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Facing America’s Long-Term Budget Challenges
Brian Riedl
Grover M. Hermann Fellow for Federal Budgetary Affairs
The Heritage Foundation
Washington is Spending Nearly $30,000 Per Household in 2010
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
1990 1995 2000 2005 2010 2015 2020
Fiscal Year
Infl
atio
n-A
dju
sted
Do
llar
s
$20,766(1990)
$21,105 (2001)
$38,500(2020)
$24,650(2007)
$29,466(2010)
Current-Policy Budget Baseline
Actual Spending per Household
Above-Average Spending – not Falling Revenues –is Driving Long-Term Deficits Upward
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
1960 1970 1980 1990 2000 2010 2020
Fiscal Year
%G
DP
Revenues
Spending
26.5%2020
18.4%2020
1960-2009 Average: 18.0%
1960-2009 Average: 20.3%
Current-Policy Budget Baseline
Composition of Federal Spending: 1962-2020
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1962 1970 1978 1986 1994 2002 2010 2018
Fiscal Year
Social Security & Medicare
Defense
Antipoverty Programs
Net Interest
Other Programs
13%
36%49%
18%
29%
6%
18%
14%
14%
3%
2011-2020 reflect baseline projections
The Long-Term Challenge
77 million baby boomers will retire between 2008 and 2029.
Ratio of workers supporting each retiree: 1960 – 5-to-1 2010 – 3-to-1 2030 – 2-to-1
By 2030, a married couple will have to support themselves, their children – and their very own retiree.
In addition to demographics, Medicare also must deal with rising health care costs.
Senior health care will also push up Medicaid costs.
Social Security, Medicare, & Medicaid Costs As a Percent of GDP
4.3%6.1% 6.1%
2.7%
5.9%9.4%
1.4%
2.5%
3.1%
0%2%4%6%8%
10%12%14%16%18%20%
2007 2030 2050
Sp
end
ing
(%G
DP
)
Medicaid
Medicare
Social Security
14.5%
18.6%
8.4%
Option 1: Tax IncreasesPer Household & Translated Into Today’s GDP
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048
$12,072
Option 1: Implications
Would have to raise taxes every year until they were 10.2% of GDP higher than today. In today’s economy, a 10.2% of GDP tax increase would
average $12,072 per household. Marginal tax rates would likely more than double.
Combined federal, state, and local taxes would reach European levels.
Generally, these high tax rates have been shown to reduce economic growth, depress incomes, and increase unemployment.
Option 2: Other Program CutsYearly Budget Breakdown, Assuming No Tax Hikes or Budget Deficits
Social Security, Medicare, Medicaid,
and Net Interest on Earlier Debt
0%10%20%30%40%50%60%70%80%90%
100%
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042Fiscal Year
% o
f F
eder
al B
ud
get
All Other Programs
Option 2: Implications
Would have to immediately begin terminating programs to make room for Social Security, Medicare, Medicaid, and interest on past debt.
By 2030, defense would be the only other remaining program.
By 2049, defense would have to be eliminated too.
By that point, 100% of the budget would go towards Social Security, Medicare, Medicaid, and interest on past debt.
Clearly, this is not realistic.
Option 3: Continue Current Policies And Cover Shortfalls With Budget Deficits
OtherDefense
Social SecurityMedicaid
Medicare
Net Interest
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2010 2020 2030 2040 2050
Fiscal Year
Fed
eral
Spe
ndin
g as
a %
of
GD
P
Option 3: Implications Hold all taxes and other spending constant as a percent of
GDP, and then cover shortfalls with budget deficits.
Borrowing 10.2% more of GDP per year ($1.4 trillion more in today’s economy) would raise the federal debt to levels never seen before.
Such debt could increase interest rates, which would in turn trigger an exponential increase in federal debt and net interest costs.
Such large expenses could create an economic crisis.
Option 4: Modernize Social Security, Medicare, and Medicaid Reform is the only way to avoid the scenarios listed above.
Delays only push up the final reform costs.
Hold harmless those under age 50? Four million baby boomers cross this threshold annually. All will have by 2014.
Some pain now, or more pain later.
Conclusion
This issue is about more than economics. It is about the future we want.
There is a moral question of whether one generation should hand a multi-trillion dollar retirement bill over to the next generation.
In the absence of fundamental reform, those entering the workforce today will experience both higher lifetime tax rates and lower incomes than their parents as a result of these retirement costs.