The Congressional Budget Office’s just-released long-term budget outlook finds that deficits rise over the next three decades — from 2.9% of GDP in 2017 to 9.8% in 2047 — because spending growth is projected to outpace growth in revenues, particularly as it relates to Social Security and Medicare.
Spending as a share of GDP increases for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt, the outlook notes, with much of the spending growth for Social Security and Medicare coming from the baby-boom generation aging and life expectancies increasing.
The percentage of the population age 65 or older will grow sharply over the next 30 years, boosting the number of beneficiaries of those programs.
In addition, growth in spending on Medicare and the other major health care programs “is driven by rising health care costs per person, which are projected to increase more quickly than GDP per capita (after the effects of aging and other demographic changes are removed),” the outlook states.
CBO projects that those health care costs “will rise — although more slowly than they have in the past — in part because of the effects of new medical technologies and rising personal income.”
By 2047, under current law, federal spending for people age 65 or older who receive benefits from Social Security, Medicare and Medicaid would account for “about half of all federal noninterest spending, compared with about two-fifths today,” the CBO said.
Moreover, “because interest rates are expected to rise from their current low levels and federal debt is projected to grow, interest payments on the government’s debt would rise sharply.”
All told, under CBO’s extended baseline, federal spending would increase from today’s 21% of GDP to 23% in 2027 and to 29% by 2047.
Federal spending has averaged about 20% of GDP over the past 50 years, the CBO states. “Meanwhile, if current laws generally remained unchanged, revenues would rise more slowly — from 17.8% of GDP this year to 18.4% in 2027.”
CBO projects that the growth in spending for Social Security, the major health care programs and net interest would continue to “reshape the spending patterns” of the U.S. government.
As it stands now, spending on Social Security and the major health care programs constitutes 54% of all federal noninterest spending, more than the average of 37% over the past 50 years, the CBO said. “If current laws generally stayed the same, that figure would increase to 67% by 2047.”
Although Social Security spending alone would claim a larger portion of noninterest spending in 30 years than it does today, CBO’s extended baseline finds that share peaks in 2028 and then declines as baby boomers die.
As the Committee for a Responsible Federal Budget notes, the CBO outlook also finds that a number of major federal trust funds face exhaustion in the coming years, including the Highway Trust Fund in 2021, the Social Security Disability Insurance Trust Fund in 2023, the Medicare Part A (Hospital Insurance) Trust Fund in 2025, and the Social Security Old-Age and Survivors Insurance Trust Fund in 2031. "Exhaustion of these trust funds would spell deep across-the-board cuts for their beneficiaries," the committee said.
--- Check out Advising Clients on Social Security: Talking Points, Part 4 on ThinkAdvisor.