Long-Term Fiscal Outlook: Long-Term Federal Fiscal Challenge	 
Driven Primarily by Health Care (17-JUN-08, GAO-08-912T).	 
                                                                 
GAO was asked to provide its views on the long-term fiscal	 
outlook. This statement addresses four key points: (1) the	 
federal government's long-term fiscal outlook is a matter of	 
utmost concern; (2) this challenge is driven primarily by health 
care cost growth; (3) reform of health care is essential but	 
other areas also need attention which requires a multipronged	 
solution; and (4) the federal government faces increasing	 
pressures yet a shrinking window of opportunity for phasing in	 
needed adjustments. GAO's simulations of the federal government's
long-term fiscal outlook were updated with the Trustees 2008	 
intermediate projections and continue to indicate that the	 
long-term outlook is unsustainable. This update combined with	 
GAO's analysis of the fiscal outlook of state and local 	 
governments demonstrates that the fiscal challenges facing all	 
levels of government are linked and should be considered in a	 
strategic and integrated manner. Since 1992, GAO has published	 
long-term fiscal simulations of what might happen to federal	 
deficits and debt levels under varying policy assumptions. GAO	 
developed its long-term model in response to a bipartisan request
from Members of Congress who were concerned about the longterm	 
effects of fiscal policy. Information about GAO's model and	 
assumptions can be found at					 
http://www.gao.gov/special.pubs/longterm/.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-912T					        
    ACCNO:   A82396						        
  TITLE:     Long-Term Fiscal Outlook: Long-Term Federal Fiscal       
Challenge Driven Primarily by Health Care			 
     DATE:   06/17/2008 
  SUBJECT:   Federal social security programs			 
	     Medicare						 
	     Social security benefits				 
	     Fiscal policies					 
	     Budget deficit					 
	     Cost analysis					 
	     Health care cost control				 
	     Federal debt					 
	     Health care costs					 
	     Health care reform 				 
	     Future budget projections				 
	     Economic growth					 
	     Intergovernmental fiscal relations 		 
	     Federal/state relations				 
	     Comparative analysis				 
	     Data integrity					 

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GAO-08-912T

   

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Testimony: 

Before the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT: 
Tuesday, June 17, 2008: 

Long-Term Fiscal Outlook: 

Long-Term Federal Fiscal Challenge Driven Primarily by Health Care: 

Statement of Gene L. Dodaro: 
Acting Comptroller General of the United States: 

GAO-08-912T: 

GAO Highlights: 

Highlights of GAO-08-912T, a testimony to the Committee on Finance, 
U.S. Senate. 

Why GAO Did This Study: 

GAO was asked to provide its views on the long-term fiscal outlook. 
This statement addresses four key points: (1) the federal governmentï¿½s 
long-term fiscal outlook is a matter of utmost concern; (2) this 
challenge is driven primarily by health care cost growth; (3) reform of 
health care is essential but other areas also need attention which 
requires a multipronged solution; and (4) the federal government faces 
increasing pressures yet a shrinking window of opportunity for phasing 
in needed adjustments. 

GAOï¿½s simulations of the federal governmentï¿½s long-term fiscal outlook 
were updated with the Trustees 2008 intermediate projections and 
continue to indicate that the long-term outlook is unsustainable. This 
update combined with GAOï¿½s analysis of the fiscal outlook of state and 
local governments demonstrates that the fiscal challenges facing all 
levels of government are linked and should be considered in a strategic 
and integrated manner. 

Since 1992, GAO has published long-term fiscal simulations of what 
might happen to federal deficits and debt levels under varying policy 
assumptions. GAO developed its long-term model in response to a 
bipartisan request from Members of Congress who were concerned about 
the long-term effects of fiscal policy. Information about GAOï¿½s model 
and assumptions can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

What GAO Found: 

Long-term fiscal simulations by GAO, the Congressional Budget Office 
(CBO), and others all show that despite a decline in the federal 
governmentï¿½s unified budget deficit between fiscal years 2003 and 2007, 
it still faces large and growing structural deficits driven primarily 
by rising health care costs and known demographic trends. Simply put, 
the federal government is on an unsustainable long-term fiscal path. 
Although Social Security is important because of its size, over the 
long term health care spending is the principal driverï¿½Medicare and 
Medicaid are both large and projected to continue growing rapidly in 
the future. 

Figure: Social Security, Medicare, and Medicaid Spending as a 
Percentage of GDP: 

[See PDF for image] 

This is a line graph with three stacked lines (Social Security, 
Medicaid, and Medicare). The vertical axis represents Percent of GDP 
and the horizontal axis represents fiscal years 2008 through 2080. The 
following data is depicted: 

2008: 
Social Security: 4.32; 
Medicaid: 1.5; 
Medicare: 3.236; 
Total: 9.056. 

2009: 
Social Security: 4.35; 
Medicaid: 1.525; 
Medicare: 3.277; 
Total: 9.152. 

2010: 
Social Security: 4.39; 
Medicaid: 1.6; 
Medicare: 3.323; 
Total: 9.313. 

2011: 
Social Security: 4.44; 
Medicaid: 1.6; 
Medicare: 3.367; 
Total: 9.407. 

2012: 
Social Security: 4.52; 
Medicaid: 1.625; 
Medicare: 3.446; 
Total: 9.591. 

2013: 
Social Security: 4.61; 
Medicaid: 1.7; 
Medicare: 3.568; 
Total: 9.878. 

2014: 
Social Security: 4.7; 
Medicaid: 1.725; 
Medicare: 3.618; 
Total: 10.043. 

2015: 
Social Security: 4.8; 
Medicaid: 1.825; 
Medicare: 3.713; 
Total: 10.338. 

2016: 
Social Security: 4.9; 
Medicaid: 1.9; 
Medicare: 3.819; 
Total: 10.619. 

2017: 
Social Security: 5.01; 
Medicaid: 1.925; 
Medicare: 3.967; 
Total: 10.902. 

2018: 
Social Security: 5.1; 
Medicaid: 1.962; 
Medicare: 4.122; 
Total: 11.184. 

2019: 
Social Security: 5.2; 
Medicaid: 2.002; 
Medicare: 4.281; 
Total: 11.483. 

2020: 
Social Security: 5.3; 
Medicaid: 2.044; 
Medicare: 4.445; 
Total: 11.789. 

2021: 
Social Security: 5.39; 
Medicaid: 2.087; 
Medicare: 4.616; 
Total: 12.093. 

2022: 
Social Security: 5.48; 
Medicaid: 2.133; 
Medicare: 4.797; 
Total: 12.41. 

2023: 
Social Security: 5.56; 
Medicaid: 2.181; 
Medicare: 4.982; 
Total: 12.723. 

2024: 
Social Security: 5.64; 
Medicaid: 2.231; 
Medicare: 5.166; 
Total: 12.976. 

2025: 
Social Security: 5.71; 
Medicaid: 2.284; 
Medicare: 5.351; 
Total: 13.345. 

2026: 
Social Security: 5.78; 
Medicaid: 2.338; 
Medicare: 5.537; 
Total: 13,655. 

2027: 
Social Security: 5.84; 
Medicaid: 2.395; 
Medicare: 5.725; 
Total: 13.96. 

2028: 
Social Security: 5.9; 
Medicaid: 2.45; 
Medicare: 5.910; 
Total: 14.26. 

2029: 
Social Security: 5.95; 
Medicaid: 2.506; 
Medicare: 6.088; 
Total: 14.544. 

2030: 
Social Security: 6; 
Medicaid: 2.564; 
Medicare: 6.258 
Total: 14.882. 

2031: 
Social Security: 6.03; 
Medicaid: 2.622; 
Medicare: 6.417; 
Total: 15.069. 

2032: 
Social Security: 6.06; 
Medicaid: 2.681; 
Medicare: 6.568; 
Total: 15.309. 

2033: 
Social Security: 6.08; 
Medicaid: 2.741; 
Medicare: 6.716; 
Total: 15.537. 

2034: 
Social Security: 6.09; 
Medicaid: 2.802; 
Medicare: 6.681; 
Total: 15.573. 

2035: 
Social Security: 6.09; 
Medicaid: 2.86; 
Medicare: 7.003; 
Total: 15.953. 

2036: 
Social Security: 6.09; 
Medicaid: 2.92; 
Medicare: 7.142; 
Total: 16.152. 

2037: 
Social Security: 6.08; 
Medicaid: 2.978; 
Medicare: 7.268; 
Total: 16.326. 

2038: 
Social Security: 6.06
Medicaid: 3.038; 
Medicare: 7.380; 
Total: 16.478. 

2039: 
Social Security: 6.04
Medicaid: 3.095; 
Medicare: 7.484; 
Total: 16.619. 

2040: 
Social Security: 6.02; 
Medicaid: 3.151; 
Medicare: 7.583; 
Total: 16.754. 

