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The Budget, Medicare, Medicaid, and
Social Security:
Time to Take Action
Alison Acosta Fraser
The Heritage Foundation
Federal spending will more than double, driven
by Medicare, Medicaid and Social Security
Total Federal Spending and Tax Revenue as a Percentage of GDP
50%
50%
45%
45%
40%
40%
35%
35%
30%
Net Interest
25%
Other
20%
30%
25%
Defense
20%
Social Security
15%
10%
Medicaid
10%
5%
Medicare
5%
45-Year Historical
Level of Tax Revenue
15%
0%
1975
0%
1985
1995
2005
2015
2025
Source: Calculations based on Congressional Budget Office (CBO) Data.
2035
2045
Medicare, Medicaid and Social Security will grow
dramatically as nation ages, but healthcare is the big driver.
Spending on Three Entitlements as a Percentage of GDP
22%
Total = 19.9%
20%
Total = 18.2%
18%
Total = 15.9%
16%
Social Security
6.9%
14%
Total =12.5%
12%
10%
8%
6%
4%
2%
0%
Total = 9.7%
Total = 8.6%
Social Security
4.5%
Social Security
4.4%
Medicaid
Medicaid
1.7%
1.5%
Medicare
Medicare
3.5%
2.7%
2005
2010
Social Security
5.5%
Social Security
6.6%
Medicaid
2.8%
Medicaid
2.3%
Medicare
4.7%
2020
Medicare
6.5%
2030
Medicaid
3.4%
Medicare
8.0%
2040
Social Security
6.9%
Medicaid
4.0%
Medicare
9.0%
2050
Source: Spending and Revenues from CBO Long-Term Budget Outlook, December 2005 (Scenario 2 Data),
2006 Social Security and Medicare Trustees Report.
Absent action under current law deficits not a problem
soon – but then skyrocket to unprecedented levels
Federal Deficit as a Percentage of GDP
35%
30%
25%
20%
Federal Deficit
15%
10%
45-Year
Historical Average
5%
0%
1962
1972
1982
1992
2002
2012
2022
2032
2042
-5%
Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees
Data (discretionary spending held constant).
Entitlements will crowd out everything else and
collide with historical long-term level of taxes
Three Major Entitlements and Tax Revenues as a Percentage of GDP
25%
25%
Historical Level of
Tax Revenues
20%
20%
Social Security
15%
15%
Medicaid
10%
5%
10%
5%
Medicare
0%
1965
0%
1975
1985
1995
2005
2015
2025
2035
2045
Source: Spending and Revenues from CBO Long-Term Budget Outlook, December 2005 (Scenario 2 Data),
2006 Social Security and Medicare Trustees Report.
Even eliminating defense won’t solve the problem
without tackling entitlements.
Total Federal Spending and Tax Revenue as a Percentage of GDP
50%
50%
45%
45%
40%
40%
35%
35%
30%
30%
Net Interest
25%
25%
Other
20%
45-Year Historical
Level of Tax Revenue
15%
10%
Defense
5%
Social Security
15%
Medicaid
10%
Medicare
0%
1960
20%
5%
0%
1970
1980
1990
2000
2010
2020
2030
2040
2050
Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees
Data (discretionary spending held constant).
Bush 2008 Medicare proposal has significant
savings—trimming 2014 long-term costs
Total Federal Spending and Tax Revenue as a Percentage of GDP
50%
50%
45%
45%
40%
40%
35%
35%
30%
Net Interest
25%
Other
20%
Defense
Social Security
45-Year Historical
Level of Tax Revenue
15%
30%
25%
20%
15%
10%
Medicaid
10%
5%
Medicare
5%
0%
1975
0%
1985
1995
2005
2015
2025
Source: Calculations based on Congressional Budget Office (CBO) Data.
