are reflected in the Baseline Extended
simulation, would slow the growth in federal health care spending over
the long term. Under the Baseline Extended simulation, spending on
Medicare and Medicaid grows from 5 percent of GDP in 2010 to over 7
percent by 2030.There are, however, significant uncertainties surrounding
the growth of health care costs. Spending is influenced not only by
policies and laws, but also by future demographic and economic trends,
development and deployment of medical technology, the cost and
availability of insurance, and the responses of health care providers,
consumers, and policymakers to these trends. The Trustees, CBO, and
the CMS Actuary have expressed concerns about the sustainability of
certain health care cost-control measures over the long term. For
example, they note that reductions in physician payment rates scheduled
to occur under current law have routinely been overridden.

They have also questioned whether a provision in PPACA that would
restrain spending growth by reducing the payment rates for certain
Medicare services based on productivity gains observed throughout the
economy is sustainable over the long term. According to CMS, health
care productivity gains have historically been small, and may be difficult

Page 3                                     GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
to achieve in the future due to several factors, including the labor-
intensive nature of the industry and the individual customization of
treatments in many cases. These concerns are reflected in our Alternative
simulation, which, consistent with CBO’s and the CMS Actuary’s
alternative scenarios, assumes that certain cost-containment
mechanisms are not sustained over the long term. 2 Spending on health
care grows much more rapidly under this more pessimistic set of
assumptions. Absent changes to these programs, spending on Medicare
and Medicaid under the Alternative simulation grows to over 8 percent of
GDP by 2030.

Under either set of assumptions about health care cost growth, spending
for the major health and retirement programs will increase, putting greater
pressure on the rest of the federal budget. In 2010, about 47 cents of
every federal dollar spent went to Social Security, Medicare, Medicaid,
and interest on the federal debt. Figures 3 and 4 below show revenue and
the composition of spending under the Baseline Extended and Alternative
simulations moving forward.




2
 While both CBO and the CMS Actuary assume that certain cost-containment
mechanisms are not sustained, they make different assumptions that affect spending on
health care. For example, CBO’s assumes that physician payment rates are maintained at
2011 levels. In the CMS Actuary’s alternative scenario, physician payment rates grow with
inflation (using the Medicare Economic Index), which results in higher spending than
under CBO’s assumption.

Page 4                                GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
Under the Baseline Extended simulation, revenues as a share of the
economy are higher and discretionary spending is lower than historical
averages. As figure 3 shows, spending on Social Security, Medicare,
Medicaid, and interest would grow to about 70 cents of every dollar spent
by 2040. By this time, there is little room for “all other spending,” which
includes not only national defense, homeland security, veteran’s health
care, and investment in highways and mass transit, but also smaller
entitlement programs such as farm price supports and student loans.

Figure 3: Potential Fiscal Outcomes under the Baseline Extended Simulation:
Revenues and Composition of Spending




Notes: Data are from GAO’s Spring 2012 simulations based on the Trustees’ assumptions for Social
Security and the Trustees’ and the CMS Actuary’s assumptions for Medicare.
a
 This also includes spending for insurance exchange subsidies and the Children’s Health Insurance
Program.




Page 5                                    GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
In the Alternative simulation, revenue and discretionary spending are at
their historical averages over the long term. In this simulation, spending
on Social Security, Medicare, Medicaid, and interest exceeds revenues
by 2030 and by 2040, 73 cents of every federal dollar spent would go to
these categories. Overall, our simulations illustrate the difficult trade-offs
that policymakers will have to consider in order to rebalance the federal
government’s fiscal position.

Figure 4: Potential Fiscal Outcomes under the Alternative Simulation: Revenues
and Composition of Spending




Notes: Data are from GAO’s Spring 2012 simulations based on the Trustees’ assumptions for Social
Security and the Trustees’ and the CMS Actuary’s assumptions for Medicare.
a
 This also includes spending for insurance exchange subsidies and the Children’s Health Insurance
Program.