2041: 
Social Security: 5.99; 
Medicaid: 3.205; 
Medicare: 7.676; 
Total: 16.871. 

2042: 
Social Security: 5.97; 
Medicaid: 3.26; 
Medicare: 7.764; 
Total: 16.994. 

2043: 
Social Security: 5.94; 
Medicaid: 3.311; 
Medicare: 7.848; 
Total: 17.099. 

2044: 
Social Security: 5.92; 
Medicaid: 3.365; 
Medicare: 7.930; 
Total: 17.215. 

2045: 
Social Security: 5.89; 
Medicaid: 3.417; 
Medicare: 8.013; 
Total: 17.32. 

2046: 
Social Security: 5.87; 
Medicaid: 3.471; 
Medicare: 8.095; 
Total: 17.436. 

2047: 
Social Security: 5.85; 
Medicaid: 3.521; 
Medicare: 8.174; 
Total: 17.545. 

2048: 
Social Security: 5.84; 
Medicaid: 3.572; 
Medicare: 8.249; 
Total: 17.661. 

2049: 
Social Security: 5.82; 
Medicaid: 3.62; 
Medicare: 8.323; 
Total: 17.763. 

2050: 
Social Security: 5.81; 
Medicaid: 3.666; 
Medicare: 8.397; 
Total: 17.873. 

2051: 
Social Security: 5.8; 
Medicaid: 3.71; 
Medicare: 8.472; 
Total: 17.982. 

2052: 
Social Security: 5.79; 
Medicaid: 3.753; 
Medicare: 8.546; 
Total: 18.089. 

2053: 
Social Security: 5.78; 
Medicaid: 3.798; 
Medicare: 8.619; 
Total: 18.197. 

2054: 
Social Security: 5.78; 
Medicaid: 3.841; 
Medicare: 8.697; 
Total: 18.318. 

2055: 
Social Security: 5.77; 
Medicaid: 3.885; 
Medicare: 8.781; 
Total: 18.436. 

2056: 
Social Security: 5.77; 
Medicaid: 3.93; 
Medicare: 8.869; 
Total: 18.569. 

2057: 
Social Security: 5.77; 
Medicaid: 3.974; 
Medicare: 8.956; 
Total: 18.7. 

2058: 
Social Security: 5.77; 
Medicaid: 4.02; 
Medicare: 9.042; 
Total: 18.832. 

2059: 
Social Security: 5.77; 
Medicaid: 4.061; 
Medicare: 9.126; 
Total: 18.957. 

2060: 
Social Security: 5.77; 
Medicaid: 4.106; 
Medicare: 9.209; 
Total: 19.085. 

2061: 
Social Security: 5.77; 
Medicaid: 4.151; 
Medicare: 9.292; 
Total: 19.213. 

2062: 
Social Security: 5.77; 
Medicaid: 4.193; 
Medicare: 9.374; 
Total: 19.337. 

2063: 
Social Security: 5.76; 
Medicaid: 4.237; 
Medicare: 9.456; 
Total: 19.453. 

2064: 
Social Security: 5.76; 
Medicaid: 4.282; 
Medicare: 9.539; 
Total: 19.581. 

2065: 
Social Security: 5.76; 
Medicaid: 4.329; 
Medicare: 9.625; 
Total: 19.714. 

2066: 
Social Security: 5.76; 
Medicaid: 4.376; 
Medicare: 9.709; 
Total: 19.845. 

2067: 
Social Security: 5.77; 
Medicaid: 4.442; 
Medicare: 9.789; 
Total: 20.001. 

2068: 
Social Security: 5.77; 
Medicaid: 4.469; 
Medicare: 9.867; 
Total: 20.106. 

2069: 
Social Security: 5.77; 
Medicaid: 4.516; 
Medicare: 9.946; 
Total: 20.232. 

2070: 
Social Security: 5.77; 
Medicaid: 4.562; 
Medicare: 10.025; 
Total: 20.582. 

2071: 
Social Security: 5.78; 
Medicaid: 4.605; 
Medicare: 10.100; 
Total: 20.485. 

2072: 
Social Security: 5.78; 
Medicaid: 4.651; 
Medicare: 10.170; 
Total: 20.601. 

2073: 
Social Security: 5.78; 
Medicaid: 4.693; 
Medicare: 10.240; 
Total: 20.713. 

2074: 
Social Security: 5.79; 
Medicaid: 4.738; 
Medicare: 10.309; 
Total: 20.837. 

2075: 
Social Security: 5.79; 
Medicaid: 4.784; 
Medicare: 10.377; 
Total: 20.951. 

2076: 
Social Security: 5.79; 
Medicaid: 4.827; 
Medicare: 10.442; 
Total: 21.059. 

2077: 
Social Security: 5.8; 
Medicaid: 4.87; 
Medicare: 10.505; 
Total: 21.205. 

2078: 
Social Security: 5.8; 
Medicaid: 4.915; 
Medicare: 10.567; 
Total: 21.282. 

2079: 
Social Security: 5.81; 
Medicaid: 4.955; 
Medicare: 10.627; 
Total: 21.392. 

2080: 
Social Security: 5.81; 
Medicaid: 4.995; 
Medicare: 10.686; 
Total: 21.491. 

Source: GAO analysis. 

[End of graph] 

Rapidly rising health care costs are not simply a federal budget 
problem. Growth in health-related spending is the primary driver of the 
fiscal challenges facing state and local governments as well. 
Unsustainable growth in health care spending also threatens to erode 
the ability of employers to provide coverage to their workers and 
undercuts their ability to compete in a global marketplace. Public and 
private health care spending continues to rise because of several key 
factors: (1) increased utilization of new and existing medical 
technology; (2) lack of reliable comparative information on medical 
outcomes, quality of care, and cost; and (3) increased prevalence of 
risk factors such as obesity that can lead to expensive chronic 
conditions. 

Addressing health care costs and demographicsï¿½and their interactionï¿½ 
will be a major societal challenge. The longer action on reforming 
heath care and Social Security is delayed, the more painful and 
difficult the choices will become. The federal government faces 
increasing pressures yet a shrinking window of opportunity for phasing 
in adjustments. In fact, the oldest members of the baby-boom generation 
are now eligible for Social Security retirement benefits and will be 
eligible for Medicare benefits in less than 3 years. Additionally, in 
addressing this fiscal challenge it will be important to review other 
programs and activities on both the spending and revenue sides of the 
budget. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-912T]. For more 
information, contact Susan J. Irving at (202) 512-9142 or 
[email protected] or Marjorie Kanof at (202) 512-7114 or [email protected]. 

[End of section] 

Chairman Baucus, Senator Grassley, and Members of the Committee: 

I appreciate this invitation to talk with you about the federal 
government's long-term fiscal outlook. Under any plausible scenario, 
the federal budget is on an unsustainable path. Long-term fiscal 
simulations by GAO, the Congressional Budget Office (CBO), and others 
all show that despite a decline in the federal government's unified 
budget deficit between fiscal years 2003 and 2007, it still faces large 
and growing structural deficits. This long-term path is driven 
primarily by rising health care costs and known demographic trends. In 
fact, the oldest members of the baby-boom generation are now eligible 
for Social Security retirement benefits and will be eligible for 
Medicare benefits in less than 3 years. According to the Social 
Security Administration, nearly 80 million Americans will become 
eligible for Social Security retirement benefits over the next two 
decades--an average of more than 10,000 per day. Although Social 
Security is important because of its size, the principal driver of the 
long-term fiscal outlook is health care spending. Medicare and Medicaid 
are both large and projected to continue growing rapidly in the future. 

Today, I will emphasize a few key points: 

* the federal government's long-term fiscal outlook is a matter of 
utmost concern, 

* this challenge is driven primarily by health care cost growth, 

* reform of health care is essential but other areas also need 
attention--this is a multipronged problem that requires a multipronged 
solution, and: 

* the federal government faces increasing pressures yet a shrinking 
window of opportunity for phasing in adjustments needed by individuals 
in the public and private sectors. 

My remarks are based on GAO's previous work on a variety of issues, 
including various reports and testimonies on our nation's long-term 
fiscal challenges, health care, and the need for budget process reform. 
These efforts were conducted in accordance with generally accepted 
government auditing standards. 

The Long-Term Fiscal Outlook Remains Unsustainable: 

The unified budget deficit declined between fiscal years 2003 and 2007, 
but this did not change the long-term path: it remains unsustainable. 
Moreover, while the recent past shows some progress in the annual 
unified deficit figures, any assessment of the federal government's 
long-term fiscal outlook also needs to recognize the fact that the 
Social Security cash surplus has been used to offset spending in the 
rest of government for many years. In fiscal year 2007, for example, 
the "on-budget" deficit--the deficit excluding the Social Security 
surplus[Footnote 1]--was $344 billion, more than double the size of the 
unified deficit of $163 billion. There is a limit to how long the 
Social Security surplus will offset other spending. The rest of the 
budget will feel the pressure when the Social Security cash surplus 
begins to decline starting in 2011--less than 3 years from now. In 2017 
the Social Security cash flow turns negative--at that point the choices 
will be increased borrowing from the public, reduced spending, or 
increased revenue. 

