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United States Government Accountability Office:
GAO: 

The Nation's Long-Term Fiscal Outlook:
April 2008 Update:

GAO-08-783R: 

GAOs Long-Term Fiscal Simulations: 

Since 1992, GAO has published long-term fiscal simulations of what 
might happen to federal deficits and debt levels under varying policy 
assumptions. We developed our long-term model in response to a 
bipartisan request from Members of Congress who were concerned about 
the long-term effects of fiscal policy. 

Our simulations were updated with the Trustees 2008 intermediate 
projections and continue to indicate that the long-term federal fiscal 
outlook remains unsustainable. This update combined with our analysis 
of the fiscal outlook of state and local governments demonstrates that 
the fiscal challenges facing all levels of government are linked and 
should be considered in a strategic and integrated manner. 

We update our simulations three times a year as new estimates become 
available from: 

* the Congressional Budget Offices (CBO) Budget and Economic Outlook 
(January); 

* Social Security and Medicare Trustees Reports (spring), and; 

* CBOs Budget and Economic Outlook: An Update (late summer). 

This product responds to congressional interest in receiving updated 
simulation results. Additional information about the GAO model, its 
assumptions, data, and charts can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. For more information, 
contact Susan J. Irving at (202) 512-9142 or irvings@gao.gov. 

Health Care Cost Growth and Demographic Trends Drive the Long-Term 
Fiscal Challenge:

Our updated simulations continue to illustrate that the long-term 
fiscal outlook is unsustainable. (See fig. 1) Despite some improvement 
in the long-term outlook for federal health and retirement spending, 
the federal government still faces large and growing structural 
deficits driven primarily by rising health care costs and known 
demographic trends. In fact, the oldest members of the baby boom 
generation are now eligible for Social Security retirement benefits and 
will be eligible for Medicare benefits in less than 3 years. According 
to the Social Security Administration nearly 80 million Americans will 
become eligible for Social Security retirement benefits over the next 
two decades--an average of more than 10,000 per day. Although Social 
Security is important because of its size, the real driver of the long-
term fiscal outlook is health care spending. Medicare and Medicaid are 
both large and projected to continue growing rapidly in the future.

Figure 1: Unified Surpluses and Deficits as a Share of GDP under 
Alternative Fiscal Policy Simulations:

[See PDF for image] 

This figure is a graph illustrating the unified surpluses and deficits 
as a share of GDP under Alternative Fiscal Policy Simulations. The 
vertical axis of the graph represents percent of GDP from -20 to 5. The 
horizontal axis of the graph represents years from 2000 to 2050. The 
following data is depicted: 

Year: 2000; 
Baseline extended: 2.433%; 
Alternative Simulation: 2.433%. 

Year: 2001; 
Baseline extended: 1.274%; 
Alternative Simulation: 1.274%. 

Year: 2002; 
Baseline extended: -1.52%; 
Alternative Simulation: -1.52%.

Year: 2003; 
Baseline extended: -3.495%; 
Alternative Simulation: -3.495%. 

Year: 2004; 
Baseline extended: -3.588%; 
Alternative Simulation: -3.588%. 

Year: 2005; 
Baseline extended: -2.599%; 
Alternative Simulation: -2.599%. 

Year: 2006; 
Baseline extended: -1.906%;  
Alternative Simulation: -1.906%. 

Year: 2007; 
Baseline extended: -1.192%; 
Alternative Simulation: -1.192%. 

Year: 2008; 
Baseline extended:  -1.542%; 
Alternative Simulation: -1.79%.

Year: 2009; 
Baseline extended:  -1.337%; 
Alternative Simulation: -2.127%. 

Year: 2010; 
Baseline extended:  -1.545%; 
Alternative Simulation: -2.783%. 

Year: 2011; 
Baseline extended: -0.711%; 
Alternative Simulation: -3.142%.

Year: 2012; 
Baseline extended: 0.504%; 
Alternative Simulation: -3.025%. 

Year: 2013; 
Baseline extended: 0.338%; 
Alternative Simulation: -3.626%. 

Year: 2014; 
Baseline extended: 0.509%; 
Alternative Simulation: -3.691%. 

Year: 2015; 
Baseline extended: 0.594%; 
Alternative Simulation: -4.051%. 

Year: 2016; 
Baseline extended: 0.463; 
Alternative Simulation: -4.447.

Year: 2017; 
Baseline extended: 0.705; 
Alternative Simulation: -4.481. 

Year: 2018; 
Baseline extended: 0.174; 
Alternative Simulation: -4.623. 

Year: 2019; 
Baseline extended: 0.774; 
Alternative Simulation: -5.048. 