Page 6                                    GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
                      When considering action to address the longer-term fiscal challenge, it is
Balancing Near-Term   important to balance the near-term effects. One tool used to measure the
and Long-Term         challenge over the long term is the “fiscal gap.” The fiscal gap represents
                      the difference, or gap, between revenue and noninterest spending in
Considerations        present value terms over a certain period, such as 75 years, that would
                      need to be closed in order to achieve a specified debt level (e.g., today’s
                      debt to GDP ratio) at the end of the period. From the fiscal gap, one can
                      calculate the size of action needed—in terms of tax increases, spending
                      reductions, or, more likely, some combination of the two—to close the
                      gap.

                      For example, under our Alternative simulation, the fiscal gap is 8.2
                      percent of GDP (see table 1). This means that, on average over the next
                      75 years, revenue would have to increase by more than 45 percent or
                      noninterest spending would have to be reduced by about 32 percent (or
                      some combination of the two) to keep debt held by the public at the end
                      of the period from exceeding its level at the beginning of 2012 (roughly 68
                      percent of GDP). Even-more significant changes would be needed to
                      reduce debt to lower levels.

                      Table 1: Federal Fiscal Gap under GAO’s Simulations

                                                          Average percentage change required to close gap
                                                                                     If action is delayed until
                                                         If action is taken today               2022
                                                                             Solely                       Solely
                                         Fiscal gap                        through                      through
                                                             Solely      decreases        Solely      decreases
                                        2012–2086
                                                           through               in     through               in
                                        (percent of      increases      noninterest   increases     noninterest
                      Simulation              GDP)      in revenue        spending  in revenue         spending
                      Baseline                   1.8             8.4            8.0          9.9             9.4
                      Extended
                      Alternative                8.2            45.7             32.2            54.3             37.0
                      Source: GAO.


                      Note: Data are from GAO’s Spring 2012 simulations based on the Trustees’ assumptions for Social
                      Security and the Trustees’ and CMS Actuary’s assumptions for Medicare.

                      While immediate action would reduce the size of the changes necessary
                      to close the fiscal gap, the risk to near-term economic growth is also a
                      factor. With this in mind, policy changes could be designed to phase in
                      over time allowing for the economy to fully recover and for people to
                      adjust to the changes. Table 1 illustrates how much greater fiscal policy
                      changes would have to be if no actions were taken for the next decade.
                      Such a delay would increase the risk that the eventual changes will be
                      disruptive and destabilizing. Under our Alternative simulation, waiting 10
                      years would increase the fiscal gap to nearly 10 percent of GDP—
                      Page 7                                   GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
               meaning a revenue increase of about 54 percent or a noninterest
               spending cut of 37 percent or some combination of the two would be
               required to bring debt held by the public back to today’s level by 2086.


               The economy continues to recover from the nation’s most severe
Concluding     recession since the end of World War II, and while there are calls for
Observations   continued federal action to support the economy, these must be balanced
               with the need to act soon to develop a plan for addressing the long-term
               fiscal imbalance. Absent policy changes, increasingly significant changes
               will be needed to close the fiscal gap. However, action taken to address
               the fiscal outlook needs to be balanced with the importance of sustaining
               economic growth in the near term. If policy changes designed to correct
               the federal government’s fiscal path are too sharp, they could stifle the
               pace of the recovery in the near term. Conversely, changes in policy
               designed to encourage near-term recovery could worsen the long-term
               outlook and increase the size of necessary changes in the long run.

               Our simulations show deficits declining over the next several years, but
               this trend reverses before the decade is over under the assumptions in
               our simulations. Despite limits on discretionary spending that would bring
               discretionary spending to levels not seen in recent history, our simulations
               show total federal spending continuing to exceed revenues and feeding
               an unsustainable growth in debt. The policy actions required to close the
               fiscal gap are significant, and changing the long-term outlook will likely
               require difficult decisions about both federal spending and revenue.




