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The Budget Squeeze
C. Eugene Steuerle
The Urban Institute
September 10
Stanford Institute for Economic Policy Research
OUTLINE
WHERE WE WERE IN 2000
Sources of Pressure: Revenues, Health, Retirement
Programs, Future Labor Force Growth Slowdown
Retirement & Health: Not Well Targeted
Everything Else in Budget Squeezed
Impact on Democracy: Dead Men Ruling
 TRENDS SINCE 2000
Tax Cuts, Drug Benefits, Defense & International, Other
Revenue Shortfall
 $800 Billion Annual Shift from Surplus to Deficit
The Squeeze Tightens
 THE IMPLICATIONS
Private: Restructuring of Labor Market
Public: Fundamental (Trillion Dollar) Shifts in Policy

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
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




Federal Revenues by Source as a Percentage of GDP,
1934-2008
21.0%
Other**
Excise Taxes*
18.0%
15.0%
Social Insurance
and Retirement
Receipts
12.0%
Corporate Income
Tax
9.0%
6.0%
Individual Income
Taxes
3.0%
0.0%
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
* Includes receipts from highway, airport, telephone, alcohol, and tobacco.
** Includes estate and gift taxes, customs duties, and miscellaneous receipts.
Source: Eugene Steuerle and Adam Carasso, The Urban Institute, 2003. Historical data based on the Budget of the United
States Government, FY 2004 and projections based on CBO's January 2003 budget projections.
2002
2006
24.0%
Social Security, Medicare, and Medicaid Outlays as a
Percentage of GDP, Fiscal Years 1950-2075
22.0%
20.0%
18.0%
16.0%
14.0%
Medicaid
12.0%
10.0%
8.0%
Medicare
6.0%
4.0%
2.0%
Social Security
0.0%
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2075
Pressures from Elderly
Programs
People have been retiring earlier
 People are living longer
 Birth rates have fallen
 Annual/lifetime benefits continue to rise
 Health services grow & expand (quantity)
 Healthcare insurance system reduces
downward price pressures normal for a
growing industry (price)

Social vs. Legal Pressures
Only the change in birth rates indicates a
growing need in society.
 The other five are signs of increased wellbeing or legal promises to pay out more.

INDIVIDUALS RETIRE EARLIER:
AVERAGE AGE AT WHICH MALE WORKERS BEGIN RECEIVING
SOCIAL SECURITY BENEFITS
70
68.7
64.1
65
60
55
50
1950
2000
Source: Social Security Administration, Annual Statistical Supplement to the Social
Security Bulletin, 2001. Table 6.B5.
Average Number of Years Lived in Retirement
Life Expectancy at the Early Retirement Age
Men
Women
28
26
24
22
20
18
16
14
12
10
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
Year of Retirement
Source: Adam Carasso and C. Eugene Steuerle, The Urban Institute, 2003. Based on mortality
data from the Social Security Administration, Office of the Chief Actuary.
OASI Benefit for a One-Earner Couple in First Year of
Retirement
$50,000
High Wage (160%)
$45,000
Average Wage (100%)
Constant 2002 Dollars
$40,000
Low Wage (45%)
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
Year Cohort Turns 65
Source: Adam Carasso and C. Eugene Steuerle. The Urban Institute, 2003. Update of C. Eugene Steuerle
and Jon M. Bakija, Retooling Social Security for the 21st Century, Washington, DC: The Urban Institute, 1994.
Quantity Indices Over Time:
Medical Care vs. Other Consumption Categories
Quantity Indexes: 2000 Growth Over 1950
200
19,000%
180
160
140
120
100
80
60
2,779%
40
20
899%
448%
1,611%
0
Total personal
consumption
Telephone &
telegraph
MEDICAL
CARE
Recreation
Video, audio,
& computers
Price Indices Over Time:
Medical Care vs. Other Consumption Categories
Percent Growth Between 2000 and 1950
Price Indexes: 2000 Growth Over 1950
1200%
1,074%
1000%
800%
600%
494%
400%
180%
118%
200%
0%
-79%
-200%
Total personal
consumption
Telephone &
telegraph
MEDICAL
CARE
Recreation
Video, audio,
& computers
Social Security and Expected* Medicare Benefits for
Average-Wage, Two-Earner Couple
—Real 2002 Dollars—
Year
Cohort
Turns 65
Soc.
Security
Annual
Benefits
Soc.
Security
Lifetime
Benefits
Medicare
Lifetime
Benefits
Total
Lifetime
Benefits
Soc.
Security
Lifetime
Taxes
Medicare
Lifetime
Taxes
Total
Lifetime
Taxes
1960
$15,000
$160,000
$0
$160,000
$23,000
$0
$23,000
1970
$18,000
$250,000
$80,000
$330,000
$61,000
$2,000
$63,000
2000
$25,000
$360,000
$240,000
$600,000
$290,000
$55,000
$345,000
2030
$38,000
$530,000
$490,000
$1,020,000
$500,000
$140,000
$640,000
* Expected rather than realized benefits. Notes: The “average” wage profile is a hypothetical profile routinely employed by
the Social Security Administration in its analyses. Data are discounted to present value at age 65 using a 2 percent real
interest rate. Table assumes survival to age 65. Projections based on intermediate assumptions of the 2002 OASDI and
HI/SMI Trustees Reports. Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002.
Number of Workers Available to Support Each Social
Security Beneficiary
4.0
3.7 workers per
beneficiary in 1970
Workers per beneficiary
3.5
3.3 workers per
beneficiary in 2003
3.0
2.5
1.8 workers per
beneficiary in 2080
2.0
1.5
1.0
0.5
0.0
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
Source: Table IV.B2, "Covered Workers and Beneficiaries," from the 2002 and 2003 OASDI Trustees Report.
Labor Force Projections
(Annual Growth Rates)
Labor Force Projections
(Annual Growth Rates)
Annual Growth Rate (% over Period)
2000–10
2010–20
2020–30
1.08
0.38
0.38
Adult Employment Rate (Absent Changes in Retirement
Patterns), 1950-2040
70%
65%
60%
55%
50%
45%
40%
1950
1960
1970
1980
1990
2000
2010
2020
2030
Note: Projections show what happens if there is a change in age-specific employment rates as the population ages.
Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. Based on data from the U.S. Bureaus of Census
and Labor Statistics.
2040
Example of Shift in Resources Upon Retirement
For a worker who earns $50,000…
Increases in Resources Transferred from Others
Social Security Benefits
Medicare Benefits
Total 1
Decrease in Resources Transferred to Others
Social Security Taxes
Federal Income Taxes
Other Taxes (Including State and Local)
Total 2
Net Change in Transfers Received (Total 1 - Total 2)
Addendum: Additional decline in retiree's after tax earnings
otherw ise available to meet current and future needs
$18,500
$5,000
$23,500
-$7,700
-$6,600
-$4,000
-$18,300
$41,800
$31,700
One Possible Reprieve
Despite debates over capital (individual
accounts), the main problem is labor
 Many so-called elderly are middle-aged
 They still want to be productive
 Government estimates may seriously
understate potential labor demand for these
workers