These dates call attention to the narrowing window. The real challenge 
then is not this year's deficit or even next year's; it is how to 
change the current fiscal path so that growing deficits and debt levels 
do not reach unsustainable levels. By definition something that is 
unsustainable will stop--the challenge is to take action before being 
forced to do so by some sort of crisis. Health care costs are growing 
much faster than the economy, and the nation's population is aging. 
These drivers will soon place unprecedented, growing, and long-lasting 
stress on the federal budget. Absent action, debt held by the public 
will grow to unsustainable levels. 

Figure 1 shows GAO's simulation of the deficit path based on recent 
trends and policy preferences. In this simulation, we start with CBO's 
baseline and then assume that (1) all expiring tax provisions are 
extended through 2018--and then revenues are brought to their 
historical level as a share of gross domestic product (GDP) plus 
expected revenue from deferred taxes--(2) discretionary spending grows 
with the economy, and (3) no changes are made to Social Security, 
Medicare, or Medicaid[Footnote 2]. 

Figure 1: Unified Federal Surpluses and Deficits under GAO's 
Alternative Simulation: 

[See PDF for image] 

This figure is a graph illustrating the unified surpluses and deficits 
as a share of GDP under Alternative Fiscal Policy Simulations. The 
vertical axis of the graph represents percent of GDP from -20 to 5. The 
horizontal axis of the graph represents years from 2000 to 2050. The 
following data is depicted: 

Year: 2000; 
Baseline extended: 2.433%; 
Alternative Simulation: 2.433%. 

Year: 2001; 
Baseline extended: 1.274%; 
Alternative Simulation: 1.274%. 

Year: 2002; 
Baseline extended: -1.52%; 
Alternative Simulation: -1.52%. 

Year: 2003; 
Baseline extended: -3.495%; 
Alternative Simulation: -3.495%. 

Year: 2004; 
Baseline extended: -3.588%; 
Alternative Simulation: -3.588%. 

Year: 2005; 
Baseline extended: -2.599%; 
Alternative Simulation: -2.599%. 

Year: 2006; 
Baseline extended: -1.906%; 
Alternative Simulation: -1.906%. 

Year: 2007; 
Baseline extended: -1.192%; 
Alternative Simulation: -1.192%. 

Year: 2008; 
Baseline extended: -1.542%; 
Alternative Simulation: -1.79%. 

Year: 2009; 
Baseline extended: -1.337%; 
Alternative Simulation: -2.127%. 

Year: 2010; 
Baseline extended: -1.545%; 
Alternative Simulation: -2.783%. 

Year: 2011; 
Baseline extended: -0.711%; 
Alternative Simulation: -3.142%. 

Year: 2012; 
Baseline extended: 0.504%; 
Alternative Simulation: -3.025%. 

Year: 2013; 
Baseline extended: 0.338%; 
Alternative Simulation: -3.626%. 

Year: 2014; 
Baseline extended: 0.509%; 
Alternative Simulation: -3.691%. 

Year: 2015; 
Baseline extended: 0.594%; 
Alternative Simulation: -4.051%. 

Year: 2016; 
Baseline extended: 0.463; 
Alternative Simulation: -4.447. 

Year: 2017; 
Baseline extended: 0.705; 
Alternative Simulation: -4.481. 

Year: 2018; 
Baseline extended: 0.174; 
Alternative Simulation: -4.623. 

Year: 2019; 
Baseline extended: 0.774; 
Alternative Simulation: -5.048. 

Year: 2020; 
Baseline extended: 0.556; 
Alternative Simulation: -5.151. 

Year: 2021; 
Baseline extended: 0.224; 
Alternative Simulation: -5.603. 

Year: 2022; 
Baseline extended: -0.028; 
Alternative Simulation: -5.986. 

Year: 2023; 
Baseline extended: -0.393; 
Alternative Simulation: -6.494. 

Year: 2024; 
Baseline extended: -0.677%; 
Alternative Simulation: -6.953%. 

Year: 2025; 
Baseline extended: -1.074%; 
Alternative Simulation: -7.507%. 

Year: 2026; 
Baseline extended: -1.343%; 
Alternative Simulation: -7.961%. 

Year: 2027; 
Baseline extended: -1.72%; 
Alternative Simulation: -8.527%. 

Year: 2028; 
Baseline extended: -2.01%; 
Alternative Simulation: -9.01%. 

Year: 2029; 
Baseline extended: -2.402%; 
Alternative Simulation: -9.6%. 

Year: 2030; 
Baseline extended: -2.69%; 
Alternative Simulation: -10.093%. 

Year: 2031; 
Baseline extended: -3.078%; 
Alternative Simulation: -10.693%. 

Year: 2032; 
Baseline extended: -3.463%; 
Alternative Simulation: -11.294%. 

Year: 2033; 
Baseline extended: -3.75%; 
Alternative Simulation: -11.801%. 

Year: 2034; 
Baseline extended: -4.134%; 
Alternative Simulation: -12.409%. 

Year: 2035; 
Baseline extended: -7.163%; 
Alternative Simulation: -12.863%. 

Year: 2036; 
Baseline extended: -4.806%; 
Alternative Simulation: -13.471%. 

Year: 2037; 
Baseline extended: -5.187%.
Alternative Simulation: -14.083%. 

Year: 2038; 
Baseline extended: -5.462%; 
Alternative Simulation: -14.589%. 

Year: 2039; 
Baseline extended: -9.17%; 
Alternative Simulation: -15.19%. 

Year: 2040; 
Baseline extended: -6.099%; 
Alternative Simulation: -15.696%. 

Year: 2041; 
Baseline extended: -6.465; 
Alternative Simulation: -16.298. 

Year: 2042; 
Baseline extended: -6.735; 
Alternative Simulation: -16.807. 

Year: 2043; 
Baseline extended: -7.105; 
Alternative Simulation: -17.414. 

Year: 2044; 
Baseline extended: -7.483; 
Alternative Simulation: -18.03. 

Year: 2045; 
Baseline extended: -7.769; 
Alternative Simulation: -18.555. 

Year: 2046; 
Baseline extended: -8.159; 
Alternative Simulation: -19.188. 

Year: 2047; 
Baseline extended: -8.457; 
Alternative Simulation: -19.727. 

Year: 2048; 
Baseline extended: -8.86; 
Alternative Simulation: -20.378. 

Year: 2049; 
Baseline extended: -9.172%; 
Alternative Simulation: -20.938%. 

Year: 2050; 
Baseline extended: -9.591%; 
Alternative Simulation: -21.605%. 

Source: GAOï¿½s August 2008 analysis. 

Note: Assumes currently scheduled Social Security and Medicare Part A 
benefits are paid in full throughout the simulation period. 

[End of figure] 

Figure 2 looks behind the deficit path to the composition of federal 
spending. It shows that the estimated growth in Medicare, Medicaid, and 
to a lesser extent Social Security leads to an unsustainable fiscal 
future. In this figure the category "all other spending" includes much 
of what many think of as "government"--discretionary spending on such 
activities as national defense, homeland security, veterans health 
benefits, national parks, highways and mass transit, and foreign aid, 
plus mandatory spending on the smaller entitlement programs such as 
Supplemental Security Income, Temporary Assistance for Needy Families, 
and farm price supports.[Footnote 3] The growth in Social Security, 
Medicare, Medicaid, and interest on debt held by the public dwarfs the 
growth in all other types of spending. 

Figure 2: Potential Fiscal Outcomes under GAO's Alternative Simulation: 
Revenues and Composition of Spending as Shares of GDP: 

[See PDF for image] 

Potential Fiscal Outcomes under GAO's Alternative Simulation: Revenues 
and Composition of Spending as Shares of GDP: 

[See PDF for image] 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2008, 2018, 2030, and 2040. 

The following data is depicted: 

Fiscal year 2008: 
Net interest: 1.6%; 
Social Security: 4.3%; 
Medicare & Medicaid: 4.3%; 
All other spending: 10.1%; 
Revenue: 18.6%. 

Fiscal year 2018: 
Net interest: 2.5%; 
Social Security: 4.9%; 
Medicare & Medicaid: 5.7%; 
All other spending: 9.7%; 
Revenue: 17.9%. 

Fiscal year 2030: 
Net interest: 4.9%; 
Social Security: 6.1%; 
Medicare & Medicaid: 8.1%; 
All other spending: 9.7%; 
Revenue: 18.6%. 

Fiscal year 2040: 
Net interest: 8.5%; 
Social Security: 6.3%; 
Medicare & Medicaid: 9.9%; 
All other spending: 9.7%; 
Revenue: 18.6%. 

Source: GAOï¿½s April 2008 analysis. 

