6. Long-Term Fiscal Projections

Chart 6-1. The price of leaving entitlements on autopilot:rising federal outlays and persistent deficits even over the medium-term future.

Projection is the January 1994 CBO projection. Entitlements here and in chart 6-6 are CBO-defined, and thus differ from the OMB-based definition used elsewhere. Constant dollars are calculated with the CBO-projected GDP deflator. "All other" subtracts offsetting receipts and deposit insurance. Source: Economic and Budget Outlook: FY 1995-1999 (CBO; January 1994).

Chart 6-2. The long-term cost of Social Security cash benefits: 17 to 22 percent of payroll by the year 2040.

See chart 5-1 for explanation of low-cost and high-cost projections. "Taxable payroll" is payroll subject to the Social Security cash benefit (OASDI) portion of the FICA tax. Source: 1993 Annual Report of the Board of Trustees of the OASDI Trust Funds, Tables II.F.6 and III.A.2.

Chart 6-3. The long-term cost of Medicare Part A: 11 to 20 percent of payroll by the year 2040.

See chart 5-1 for explanation of low-cost and high-cost projections. "Taxable payroll" is payroll subject to the Medicare Hospital Insurance (HI) portion of the FICA tax. Source: 1993 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (April 1993), Table I.D.1; and 1993 Annual Report of the Board of Trustees of the OASDI Trust Funds, Table III.A.2.

Chart 6-4. The long-term cost of Medicare Part-B: 10 to 18 percent of payroll by the year 2040.

See chart 5-1 for explanation of low-cost and high-cost projections. Although Medicare Part B (SMI) is not payroll-tax financed, expressing its cost as a share of payroll enables a consistent projection of the cost of the entire Social Security and Medicare system. "Taxable payroll" is payroll subject to the Medicare (HI) portion of the FICA tax. For the low-cost projection presented here, SMI GDP shares in HCFA's Scenario II were translated into payroll shares. Cost rates for the SMI high-cost projection were assumed to exceed those for the low-cost projection by the same proportion as cost rates in HCFA's HI Scenario III exceed those in its HI Scenario II. (HCFA does not publish a high-cost SMI scenario.)

Source: 1993 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund, (April 1993), Tables I.C.2 and I.C.4; 1993 Annual Report of the Board of Trustees of the HI Trust Fund, Table I.C.2; 1993 Annual Report of the Board of Trustees of the OASDI Trust Funds, Table III.A.2; and unpublished projections of the relationship between HI taxable payroll and GDP underlying the 1993 SSA scenarios (supplied by SSA's Office of the Actuary).

Chart 6-5. The long-term cost of the total Social Security system: 37 to 60 percent of payroll by the year 2040.

See chart 5-1 for explanation of low-cost and high-cost projections. See charts 6-2 to 6-4 for sources and definitions.

Chart 6-6. The long-term cost of all federal entitlements: 21 to 32 percent of GDP by the year 2040.

All projections are computed as GDP shares. The low-cost projection for all benefits from 1994 through 2005 is the January 1994 CBO projection (extended from 2004 to 2005). After 2005, Social Security (OASDI) and Medicare (HI and SMI) are assumed to grow as shares of GDP by the annual GDP cost increments projected in SSA's 1993 Scenario II. (See chart 5-1 for explanation of the SSA scenarios.) Medicaid is assumed to grow by the annual GDP cost increments in HCFA's 1992 long-term projection of national health expenditures. All other benefits are assumed to remain constant as a share of GDP. The high-cost projection for 1994 and 1995 is the January 1994 CBO projection. From 1996 through 2005, CBO-projected GDP shares for Social Security and Medicare are trended upward to reflect the amount by which the growth in these programs' GDP shares in SSA's 1993 Scenario III exceeds their growth in Scenario II. After 2005, Social Security and Medicare are assumed to grow as shares of GDP by the annual GDP cost increments projected in Scenario III. (For derivation of the assumed high-cost growth trend for SMI, see note to chart 6-4.) For Medicaid, the high-cost projection assumes that real age-specific per-capita costs will grow no faster than under the low-cost projection; that projection is only adjusted upward to reflect the impact that changes in the age composition of the population will have on future spending. As in the low-cost projection, all other entitlements are assumed to remain constant as a share of GDP after 2005.

Source: Economic and Budget Outlook: FY 1995-1999 (CBO; January 1994); 1993 Annual Reports of the Boards of Trustees of the OASDI, HI, and SMI Trust Funds; "National Health Expenditures Projections through 2030," Health Care Financing Review, (Fall 1992).

Chart 6-7. The outlook for the total federal budget: an economically impossible spending and deficit spiral.

See chart 6-6 for sources and entitlements assumptions. As in the projection for entitlements alone, the low-cost projection of the entire budget for 1994 through 2005 is the January 1994 CBO projection (extended from 2004 to 2005). After 2005, entitlements grow as in chart 6-6. Revenues and all other spending except net interest are assumed to remain constant as a share of GDP. Net interest outlays assume that the average interest rate on publicly held federal debt is 6.0 percent (with inflation at 2.5 percent)--a fixed extrapolation of the CBO projection. Assumptions in the high-cost projection about revenues, nonentitlement spending, and the average interest rate on the federal debt are identical to those in the low-cost projection. Again, entitlements grow as in chart 6-6. The greater growth in total outlays (and deficits) in the high-cost projection is thus driven entirely by the greater growth in entitlements and by the (resulting) greater growth in interest costs.

Chart 6-8. The bottom line for future generations: a massive injustice that threatens to end the American Dream.

Calculations assume that tax and benefit schedules affecting all Americans born before 1993 will remain unchanged. A generation's lifetime net tax rate is the present value of its lifetime net taxes (taxes paid less benefits received) divided by the present value of its lifetime labor income. All present values are expressed as of the year of each generation's birth.

Source: FY 1995 Budget of the United States Government: Analytical Perspectives (OMB; 1994), Table 3.3.