Labor Force Participation: Males Aged 55 and
Older vs. the Adult Population,1948-99
All 20+
Males 55+
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
Multiple Gains if Work Expands
Fewer beneficiaries
 More national output, divided into:
 More taxes for elderly programs
 More taxes for children’s and other
programs
 More private wealth & income to be
spread over fewer retirement years.

Male Labor Force Participation Rates, 1940-2001
100
Age 58.5 in 1940
90
Men with 16.4 years of life expectancy
Men age 65
Percent in Labor Force
80
70
60
Men age 65 in 2001
under either measure
50
40
30
20
Early retirement available
Medicare introduced in 1966
10
0
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: C. Eugene Steuerle, Adam Carasso and Meghan Bishop, The Urban Institute, 2002. Based on data from the U.S. Social
Security Administration, the Bureau of Labor Statistics, and the U.S. Census of Population.
Constricted Choices Among
Elderly Programs

Locked-in guarantees and growth rates
prevent
 taking better care of truly old
 removing inequities among beneficiaries
 switching money toward long-term care
 removing elderly from poverty
Proportion of Social Security Benefits for Males Going
to Those with More Than 10 Years of Life Expectancy
70%
60%
62%
48%
50%
40%
30%
20%
10%
0%
1968
1997
Some Inequities
 Current system discriminates:
single heads of household
• receive less than married persons who
contribute no more to system
two-earner couples
• receive fewer benefits for the same levels of
contribution when their earnings are split
some divorced persons
• receive no share of their spouses’ benefits if
married fewer than 10 years
Long-term “Long-term” Care
There does remain a serious long-term care
issue for the very old
 By providing increasing amounts to those
relatively younger, current system actually
makes problem harder to solve