               Page 8                          GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
                     This update incorporates CBO’s January 2012 baseline projections that
Changes since the    follow current law at that time. 3 A key change from CBO’s prior baseline
Last Update          estimates—and our prior long-term fiscal outlook update—was the
                     treatment of deficit reduction related to the BCA. At the time of our last
                     update in fall 2011, it was not known whether lawmakers would enact
                     legislation originating from the Joint Select Committee on Deficit
                     Reduction, and thus whether such legislation or the Budget Control Act’s
                     automatic enforcement procedures would be implemented. Therefore, we
                     assumed that deficit reduction resulting from the act would take effect
                     under both the Baseline Extended and the Alternative simulations, but did
                     not make assumptions about the allocation between spending and
                     revenues. Because no such legislation was enacted, CBO’s January
                     2012 baseline reflects the act’s automatic procedures—cuts among
                     discretionary, Medicare, and other mandatory spending—that go into
                     effect under current law. Consistent with CBO’s baseline, our Baseline
                     Extended simulation also reflects the changes to discretionary and
                     mandatory spending under the automatic enforcement procedures.
                     However, we do not apply the effects of the automatic enforcement
                     procedures to the Alternative simulation in this update. In this regard, our
                     Alternative simulation is consistent with the alternative scenario CBO
                     described in its January 2012 update.


                     Table 2 lists the key assumptions incorporated in the Baseline Extended
Key Assumptions in   and Alternative simulations based on the Trustees’ assumptions for
Our Federal          Social Security and the Trustees’ and CMS Actuary’s assumptions for
                     Medicare.
Simulations




                     3
                      The CBO report is available at www.cbo.gov. When CBO analyzes the President’s
                     budget proposals, usually in March, it also updates its baseline. This year CBO’s update
                     includes the effects of the Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L.
                     No. 112-96) that was enacted on February 22, 2012 and extended the payroll tax
                     reduction and emergency unemployment insurance benefits through the end of December
                     2012 and prevented scheduled cuts in reimbursement rates to physicians. Consistent with
                     past practice, we use the January baseline and so do not include the effects of that
                     legislation. Doing so would have only minimal effect on the longer-term fiscal outlook.


                     Page 9                                GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
Table 2: Assumptions for Baseline Extended and Alternative Simulations

 Model inputs      Baseline Extended simulation                               Alternative simulation
 Revenue           CBO’s January 2012 baseline that assumes tax cuts          CBO’s estimates assuming expiring tax provisions other
                   will expire as scheduled under current law and that an     than the temporary Social Security payroll tax reduction
                   increasing share of taxpayers will be subject to higher    are extended through 2022, and the 2011 alternative
                   tax rates through 2022; thereafter remains constant at     minimum tax (AMT) exemption amount is indexed to
                                                                    a
                   21.0 percent of GDP (CBO’s projection in 2022)             inflation for years 2012–2022; thereafter is phased into
                                                                              the 40-year historical average of 17.9 percent of GDP
 Social Security   CBO’s January 2012 baseline through 2022;                  Same as Baseline Extended
 spending          thereafter based on 2011 Social Security Trustees’
                   intermediate projections
 Medicare          CBO’s January 2012 baseline through 2022 that              Based on CMS Actuary’s alternative scenario that
 spending          assumes cuts in physician payment rates will occur         assumes that physician payment rates grow with
                                                             b                                                               d
                   as scheduled under current law at the time and that        inflation (using the Medicare Economic Index) in all
                   the implementation of the Budget Control Act’s             future years, that spending reductions under the BCA do
                   automatic enforcement procedures reduces                   not occur, and policies that would restrain spending
                            c
                   spending; thereafter 2011 Medicare Trustees’               growth are applied fully through 2019 but begin to phase
                   intermediate projections                                   out thereafter
 Medicaid, the     CBO’s January 2012 baseline through 2022;                  CBO’s January 2012 baseline through 2022; thereafter
 Children’s        thereafter CBO’s June 2011 long-term projections           CBO’s 2011 long-term projections adjusted to reflect
 Health            adjusted to reflect excess cost growth consistent with     excess cost growth consistent with CMS Actuary’s
 Insurance         the 2011 Medicare Trustees’ intermediate projections       alternative scenario and CBO’s alternative assumption
 Program, and                                                                 that a policy that would slow the growth of subsidies for
 exchange                                                                     health insurance coverage is not in effect
 subsidies
 spending
 Other             CBO’s January 2012 baseline through 2022, which            Baseline Extended adjusted for extension of certain tax
 mandatory         incorporates the reductions in spending scheduled to       credits and to exclude the effects of the Budget Control
 spending          occur under the Budget Control Act’s automatic             Act’s automatic enforcement procedures through 2022;
                   enforcement procedures; thereafter remains constant        thereafter is phased back to 2.3 percent of GDP by
                   as a share of GDP at 2.3 percent of GDP (implied by        2025 (same as Baseline Extended)
                   CBO’s projection in 2022)
 Discretionary     CBO’s January 2012 baseline through 2022, which            Follows the original caps set by the Budget Control Act
 spending          reflects the original caps set by the Budget Control       but not the lower caps triggered by the act’s automatic
                   Act, as well as the lower caps triggered by the            enforcement procedures; after 2022 it gradually phases
                   automatic enforcement procedures; thereafter               to 7.5 percent of GDP (the 20-year historical average)
                   remains constant at 5.6 percent of GDP (CBO’s
                   projection in 2022)
                                           Source: GAO.


