United States Government Accountability Office GAO The Federal Government’s Long-Term Fiscal Outlook Fall 2012 Update GAO’s simulations continue to illustrate that the federal government is on GAO’s Long-Term Fiscal Simulations an unsustainable long-term fiscal path. In both the Baseline Extended and Alternative simulations, debt held by the public grows as a share of gross Since 1992, GAO has published domestic product (GDP) over the long term as shown in figure 1. While the long-term fiscal simulations showing federal deficits and debt timing and pace of growth varies depending on the assumptions used, under different sets of policy neither set of assumptions achieves a sustainable path. In the Baseline assumptions. GAO developed its Extended simulation, which assumes current law, including the long-term model in response to a discretionary spending limits and other spending reductions contained in bipartisan request from members the Budget Control Act (BCA) of 2011 and expiration of certain tax cuts of Congress concerned about the enacted in 2001 and 2003, debt as a share of GDP declines in the short long-term effects of fiscal policy. term before turning up again. In the Alternative simulation, in which these GAO’s simulations provide context for consideration of policy options. laws are assumed to not take full effect, federal debt as a share of GDP They are not intended to suggest grows throughout the period. Discretionary spending limits alone do not particular policy choices or to address the fundamental imbalance between estimated revenue and predict the economic impact of any spending, which is driven largely by the aging of the population and rising set of choices but to help facilitate health care costs. The Patient Protection and Affordable Care Act (PPACA) a dialogue on this important issue. slows the growth of health care spending and federal debt under the GAO regularly updates its Baseline Extended simulation, in which cost-containment mechanisms are simulations as new data become assumed to be fully implemented and effective. However, some have available. This update incorporates the most recent projections questioned whether these mechanisms can be sustained over the long released by the Congressional term; this is reflected in GAO’s Alternative simulation. Budget Office (CBO), the Social Security and Medicare Trustees (Trustees), and the Centers for Figure 1: Debt Held by the Public under Two Fiscal Policy Simulations Medicare & Medicaid Services Office of the Actuary (CMS Actuary). As in the past, GAO shows two simulations: The Baseline Extended simulation follows CBO’s August 2012 baseline, which generally reflects current law for the first 10 years. The baseline includes the effects from the discretionary spending limits and automatic enforcement procedures put in place by the 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 GDP. Note: Data are from GAO’s Fall 2012 simulations based on the Trustees’ assumptions for Social Over the long term, revenue as a Security and the Trustees’ and the CMS Actuary’s assumptions for Medicare. share of GDP is higher and discretionary spending lower than Significant actions to change the long-term fiscal path must be taken and historical averages. the design of these actions should take into account concerns about the GAO-13-148SP near-term impact on economic growth. In the near term, for example, the In the Alternative simulation, expiring tax provisions are Baseline Extended simulation reflects a number of fiscal policy changes extended to 2022, and the contained in current law that are projected to sharply reduce spending and alternative minimum tax raise revenue from their current levels beginning in 2013. CBO, the Federal (AMT) exemption amount is Reserve Board Chairman, and others project that such drastic fiscal indexed to inflation through tightening—commonly referred to as the “fiscal cliff”—could disrupt 2022; revenues are then economic growth. In the Alternative simulation, historcial trends and past brought back to the historical average as a share of GDP. policy preferences are assumed to continue; revenue is lower and spending For the first 10 years, is higher than in the Baseline Extended simulation. While CBO projects that discretionary spending reflects continuation of such polices would prevent disruptions to the economy in the the original caps set by the very near term, it would lead to higher debt over the long term. BCA but not the lower caps triggered by the automatic In both GAO simulations spending for the major health and retirement enforcement procedures. Over the long term, discretionary programs will increase in coming decades, putting greater pressure on spending and revenue are the rest of the federal budget. For the first few decades this spending is held at historical averages. driven largely by the aging of the population. The oldest members of the baby-boom generation are already eligible for Social Security retirement The