Year: 2020; 
Baseline extended: 0.556; 
Alternative Simulation: -5.151. 

Year: 2021; 
Baseline extended: 0.224; 
Alternative Simulation: -5.603. 

Year: 2022; 
Baseline extended: -0.028; 
Alternative Simulation: -5.986. 

Year: 2023; 
Baseline extended: -0.393; 
Alternative Simulation: -6.494. 

Year: 2024; 
Baseline extended: -0.677%; 
Alternative Simulation: -6.953%. 

Year: 2025; 
Baseline extended: -1.074%; 
Alternative Simulation: -7.507%. 

Year: 2026; 
Baseline extended: -1.343%; 
Alternative Simulation: -7.961%. 

Year: 2027; 
Baseline extended: -1.72%; 
Alternative Simulation: -8.527%. 

Year: 2028; 
Baseline extended: -2.01%; 
Alternative Simulation: -9.01%. 

Year: 2029; 
Baseline extended: -2.402%; 
Alternative Simulation: -9.6%. 

Year: 2030; 
Baseline extended: -2.69%; 
Alternative Simulation: -10.093%. 

Year: 2031; 
Baseline extended: -3.078%; 
Alternative Simulation: -10.693%. 

Year: 2032; 
Baseline extended: -3.463%; 
Alternative Simulation: -11.294%. 

Year: 2033; 
Baseline extended: -3.75%; 
Alternative Simulation: -11.801%. 

Year: 2034; 
Baseline extended: -4.134%; 
Alternative Simulation: -12.409%. 

Year: 2035; 
Baseline extended: -7.163%; 
Alternative Simulation: -12.863%. 

Year: 2036; 
Baseline extended: -4.806%; 
Alternative Simulation: -13.471%. 

Year: 2037; 
Baseline extended: -5.187%.
Alternative Simulation: -14.083%. 

Year: 2038; 
Baseline extended: -5.462%; 
Alternative Simulation: -14.589%. 

Year: 2039; 
Baseline extended: -9.17%; 
Alternative Simulation: -15.19%. 

Year: 2040; 
Baseline extended: -6.099%; 
Alternative Simulation: -15.696%. 

Year: 2041; 
Baseline extended: -6.465; 
Alternative Simulation: -16.298. 

Year: 2042; 
Baseline extended: -6.735; 
Alternative Simulation: -16.807. 

Year: 2043; 
Baseline extended: -7.105; 
Alternative Simulation: -17.414. 

Year: 2044; 
Baseline extended: -7.483; 
Alternative Simulation: -18.03. 

Year: 2045; 
Baseline extended: -7.769; 
Alternative Simulation: -18.555. 

Year: 2046; 
Baseline extended: -8.159; 
Alternative Simulation: -19.188. 

Year: 2047; 
Baseline extended: -8.457; 
Alternative Simulation: -19.727.

Year: 2048; 
Baseline extended: -8.86; 
Alternative Simulation: -20.378. 

Year: 2049; 
Baseline extended: -9.172%; 
Alternative Simulation: -20.938%. 

Year: 2050; 
Baseline extended: -9.591%; 
Alternative Simulation: -21.605%. 

Source: GAOs August 2008 analysis. 

[End of figure]

Figure 1 shows two alternative fiscal paths. The first is "Baseline 
Extended," which follows the CBO's January baseline estimates for the 
first 10 years and then simply holds revenue and spending other than 
large entitlement programs constant as a share of gross domestic 
product (GDP). The second is the "Alternative simulation" based on 
historical trends and recent policy preferences. Under these 
alternative assumptions, discretionary spending grows with the economy 
rather than inflation during the first 10 years, Medicare physician 
payments are not reduced as in current law,[Footnote 1] and revenues 
are brought down to their historical level.

Simulations are not forecasts or predictions. They are designed to ask 
the question "what if?" Our "what ifs" include what if discretionary 
spending is lower than the 20-year historical average and revenue 
higher than the historical average (as in Baseline Extended) or nearly 
at the historical averages (as in the Alternative). Although the timing 
of deficits and the resulting debt buildup varies depending on the 
assumptions used, both simulations show that the federal government is 
on an unsustainable fiscal path.

By definition, what is unsustainable will not be sustained. The 
question is how and when the nation's current imprudent and 
unsustainable path will end. At some point, action will be taken to 
change the nation's fiscal course. The longer action to deal with the 
nation's long-term fiscal outlook is delayed, the greater the risk that 
the eventual changes will be disruptive and destabilizing. Acting 
sooner rather than later will provide more time to phase in gradual 
changes, while also providing more time for those likely to be most 
affected to make compensatory changes.

