The CBO Finds Medicare Looking a Little Healthier, Social Security Looking a Little Worse, and the Overall Budget a Mess

The Congressional Budget Office released their annual report on the long-term budget outlook today, and you’ll be forgiven for thinking you’ve heard this story before: The long-term debt picture is an unsustainable mess because of our health and retirement systems and accumulating interest payments.

There are a couple optimistic signs: The CBO foresees deficits continuing to be small in the next couple of years, and revised their Medicare cost growth estimates downward ever so slightly. Loren Adler of the Committee for a Responsible Federal Budget notes that estimate for the long-term growth rate in Medicare’s costs has dropped by 0.07 percentage compared with last year’s projection, thanks to slower health-care cost growth. That development gives the trust fund an additional four years of life in this CBO projection. But besides that, there’s not much good news here.

Under current law according to the CBO, debt will rise from 74 percent of GDP in 2014 to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. These almost apocalyptic projections don’t even fully account for the scale of our predicament, as current law is held down by budgeting distortions, some benign and some gimmicky, like tax breaks that are projected to expire even though they’ll more than likely be extended and unrealistic cuts in Medicare reimbursement rates. As soon as 2039, the CBO anticipates a deficit of 6.4 percent of GDP.

A couple other points: Discretionary spending may be a favorite target of conservatives when they talk wasteful spending, and has been at the center of recent budget debates, but it’s already cratering. In fact, this report shows that non-health and old age spending will be by 2040 at its lowest point as a share of the economy since the late 1930s. The culprits of our future debt problems are Medicare, Medicaid, the ACA, and Social Security, and their massive increases will be caused by “the aging of the population, growth in per capita spending on health care, and an expansion of federal health care programs.”

Social Security is sometimes regarded as the easiest nut to crack of all of those issues, but its outlook is actually worsening substantially: As David Wessel of Brookings points out, this year’s report has revised the program’s long-term actuarial deficit upwards from 3.4 percent of the program’s entire tax base (payrolls) to 4 percent. One of the problems is lower projections for economic growth and payroll taxes in particular — probably due to a weaker labor market than had been projected — but it’s also because of lower projected interest rates, which means that the Social Security trust fund’s “investments” aren’t going to yield as much as expected. This is, in other words, a deterioration of the program’s financial state, but not necessarily a problem for the overall federal budget. Those concerned about the program’s sustainability, though, can’t exactly ignore the issue.

And, as seen in the following chart, is that the longer we wait to reform these programs, the more painful it’s going to be.