Baseline Extended simulation follows the Trustees’ 2012 benefits and for Medicare, and, as shown in figure 2, the number of baby intermediate projections for Social boomers turning 65 is projected to grow in coming years from an average Security and Medicare and CBO’s of about 7,600 per day in 2011 to more than 11,000 per day in 2029. June 2012 long-term projections for Medicaid adjusted to reflect excess cost growth consistent with Figure 2: Daily Average Number of People Turning 65 Each Year the Trustees’ Medicare projections. In the Alternative simulation, Medicare spending is based on the CMS Actuary’s alternative projections that assume reductions in Medicare physician rates do not occur as scheduled under current law and that certain cost-containment mechanisms intended to slow the growth of health care cost are not sustained over the long term. GAO also shows the outlook using CBO’s long-term projections for Social Security and the major health entitlements; the results are consistent with GAO’s simulations based largely on the Trustees’ projections. Additional information on the fiscal outlook and federal debt is available at www.gao.gov/special.pubs/longterm/. For more information, contact Susan J. Note: Data are from the U.S. Census Bureau’s National Population Projections. For this analysis, we Irving at (202) 512-6806 or used data from the low net international migration series. email@example.com or Thomas J. McCool, at (202) 512-2642 or firstname.lastname@example.org. Page 2 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 Health care spending has been growing faster than the overall economy and is expected to continue growing as more members of the baby-boom generation become eligible for federal health programs and the cost of caring for each enrollee increases. If PPACA is implemented as currently written and is effective, it would have a major effect on slowing the rate of growth in federal health care spending as shown in our Baseline Extended simulation. In this simulation, spending on Medicare and Medicaid, the Children’s Health Insurance Program (CHIP), and exchange subsidies grows from 5 percent of GDP in 2010 to over 7 percent by 2030. If, however, the cost containment measures are not sustained over the long term—a concern expressed by the Trustees, the CMS Actuary, the CBO, and others—spending on federal health care programs grows much more rapidly. Spending on Medicare and Medicaid, CHIP, and exchange subsidies under the Alternative simulation grows to over 8 percent of GDP by 2030. Figures 3 and 4 below show revenue and the composition of spending in the Baseline Extended and Alternative scenarios moving forward. In the Baseline Extended simulation, not only is health care spending growth slower, but revenue as a share of the economy is higher and discretionary spending lower than at any point in the last 50 years. Even in this simulation, revenue covers little more than spending on Social Security, Medicare, Medicaid, CHIP, exchange subsidies, and interest in 2040 (see fig. 3).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. Page 3 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 Figure 3: Potential Fiscal Outcomes: Revenues and Composition of Spending in the Baseline Extended Simulation Notes: Data are from GAO’s Fall 2012 simulations based on the Trustees’ assumptions for Social Security and Medicare. Page 4 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 As figure 4 shows, if the federal government continues on the current path, as assumed in the Alternative simulation, and borrows from the public to finance the growing imbalance between revenue and spending, by 2040 more than half of all federal revenue will go to net interest payments. Overall, our simulations illustrate the difficult trade-offs that policymakers will have to consider in order to put the federal government on a more sustainable path. Figure 4: Potential Fiscal Outcomes: Revenues and Composition of Spending in the Alternative Simulation Notes: Data are from GAO’s Fall 2012 simulations based on the Trustees’ assumptions for Social Security and the CMS Actuary’s assumptions for Medicare. One measure of the challenge over the long term is the “fiscal gap.” The Balancing Near-Term fiscal gap represents the difference, or gap, between revenue and and Long-Term noninterest spending over a certain period, such as 75 years, that would need to be closed in order to achieve a specified debt level at the end of Considerations the period. From the fiscal gap, one can calculate the size of action Page 5 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 needed—in terms of tax increases, spending reductions, or, more likely, some combination of the two—to close the gap. For example, to keep debt held by the public as a share of GDP in 2086 from exceeding its level at the beginning of 2012 (roughly 68 percent of GDP) in our Alternative simulation, the fiscal gap is 8.3 percent of GDP (see table 1). This means