Notes: Discretionary spending grows with GDP after 2008. The 
Alternative Minimum Tax (AMT) exemption amount is retained at the 2007 
level through 2018 and expiring tax provisions are extended. After 
2018, revenue as a share of GDP returns to its historical level of 18.3 
percent plus expected revenues from deferred taxes (i.e., taxes on 
withdrawals from retirement accounts). Medicare spending is based on 
the Trustees' 2008 projections adjusted for the Centers for Medicare 
and Medicaid Services' alternative assumption that physician payments 
are not reduced as specified under current law. 

[End of figure] 

Rapidly rising health care costs are not simply a federal budget 
problem; they are a problem for other levels of government and other 
sectors. As shown in figure 3, GAO's fiscal model demonstrates that 
state and local governments--absent policy changes--will also face 
large and growing fiscal challenges beginning within the next few 
years.[Footnote 4] As is true for the federal budget, growth in health- 
related spending--Medicaid and health insurance for state and local 
employees and retirees--is the primary driver of the long-term fiscal 
challenges facing the state and local governments. These simulations 
imply that state and local fiscal challenges will add to the nation's 
fiscal difficulties and suggest that the nation's fiscal challenges 
cannot be remedied simply by shifting the burden from one sector to 
another. 

Figure 3: Federal and Combined Federal, State, and Local Fiscal 
Imbalance: 

[See PDF for image] 

This figure is a graph illustrating the federal and combined federal, 
state, and local surpluses and deficits as a share of GDP. The vertical 
axis of the graph represents percent of GDP from -20 to 5. The 
horizontal axis of the graph represents years from 2000 to 2050. The 
following data is depicted: 

Fiscal year: 2000; 
Federal surplus/deficit: 2.4%; 
Combined surplus/deficit: 2.1% 

Fiscal year: 2001; 
Federal surplus/deficit: 1.3%; 
Combined surplus/deficit: 0.5%. 

Fiscal year: 2002; 
Federal surplus/deficit: -1.5%; 
Combined surplus/deficit: -2.7%. 

Fiscal year: 2003; 
Federal surplus/deficit: -3.5%; 
Combined surplus/deficit: -4.5%. 

Fiscal year: 2004; 
Federal surplus/deficit: -3.6%; 
Combined surplus/deficit: -4.4. 

Fiscal year: 2005; 
Federal surplus/deficit: -2.6%; 
Combined surplus/deficit: -3.2. 

Fiscal year: 2006; 
Federal surplus/deficit: -1.9%; 
Combined surplus/deficit: -2.5%. 

Fiscal year: 2007; 
Federal surplus/deficit: -1.2%; 
Combined surplus/deficit: -1.8%. 

Fiscal year: 2008; 
Federal surplus/deficit: -1.8%; 
Combined surplus/deficit: -2.6%. 

Fiscal year: 2009; 
Federal surplus/deficit: -2.1%; 
Combined surplus/deficit: -2.8. 

Fiscal year: 2010; 
Federal surplus/deficit: -2.8%; 
Combined surplus/deficit: -3.4%. 

Fiscal year: 2011; 
Federal surplus/deficit: -3.1%; 
Combined surplus/deficit: -3.7%. 

Fiscal year: 2012; 
Federal surplus/deficit: -3%; 
Combined surplus/deficit: -3.6%. 

Fiscal year: 2013; 
Federal surplus/deficit: -3.6%; 
Combined surplus/deficit: -4.2%. 

Fiscal year: 2014; 
Federal surplus/deficit: -3.7%; 
Combined surplus/deficit: -4.3%. 

Fiscal year: 2015; 
Federal surplus/deficit: -4.1%; 
Combined surplus/deficit: -4.7%. 

Fiscal year: 2016; 
Federal surplus/deficit: -4.5%; 
Combined surplus/deficit: -5.2%. 

Fiscal year: 2017; 
Federal surplus/deficit: -4.6%; 
Combined surplus/deficit: -5.4. 

Fiscal year: 2018; 
Federal surplus/deficit: -5%; 
Combined surplus/deficit: -5.7%. 

Fiscal year: 2019; 
Federal surplus/deficit: -5%; 
Combined surplus/deficit: -5.8%. 

Fiscal year: 2020; 
Federal surplus/deficit: -5.2%; 
Combined surplus/deficit: -5.9. 

Fiscal year: 2021; 
Federal surplus/deficit: -5.6%; 
Combined surplus/deficit: -6.4%. 

Fiscal year: 2022; 
Federal surplus/deficit: -6%; 
Combined surplus/deficit: -6.9%. 

Fiscal year: 2023; 
Federal surplus/deficit: -6.5%; 
Combined surplus/deficit: -7.5. 

Fiscal year: 2024; 
Federal surplus/deficit: -7%; 
Combined surplus/deficit: -8%. 

Fiscal year: 2025; 
Federal surplus/deficit: -7.5%; 
Combined surplus/deficit: -8.6%. 

Fiscal year: 2026; 
Federal surplus/deficit: -8%; 
Combined surplus/deficit: -9.2%. 

Fiscal year: 2027; 
Federal surplus/deficit: -8.5%; 
Combined surplus/deficit: -9.8%. 

Fiscal year: 2028; 
Federal surplus/deficit: -9%; 
Combined surplus/deficit: -10.4%. 

Fiscal year: 2029; 
Federal surplus/deficit: -9.6%; 
Combined surplus/deficit: -11%; 

Fiscal year: 2030; 
Federal surplus/deficit: -10.1%; 
Combined surplus/deficit: -11.6%. 

Fiscal year: 2031; 
Federal surplus/deficit: -10.7%; 

Combined surplus/deficit: -12.4%. 

Fiscal year: 2032; 
Federal surplus/deficit: -11.3%; 
Combined surplus/deficit: -13%. 

Fiscal year: 2033; 
Federal surplus/deficit: -11.8%; 
Combined surplus/deficit: -13.6%. 

Fiscal year: 2034; 
Federal surplus/deficit: -12.4%; 
Combined surplus/deficit: -14.3%. 

Fiscal year: 2035; 
Federal surplus/deficit: -12.9%; 
Combined surplus/deficit: -14.9%. 

Fiscal year: 2036; 
Federal surplus/deficit: -13.5%; 
Combined surplus/deficit: -15.6%. 

Fiscal year: 2037; 
Federal surplus/deficit: -14.1%; 
Combined surplus/deficit: -16.3%. 

Fiscal year: 2038; 
Federal surplus/deficit: -14.6%; 
Combined surplus/deficit: -16.9%. 

Fiscal year: 2039; 
Federal surplus/deficit: -15.2%; 
Combined surplus/deficit: -17.6%. 

Fiscal year: 2040; 
Federal surplus/deficit: -15.7%; 
Combined surplus/deficit: -18.2%. 

Fiscal year: 2041; 
Federal surplus/deficit: -16.3%; 
Combined surplus/deficit: -18.9%. 

Fiscal year: 2042; 
Federal surplus/deficit: -16.8%; 
Combined surplus/deficit: -19.5%. 

Fiscal year: 2043; 
Federal surplus/deficit: -17.4%; 
Combined surplus/deficit: -20.2%. 

Fiscal year: 2044; 
Federal surplus/deficit: -18%; 
Combined surplus/deficit: -20.9%. 

Fiscal year: 2045; 
Federal surplus/deficit: -18.6%; 
Combined surplus/deficit: -21.5%. 

Fiscal year: 2046; 
Federal surplus/deficit: -19.2%; 
Combined surplus/deficit: -22.2%. 

Fiscal year: 2047; 
Federal surplus/deficit: -19.7%; 
Combined surplus/deficit: -22.9%. 

Fiscal year: 2048; 
Federal surplus/deficit: -20.4%; 
Combined surplus/deficit: -23.6%. 

Fiscal year: 2049; 
Federal surplus/deficit: -20.9%; 
Combined surplus/deficit: -24.3%. 

Fiscal year: 2050; 
Federal surplus/deficit: -21.6%; 
Combined surplus/deficit: -25%. 

Source: GAO's April 2008 analysis. 

Note: Federal surpluses and deficits are from GAO's alternative 
simulation. 

[End of figure] 

If unchanged, the federal government's increased spending and rising 
deficits will drive a rising debt burden. At the end of fiscal year 
2007, federal debt held by the public exceeded $5 trillion. Figure 4 
shows that this growth in the federal government's debt cannot continue 
unabated without causing serious harm to the economy. In the last 200 
years, only during and after World War II has debt held by the public 
exceeded 50 percent of GDP. 

Figure 4: Debt Held by the Public under GAO's Alternative Simulation: 

[See PDF for image] 

Debt Held by the Public under GAO's Alternative Simulation: 

[See PDF for image] 

This figure is a line graph. The vertical axis of the graph represents 
percent of GDP from 0 to 200. The horizontal axis of the graph 
represents fiscal years from 2000 through 2050. On the graph a line 
indicates the historical high of 109 percent in 1946. The following 
data is depicted: 

Fiscal year: 2000; 
Percent of GDP: 35.122; 

Fiscal year: 2001; 
Percent of GDP: 32.999. 