What Drives Our Nation's Bleak Long-Term Fiscal Outlook?

The long-term fiscal outlook results from a large and persistent gap 
between expected revenues and expected spending. The spending that 
drives the outlook is primarily spending on the large federal 
entitlement programs (i.e., Medicare, Medicaid, and Social Security), 
especially health care programs. The retirement of the baby boom 
generation is one key element of this. Already the first members of the 
baby boom generation have begun receiving Social Security retirement 
benefits and in 2011 will become eligible for Medicare benefits. In the 
next two decades America's population will age dramatically, and 
relatively fewer workers will be asked to support ever-larger costs for 
retirees.

Although Social Security is a major part of the fiscal challenge, it is 
far from the biggest challenge. Spending on the major federal health 
programs (i.e., Medicare and Medicaid) represents a much larger, faster 
growing, and more immediate problem. In fact, the federal government's 
future obligations for Medicare Part D alone exceed the unfunded 
obligations for Social Security. Over the past several decades, health 
care spending per capita has grown on average about 2.5 percent faster 
than average annual GDP per capita, absorbing increasing shares of the 
nation's resources, and this rapid growth is projected to continue. For 
this reason and others, rising health care costs pose a fiscal 
challenge not just to the federal budget but to American business and 
our economy and society as a whole.

Figures 2 and 3 look behind the deficit path to the composition of 
federal spending under the two scenarios. Both figures show that the 
estimated growth in the major entitlement programs leads to an 
unsustainable fiscal future--whether revenues as a share of GDP are 
above historical levels, as in Baseline Extended, or at about 
historical levels, as in the Alternative simulation. In these figures 
the category "all other spending" includes much of what many think of 
as "government"--discretionary spending on such activities as national 
defense, homeland security, veterans health benefits, national parks, 
highways and mass transit, and foreign aid, plus mandatory spending on 
the smaller entitlement programs such as Supplemental Security Income, 
Temporary Assistance for Needy Families, and farm price 
supports.[Footnote 2] The growth in Social Security, Medicare, 
Medicaid, and interest on debt held by the public dwarfs the growth in 
all other types of spending.

Under Baseline Extended (see fig. 2) we follow CBO's January baseline 
for the first 10 years: tax provisions that are scheduled to expire are 
assumed to do so (including the temporary increase in the alternative 
minimum tax (AMT) exemption amount) and discretionary spending is 
assumed to grow with inflation. At the end of the 10-year period, 
revenues in Baseline Extended are at 20.3 percent of GDP--a couple of 
points above the 20-year historical average. Discretionary spending is 
at 6.1 percent of GDP--somewhat below the 20-year historical average of 
7.6 percent of GDP. For the remainder of the simulation period, levels 
of revenues and discretionary spending as shares of GDP are held 
constant, and for Social Security and Medicare, we use the Trustees' 
2008 intermediate estimates. The Medicare estimates assume the 
continuation of current law, under which fees for physicians treating 
Medicare patients would be cut in future years.[Footnote 3]

Figure 2: Potential Fiscal Outcomes under Baseline Extended: Revenues 
and Composition of Spending as Shares of GDP:

[See PDF for image]

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2008, 2018, 2030, and 2040. 

The following data is depicted:

Fiscal year 2008: 
Net interest: 1.6%; 
Social Security: 4.3%; 
Medicare & Medicaid: 4.2%; 
All other spending: 10.1%; 
Revenue: 18.7%.

Fiscal year 2018: 
Net interest: 1.2%; 
Social Security: 4.9%; 
Medicare & Medicaid: 5.3%; 
All other spending: 8.0%; 
Revenue: 20.3%.

Fiscal year 2030: 
Net interest: 1.1%; 
Social Security: 6.1%; 
Medicare & Medicaid: 7.9%; 
All other spending: 8.0%; 
Revenue: 20.3%.

Fiscal year 2040: 
Net interest: 2.5%; 
Social Security: 6.3%; 
Medicare & Medicaid: 9.6%; 
All other spending: 8.0%; 
Revenue: 20.3%.

Source: GAOs April 2008 analysis. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2018 because of (1) real bracket creep, (2) more 
taxpayers becoming subject to the AMT, and (3) increased revenue from 
tax-deferred retirement accounts. After 2018, revenue as a share of GDP 
is held constant--implicitly assuming that action is taken to offset 
increased revenue from real bracket creep, the AMT, and tax-deferred 
retirement accounts. 

