CBO Director Doug Elmendorf issued a stern warning to the White House and Congress yesterday afternoon, although so far it seems few listened. Elmendorf testified that entitlement programs will fuel a rapid increase in federal budget deficits, driven primarily by an aging population, unless significant reforms are applied:
Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.
Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.
Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.
For most people, the obvious issues of the Baby Boomer generation entering Medicare/Social Security eligibility and the lack of a sufficient younger population to pay for their benefits would have prompted the government to significantly overhaul both programs to meet fiscal reality. Instead, the Democrats have continued to insist that the problem of Medicare’s viability didn’t come from a huge influx of eligible members and the skyrocketing costs of caring for them, but from rises in prices for medical services. Elmendorf completely rejects that argument, and demonstrates in the chart below that the main problem in Medicare cost growth for at least the next 25 years comes from an aging population:
Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. As shown in the figure below, between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.
What happens in 25 years? Most of the Boomers will be dead, and the population age distribution will return to normal. At that point, the cost increases in medical care begin to balance between aging and price increases.
Therefore, the massive spending on a government takeover of the health-care industry will do nothing to halt the entitlement crisis, as the CBO also reported yesterday. In fact, it makes the crisis worse by expanding the entitlement and forcing the government even further into deficit spending. It attacks the problem in exactly the wrong manner. Instead of slimming the entitlements and narrowing its focus to what can be delivered and who can be covered with the money at hand, which would actually work the problem, Barack Obama and Congressional Democrats offer a hair-of-the-dog approach with massive new government programs and costs.
That brings us to this chart, showing the percentage of federal debt in relation to GDP in the future:
In case that’s difficult to read, the CBO projects that federal debt will surpass the annual GDP of the US by 2025 in one scenario, or about 16 years from now, as the government borrows more and more money to pay for the entitlement commitments now in place. The second baseline assumes that Congress will not adjust the alternative-minimum tax to inflation, as both parties have promised, and will allow all of the Bush tax cuts to expire. Under that scenario, we hit 100% of GDP debt around 2040, but only because we will have hiked taxes on nearly all Americans to increase revenues enough to stave off a national default.
We need to dismantle entitlements, not expand them. We need to stop spending money, not get more profligate. The CBO could not possibly be more clear about this, even if Congress and the White House remain deliberately obtuse.