Fiscal year: 2002; 
Percent of GDP: 34.113. 

Fiscal year: 2003; 
Percent of GDP: 36.223. 

Fiscal year: 2004; 
Percent of GDP: 37.34. 

Fiscal year: 2005; 
Percent of GDP: 37.504. 

Fiscal year: 2006; 
Percent of GDP: 37.082. 

Fiscal year: 2007; 
Percent of GDP: 36.832. 

Fiscal year: 2008; 
Percent of GDP: 37.093. 

Fiscal year: 2009; 
Percent of GDP: 37.776. 

Fiscal year: 2010; 
Percent of GDP: 38.743. 

Fiscal year: 2011; 
Percent of GDP: 39.966. 

Fiscal year: 2012; 
Percent of GDP: 41.176. 

Fiscal year: 2013; 
Percent of GDP: 43.067. 

Fiscal year: 2014; 
Percent of GDP: 44.944. 

Fiscal year: 2015; 
Percent of GDP: 47.138. 

Fiscal year: 2016; 
Percent of GDP: 49.682. 

Fiscal year: 2017; 
Percent of GDP: 52.278. 

Fiscal year: 2018; 
Percent of GDP: 55.074. 

Fiscal year: 2019; 
Percent of GDP: 57.935. 

Fiscal year: 2020; 
Percent of GDP: 60.837. 

Fiscal year: 2021; 
Percent of GDP: 64.107. 

Fiscal year: 2022; 
Percent of GDP: 67.696. 

Fiscal year: 2023; 
Percent of GDP: 71.698. 

Fiscal year: 2024; 
Percent of GDP: 76.017. 

Fiscal year: 2025; 
Percent of GDP: 80.738. 

Fiscal year: 2026; 
Percent of GDP: 85.747. 

Fiscal year: 2027; 
Percent of GDP: 91.144. 

Fiscal year: 2028; 
Percent of GDP: 96.83. 

Fiscal year: 2029; 
Percent of GDP: 102.902. 

Fiscal year: 2030; 
Percent of GDP: 109.248. 
	
Fiscal year: 2031; 
Percent of GDP: 115.964. 

Fiscal year: 2032; 
Percent of GDP: 123.037. 

Fiscal year: 2033; 
Percent of GDP: 130.3. 

Fiscal year: 2034; 
Percent of GDP: 137.88. 

Fiscal year: 2035; 
Percent of GDP: 145.627. 

Fiscal year: 2036; 
Percent of GDP: 153.689. 

Fiscal year: 2037; 
Percent of GDP: 162.056. 

Fiscal year: 2038; 
Percent of GDP: 170.61. 

Fiscal year: 2039; 
Percent of GDP: 179.437. 

Fiscal year: 2040; 
Percent of GDP: 188.43. 

Fiscal year: 2041; 
Percent of GDP: 197.678. 

Fiscal year: 2042; 
Percent of GDP: 207.076. 

Fiscal year: 2043; 
Percent of GDP: 216.715. 

Fiscal year: 2044; 
Percent of GDP: 226.594.
	
Fiscal year: 2045; 
Percent of GDP: 236.61. 

Fiscal year: 2046; 
Percent of GDP: 246.864. 

Fiscal year: 2047; 
Percent of GDP: 257.253. 

Fiscal year: 2048; 
Percent of GDP: 268.001. 

Fiscal year: 2049; 
Percent of GDP: 278.932. 

Fiscal year: 2050; 
Percent of GDP: 290.105. 

Source: GAO's April 2008 analysis. 

Note: Assumes currently scheduled Social Security and Medicare Part A 
benefits are paid in full throughout the simulation period. 

[End of figure] 

But this is only part of the story. The federal government for years 
has been borrowing the surpluses in the Social Security trust funds and 
other similar funds and using them to finance federal government costs. 
When such borrowings occur, the Department of the Treasury issues 
federal securities to these government funds that are backed by the 
full faith and credit of the U.S. government. Although borrowing by one 
part of the federal government from another does not have the same 
economic and financial implications as borrowing from the public, it 
represents a claim on future resources and hence a burden on future 
taxpayers and the future economy. If federal securities held by those 
funds are included, the federal government's total debt is much higher-
-about $9 trillion as of the end of fiscal year 2007. As shown in 
figure 5, total federal debt increased over each of the last 4 fiscal 
years. 

Figure 5: Total Federal Debt Outstanding: 

[See PDF for image] 

This figure is a combined stacked vertical bar and line graph depicting 
the following data: 

Total Federal Debt Outstanding (dollars in billions): 

Date: As of September 30, 2003; 
Intragovernmental holdings: $2,859; 
Held by the public: $3,913; 
Total: $6,772. 

Date: As of September 30, 2004; 
Intragovernmental holdings: $3,071; 
Held by the public: $4,297; 
Total: $7,368. 

Date: As of September 30, 2005; 
Intragovernmental holdings: $3,346; 
Held by the public: $4,589; 
Total: $7,935. 

Date: As of September 30, 2006; 
Intragovernmental holdings: $3,663; 
Held by the public: $4,826; 
Total: $8,489. 

Date: As of September 30, 2007; 
Intragovernmental holdings: $3,962; 
Held by the public: $5,033; 
Total: $8,995. 

Source: The Department of the Treasury. 

[End of figure] 

On September 29, 2007, the statutory debt limit had to be raised for 
the third time in 4 years in order to avoid being breached; between the 
end of fiscal year 2003 and the end of fiscal year 2007, the debt limit 
had to be increased by about one-third. It is anticipated that actions 
will need to be taken in fiscal year 2009 to avoid breaching the 
current statutory debt limit of $9,815 billion. 

While today's debt numbers are large, they do not represent a measure 
of all future claims. They exclude a number of significant items, such 
as the gap between currently scheduled Social Security and Medicare 
benefits and the revenues earmarked for these programs as well as the 
likely cost of veterans' health care and a range of other commitments 
and contingencies that the federal government has pledged to support. 
For example, the Statement of Social Insurance in the 2007 Financial 
Report of the United States Government disclosed that as of September 
30, 2007, for Social Security and Medicare alone, projected 
expenditures for scheduled benefits exceed earmarked revenues (i.e., 
dedicated payroll taxes and premiums) by approximately $41 trillion 
over the next 75 years in present value terms. Of that amount, $34 
trillion is related to Medicare and $7 trillion to Social Security. 
While Social Security, Medicare, and Medicaid dominate the long-term 
outlook, policymakers need to look at other policies that limit 
flexibility--not necessarily to eliminate them but to at least be aware 
of them and make a conscious decision about them. Several years ago, we 
developed the term "fiscal exposures" to provide a framework for 
considering the wide range of responsibilities, programs, and 
activities that may explicitly or implicitly expose the federal 
government to future spending.[Footnote 5] 

Fiscal exposures vary widely as to source, extent of the government's 
legal obligation, likelihood of occurrence, and magnitude. They include 
not only liabilities, contingencies, and financial commitments that are 
identified on the balance sheet or accompanying notes, but also 
responsibilities and expectations for government spending that do not 
meet the recognition or disclosure requirements for that statement. By 
extending beyond conventional accounting, the concept of fiscal 
exposure is meant to provide a broad perspective on long-term costs and 
uncertainties. Fiscal exposures include items such as retirement 
benefits, environmental cleanup costs, the funding gap in Social 
Security and Medicare, and the life cycle-cost for fixed assets. Given 
this variety, it is useful to think of fiscal exposures as lying on a 
spectrum extending from explicit liabilities to the implicit promises 
embedded in current policy or public expectations. 

Many ways exist to assess the long-term fiscal challenge. One 
quantitative measure is called "the fiscal gap." This measures the 
amount of spending cuts or tax increases that would be needed to keep 
debt as a share of GDP at or below today's ratio. The fiscal gap is an 
estimate of the action needed to achieve fiscal balance over a certain 
time period such as 75 years. Another way to say this is that the 
fiscal gap is the amount of change needed to prevent the kind of debt 
explosion shown in figure 4. The fiscal gap can be expressed as a share 
of the economy or in present value dollars. 

For example, under our alternative simulation closing the fiscal gap 
would require spending cuts or tax increases equal to 6.7 percent of 
the entire economy over the next 75 years, or about $54 trillion in 
present value terms. To put this in perspective, closing the gap would 
require an increase in today's federal tax revenues of more than one- 
third or an equivalent reduction in today's federal program spending 
(i.e., in all spending except for interest on the debt held by the 
public, which cannot be directly controlled) and maintained over the 
entire period. Table 1 shows the changes necessary to close the fiscal 
gap over the next 75 years. 