                                           Notes: CBO’s projections are from The Budget and Economic Outlook: Fiscal Years 2012 to 2022
                                           (January 2012) and CBO’s 2011 Long-Term Budget Outlook (June 2011). Trustees projections are
                                           from The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
                                           Insurance and Federal Disability Insurance Trust Funds and The 2011 Annual Report of the Boards
                                           of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
                                           Funds, which were both issued on May 13, 2011. Projections from the CMS Actuary are based on
                                           Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to
                                           Medicare Providers (May 13, 2011). We assume that Social Security and Medicare benefits are paid
                                           in full regardless of the amounts available in the trust funds.




                                           Page 10                                   GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
                                          a
                                           Both simulations assume that the temporary Social Security payroll tax reduction would expire at the
                                          end of February 2012. However, the Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L.
                                          No. 112-96) extended the reduction through the end of December 2012. The act did not offset the
                                          cost of the extended reduction, but we expect that the change would have a minimal effect on the
                                          overall outlook.
                                          b
                                           The Middle Class Tax Relief and Job Creation Act prevented scheduled cuts in reimbursement rates
                                          to physicians for 2012 that were assumed to occur under CBO’s January 2012 baseline projections.
                                          We did not incorporate the effects of this override into the Baseline Extended simulation. Because the
                                          act included provisions to offset the costs of the extension, it would have a minimal effect on the
                                          longer-term fiscal outlook.
                                          c
                                           The Budget Control Act established limits on discretionary budget authority for 2013 through 2021. In
                                          addition, it specified additional limits on discretionary spending and automatic reductions in
                                          mandatory spending, including Medicare, that would take effect if lawmakers did not enact legislation
                                          originating from the Joint Select Committee on Deficit Reduction that would reduce projected deficits
                                          by at least $1.2 trillion. Because no such legislation was enacted, those procedures are now
                                          scheduled to go into effect.
                                          d
                                           Since 2003, Congress took a series of legislative actions to prevent scheduled reductions in
                                          physician payment rates that would otherwise occur under law. Physician fee updates set by
                                          Congress have averaged 0.9 percent per year over this period. Growth in the Medicare Economic
                                          Index is projected to average 1.9 percent from 2012 to 2020. Thus, the assumption used by CMS,
                                          and in our Alternative simulation, implies physician payment rates will grow almost two times faster
                                          than they have since 2003.

                                          Table 3 shows the key economic assumptions that underlie all of our
                                          simulations. GDP is held constant across simulations and does not
                                          respond to changes in fiscal policy. Also, the implied interest rate on
                                          federal debt held by the public in our simulations is held constant over the
                                          long term even when deficits climb. With large budget deficits, there could
                                          be a rise in the rate of interest and a more rapid increase in federal
                                          interest payments than our simulations display.