[End of figure] 

Under the Alternative scenario (see fig. 3) in the first 10 years we 
assume that all expiring tax provisions are extended and that the 2007 
exemption amount for the AMT is continued but not indexed for 
inflation. After the first 10 years we bring revenues to their 
historical share of the economy--18.3 percent--plus expected revenues 
from deferred taxes (i.e., taxes on withdrawals from retirement 
accounts). Discretionary spending grows with the economy throughout the 
simulation period--it remains at 7.7 percent of GDP. This means that 
over the long term discretionary spending is nearly at its 20-year 
historical average. In addition, the Alternative scenario uses Medicare 
estimates developed by the Centers for Medicare & Medicaid Services 
(CMS) that assume payment rates to physicians will not be reduced as 
specified under current law and assumed by the Trustees in their 
intermediate projections.[Footnote 4] As in Baseline Extended, the 
Alternative scenario uses the Trustees' intermediate estimates for 
Social Security after the first 10 years.

Figure 3: Potential Fiscal Outcomes under Alternative Simulation: 
Revenues and Composition of Spending as Shares of GDP:

[See PDF for image] 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2008, 2018, 2030, and 2040. 

The following data is depicted: 

Fiscal year 2008: 
Net interest: 1.6%; 
Social Security: 4.3%; 
Medicare & Medicaid: 4.3%; 
All other spending: 10.1%; 
Revenue: 18.6%.

Fiscal year 2018: 
Net interest: 2.5%; 
Social Security: 4.9%; 
Medicare & Medicaid: 5.7%; 
All other spending: 9.7%; 
Revenue: 17.9%.

Fiscal year 2030: 
Net interest: 4.9%; 
Social Security: 6.1%; 
Medicare & Medicaid: 8.1%; 
All other spending: 9.7%; 
Revenue: 18.6%. 

Fiscal year 2040: 
Net interest: 8.5%; 
Social Security: 6.3%; 
Medicare & Medicaid: 9.9%; 
All other spending: 9.7%; 
Revenue: 18.6%. 

Source: GAOs April 2008 analysis. 

Notes: Discretionary spending grows with GDP after 2008. The AMT 
exemption amount is retained at the 2007 level through 2018 and 
expiring tax provisions are extended. After 2018, revenue as a share of 
GDP is brought to its historical level of 18.3 percent plus expected 
revenues from deferred taxes (i.e., taxes on withdrawals from 
retirement accounts). Medicare spending is based on the Trustees' 2008 
projections adjusted for CMS's alternative assumption that physician 
payments are not reduced as specified under current law. 

[End of figure]

Both these figures show that waiting makes the size of the problem 
worse. For example, even under our more optimistic Baseline Extended 
scenario, waiting until 2040 to balance the budget would require 
drastic change. To balance the budget in that year, federal revenue as 
a share of GDP would have to increase by one-third or noninterest 
federal spending would have to be cut by one-quarter. If changes in 
federal individual income taxes were the sole means used to balance the 
budget, these would have to increase by almost 60 percent in that year 
assuming no changes to the composition of revenues after 2018. Sudden, 
drastic changes of either kind--and revenues at such a level--have not 
been seen in this country since the end of World War II.

The Fiscal Gap--Another Way to Measure the Challenge:

There are many ways to measure the long-term fiscal challenge. One 
quantitative measure is called the fiscal gap. The fiscal gap is the 
amount of spending reduction or tax increases that would be needed to 
keep debt as a share of GDP at or below today's ratio. In contrast to 
balancing the budget in a particular year, such as in 2040 as described 
above, the fiscal gap is an estimate of the action needed to achieve 
fiscal balance over a certain time period, such as 75 years. Another 
way to say this is that the fiscal gap is the amount of change needed 
to prevent the kind of debt explosion implicit in figure 1. The fiscal 
gap can be expressed as a share of the economy or in present value 
dollars. (See table 1.)

Table 1: Federal Fiscal Gap, 2008-2082:

Change required to close gap compared to today's levels:

Baseline Extended: 
Fiscal gap: Trillions of 2008 dollars: $25.7; 
Fiscal gap: Percent of GDP: 3.2; 
Change required to close gap compared to today's levels: Percent 
increase in revenue: 16.9%; 
Change required to close gap compared to today's levels: Percent 
increase in individual income taxes: 37.2%; 
Change required to close gap compared to today's levels: Percent 
decrease in noninterest spending: 17.0%. 

Alternative: 
Fiscal gap: Trillions of 2008 dollars: $54.0; 
Fiscal gap: Percent of GDP: 6.7%; 
Change required to close gap compared to today's levels: Percent 
increase in revenue: 35.8%; 
Change required to close gap compared to today's levels: Percent 
increase in individual income taxes: 78.3%; 
Change required to close gap compared to today's levels: Percent 
decrease in noninterest spending: 35.5. 