Table 1: Federal Fiscal Gap 2008-2082: 

Alternative: 
Fiscal gap: Trillions of 2008 dollars: $54.0; 
Fiscal gap: Share of GDP: 6.7%; 
Change required to close gap compared to today's levels: Percentage 
increase in revenue: 35.8%; 
Change required to close gap compared to today's levels: Percentage 
increase in individual income taxes: 78.3%; 
Change required to close gap compared to today's levels: Percentage 
decrease in noninterest spending: 35.5%. 

Source: GAO's April 2008 analysis. 

[End of table] 

Policymakers could phase in the policy changes so that the tax 
increases or spending cuts would grow over time and allow people to 
adjust. The size of these annual tax increases and spending cuts would 
be more than five times the fiscal year 2007 deficit of 1.2 percent of 
GDP. Delaying action would make future adjustments even larger. Under 
our alternative simulation, waiting even 10 years would require a 
revenue increase of about 45 percent or noninterest spending cuts of 
about 40 percent. This gap is too large to grow out of the problem. To 
be sure, additional economic growth would certainly help the federal 
government's financial condition, but it will not eliminate the need 
for action. 

The Federal Government's Long-Term Fiscal Outlook Is Driven Primarily 
by Health Care: 

The large fiscal gap is primarily the result of spending on Medicare 
and Medicaid, which continue to consume ever-larger shares of both the 
federal budget and the economy. Federal expenditures on Medicare and 
Medicaid represent a much larger, faster-growing, and more immediate 
problem than Social Security. Medicare and Medicaid are not unique in 
experiencing rapid spending growth, but instead this growth largely 
mirrors spending trends in other public health care programs and the 
overall health care system. A number of factors contribute to the rise 
in spending, including the use of new medical technology and market 
dynamics that do not encourage the efficient provision of health care 
services. Addressing these challenges will not be easy. 

Health Care Costs Have Outpaced Economic Growth: 

Federal health care spending comprises a myriad of programs, but 
federal obligations are driven by the two largest programs, Medicare 
and Medicaid. Spending for these two programs threatens to consume an 
untenable share of the budget and economy in the coming decades. Figure 
6 shows the total future draw on the economy represented by Social 
Security, Medicare, and Medicaid. While Social Security will grow from 
4.3 percent of GDP today to 5.8 percent in 2080, Medicare and 
Medicaid's burden on the economy will more than triple--from 4.7 
percent to 15.7 percent of the economy. Although some of the increased 
burden is due to the aging of the population, the majority is due to 
increased costs per beneficiary, some of which is the result of 
interaction between demographics and health care spending. 
Consequently, unlike Social Security, which will level off after 
growing as a share of the economy, Medicare and Medicaid will continue 
to grow. The projections for Medicaid spending assume a long-term cost 
growth rate consistent with the long-term growth rate assumption of the 
Medicare Trustees--GDP per capita plus about 1 percent on average. This 
growth rate, which would represent a slowing of the current trend, is 
well below recent historical experience of about 2.5 percent above GDP 
per capita. 

Figure 6: Social Security, Medicare, and Medicaid Spending as a 
Percentage of GDP: 

[See PDF for image] 

This is a line graph with three stacked lines (Social Security, 
Medicaid, and Medicare). The vertical axis represents Percent of GDP 
and the horizontal axis represents fiscal years 2008 through 2080. The 
following data is depicted: 

2008: 
Social Security: 4.32; 
Medicaid: 1.5; 
Medicare: 3.236; 
Total: 9.056. 

2009: 
Social Security: 4.35; 
Medicaid: 1.525; 
Medicare: 3.277; 
Total: 9.152. 

2010: 
Social Security: 4.39; 
Medicaid: 1.6; 
Medicare: 3.323; 
Total: 9.313. 

2011: 
Social Security: 4.44; 
Medicaid: 1.6; 
Medicare: 3.367; 
Total: 9.407. 

2012: 
Social Security: 4.52; 
Medicaid: 1.625; 
Medicare: 3.446; 
Total: 9.591. 

2013: 
Social Security: 4.61; 
Medicaid: 1.7; 
Medicare: 3.568; 
Total: 9.878. 

2014: 
Social Security: 4.7; 
Medicaid: 1.725; 
Medicare: 3.618; 
Total: 10.043. 

2015: 
Social Security: 4.8; 
Medicaid: 1.825; 
Medicare: 3.713; 
Total: 10.338. 

2016: 
Social Security: 4.9; 
Medicaid: 1.9; 
Medicare: 3.819; 
Total: 10.619. 

2017: 
Social Security: 5.01; 
Medicaid: 1.925; 
Medicare: 3.967; 
Total: 10.902. 

2018: 
Social Security: 5.1; 
Medicaid: 1.962; 
Medicare: 4.122; 
Total: 11.184. 

2019: 
Social Security: 5.2; 
Medicaid: 2.002; 
Medicare: 4.281; 
Total: 11.483. 

2020: 
Social Security: 5.3; 
Medicaid: 2.044; 
Medicare: 4.445; 
Total: 11.789. 

2021: 
Social Security: 5.39; 
Medicaid: 2.087; 
Medicare: 4.616; 
Total: 12.093. 

2022: 
Social Security: 5.48; 
Medicaid: 2.133; 
Medicare: 4.797; 
Total: 12.41. 

2023: 
Social Security: 5.56; 
Medicaid: 2.181; 
Medicare: 4.982; 
Total: 12.723. 

2024: 
Social Security: 5.64; 
Medicaid: 2.231; 
Medicare: 5.166; 
Total: 12.976. 

2025: 
Social Security: 5.71; 
Medicaid: 2.284; 
Medicare: 5.351; 
Total: 13.345. 

2026: 
Social Security: 5.78; 
Medicaid: 2.338; 
Medicare: 5.537; 
Total: 13,655. 

2027: 
Social Security: 5.84; 
Medicaid: 2.395; 
Medicare: 5.725; 
Total: 13.96. 

2028: 
Social Security: 5.9; 
Medicaid: 2.45; 
Medicare: 5.910; 
Total: 14.26. 

2029: 
Social Security: 5.95; 
Medicaid: 2.506; 
Medicare: 6.088; 
Total: 14.544. 

2030: 
Social Security: 6; 
Medicaid: 2.564; 
Medicare: 6.258 
Total: 14.882. 

2031: 
Social Security: 6.03; 
Medicaid: 2.622; 
Medicare: 6.417; 
Total: 15.069. 

2032: 
Social Security: 6.06; 
Medicaid: 2.681; 
Medicare: 6.568; 
Total: 15.309. 

2033: 
Social Security: 6.08; 
Medicaid: 2.741; 
Medicare: 6.716; 
Total: 15.537. 

2034: 
Social Security: 6.09; 
Medicaid: 2.802; 
Medicare: 6.681; 
Total: 15.573. 

2035: 
Social Security: 6.09; 
Medicaid: 2.86; 
Medicare: 7.003; 
Total: 15.953. 

2036: 
Social Security: 6.09; 
Medicaid: 2.92; 
Medicare: 7.142; 
Total: 16.152. 

2037: 
Social Security: 6.08; 
Medicaid: 2.978; 
Medicare: 7.268; 
Total: 16.326. 

2038: 
Social Security: 6.06
Medicaid: 3.038; 
Medicare: 7.380; 
Total: 16.478. 

2039: 
Social Security: 6.04
Medicaid: 3.095; 
Medicare: 7.484; 
Total: 16.619. 

2040: 
Social Security: 6.02; 
Medicaid: 3.151; 
Medicare: 7.583; 
Total: 16.754. 

2041: 
Social Security: 5.99; 
Medicaid: 3.205; 
Medicare: 7.676; 
Total: 16.871. 

2042: 
Social Security: 5.97; 
Medicaid: 3.26; 
Medicare: 7.764; 
Total: 16.994. 

2043: 
Social Security: 5.94; 
Medicaid: 3.311; 
Medicare: 7.848; 
Total: 17.099. 

2044: 
Social Security: 5.92; 
Medicaid: 3.365; 
Medicare: 7.930; 
Total: 17.215. 

2045: 
Social Security: 5.89; 
Medicaid: 3.417; 
Medicare: 8.013; 
Total: 17.32. 

2046: 
Social Security: 5.87; 
Medicaid: 3.471; 
Medicare: 8.095; 
Total: 17.436. 

2047: 
Social Security: 5.85; 
Medicaid: 3.521; 
Medicare: 8.174; 
Total: 17.545. 

2048: 
Social Security: 5.84; 
Medicaid: 3.572; 
Medicare: 8.249; 
Total: 17.661. 

2049: 
Social Security: 5.82; 
Medicaid: 3.62; 
Medicare: 8.323; 
Total: 17.763. 

2050: 
Social Security: 5.81; 
Medicaid: 3.666; 
Medicare: 8.397; 
Total: 17.873. 

2051: 
Social Security: 5.8; 
Medicaid: 3.71; 
Medicare: 8.472; 
Total: 17.982. 

2052: 
Social Security: 5.79; 
Medicaid: 3.753; 
Medicare: 8.546; 
Total: 18.089. 

