Doug Elmendorf, CBO Director, at the Macroeconomic Advisers’ 24th Annual Washington Policy Seminar: “I was very pleased to speak last week at Macroeconomic Advisers’ Washington Policy Seminar and at Cornell University. (See my slides for the first talk and my slides for the second talk.) In both presentations I described CBO’s updated outlook for the federal budget under current law (based on An Update to the Budget and Economic Outlook: 2014 to 2024) and the sharp shift in the composition of federal spending that is occurring:
- The retirement of the baby boomers will increase the number of Americans age 65 or over from about 46 million today to about 61 million ten years from now. As a result, spending for Social Security is projected to rise relative to the size of the economy, from 4.9 percent of GDP in 2014 to 5.6 percent in 2024, under current law.
- The expansion of federal subsidies for health insurance, rising health care costs per person, and the retirement of the baby boomers will push up federal spending for the major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies being provided through insurance exchanges. Such spending (net of premiums paid by Medicare beneficiaries and some other offsetting receipts) is 4.9 percent of GDP in 2014 and under current law will be 5.9 percent in 2024, CBO projects.
- The strengthening economy will generate a marked increase in interest rates during the next few years, CBO expects. That rise in rates, along with growing federal debt, causes net interest payments by the federal government to jump from 1.3 percent of GDP in 2014 to 3.0 percent in 2024 in CBO’s baseline projections.
- However, the improvement in the economy and limits set by law on the annual funding that can be provided for defense and for a range of nondefense activities (including highways, elementary and secondary education, housing assistance, veterans’ health care, and more) will cause spending for other programs to increase much more slowly than the economy. All federal spending apart from that for Social Security, the major health care programs, and net interest is 9.3 percent of GDP in 2014 and 7.3 percent in 2024 in CBO’s baseline projections. That latter amount is the smallest figure for that category since at least 1940, the earliest year for which comparable data have been reported.”