Transcript www.concordcoalition.org

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
$38,500
(2020)
$40,000
Inflation-Adjusted Dollars
$35,000
$30,000
$25,000
$21,105
(2001)
$20,766
(1990)
$24,650
(2007)
$29,466
(2010)
$20,000
Current-Policy
Budget Baseline
$15,000
Actual Spending per
Household
$10,000
$5,000
$0
1990
1995
2000
2005
Fiscal Year
2010
2015
2020
Above-Average Spending – not Falling Revenues –
is Driving Long-Term Deficits Upward
30%
28%
26.5%
2020
26%
%GDP
24%
22%
Spending
1960-2009 Average: 20.3%
20%
18%
16%
Revenues
14%
12%
18.4%
2020
1960-2009 Average: 18.0%
10%
1960
1970
1980
1990
Fiscal Year
Current-Policy Budget Baseline
2000
2010
2020
Composition of Federal Spending: 1962-2020
100%
90%
29%
Other Programs
18%
80%
70% 6%
60% 3%
13%
50%
Antipoverty Programs
40%
30%
18%
Net Interest
Social Security & Medicare
14%
36%
49%
20%
Defense
14%
10%
0%
1962
1970
1978
2011-2020 reflect baseline projections
1986
1994
Fiscal Year
2002
2010
2018
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.
Spending (%GDP)
Social Security, Medicare, & Medicaid Costs As a
Percent of GDP
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
18.6%
3.1%
14.5%
2.5%
8.4%
1.4%
2.7%
4.3%
2007
9.4%
5.9%
6.1%
6.1%
2030
2050
Medicaid
Medicare
Social Security
Option 1: Tax Increases
Per Household & Translated Into Today’s GDP
$14,000
$12,072
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048
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 Cuts
% of Federal Budget
Yearly Budget Breakdown, Assuming No Tax Hikes or Budget
Deficits
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
All Other
Programs
Social Security,
Medicare,
Medicaid,
and Net Interest
on Earlier Debt
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042
Fiscal Year
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
80%
Federal Spending as a % of GDP
70%
60%
50%
40%
Net Interest
30%
Medicare
20%
Medicaid
Social Security
Defense
Other
10%
0%
2000
2010
2020
2030
Fiscal Year
2040
2050
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.