2053: 
Social Security: 5.78; 
Medicaid: 3.798; 
Medicare: 8.619; 
Total: 18.197. 

2054: 
Social Security: 5.78; 
Medicaid: 3.841; 
Medicare: 8.697; 
Total: 18.318. 

2055: 
Social Security: 5.77; 
Medicaid: 3.885; 
Medicare: 8.781; 
Total: 18.436. 

2056: 
Social Security: 5.77; 
Medicaid: 3.93; 
Medicare: 8.869; 
Total: 18.569. 

2057: 
Social Security: 5.77; 
Medicaid: 3.974; 
Medicare: 8.956; 
Total: 18.7. 

2058: 
Social Security: 5.77; 
Medicaid: 4.02; 
Medicare: 9.042; 
Total: 18.832. 

2059: 
Social Security: 5.77; 
Medicaid: 4.061; 
Medicare: 9.126; 
Total: 18.957. 

2060: 
Social Security: 5.77; 
Medicaid: 4.106; 
Medicare: 9.209; 
Total: 19.085. 

2061: 
Social Security: 5.77; 
Medicaid: 4.151; 
Medicare: 9.292; 
Total: 19.213. 

2062: 
Social Security: 5.77; 
Medicaid: 4.193; 
Medicare: 9.374; 
Total: 19.337. 

2063: 
Social Security: 5.76; 
Medicaid: 4.237; 
Medicare: 9.456; 
Total: 19.453. 

2064: 
Social Security: 5.76; 
Medicaid: 4.282; 
Medicare: 9.539; 
Total: 19.581. 

2065: 
Social Security: 5.76; 
Medicaid: 4.329; 
Medicare: 9.625; 
Total: 19.714. 

2066: 
Social Security: 5.76; 
Medicaid: 4.376; 
Medicare: 9.709; 
Total: 19.845. 

2067: 
Social Security: 5.77; 
Medicaid: 4.442; 
Medicare: 9.789; 
Total: 20.001. 

2068: 
Social Security: 5.77; 
Medicaid: 4.469; 
Medicare: 9.867; 
Total: 20.106. 

2069: 
Social Security: 5.77; 
Medicaid: 4.516; 
Medicare: 9.946; 
Total: 20.232. 

2070: 
Social Security: 5.77; 
Medicaid: 4.562; 
Medicare: 10.025; 
Total: 20.582. 

2071: 
Social Security: 5.78; 
Medicaid: 4.605; 
Medicare: 10.100; 
Total: 20.485. 

2072: 
Social Security: 5.78; 
Medicaid: 4.651; 
Medicare: 10.170; 
Total: 20.601. 

2073: 
Social Security: 5.78; 
Medicaid: 4.693; 
Medicare: 10.240; 
Total: 20.713. 

2074: 
Social Security: 5.79; 
Medicaid: 4.738; 
Medicare: 10.309; 
Total: 20.837. 

2075: 
Social Security: 5.79; 
Medicaid: 4.784; 
Medicare: 10.377; 
Total: 20.951. 

2076: 
Social Security: 5.79; 
Medicaid: 4.827; 
Medicare: 10.442; 
Total: 21.059. 

2077: 
Social Security: 5.8; 
Medicaid: 4.87; 
Medicare: 10.505; 
Total: 21.205. 

2078: 
Social Security: 5.8; 
Medicaid: 4.915; 
Medicare: 10.567; 
Total: 21.282. 

2079: 
Social Security: 5.81; 
Medicaid: 4.955; 
Medicare: 10.627; 
Total: 21.392. 

2080: 
Social Security: 5.81; 
Medicaid: 4.995; 
Medicare: 10.686; 
Total: 21.491. 

Source: GAO analysis. 

Note: Social Security and Medicare projections are from the Office of 
the Chief Actuary, Social Security Administration, and Office of the 
Actuary, Centers for Medicare and Medicaid Services under the 
intermediate assumptions of the 2008 Trustees. Medicaid projections 
based on CBO's January 2008 short-term Medicaid estimates and CBO's 
December 2007 long-term Medicaid projections adjusted to reflect excess 
cost growth consistent with the 2008 Trustees intermediate assumptions. 

[End of figure] 

The federal government and other public payers are not the only ones 
facing rapidly rising health care expenses. Private payers face the 
same challenges. As shown in figure 7, total health care spending from 
both public and private payers is absorbing an increasing share of our 
nation's GDP. From 1976 through 2006, spending on health care grew from 
about 8 percent of GDP to 16 percent, and it is projected to grow to 
about 20 percent of GDP by 2016. While growth in public spending 
strains government budgets, growth in private sector health care costs 
erodes employers' ability to provide coverage to their workers and 
undercuts their ability to compete internationally. 

When compared with other nations, the United States is an outlier in 
its high level of health care spending. For example, in 2005, health 
care accounted for about 15 percent of GDP in the United States, the 
largest share among developed nations who are members of the 
Organization for Economic Co-operation and Development (OECD). The 
United States also ranks far ahead of other OECD countries in terms of 
per capita health spending. In that same year, the United States spent 
$6,401 per person, a level nearly twice that found in France, Canada, 
and Germany, and about two and a half times higher than the levels 
found in Italy, Japan, and the United Kingdom. Despite this higher 
level of health care spending, the United States still fares poorly on 
many health measures. Compared to other nations, the United States has 
above-average infant mortality, below-average life expectancy, and the 
largest percentage of uninsured individuals. For example, according to 
the most recent published data from OECD, the United States ranked 27 
out of 30 in infant mortality and 24 out of 30 in life expectancy. 
[Footnote 6] 

Figure 7: Health Care Spending as a Percentage of GDP: 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Year: 1976; 
Percent of GDP: 8.4. 

Year: 1986; 
Percent of GDP: 10.6. 

Year: 1996; 
Percent of GDP: 13.7. 

Year: 2006; 
Percent of GDP: 16.0. 

Year: 2016; 
Percent of GDP: 19.6. 

Notes: The figure for 2016 is projected. The most current data 
available on health care spending are for 2006. 

[End of figure] 

Systemwide Growth in Health Care Spending Is Driven by Certain Key 
Factors: 

Public and private health care spending continues to rise because of 
several key factors, including the following: 

* Medical technology. While new and existing medical technology can 
lead to medical benefits, in some cases technology can lead to the 
excessive use of resources. On the one hand, experts agree that 
technology's contributions over the past 20 years--new pharmaceuticals, 
diagnostic imaging, and genetic engineering, among others--have been, 
on the whole, of significant value to the nation's health. Such 
advances in medical science have allowed providers to treat patients in 
ways that were not previously possible or to treat conditions more 
effectively. On the other hand, experts note that the nation's general 
tendency is to treat patients with available technology even when there 
is little chance of benefit to the patient and without consideration of 
costs.[Footnote 7] 

* Market dynamics. Another cost-containment challenge for all payers 
relates to the market dynamics of health care compared with other 
economic sectors. In an ideal market, informed consumers prod 
competitors to offer the best value. However, without reliable 
comparative information on medical outcomes, quality of care, and cost, 
consumers are less able to determine the best value. Insurance masks 
the actual costs of goods and services, providing little incentive for 
consumers to be cost-conscious. Many insured individuals pay relatively 
little out of pocket for care at the point of delivery because of 
comprehensive health care coverage. Current federal tax policies 
encourage such comprehensive coverage, for example, by excluding 
employers' contribution for premiums from employees' taxable income. 
These tax exclusions represent a significant source of forgone federal 
revenue and work at cross-purposes to the goal of moderating health 
care spending. Furthermore, clinicians must often make decisions in the 
absence of universal medical standards of practice. Under these 
circumstances, medical practices vary across the nation, as evidenced 
by wide geographic variation in per capita spending and outcomes, even 
after controlling for patient differences in health status. 

* Population health. Obesity, smoking, and other population risk 
factors can lead to expensive chronic conditions, such as diabetes and 
heart disease. The increased prevalence of such conditions drives 
spending as the utilization of health care resources rises. For 
example, one study indicated that the rising prevalence of obesity and 
higher relative per capita health care spending among obese individuals 
resulted in 27 percent of the growth in inflation-adjusted per capita 
health care spending from 1987 through 2001.[Footnote 8] 

Addressing these drivers will be a major societal challenge. Solving 
the problem of the federal government's escalating health care costs is 
especially difficult, since changing programs such as Medicare and 
Medicaid will involve changes, not just within these federal programs, 
but to our country's health care system as a whole. However, many 
experts have recommended that the federal government could help drive 
improvement in the health care system. For example, experts note the 
need for strong financial incentives to overcome a lack of systems-- 
including information systems--to reduce error and reinforce best 
practices. Medicare--the single, largest purchaser of health care 
services in the United States--could play a more active role in 
promoting a market that rewards better performance through payment 
incentives that promote the pursuit of improved quality and efficiency. 