Source: GAO analysis. 

[End of table] 

To put this in perspective, the fiscal gap under Baseline Extended 
could be closed by an increase in today's revenue of about 17 percent 
or an equivalent reduction in today's programmatic spending and 
maintained over the entire period. Under our Alternative simulation, 
the required action would be even more dramatic--about 36 percent of 
today's taxes or spending. Policymakers could phase in the policy 
changes so that the tax increases or spending cuts would grow over time 
and allow people to adjust. However, delaying action would require 
larger changes. Under our Alternative simulation, waiting even 10 years 
would require a revenue increase of about 45 percent or noninterest 
spending cuts of about 40 percent.

This gap is too large to simply grow out of the problem. To be sure, 
additional economic growth would help the nation's financial condition 
and the ability to address the fiscal gap, but it will not eliminate 
the need for action.

State and Local Governments Face Similar Long-Term Fiscal Challenges:

In 2007 we expanded our work on the long-term fiscal outlook to develop 
a model of the state and local government sector.[Footnote 5] Figure 4 
presents the results of our simulations that combine the federal 
government's fiscal outlook with that of the state and local government 
sector. The simulations imply that the aggregate fiscal outcome of the 
state and local government sector will add to the nation's fiscal 
difficulties and suggest that these fiscal challenges cannot be 
remedied simply by shifting the burden from one sector to another.

Figure 4: Federal and Combined Federal, State, and Local Surpluses and 
Deficits as a Share of GDP:

[See PDF for image] 

This figure is a graph illustrating the federal and combined federal, 
state, and local surpluses and deficits as a share of GDP. The vertical 
axis of the graph represents percent of GDP from -20 to 5. The 
horizontal axis of the graph represents years from 2000 to 2050. The 
following data is depicted: 

Fiscal year: 2000; 
Federal surplus/deficit[A]: 2.4%; 
Combined surplus/deficit: 2.1%

Fiscal year: 2001; 
Federal surplus/deficit[A]: 1.3%; 
Combined surplus/deficit: 0.5%. 

Fiscal year: 2002; 
Federal surplus/deficit[A]: -1.5%; 
Combined surplus/deficit: -2.7%. 

Fiscal year: 2003; 
Federal surplus/deficit[A]: -3.5%; 
Combined surplus/deficit: -4.5%. 

Fiscal year: 2004; 
Federal surplus/deficit[A]: -3.6%; 
Combined surplus/deficit: -4.4. 

Fiscal year: 2005; 
Federal surplus/deficit[A]: -2.6%; 
Combined surplus/deficit: -3.2. 

Fiscal year: 2006; 
Federal surplus/deficit[A]: -1.9%; 
Combined surplus/deficit: -2.5%. 

Fiscal year: 2007; 
Federal surplus/deficit[A]: -1.2%; 
Combined surplus/deficit: -1.8%. 

Fiscal year: 2008; 
Federal surplus/deficit[A]: -1.8%; 
Combined surplus/deficit: -2.6%. 

Fiscal year: 2009; 
Federal surplus/deficit[A]: -2.1%; 
Combined surplus/deficit: -2.8. 

Fiscal year: 2010; 
Federal surplus/deficit[A]: -2.8%; 
Combined surplus/deficit: -3.4%. 

Fiscal year: 2011; 
Federal surplus/deficit[A]: -3.1%; 
Combined surplus/deficit: -3.7%. 

Fiscal year: 2012; 
Federal surplus/deficit[A]: -3%; 
Combined surplus/deficit: -3.6%. 

Fiscal year: 2013; 
Federal surplus/deficit[A]: -3.6%; 
Combined surplus/deficit: -4.2%. 

Fiscal year: 2014; 
Federal surplus/deficit[A]: -3.7%; 
Combined surplus/deficit: -4.3%. 

Fiscal year: 2015; 
Federal surplus/deficit[A]: -4.1%; 
Combined surplus/deficit: -4.7%. 

Fiscal year: 2016; 
Federal surplus/deficit[A]: -4.5%; 
Combined surplus/deficit: -5.2%. 

Fiscal year: 2017; 
Federal surplus/deficit[A]: -4.6%; 
Combined surplus/deficit: -5.4. 

Fiscal year: 2018; 
Federal surplus/deficit[A]: -5%; 
Combined surplus/deficit: -5.7%. 

Fiscal year: 2019; 
Federal surplus/deficit[A]: -5%; 
Combined surplus/deficit: -5.8%. 