that revenue would have to increase by 46 percent or noninterest spending would have to be reduced by about 32 percent (or some combination of the two) on average over the 75-year period. Even more significant changes would be needed to reduce debt to lower levels. Table 1: Federal Fiscal Gap under Our Simulations Average percentage change required to close gap If action is taken today If action is delayed until 2022 Solely through Solely through Fiscal gap Solely through decreases in Solely through decreases in 2012–2086 increases in noninterest increases in noninterest Scenario (percentage of GDP) revenue spending revenue spending Baseline Extended 2.1 10.0 9.4 11.8 10.9 Alternative 8.3 46.0 32.3 54.7 37.2 Source: GAO. Note: Data are from GAO’s Fall 2012 simulations based on the Trustees’ assumptions for Social Security and the Trustees’ and CMS Actuary’s assumptions for Medicare. When considering action to address the longer-term fiscal challenge, it is important to recognize the current state of the economy. 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. However, the longer action is delayed the greater the risk that the eventual changes will be disruptive and destabilizing. Table 1 illustrates how much greater fiscal policy changes would have to be if no actions were taken for the next decade. Under our Alternative simulation, waiting 10 years would increase the fiscal gap to nearly 10 percent of GDP— meaning a revenue increase of more than 54 percent or a noninterest spending cut of about 37 percent or some combination of the two would be required to bring debt held by the public back to its level in 2012 by 2086. Page 6 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 Addressing the long-term fiscal challenge will likely require difficult Concluding choices affecting both revenue and spending. In addition, the need to act Observations soon to develop a plan for addressing the long-term fiscal imbalance must be balanced with concerns about the near-term impact of policy decisions. Action now would allow for the greatest range of options to address the fiscal imbalance and strengthen the economy for the long term. Many of the long-term drivers highlighted in past updates, including health care cost growth and the aging population, have already begun to affect the federal budget. These are challenges for which there are no quick or easy solutions. This update incorporates CBO’s August 2012 baseline projections that Changes since the follow current law at the time. 1 This includes updated projections for Last Update Medicaid, CHIP, and exchange spending consistent with the Supreme Court’s recent decision about PPACA. As a result of the decision, CBO and the staff of the Joint Committee on Taxation (JCT) decreased their estimates of federal spending for Medicaid and increased their estimates of federal spending on health insurance exchange subsidies. CBO and JCT’s projections reflect an assessment of the probabilities of different outcomes. CBO notes, however, that what states decide to do regarding the Medicaid expansion under PPACA is highly uncertain and depends in part on how flexible executive branch agencies will be regarding the choices that states have. Consistent with our past practice, spending on Medicaid, CHIP, and exchange subsidies in our simulations follows CBO’s baseline projections for the first 10 years. After that, growth in spending for these programs is based on CBO’s long-term projections adjusted to reflect excess cost growth consistent with the 2012 Medicare Trustees’ intermediate projections. Overall, the net effect of the changes in spending on Medicaid, CHIP, and exchange subsidies in the 10-year baseline do not significantly change the results of our simulations because the reduced costs of covering fewer individuals in state Medicaid programs is partially offset by increased costs of the exchange subsidies. Beginning with this update, we also revised our method for developing an excess cost growth rate for Medicaid, CHIP, and exchange subsidies consistent with the Trustees intermediate projections. In prior updates, our excess cost growth assumption, while based on growth for the U.S. health sector as a whole, was affected by productivity adjustments and other cost containment mechanisms for Medicare. For this update, we 1 The CBO report is available at http//:www.cbo.gov. Page 7 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 removed the effects of productivity adjustments and other cost containment mechanisms for Medicare from our estimates of excess cost growth for Medicaid, CHIP, and exchange subsidies. Excess cost growth for these programs is now 0.8 percent in the Baseline Extended simulation, or 0.2 percentage points higher than it was in our previous update, and tracks more closely with private insurance. This is in the same range as CBO’s long-term projections for excess cost growth for Medicaid, CHIP, and exchange subsidies. Unlike our prior update where excess