The Window of Opportunity Is Narrowing: 

Here in the first half of 2008, the long-term fiscal challenge is not 
in the distant future. The first baby boomers have already retired. 
(See table 2.) The budget and economic implications of the baby-boom 
generation's retirement have already become a factor in CBO's 10-year 
baseline projections and that effect will only intensify as the baby 
boomers age. As the share of the population over 65 climbs, 
demographics will interact with rising health care costs. The longer 
action on reforming heath care and Social Security is delayed, the more 
painful and difficult the choices will become. Simply put, the federal 
budget is on an unsustainable long-term fiscal path that is getting 
worse with the passage of time. 

The window for timely action is shrinking. Albert Einstein said the 
most powerful force in the universe is compound interest, and today the 
miracle of compounding is working against the federal government. After 
2011 the Social Security cash surplus--which has cushioned and masked 
the effect of the federal government's fiscal policy--will begin to 
shrink, putting pressure on the rest of the budget. The Medicare 
Hospital Insurance trust fund is already in a negative cash-flow 
situation. Demographics narrow the window for other reasons as well. 
People need time to prepare for and adjust to changes in benefits. 
There has been general agreement that there should be no change in 
Social Security benefits for those currently in or near retirement. If 
changes are delayed until the entire baby-boom generation has retired, 
that becomes much harder and much more expensive. 

Table 2: The Long-Term Fiscal Challenge Has Begun: 

2008: Oldest members of the baby-boom generation eligible for Social 
Security. 

2008: Medicare Hospital Insurance (HI) outlays exceed cash income. 

2009: Debt ceiling will need to be raised. 

2011: Oldest members of the baby-boom generation eligible for Medicare. 

2011: Social Security cash surplus begins to decline. 

2017: Annual Social Security benefits exceed cash income. 

2019: Medicare HI trust fund exhausted, income sufficient to pay about 
79 percent of promised benefits. 

2026: Youngest members of the baby-boom generation eligible for Social 
Security. 

2030: Debt held by the public under GAO's Alternative simulation 
exceeds the historical high reached in the aftermath of World War II. 

2041: Social Security trust fund exhausted income sufficient to pay 
about 75 percent of promised benefits. 

Source: GAO. 

[End of table] 

Meeting this long-term fiscal imbalance is the nation's largest 
sustainability challenge. Aligning the federal government to meet the 
challenges and capitalize on the opportunities of the 21ST century will 
require a fundamental review of what the federal government does, how 
it does it, and how it is financed. Attention should be focused not 
only on the spending side of the budget but also on the revenue side. 
Tax expenditures,[Footnote 9] for example, should be reexamined with 
the same scrutiny as spending programs. Moving forward, the federal 
government needs to start making tough choices in setting priorities 
and linking resources and activities to results. 

Meeting the nation's long-term fiscal challenge will require a 
multipronged approach bringing people together to tackle health care, 
Social Security, and the tax system as well as: 

* strengthening oversight of programs and activities, including 
creating approaches to better facilitate the discussion of integrated 
solutions to cross-cutting issues; and: 

* reengineering and reprioritizing the federal government's existing 
programs, policies, and activities to address 21ST century challenges 
and capitalize on related opportunities. 

There are also some process changes that might help the discussion by 
increasing the transparency and relevancy of key financial, 
performance, and budget reporting and estimates that highlight the 
fiscal challenge. Stronger budget controls for both spending and tax 
policies to deal with both near-term and longer-term deficits may also 
be helpful. 

As we recently reported,[Footnote 10] several countries have begun 
preparing fiscal sustainability reports to help assess the implications 
of their public pension and health care programs and other challenges 
in the context of overall sustainability of government finances. 
European Union members also annually report on longer-term fiscal 
sustainability. The goal of these reports is to increase public 
awareness and understanding of the long-term fiscal outlook in light of 
escalating health care cost growth and population aging, to stimulate 
public and policy debates, and to help policymakers make more-informed 
decisions. These countries used a variety of measures, including 
projections of future revenue and spending and summary measures of 
fiscal imbalance and fiscal gaps, to assess fiscal sustainability. Last 
year, we recommended that the United States should periodically prepare 
and publish a long-range fiscal sustainability report.[Footnote 11] I 
am pleased to note that the Federal Accounting Standards Advisory Board 
(FASAB) is considering possible changes to social insurance reporting 
and has initiated a project on fiscal sustainability reporting. 

Mr. Chairman, Senator Grassley, members of the committee--health care 
may be the principal driver of the long-term fiscal outlook, but that 
does not mean government should ignore other drivers. Demographics are 
a smaller component than rapid health care cost growth, but the two 
interact, and aging is not a trivial contributor to the federal 
government's long-term fiscal condition. We have suggested that to 
right the fiscal path will require discussing health care and Social 
Security and looking at both the spending and tax sides of the budget. 
Although these entitlements and revenue drive the overall fiscal 
trends, it is also important that the federal government look at other 
programs and activities. Reexamining what government does and how it 
does business can help government meet the challenges of this century 
in providing some specific and practical steps that Congress can take 
to help address these long-term challenges. In this effort Congress may 
find a report we published in December 2007 useful. The report is 
entitled, A Call for Stewardship: Enhancing the Federal Government's 
Ability to Address Key Fiscal and Other 21ST Century Challenges. 
[Footnote 12] 

Thank you Mr. Chairman, Senator Grassley, and members of the committee 
for having me today. We at GAO, of course, stand ready to assist you 
and your colleagues as you tackle these important challenges. 

Contacts and Acknowledgments: 

For further information on this testimony, please contact Susan J. 
Irving, Director, Federal Budget Analysis, Strategic Issues at (202) 
512-9142, [email protected], or Marjorie Kanof, Managing Director, Health 
Care at (202) 512-7114, [email protected]. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this testimony. Individuals making key contributions to this 
testimony include James Cosgrove, Jay McTigue, Jessica Farb, and 
Melissa Wolf. 

[End of testimony] 

Footnotes: 

[1] The Postal Service is also off-budget, but it had a deficit of $5 
billion in fiscal year 2007. 

[2] Social Security and Medicare spending are based on the programs' 
2008 Trustees' intermediate projections. Medicare spending is adjusted 
using the Centers for Medicare and Medicaid Services' estimates 
assuming that physician payments are not reduced as required under 
current law. Medicaid spending is based on CBO's December 2007 long- 
term projections adjusted to reflect excess cost growth consistent with 
the Trustees' intermediate projections. Additional information about 
GAO's simulation model, assumptions, data, and results can be found at 
[hyperlink, http://www.gao.gov/special.pubs/longterm/]. 

[3] Discretionary spending refers to spending based on authority 
provided in annual appropriations acts. Mandatory spending refers to 
spending that Congress has authorized in legislation other than 
appropriations acts that entitles beneficiaries to receive payment or 
that otherwise obligates the government to make payment. 

[4] See GAO, State and Local Governments: Growing Fiscal Challenges 
Will Emerge during the Next 10 Years, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-317] (Washington, D.C.: Jan. 
22, 2008), and State and Local Governments: Persistent Fiscal 
Challenges Will Likely Emerge within the Next Decade, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-1080SP] (Washington, D.C.: 
July 18, 2007). 

[5] GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term 
Costs and Uncertainties, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-03-213] (Washington, D.C.: Jan. 24, 2003). 

[6] Data for most OECD countries are for 2005. Data on life expectancy 
and infant mortality in the United States are for 2004 and 2002 
respectively. Recent preliminary data show a slight improvement in life 
expectancy in the United States for 2006. 

[7] GAO, Health Care: Unsustainable Trends Necessitate Comprehensive 
and Fundamental Reforms to Control Spending and Improve Value, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-793SP] 
(Washington, D.C.: May 2004). 

[8] Kenneth E. Thorpe et al., "The Impact of Obesity on Rising Medical 
Spending," Health Affairs Web Exclusive, (Oct. 20, 2004) [hyperlink, 
http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.480]. 

[9] Tax expenditures are revenue losses attributable to provisions of 
the federal tax laws that allow a special exclusion, exemption, or 
deduction from gross income or that provide a special credit, a 
preferential rate of tax, or a deferral of liability. These exceptions 
may be viewed as alternatives to other policy instruments, such as 
spending or regulatory programs. 

[10] GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but 
Does Not Provide Sufficient Information for Reporting on Our Nation's 
Longer-Term Fiscal Challenge, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-206] (Washington, D.C.: Dec. 20, 2007). 

[11] GAO, Long-Term Fiscal Challenge: Additional Transparency and 
Controls Are Needed, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
07-1144T] (Washington, D.C.: July 25, 2007) and Long-Term Budget 
Outlook: Deficits Matter--Saving Our Future Requires Tough Choices 
Today, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-389T] 
(Washington, D.C.: Jan. 23, 2007). 

[12] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-93SP] 
(Washington, D.C.: Dec. 17, 2007). 

[End of section] 

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