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America’s National Debt and Long-Term Outlook An Overview of the Challenge and the Implications for Young People March 2009 $184,000 Burden That’s every baby’s burden, including current debt and unfunded promises for Medicare and Social Security. Unless we do something soon, it will only get worse. Overview of the Federal Budget Challenge 2 Debt vs. Deficits Deficits: The annual imbalances between revenues and spending Debt: Accumulation of deficits over time • Public debt: U.S. government securities held by Americans and foreigners • Debt held by the public net of financial assets: debt to finance a loan to a private entity in which government acquires a financial asset • Intragovernmental debt: Held by government trust funds (e.g., Social Security) and other accounts Overview of the Federal Budget Challenge 3 Unfunded Liabilities Benefits (e.g., Social Security or Medicare) promised to be paid in the future, with no dedicated source of revenue to fund them Total U.S. government debt, liabilities, and unfunded promises: $56 trillion (Dec. 2008) Equal to Americans’ total household net worth Overview of the Federal Budget Challenge 4 Projecting the Future? Projections of future deficits and debt are based on assumptions, such as: – Economic growth or recessions – Changes in spending and tax policies – Population trends – Workforce participation rates History shows that assumptions and projections are often wrong Overview of the Federal Budget Challenge 5 U.S. Budget Deficits/ Surpluses, 1929-2010 Deficits rose from 0 in 1969 to $340 billion in 1992. U.S. budget has $86 billion surplus in 2000. Deficits rose to $568 billion in 2004 and $1.8 trillion in 2009. Years, 1961-2008 Deficits as percent of GDP; source: The Washington Post Overview of the Federal Budget Challenge 6 National Debt, 1940-2009 (in non-inflation adjusted dollars) National Debt (March 2009): $11 trillion Overview of the Federal Budget Challenge 7 Unless Changes are Made, the National Debt Will Grow Even Faster $400 $350 Trillions of Dollars $300 $250 $200 $150 $100 $50 $0 Source: Heritage Foundation; CBO data 1962 ‘72 ‘82 ‘92 2002 ‘12 ‘22 ‘32 ‘42 ‘50 8 Overview of the Federal Budget Challenge Public Debt Projected to Soar Overview of the Federal Budget Challenge 9 Current Policy Trends Lead to Large Sustained Deficits Overview of the Federal Budget Challenge 10 Current fiscal policy is on an unsustainable path Interest All Other Average tax revenue Medicaid Medicare Social Security Source: Government Accountability Office, March 2008 Overview of the Federal Budget Challenge 11 Current Deficits are Huge, But LONGTERM Deficits are the Real Problem • SHORT TERM--Current economic crisis is causing rapidly rising deficits and debt • LONG TERM--The real problem is the enormous mismatch between rapidly rising projected federal spending and insufficient revenues during the next 20-50 years Overview of the Federal Budget Challenge 12 LONG-TERM Debt is an Intergenerational Issue • The burden of growing long-term debt will fall on America’s younger generations as • drastically higher taxes • cut benefits • lower living standards • fewer choices for public spending • ALL OF THE ABOVE • This is about federal finances, U.S. economic well-being, and intergenerational equity Overview of the Federal Budget Challenge 13 The Short Term: The 2008-2009 Economic Crisis and Soaring Federal Deficits Deficits up from $455 billion in 2008 to $1.8 trillion in 2009 due to federal spending associated with the current economic crisis Overview of the Federal Budget Challenge 14 The Short Term: The Economic Crisis and Trillions in Federal Spending Overview of the Federal Budget Challenge 15 Where the Money Goes: President Obama’s FY 2010 Budget Overview of the Federal Budget Challenge 16 Entitlement Spending is Consuming an Ever Larger Share of the Federal Budget 1966 1986 28% 29% 34% 43% 15% 20% 32% 21% 14% 7% 2009 2006 20% 9% 10% 19% 1% Defense Social Security Net interest All other spending Medicare & Medicaid Sources: Office of Management and Budget