Fiscal year: 2020; 
Federal surplus/deficit[A]: -5.2%; 
Combined surplus/deficit: -5.9. 

Fiscal year: 2021; 
Federal surplus/deficit[A]: -5.6%; 
Combined surplus/deficit: -6.4%. 

Fiscal year: 2022; 
Federal surplus/deficit[A]: -6%; 
Combined surplus/deficit: -6.9%. 

Fiscal year: 2023; 
Federal surplus/deficit[A]: -6.5%; 
Combined surplus/deficit: -7.5. 

Fiscal year: 2024; 
Federal surplus/deficit[A]: -7%; 
Combined surplus/deficit: -8%. 

Fiscal year: 2025; 
Federal surplus/deficit[A]: -7.5%; 
Combined surplus/deficit: -8.6%. 

Fiscal year: 2026; 
Federal surplus/deficit[A]: -8%; 
Combined surplus/deficit: -9.2%. 

Fiscal year: 2027; 
Federal surplus/deficit[A]: -8.5%; 
Combined surplus/deficit: -9.8%. 

Fiscal year: 2028; 
Federal surplus/deficit[A]: -9%; 
Combined surplus/deficit: -10.4%. 

Fiscal year: 2029; 
Federal surplus/deficit[A]: -9.6%; 
Combined surplus/deficit: -11%; 

Fiscal year: 2030; 
Federal surplus/deficit[A]: -10.1%; 
Combined surplus/deficit: -11.6%. 

Fiscal year: 2031; 
Federal surplus/deficit[A]: -10.7%; 
Combined surplus/deficit: -12.4%. 

Fiscal year: 2032; 
Federal surplus/deficit[A]: -11.3%; 
Combined surplus/deficit: -13%. 

Fiscal year: 2033; 
Federal surplus/deficit[A]: -11.8%; 
Combined surplus/deficit: -13.6%. 

Fiscal year: 2034; 
Federal surplus/deficit[A]: -12.4%; 
Combined surplus/deficit: -14.3%. 

Fiscal year: 2035; 
Federal surplus/deficit[A]: -12.9%; 
Combined surplus/deficit: -14.9%. 

Fiscal year: 2036; 
Federal surplus/deficit[A]: -13.5%; 
Combined surplus/deficit: -15.6%. 

Fiscal year: 2037; 
Federal surplus/deficit[A]: -14.1%; 
Combined surplus/deficit: -16.3%. 

Fiscal year: 2038; 
Federal surplus/deficit[A]: -14.6%; 
Combined surplus/deficit: -16.9%. 

Fiscal year: 2039; 
Federal surplus/deficit[A]: -15.2%; 
Combined surplus/deficit: -17.6%. 

Fiscal year: 2040; 
Federal surplus/deficit[A]: -15.7%; 
Combined surplus/deficit: -18.2%. 

Fiscal year: 2041; 
Federal surplus/deficit[A]: -16.3%; 
Combined surplus/deficit: -18.9%. 

Fiscal year: 2042; 
Federal surplus/deficit[A]: -16.8%; 
Combined surplus/deficit: -19.5%. 

Fiscal year: 2043; 
Federal surplus/deficit[A]: -17.4%; 
Combined surplus/deficit: -20.2%. 

Fiscal year: 2044; 
Federal surplus/deficit[A]: -18%; 
Combined surplus/deficit: -20.9%. 

Fiscal year: 2045; 
Federal surplus/deficit[A]: -18.6%; 
Combined surplus/deficit: -21.5%. 

Fiscal year: 2046; 
Federal surplus/deficit[A]: -19.2%; 
Combined surplus/deficit: -22.2%. 

Fiscal year: 2047; 
Federal surplus/deficit[A]: -19.7%; 
Combined surplus/deficit: -22.9%. 

Fiscal year: 2048; 
Federal surplus/deficit[A]: -20.4%; 
Combined surplus/deficit: -23.6%. 

Fiscal year: 2049; 
Federal surplus/deficit[A]: -20.9%; 
Combined surplus/deficit: -24.3%. 

Fiscal year: 2050; 
Federal surplus/deficit[A]: -21.6%; 
Combined surplus/deficit: -25%. 

[A] Under GAO's Alternative simulation. 

Source: GAO's April 2008 analysis. 

[End of figure] 

Rapidly rising health care costs are not simply a federal budget 
problem; they are our nation's number one fiscal challenge. Growth in 
health-related spending--Medicaid and health insurance for state and 
local employees and retirees--is the primary driver of the fiscal 
challenges facing the state and local governments. As we have noted 
elsewhere, the expected continued rise in health care costs poses a 
fiscal challenge not just to government budgets, but to American 
business and society as a whole.[Footnote 6] In short, the fundamental 
fiscal problems facing all levels of government are similar and are 
linked. As such, solutions to address these challenges should be 
considered in tandem.