Comparison of Average Benefits, Poverty Level, and
Elderly Poverty Rate
In Constant 2002 Dollars
10,000
10.0%
$11,140
$8,917
7.8%
$8,628
$8,628
8.0%
8,000
6.0%
6,000
4.2%
4.0%
4,000
2.0%
2,000
0
0.0%
Early 1990s
Avg. Benefit
2020
Poverty Level
Poverty Rate
Poverty Rate
12,000
Composition of Federal Outlays, 1950-2008
100%
90%
All Other
80%
Total
Retirement,
Health, &
Income
Security
70%
Defense
60%
50%
40%
Net Interest
Other Retirement,
Disability, and Income
Security
30%
20%
Social Security
Medicare
10%
0%
Medicaid, Veterans, and
Other Health
1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
All Other
Source:
Eugene
Steuerle and Adam
Carasso, The Urban
Institute, 2003. From
theDefense
Budget of the U.S.
Government, FY 2004.
Net Interest
Federal Outlays as a Percentage of GDP, 1962-2002
Other Domestic
Social Security, Medicare, and Medicaid
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
1962
1967
1972
1977
1982
1987
1992
1997
2002
0.0
1962
1967
1972
Defense and International
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
1962
0.0
1962
1972
1977
1982
1987
1992
1982
1987
1992
1997
2002
1992
1997
2002
Net Interest
12.0
1967
1977
1997
2002
1967
1972
1977
1982
1987
Other Domestic Outlays as a Percentage of GDP,
1962-2002
Means-Tested Entitlements
Other Entitlements
5.0
5.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
1962
1967
1972
1977
1982
1987
1992
1997
2002
1997
2002
Domestic Discretionary
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1962
1967
1972
1977
1982
1987
1992
0.0
1962
1967
1972
1977
1982
1987
1992
1997
2002
Reduction in Outlay Category as a Percentage of
GDP, 1961-2002
Table 3: Reduction in Outlay Category as a Percentage of GDP, 1961-2002
Function and Subfunction
Peak Year Maximum
2002
National Defense
1968
9.43%
3.37%
International Development and Humanitarian Assistance
1964
0.53%
0.08%
General Science, Space and Technology
1966
0.89%
0.20%
Energy Conservation
1981
0.02%
0.01%
Natural Resources and Environment
1977
0.51%
0.28%
% Change
-64%
-86%
-77%
-64%
-44%
Dead Men (yes, they were men) Rule
 Priorities set yesterday for the needs of
tomorrow
 Voters left with fewer choices
 Unable to switch priorities (defense,
education, homeland security, children)
"Which Federal Baseline Do We Use?"
21%
Baseline Receipts
20%
% of GDP
2001 Tax Law
Extended
19%
2002 Tax Law Extended
2003 Tax Law Extended
18%
17%
Other Tax Laws
Extended
Alternative Minimum
Tax Growth Halted
16%
1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 2054 2061 2068 2075
Source: Steuerle, Carasso, Bishop, based on data from Gale, Orszag, and the Tax Policy Center..
The Assumption "Gap"
21%
Old Baseline
% of GDP
20%
19%
3.3%
18%
17%
Baseline with All Tax
Law Changes
16%
1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 2054 2061 2068 2075
Source: Steuerle, Carasso, Bishop, based on data from Gale, Orszag, and the Tax Policy Center..
Baseline Receipts Meet Major Spending
Initiatives
35%
Adjusted Baseline
Spending (includes
new Interest estimate)
30%
% of GDP
25%
20%
Adjusted Baseline
Receipts
15%
Includes new Defense
estimate
Includes Baseline
Defense, Internat'l
Interest
10%
5%
Baseline SS, M'Care,
& M'Caid
Includes Rx Bill and
M'Care Fix
0%
1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 2054 2061 2068 2075
Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.
Lower Receipts and More Spending Move the "Cliff" Up
from 2041 to 2011
35%
30%
Baseline Spending
(ADJUSTED)
25%
% of GDP
Baseline Receipts
(OLD)
20%
15%
10%

Baseline SS, M'Care,
M'Caid, Defense,
Internat'l, Interest
(OLD)

Baseline Receipts
(ADJUSTED)
5%
0%
1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 2054 2061 2068 2075
Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.
Focus in on the "Cliff"
(2000-2015)
25%
20%
Baseline Receipts
(ADJUSTED)
Baseline Receipts
(OLD)
% of GDP

2011
15%
Baseline Spending
(ADJUSTED)
10%
Baseline SS, M'Care,
M'Caid, Defense,
Internat'l (OLD)
5%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.
Focus in on the "Cliff"
(2000-2015)
25%
20%
Baseline Receipts
(ADJUSTED)
Baseline Receipts
(OLD)
% of GDP

2011
15%
Baseline Spending
(ADJUSTED)
10%
Baseline SS, M'Care,
M'Caid, Defense,
Internat'l (OLD)
5%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.
SOON…VERY SOON

ANY spending
on education, environment, welfare, community
development and most domestic programs
must be paid for out of:
 Deficits (but this can only be temporary)
 Rescinding of tax cuts or tax increases
 Pared growth in retirement and health spending
 A very small international and defense presence
CONCLUSION
 Dead Men Rule by locking in future changes
 Rest of government squeezed between lower taxes
and higher retirement/health spending
Education/environment/discretionary programs
get leftovers, if any
 Automatic government (spending tomorrow’s
money today) restricts choices among
programs in general
elderly programs as well
 Fundamental restructuring of public budgets and
private labor markets almost inevitable
Will it be done well?