and the Department of the Treasury. Note: Numbers may not add to 100 percent due to rounding. Overview of the Federal Budget Challenge 17 Entitlements: Social Security and Medicare Part A Cumulative Cash Deficits Surpluses and Deficits in Constant 2008 Dollars, 2008 through 2085 In Billions of Constant 2008 Dollars $500 $496 Billion: Cumulative Social Security Cash Surplus $0 -$27 Trillion: Cumulative Social Security Cash Deficits -$500 -$55 Trillion: Cumulative Medicare Part A Cash Deficits -$1,000 -$1,500 -$2,000 -82.6 Trillion: Cumulative Social Security and Medicare Part A Cash Deficits -$2,500 -$3,000 2008 2010 2020 2030 2040 2050 2060 2070 2080 Calendar Year Source: Social Security Trustees’ Report—March 2008 (Intermediate Projections) Overview of the Federal Budget Challenge 18 Rising Health Care Costs = The No. 1 Factor in Rising Federal Spending and Debt Overview of the Federal Budget Challenge 19 Medicare Obligations Will Explode as Health Care Costs Rise Calendar Year Overview of the Federal Budget Challenge 20 State Governments Face Growing Deficits Costs, Squeezing Other Spending Sources: National Association of State Budget Officers, State Expenditure Report 2006; and Center on Budget and Policy Priorities, Feb. 2009 • AT LEAST 46 STATES PROJECT DEFICITS IN 2009 • OVER 40 STATES PLAN 2009 CUTS • $350 BILLION IN PROJECTED STATE DEFICITS, Mar. 2009-Sept. 2011 Overview of the Federal Budget Challenge 21 Declining Personal Savings and Federal Debt: The Relationship We No Longer Owe National Debt to Ourselves We Have Less to Supplement Social Security and Medicare • • • • • Overview of the Federal Budget Challenge Americans saving at lowest rate since Great Depression. 40% of Americans say they save nothing for retirement. One in four Americans say have no savings. Debt payments consume 15% of the average U.S. family’s income, and 40% of low-income families’ 1 in 7 families is dealing with a debt collector 22 Percent of Debt Held by the Public Owned by Foreigners Source: United States Treasury Department Overview of the Federal Budget Challenge 23 Current Fiscal Policy Is Unsustainable • The “Status Quo” is Not an Option – Large and growing structural deficits largely due to rising health care costs and demographic trends – Balancing the budget in 2040 could require cutting spending by 60 percent or raising federal taxes to double today's level. • Faster Economic Growth Cannot Solve the Problem – Closing the current long-term fiscal gap would require 10% average economic growth every year for the next 75 years – From 2001 to 2007, U.S. economy grew by average of 2.2% • Tough choices will be required Overview of the Federal Budget Challenge 24 Americans Worried About Increasing Deficits Source: Peter G. Peterson Foundation, Feb. 2009 Overview of the Federal Budget Challenge 25 The Sooner We Get Started, the Better • Compound interest is currently working against us • Less change would be needed, and there would be more time to make adjustments • Demographic changes will make reform even more difficult over time Overview of the Federal Budget Challenge 26 This is an Issue for all Americans Confronting and finding solutions is in the interests of all Americans • Restoring fiscal responsibility will strengthen America’s future • Reducing debt and rethinking national priorities can enhance bonds between young and old • This is not about one generation “winning” or “losing,” but about all Americans working for a common future • Overview of the Federal Budget Challenge 27 Framing the Discussion – Long-term vs. short-term debt – Which Federal programs and policies should be changed and how? • Entitlement programs • Other spending • Tax policy – How can budget processes and controls be reformed? – What should be the roles of government, business and individuals in U.S. economy? • Investing in the future (education, infrastructure, science, environment, etc.) • Providing income security and good living standards • Providing health care for all Americans Overview of the Federal Budget Challenge 28 Overview of the Federal Budget Challenge 29