Key Assumptions in GAO's Federal Simulations:

We run two simulations that illustrate a range of possible outcomes 
based on different policy decisions for the long-term budget outlook. 
The first, Baseline Extended, is more optimistic and follows CBO's 
January baseline estimates over the next 10 years; beyond the 10-year 
projection period, revenue and spending on programs other than large 
entitlements are held constant as a share of GDP.[Footnote 7] CBO's 
baseline is not a forecast of future outcomes; rather, it is based on 
the assumption that current laws and policies remain the same.[Footnote 
8] As such, we change some assumptions in our Alternative simulation to 
reflect historical trends and recent policy preferences. Table 2 lists 
the key assumptions incorporated in the Baseline Extended and 
Alternative simulations.

Table 2: Assumptions for Baseline Extended and Alternative Simulations:

Model inputs: Revenue; 
Baseline Extended: CBO's January 2008 baseline through 2018; thereafter 
remains constant at 20.3 percent of GDP (CBO's projection in 2018); 
Alternative: All expiring tax provisions are extended through 2018; 
thereafter equal to the 40 year historical average of 18.3 percent of 
GDP plus revenue from tax-deferred retirement plans.

Model inputs: Social Security Spending; (OASDI); 
Baseline Extended: CBO's January 2008 baseline through 2018; thereafter 
based on 2008 Social Security Trustees' intermediate projections; 
Alternative: Same as Baseline Extended.

Model inputs: Medicare spending; 
Baseline Extended: CBO's January 2008 baseline through 2018; 
thereafter 2008 Medicare Trustees' intermediate projections that assume 
per enrollee Medicare spending grows on average 1 percent faster than 
GDP per capita over the long term; 
Alternative: 2008 Trustees intermediate projections adjusted for the 
CMS's alternative assumption of 0 percent physician payment updates in 
the first 10 years.

Model inputs: Medicaid spending; 
Baseline Extended: CBO's January 2008 baseline through 2018; 
thereafter CBO's December 2007 long-term projections adjusted to 
reflect excess cost growth consistent with the 2008 Medicare Trustees'; 
intermediate projections; 
Alternative: Same as Baseline Extended. 

Model inputs: Other mandatory spending; 
Baseline Extended: CBO's January 2008 baseline through 2018; 
thereafter remains constant as a share of GDP at 1.9 percent of GDP 
(i.e., increases at the rate of; economic growth); 
Alternative: Baseline Extended through 2011, then adjusted for 
extension of certain tax credits through 2018; thereafter; remains 
constant at 2.0 percent of GDP.

Model inputs: Discretionary spending; 
Baseline Extended: CBO's January 2008 baseline through 2018; 
thereafter remains constant at 6.1 percent of GDP; 
Alternative: Increases at the rate of economic growth starting after 
2008 (i.e., remains constant at 7.7 percent of GDP).

Source: GAO. 

[End of table] 

One assumption we change in our Alternative simulation is discretionary 
spending. CBO's projections of discretionary spending for fiscal years 
2009 through 2018 are based on fiscal year 2008 funding enacted to 
date, including any supplemental appropriations. CBO assumes 
discretionary spending grows over the next 10 years at the rate of 
inflation. As such, the use of supplemental appropriations and their 
timing can cause sharp swings in discretionary outlay projections.

For example, $88 billion had been appropriated for operations in Iraq 
and the Global War on Terror (GWOT) thus far for fiscal year 2008. In 
contrast, $170 billion in supplemental appropriations was provided for 
Iraq and GWOT in fiscal year 2007. As a result, both CBO's 10-year 
discretionary spending estimates and our long-term assumption for 
discretionary spending in our Baseline Extended simulation are lower 
than if the full year's funding had been appropriated. However, this 
change may only be temporary; the administration requested additional 
supplemental funding of more than $100 billion for this fiscal year, 
which will lead to higher discretionary spending projections in CBO's 
August 2008 baseline (and subsequently our simulations). Despite these 
swings in discretionary spending, our simulations continually show that 
the nation is on an unsustainable fiscal path.

A more detailed description of the federal model and key assumptions 
can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/simulations.html]. Details on 
the state and local fiscal model can be found in appendix I of State 
and Local Governments: Growing Fiscal Challenges Will Emerge during the 
Next 10 Years.[Footnote 9]

Changes to the Federal Model in This Update:

GAO's simulations were updated using estimates from the Social Security 
and Medicare Trustees. The Trustees' March 2008 reports can be accessed 
at [hyperlink, http://www.ssa.gov/OACT/TR/TR08/index.html].

