An important purpose of this Guide and the Report is to help citizens understand current fiscal policy, and the importance and magnitude of policy reforms necessary to make it sustainable. A sustainable policy is one where the ratio of debt held by the public to Gross Domestic Product (GDP) (the debt-to-GDP ratio) is ultimately stable or declining. To determine if current fiscal policy is sustainable, the projections discussed in this Guide assume current policy will be sustained indefinitely and draw out the implications for the growth of the debt-to- GDP ratio.1 The projections are therefore neither forecasts nor predictions. As policy changes are enacted, then actual financial outcomes will, of course, be different than those projected.
Chart 5 shows historical and current policy projections for receipts, non-interest spending by major category, and total spending expressed as a percent of GDP. The difference between the receipts and non-interest spending shares of GDP - the primary deficit-to-GDP ratio, grew rapidly in 2009 due to the financial crisis and the recession, and the Federal Government's response. The ratio stayed large from 2010 to 2012 despite shrinking in each successive year, but is projected to fall rapidly between 2013 and 2018 as the economy recovers and spending reductions called for in the BCA take effect, reaching primary balance in 2018, and remaining relatively flat and near zero until 2021. Between 2022 and 2039, however, increased spending for Social Security and health programs3 due to continued aging of the population and anticipated rising health costs is expected to cause the primary deficit-to-GDP ratio to steadily deteriorate, reaching 2.3 percent of GDP in 2039. After 2039, the ratio is projected to slowly decline to 1.7 percent of GDP in 2087 as the impact of the baby boom generation retiring dissipates. In these projections, the Affordable Care Act (ACA)4 provision of health insurance subsidies and expanded Medicaid coverage boost federal spending, and other provisions significantly reduce per-beneficiary Medicare and Medicaid cost growth. Overall, the ACA is projected to substantially reduce federal expenditures over the next 75 years. However, as noted in the Report, there is uncertainty about the effectiveness of the ACA's provisions designed to reduce health care cost growth. Even if those provisions work as intended and as assumed in these projections, Chart 5 still shows a persistent gap between projected receipts and total non-interest spending.
The primary deficit projections in Chart 5, along with those for interest rates and GDP, determine the debt-to-GDP ratio projections shown in Chart 6. That ratio was 73 percent at the end of FY 2012 and under current policy is projected to grow to 78 percent in 2022, 145 percent in 2042, and 395 percent in 2087. While these projections are subject to considerable uncertainty, the debt-to-GDP ratio would continue to rise unsustainably under current policy.
It is estimated that preventing the debt-to-GDP ratio from rising over the next 75 years would require some combination of expenditure reductions and revenue increases that amount, on average, to 2.7 percent of GDP over each of the next 75 years. The timing of changes to non-interest spending and receipts that close this "75-year fiscal gap" has important implications for the well-being of future generations. For example, relative to a policy that begins immediately, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap increases by nearly 20 percent if action is delayed by 10-years and for more than 50 percent if action is delayed 20 years.
The Government took potentially significant steps towards fiscal sustainability by enacting: (1) the ACA in 2010 and (2) the BCA in 2011. The ACA holds the prospect of lowering the long-term per beneficiary spending growth for Medicare and Medicaid, and the BCA significantly curtails discretionary spending. Together, these two laws substantially reduce the estimated long-term fiscal gap. But even with these new laws, the Government's debt-to-GDP ratio is projected to increase continuously over the next 75 years and beyond if current policy is kept in place, which implies that current policy is not sustainable. Subject to the important caveat that changes in policy not be so abrupt that they slow the economy's recovery, the sooner policies are put in place to avert these trends, the smaller the revenue increases and/or spending decreases will need to be to return the Government to a sustainable fiscal path.5
1Current policy in the projections is based on current law, but includes extension of certain policies that expire under current law but are routinely extended or otherwise expected to continue, such as extension of relief from the Alternative Minimum Tax (AMT). In addition, for this year's Report, the projections include the extension of all 2001/2003 tax cuts indefinitely, whereas in the FY 2011 Report, it was assumed that the high income tax cuts were allowed to expire.(Back to Content)
2ATRA did not extend the 2001/2003 tax cuts for high income individuals and families that were assumed to occur in the projections. Updating the projections in this Report to account for ATRA would therefore modestly reduce projected long term fiscal imbalances. (Back to Content)
3The 2012 Medicare Trustees Report projects that, assuming full implementation of the Affordable Care Act (ACA) provisions, the Hospital Insurance (HI) Trust Fund will remain solvent under current law until 2024, at which point the share of estimated HI costs that could be paid from trust fund income is 87 percent, declining to 69 percent by 2086. As for Social Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds are projected to be exhausted in 2033, at which time the projected share of scheduled benefits payable from trust fund income is 75 percent, declining to 73 percent in 2086. The projections assume full Social Security and Medicare benefits are paid after the corresponding trust funds are exhausted. See http://www.ssa.gov/oact/trsum/index.html. (Back to Content)
4The ACA refers to P.L. 111-148, as amended by P.L. 111-152. The ACA expands health insurance coverage, provides health insurance subsidies for low-income individuals and families, includes many measures designed to reduce health care cost growth, and significantly reduces Medicare payment rates. (Back to Content)
5Further information about these fiscal projections and the underlying assumptions can be found in the Required Supplementary Information section of the Financial Report at www.fms.treas.gov/fr.(Back to Content)