2035
2045
2008 House Budget: No entitlement savings,
but huge tax increases
TotalFederal
Federal
Spending
Tax Revenue
as a of
Percentage
of GDP
Total
Spending
and Taxand
Revenues
as a Percentage
GDP
50%
50%
50%
50%
45%
45%
40%
40%
35%
35%
30%
30%
45%
45%
40%
40%
35%
35%
30%
30%
TaxNet
Revenue
Interest 25%
25%
25%
Interest
20%
20%
Other
15%
15%
25%
45-Year Historical
Level of Tax Revenue
Defense
Social Security
Defense
Medicaid
Medicare
10%
10%
5%
5%
Other
20%
20%
15%
Social Security
15%
Medicaid
10%
10%
5%
5%
Medicare
0%
0%
0%
0%
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees
Data (discretionary spending held constant).
But under current law taxes will rise sharply thanks
to pre-Bush laws, despite Bush tax changes
Projected Federal Tax Revenue for Three Tax Policy Scenarios as
a Percentage of GDP (1965-2050)
24%
Current Law: 2001 and 2003
Tax Cuts Expire
22%
Highest Level in U.S. History = 20.5%
20%
Average Historical Tax Burden = 18.2%
18%
16%
1965
1975
1985
1995
2005
2015
2025
2035
2045
Source: CBO Long-Term Budget Outlook, December 2005 and Budget and Economic Outlook, January 2007.
Taxes will continue to rise even if ’01 and ’03 tax
changes are extended
Projected Federal Tax Revenue for Three Tax Policy Scenarios as
a Percentage of GDP (1965-2050)
24%
22%
2001 and 2003
Tax Cuts Extended
Highest Level in U.S. History = 20.5%
20%
18%
Average Historical Tax Burden = 18.2%
16%
1965
1975
1985
1995
2005
2015
2025
2035
2045
Source: CBO Long-Term Budget Outlook, December 2005 and Budget and Economic Outlook, January 2007.
Raising revenue to balance the budget would lead to
European level taxes
Total Federal Spending and Tax Revenue as a Percentage of GDP
50%
50%
45%
45%
40%
40%
35%
35%
30%
30%
Other
25%
20%
Taxes
Net Interest
Defense
25%
20%
15%
Social Security
15%
10%
Medicaid
10%
5%
0%
Medicare
5%
0%
Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees
Data (discretionary spending held constant).
But European-level taxes = European-level growth
Real GDP Growth Over Ten-years (1995-2005)
3.5%
3.3%
3.0%
2.7%
2.5%
2.2%
2.1%
2.0%
1.5%
1.3%
1.4%
1.0%
U.S.
Sweden
Source: OECD in Figures, 2006-2007 Edition.
France
Italy
Germany
EU-15
Slow European-style growth = Lower incomes in US
GDP per Capita for 2005 (Using Current PPPs)
$45,000
$41,900
$40,000
Alabama has the lowest GSP in
the U.S., but it’s standard of
living is still higher than these
nations.
$35,000
$33,264
$32,700
$30,200
$30,000
$29,800
$29,900
Germany
EU-15
$28,500
$25,000
$20,000
$15,000
U.S.
Sweden
France
Italy
Source: Country GDP data from OECD in Figures, 2006-2007 Edition; State GSP data from BEA.
Alabama
Slow European-style growth = Unemployment
Unemployment Rate for 2005
12.0%
11.2%
11.0%
10.0%
10.0%
9.0%
8.3%
7.8%
8.0%
7.8%
7.0%
6.0%
5.1%
5.0%
4.0%
3.0%
2.0%
U.S.
Sweden
Source: OECD in Figures, 2006-2007 Edition.
France
Italy
Germany
EU-15
Conclusion: Take Action on
Retirement Entitlements
• Amend the Medicare drug bill
• Raise the retirement age
• Target Medicare and Social Security to those
with most need
• Transform entitlements into 30-year
budgeted programs, balanced against other
needs
• Measure impact of policy changes on longterm obligations