The long-term outlook for both Social Security and Medicare improved 
somewhat because of changes in assumptions about immigration. The 
Trustees changed their methodology and updated data related to the 
"other than legal permanent resident population" (i.e., undocumented 
and temporary legal immigrants) and increased their projection of net 
legal immigration by 25 percent from 600,000 to 750,000. Both changes 
increase the working age population relative to Social Security and 
Medicare beneficiaries. This increases labor force growth and GDP more 
than benefit payments. However, increasing immigration alone will not 
close the long-term fiscal imbalance. In addition, the projected cost 
of Medicare Part D--Prescription Drugs--declined somewhat because costs 
in 2006 were lower than expected and projected trends in drug costs 
nationally over the next 10 years were lowered.

While the reports contain some good news, the financial condition of 
the programs remains problematic and the projected long-run program 
costs are not sustainable under current financing arrangements. An 
actuarial deficit of 1.70 percent of taxable payroll remains for the 
Social Security program and the Medicare Hospital Insurance program's 
actuarial deficit remains virtually the same as last years at 3.54 
percent of taxable payroll. Total federal spending for Medicare as a 
share of GDP is projected to more than triple from 3.2 percent today to 
10.8 percent at the end of the 75-year projection period.

We conducted this work from March 2008 through May 2008 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives.

This product is based on our work on the long-term fiscal challenge, 
including reports and testimonies. Related products can be found at 
[hyperlink, 
http://www.gao.gov/special.pubs/longterm/longtermproducts.html].

[End of section] 

Footnotes: 

[1] Under the sustainable growth rate system in current law, physician 
payments are scheduled to be reduced by 10 percent in 2008 and 2009 and 
by 5 percent for nearly every year from 2010 through 2016. 

[2] Discretionary spending refers to spending based on authority 
provided in annual appropriations acts. Mandatory spending refers to 
spending that Congress has authorized in legislation other than 
appropriations acts that entitles beneficiaries to receive payment or 
that otherwise obligates the government to make payment. 

[3] The Trustees noted in their 2008 report that Medicare expenditures 
"are substantially understated because projected current-law physician 
payment updates are unrealistically reduced under the sustainable 
growth rate system by about 10 percent in the second half of 2008, 
about 10 percent in 2009, and about 5 percent in nearly every 
subsequent year through 2016. In practice, Congress is virtually 
certain to prevent some or all of the scheduled reductions through new 
legislation, as it has for 2003 through the first half of 2008." In 
addition, the Centers for Medicare & Medicaid Services assumes excess 
medical cost growth on average of 1 percent over the long term, which 
is lower than the historical average of 2.5 percent. Together these 
differences result in lower Medicare spending than CBO's long-term 
projections. See Congressional Budget Office, The Long-Term Outlook for 
Health Care Spending (Washington, D.C.: Nov. 2007).

[4] This reflects the fact that Congress has generally acted to prevent 
payment rates from being reduced. CMS developed two illustrative 
Medicare estimates that vary from the intermediate estimates. One set 
of estimates assumes a 0 percent update to physician fees; the other 
assumes updates for medical inflation. GAO's Alternative simulation 
uses the 0 percent update estimates. For more information on these 
estimates, see CMS's March 2008 memorandum, "Projected Medicare Part B 
Expenditures under Two Illustrative Scenarios with Alternative 
Physician Payment Updates," available at [hyperlink, 
http://www.cms.hhs.gov/ReportsTrustFunds/05_alternativePartB.asp].

[5] GAO, State and Local Governments: Growing Fiscal Challenges Will 
Emerge during the Next 10 Years, GAO-08-317 (Washington, D.C.: Jan. 
2008) and State and Local Governments: Persistent Fiscal Challenges 
Will Likely Emerge within the Next Decade, GAO-07-1080SP (Washington, 
D.C.: July 18, 2007).

[6] For example, see GAO, Highlights of a Forum: Health Care 20 Years 
From Now--Taking Steps Today to Meet Tomorrow's Challenges, GAO-07-
1155SP (Washington, D.C.: Sept. 2007).

[7] The CBO report can be accessed at [hyperlink, http://www.cbo.gov]. 

[8] The Balanced Budget and Emergency Deficit Control Act of 1985, 
which established rules that govern the calculation of CBO's baseline, 
expired on September 30, 2006. CBO continues to prepare baselines 
according to the methodology prescribed in that law. 

[9] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-317]. 

[End of section] 

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