GAO Long Term Care Study
Absent Reform, Spending for Medicaid, Medicare, and Social Security Will Put Unsustainable Pressure on the Federal Budget
To move into the future with no changes in federal health and retirement programs is to envision a very different role for the federal government. Our long-term budget simulations serve to illustrate the increasing constraints on federal budgetary flexibility that will be driven by entitlement spending growth. Assume, for example, that all expiring tax provisions are extended, revenue remains constant thereafter as a share of GDP, and discretionary spending keeps pace with the economy. Under these conditions, by 2040 federal revenues may be adequate to pay little more than interest on the federal debt.
Notes: Although the revenue projections assume that expiring tax provisions are extended, federal revenue as a share of GDP increases through 2015 due to (1) taxpayers paying higher marginal tax rates as the economy grows (referred to as “real bracket creep”), (2) more taxpayers becoming subject to the alternative minimum tax, and (3) increased revenue from tax-deferred retirement accounts. After 2015, the analysis assumes that revenue as a share of GDP is held constant. For additional information on our budget simulations, see GAO, Our Nation’s Fiscal Outlook: The Federal Government’s Long-Term Budget Imbalance, at http://www.gao.gov/special.pubs/longterm/longterm.html.
Beginning about 2010, the share of the population that is age 65 or older will begin to climb, with profound implications for our society, our economy, and the financial condition of these entitlement programs. In particular, both Social Security and the Hospital Insurance portion of Medicare are largely financed as pay-as-you-go systems in which current workers’ payroll taxes pay current retirees’ benefits. Therefore, these programs are directly affected by the relative size of populations of covered workers and beneficiaries. Historically, this relationship has been favorable. In the near future, however, the overall worker-to-retiree ratio will change in ways that threaten the financial solvency and sustainability of these entitlement programs. In 2000, there were 4.8 working-age persons (20 to 64 years) per elderly person, but by 2030, this ratio is projected to decline to 2.9.9 This decline in the overall worker-to-retiree ratio will be due to both the surge in retirees brought about by the aging baby boom generation as well as falling fertility rates, which translate into relatively fewer workers in the near future.
Social Security’s projected cost increases are due predominantly to the burgeoning retiree population. Even with the increase in the Social Security eligibility age to 67, these entitlement costs are anticipated to increase dramatically in the coming decades as a larger share of the population becomes eligible for Social Security, and if, as expected, average longevity increases.