Facing America’s Long-Term Budget Challenges
Download
Report
Transcript Facing America’s Long-Term Budget Challenges
Facing America’s Long-Term
Budget Challenges
Brian Riedl
Grover M. Hermann Fellow for Federal Budgetary Affairs
The Heritage Foundation
June 19, 2006
Spending Growth is Accelerating
8.8%
7.9%
8%
7.3%
7%
6.3%
6%
5.1%
5%
4.1%
3.7% 3.7%
4%
3%
7.9%
3.0%
2.6%
3.2% 3.0%
2.0%
2%
1%
0%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
Nominal Spending Growth
9%
Fiscal Year
Spending is Rising Across Government
Defense and Homeland Security account for just 30% of all
new spending since 2001.
Other 2001-06 Increases:
Education: 137%
International Affairs: 111%
Health Research/Regulation: 78%
Social Security & Medicare: 38%
Antipoverty Programs: 45%
Veterans’ Benefits: 56%
Projected 2016 Budget Deficit: $700-$800 Billion
The Problem
77 million baby boomers will soon begin retiring.
Ratio of workers supporting each retiree:
1945 – 42-to-1
1950 – 15-to-1
1960 – 5-to-1
2005 – 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, and Medicaid
Costs As a Percent of GDP
20%
18.9%
% of GDP
18%
16%
15.4%
14%
2.5%
3.5%
12%
10%
9.3%
8.4%
8%
1.5%
6%
2.7%
4%
2%
4.2%
6.8%
6.1%
6.2%
2030
2050
0%
2005
Medicaid
Medicare
Social Security
Option 1: Tax Increases
Per Household & Translated Into 2005 GDP
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2005
2010
2015
2020
2025 2030
Fiscal Year
2035
2040
2045
2050
Option 1: Implications
Would have to raise taxes every year until they were
10% of GDP higher than today.
In today’s economy, a 10% of GDP tax increase
would average $11,000 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
Yearly Budget Breakdown, Assuming No Tax Hikes or
Budget Deficits
Spending as a % of the Federal Budget
100%
90%
80%
All Other
Programs
70%
60%
Social Security,
Medicare,
Medicaid, and
Net Interest on
Pre-2006 Debt
50%
40%
30%
20%
10%
0%
2006
2011
2016
2021
2026
Fiscal Year
2031
2036
2041
Option 2: Implications
Would have to immediately begin terminating
programs to make room for Social Security, Medicare,
Medicaid, and interest on past debt.
By 2026, defense would be the only other remaining
program.
By 2045, 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% more of GDP per year ($1.2 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.
Depending on interest rates, 2005-2050 net interest spending
alone (adjusted into today’s GDP) could range from $44 trillion to
$118 trillion.
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.
Social Security reform may involve transitioning to a system
whereby individuals’ payroll taxes go into their own personal
retirement fund.
Medicare and Medicaid reforms allowing more consumer choice
and competition may hold down costs.
Limiting the Medicare drug entitlement to low-income seniors
would save $8.1 trillion over the next 75 years – an amount twice
as large as the entire Social Security shortfall.
Conclusion
This issue is about more than economics.
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.