cost growth for Medicaid, CHIP, and exchange subsidies differed in the Baseline Extended and Alternative simulations depending on assumptions about Medicare spending, the same rate is used in both simulations for this 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 Page 8 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 Table 2: Key Budget Assumptions for Baseline Extended and Alternative Simulations Based on the Social Security and Medicare Trustees’ Projections Model inputs Baseline Extended simulation Alternative simulation Revenue CBO’s August 2012 baseline that assumes tax cuts CBO’s estimates that assume expiring tax provisions will expire as scheduled under current law and that an other than the temporary Social Security payroll tax increasing share of taxpayers will be subject to higher reduction are extended through 2022, and the 2011 tax rates through 2022; thereafter remains constant at alternative minimum tax (AMT) exemption amount is 21.4 percent of GDP (CBO’s projection in 2022) indexed to inflation for years 2012 to 2022; thereafter is phased into the 40-year historical average of 17.9 percent of GDP Social Security CBO’s August 2012 baseline through 2022; thereafter Same as Baseline Extended spending phases into the 2012 Social Security Trustees’ intermediate projections Medicare CBO’s August 2012 baseline through 2022 that Based on CMS Actuary’s alternative scenario that spending assumes cuts in physician payment rates will occur assumes physician payment rates grow by 1 percent a as scheduled under current law at the time and that annually through 2022a and then gradually transition to the implementation of the Budget Control Act’s a long-term growth rate equal to the per capita increase automatic enforcement procedures reduces in overall health spending; spending reductions under b b spending; thereafter phases into the 2012 Medicare the BCA do not occur, and policies that would restrain Trustees’ intermediate projections in which cost spending growth are applied fully through 2019 but containment mechanisms reduce excess cost growth begin to phase out thereafter; excess cost growth to 0.2 percentage points on average between 2023 averages 0.8 percentage points between 2023 and and 2086c 2086c Medicaid, the CBO’s August 2012 baseline through 2022; thereafter CBO’s August 2012 baseline through 2022; thereafter Children’s growth in spending for these programs is consistent growth in spending for these programs is consistent with Health with CBO’s June 2012 long-term assumptions for the CBO’s June 2012 long-term assumptions for the Insurance number and age composition of enrollees and the number and age composition of enrollees and CBO’s Program, and 2012 Medicare Trustees’ intermediate assumptions alternative assumption that a policy that would slow the exchange for excess cost growth; excess cost growth averages growth of per-participant subsidies for health insurance c subsidies 0.8 percentage points between 2023 and 2086 coverage is not in effect and eligibility thresholds are spending modified to maintain the share of the population eligible for subsidies; as in Baseline Extended, excess cost growth averages 0.8 percentage points between 2023 c and 2086 Other CBO’s August 2012 baseline through 2022, which CBO’s August 2012 baseline adjusted for extension of mandatory incorporates the reductions in spending scheduled to certain tax credits and to exclude the effects of the spending occur under the Budget Control Act’s automatic Budget Control Act’s automatic enforcement procedures b enforcement procedures; thereafter remains through 2022;b thereafter is phased back to 2.4 percent constant as a share of GDP at 2.4 percent of GDP of GDP (same as Baseline Extended) by 2025 (implied by CBO’s projection in 2022) Discretionary CBO’s August 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 automatic Act, as well as the lower caps triggered by the enforcement procedures;b after 2022 it gradually phases b automatic enforcement procedures; thereafter up to 7.5 percent of GDP (the 20-year historical remains constant at 5.6 percent of GDP (CBO’s average) projection in 2022) Source: GAO. Notes: CBO’s projections are from An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 (August 2012) and CBO’s The 2012 Long-Term Budget Outlook (June 2012). Trustees projections are from The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds and The 2012 Annual Report of the Page 9 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, which were both issued on April 23, 2012. Projections from the CMS Actuary are based on Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers (May 18, 2012). We assume that Social Security and Medicare benefits are paid in full regardless of the amounts available in the trust funds. a Physician payment rates are scheduled to be reduced by roughly 27 percent at the start of 2013. Since 2003, Congress has taken a series of legislative actions to override 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. b The Budget Control Act established limits on discretionary budget authority for 2012 through 2021. It also specified additional limits on discretionary spending and automatic reductions in mandatory spending, including Medicare, that begin to take effect in January 2013 and are intended to reduce projected deficits by an additional $1.2 trillion. c Excess cost growth refers to the annual growth rate of health care spending per enrollee in excess of the annual growth rate of potential GDP, adjusted for demographic characteristics. 