Table 3: Key Economic Assumptions Underlying All of GAO’s Long-Term Federal Simulations

 Model inputs            All simulations
 Real GDP Growth         CBO’s January 2012 baseline through 2022; thereafter averages 2.1 percent based on the intermediate
                         assumptions of the 2011 Social Security and Medicare Trustees reports
 Inflation (percentage   CBO’s January 2012 baseline through 2022; 2.0 percent thereafter (CBO’s projection in 2022)
 change in GDP price
 index)
 Interest rate (on       Rate implied by CBO’s January 2012 baseline net interest payment projections through 2022; phasing to
 publicly held debt)     5.2 percent in 2025 and then constant thereafter (CBO’s June 2011 long-term projection)
                                          Source: GAO.



                                          A more detailed description of the federal model and key assumptions
                                          can be found at
                                          www.gao.gov/special.pubs/longterm/fed/aboutlongterm.html.

                                          The simulation results depend largely on what is assumed about growth
                                          in large entitlement programs. As in previous updates, we also show the
                                          Baseline Extended simulation using CBO estimates for long-term
                                          spending on Social Security and major health entitlement programs
                                          Page 11                                     GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
                                         (Medicare, Medicaid, and others). In addition, we show the Alternative
                                         simulation using different assumptions about certain health care cost-
                                         containment provisions based on CBO alternative projections. As figure 5
                                         shows, the results are similar to our simulations using the Trustees and
                                         CMS Actuary’s projections.

Figure 5: Debt Held by the Public under Fiscal Policy Simulations with Different Assumptions for Major Entitlement Programs




                                         Note: The two Alternative simulations are so close that their separate lines are not visible on this
                                         graph.




                                         Table 4 shows the CBO assumptions incorporated into the simulations
                                         that were used in the comparison shown in figure 5.




                                         Page 12                                      GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
Table 4: Key Assumptions Underlying GAO’s Simulations Using CBO’s Spending Projections for Major Entitlement Programs

 Model inputs        Baseline Extended simulation                              Alternative simulation
 Social Security     CBO’s January 2012 baseline through 2022;                 Same as Baseline Extended
 spending            thereafter based on CBO’s June 2011 long-term
                     projections for Social Security
 Medicare            CBO’s January 2012 baseline through 2022;                 Based on CBO’s projections under its alternative fiscal
 spending            thereafter based on CBO’s June 2011 long-term             scenario that assume physician payment rates are
                     projections under its extended-baseline scenario          maintained at 2011 levels through 2022 and that
                                                                               policies to restrain growth are not in effect after 2021
 Medicaid, the       CBO’s January 2012 baseline through 2022;                 CBO’s January 2012 baseline through 2022; thereafter
 Children’s Health   thereafter based on CBO’s June 2011 long-term             CBO’s June 2011 projections under its alternative fiscal
 Insurance           projections under its extended-baseline scenario          scenario in which a policy that would slow the growth of
 Program, and                                                                  per-participant subsidies for health insurance coverage
 exchange                                                                      is assumed not to be in effect and eligibility
 subsidies                                                                     thresholds are assumed to be modified to maintain the
 spending                                                                      share of the population eligible for subsidies
                                           Source: GAO.


                                           Notes: CBO’s projections are from CBO’s 2011 Long-Term Budget Outlook (June 2011). CBO
                                           assumes that full benefits are paid regardless of the amounts available in the trust funds.



                                           This product is part of a body of work on federal debt and the long-term
                                           fiscal challenge. Related products can be found at
                                           www.gao.gov/special.pubs/longterm/past/.

                                           We conducted our work from January 2012 to April 2012 in accordance
                                           with all sections of GAO’s Quality Assurance Framework that are relevant
                                           to our objectives. The framework requires that we plan and perform the
                                           engagement to obtain sufficient and appropriate evidence to meet our
                                           stated objectives and to discuss any limitations in our work. We believe
                                           that the information and data obtained, and the analysis conducted,
                                           provide a reasonable basis for any findings and conclusions in this
                                           product.




(450961)                                   Page 13                                   GAO-12-521SP Long-Term Fiscal Outlook Spring 2012
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