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 Our Long-Term Federal Simulations Model inputs All simulations Real GDP growth CBO August 2012 baseline through 2022; thereafter averages 2.1 percent based on the intermediate assumptions of the 2012 Social Security and Medicare Trustees Reports Inflation (percentage CBO August 2012 baseline through 2022; 2 percent thereafter (CBO’s projection in 2022) change in GDP price index) Interest rate (on debt held Rate implied by CBO’s August 2012 baseline net interest payment projections through 2022; phasing by the public) to 5.2 percent in 2025 and then constant thereafter (based on CBO’s June 2012 long-term projection) Source: GAO. A more detailed description of the federal model and key assumptions can be found at http://www.gao.gov/special.pubs/longterm/fed/aboutlongterm.html. Page 10 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 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 both Trustees and CBO estimates for long-term spending on Social Security and major health entitlement programs (Medicare, Medicaid, and others). In addition, we show the Alternative simulation using different assumptions about certain health care cost-containment provisions based on CBO and CMS Actuary alternative projections. As figure 5 shows, the results are not materially different. The outlook under either set of assumptions is unsustainable. Figure 5: Debt Held by the Public under Fiscal Policy Simulations with Different Assumptions for Major Entitlement Programs Page 11 GAO-13-148SP Long-Term Fiscal Outlook Fall 2012 Table 4 shows the CBO assumptions incorporated into the simulations that were used in the comparison shown in figure 5. Table 4: Key Budget Assumptions Underlying Our Simulations Using CBO’s Spending Projections for Major Entitlement Programs Model inputs Baseline Extended simulation Alternative simulation Social Security CBO’s August 2012 baseline through 2022; Same as Baseline Extended spending thereafter based on CBO’s June 2012 long-term projections for Social Security Medicare CBO’s August 2012 baseline through 2022; Based on CBO’s projections under its alternative fiscal spending thereafter based on CBO’s June 2012 long-term scenario that assumes physician payment rates are projections under its extended-baseline scenario maintained at 2012 levels through 2022; spending that assumes policies that would restrain reductions under the BCA do not occur; policies to spending growth are not in effect after 2029 and restrain growth are not in effect after 2022; and excess excess cost growth averages 1.2 percentage points cost growth averages 1.3 percentage points per year per year over the long term a over the long terma Medicaid, the CBO’s August 2012 baseline through 2022; CBO’s August 2012 baseline through 2022; thereafter Children’s Health thereafter based on CBO’s June 2012 long-term CBO’s June 2012 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 which follows current law and assumes that excess per-participant subsidies for health insurance coverage exchange cost growth for Medicaid and CHIP averages 0.7 is assumed not to be in effect; eligibility thresholds are a subsidies percentage points per year over the long term assumed to be modified to maintain the share of the spending population eligible for subsidies; and excess cost growth for Medicaid and CHIP is assumed to average 0.7 percentage points per year over the long terma Source: GAO. Notes: CBO’s projections are from An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 (August 2012) and CBO’s The 2012 Long-Term Budget Outlook (June 2012). CBO assumes that full benefits are paid regardless of the amounts available in the trust funds. a Excess cost growth refers to the annual growth rate of health care spending per enrollee in excess of the annual growth rate of potential GDP, adjusted for demographic characteristics. This product is part of a body of work on federal debt and the long-term fiscal challenge. Related products can be found at http://www.gao.gov/special.pubs/longterm/index.html. We conducted our work from September 2012 to December 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. 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The Federal Government's Long-Term Fiscal Outlook: Fall 2012 Update
Published by the Government Accountability Office on 2012-12-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)