CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE The 2018 Long-Term Budget Outlook Percentage of GDP 160 Actual Projected 140 120 World War II 100 Under current law, federal debt held by the 80 public is projected to 60 Great increase sharply over the Depression next 30 years . . . 40 Civil War World War I 20 0 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 Percentage of GDP 30 . . . as spending grows more quickly than revenues do. 20 Deficit Driving that spending growth are interest payments on the debt, major health care programs, 10 Spending Revenues and Social Security. 0 2018 2048 JUNE 2018 At a Glance Each year, the Congressional Budget Office issues a set of long-term budget projections—that is, projections of what federal spending, revenues, deficits, and debt would be for the next 30 years if current laws generally did not change. This report is the latest in the series. •• In CBO’s projections, the federal budget deficit, relative to the size of the economy, grows substantially over the next several years, stabilizes for a few years, and then grows again over the rest of the 30-year period, leading to federal debt held by the public that would approach 100 percent of gross domestic product (GDP) by the end of the next decade and 152 percent by 2048. Moreover, if lawmakers changed current laws to maintain certain policies now in place—preventing a significant increase in individual income taxes in 2026, for example—the result would be even larger increases in debt. •• The federal government’s net interest costs are projected to climb sharply as interest rates rise from their currently low levels and as debt accumulates. Such spending would about equal spending for Social Security, currently the largest federal program, by the end of the projection period. •• Noninterest spending is projected to rise from 19 percent of GDP in 2018 to 23 percent in 2048, mainly because of increases in spending for Social Security and the major health care programs (primarily Medicare). Much of the spending growth for Social Security and Medicare results from the aging of the population. Growth in spending for Medicare and the other major health care programs is also driven by rising health care costs per person. •• Revenues, in contrast, are projected to be roughly flat over the next few years relative to GDP, rise slowly, and then jump in 2026. Thereafter, revenues would continue to rise relative to the size of the economy—although they would not keep pace with growth in spending. The projected growth in revenues is largely attributable to increases in individual income tax receipts. •• Compared with last year’s projections, debt as a percentage of GDP is larger, but only modestly so, through 2041 and then lower thereafter. Deficits are higher as a percentage of GDP through 2025 and lower thereafter. That change is largely driven by changes in revenues and net interest costs. Revenues are initially lower as a share of GDP, but ultimately are higher because individual income taxes are now projected to grow more quickly as a result of provisions of Public Law 115-97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report). www.cbo.gov/publication/53919 Contents Summary 1 The Budget Outlook for the Next 30 Years 5 Rising Budget Deficits 5 Greater Accumulation of Federal Debt 6 Consequences of a Large and Growing Federal Debt 8 Less National Saving and Lower Income 8 Greater Pressure on the Budget From Higher Interest Costs 9 Reduced Ability to Respond to Unforeseen Events 9 Greater Chance of a Fiscal Crisis 9 Demographic and Economic Trends That Underlie CBO’s Long-Term Projections 10 Demographic Projections 10 Economic Projections 11 Projected Spending Through 2048 13 Spending for Social Security and the Major Health Care Programs 15 Causes of Growth in Spending for Social Security and the Major Health Care Programs 18 Other Noninterest Spending 20 Net Interest Costs 21 Projected Revenues Through 2048 22 Uncertainty of CBO’s Long-Term Projections 23 The Size and Timing of Policy Changes Needed to Meet Various Goals for Deficit Reduction 24 The Size of Policy Changes Needed to Meet Various Goals for Deficit Reduction 24 BOX 1. EFFECTS OF THE 2017 TAX ACT ON THE LONG-TERM BUDGET OUTLOOK 26 The Timing of Policy Changes Needed to Meet Various Goals for Deficit Reduction 29 Changes From Last Year’s Long-Term Budget Outlook 30 Appendix A: CBO’s Projections of Demographic and Economic Trends 33 Appendix B: Changes in Long-Term Budget Projections Since March 2017 45 List of Tables and Figures 52 About This Document 53 Notes The Congressional Budget Office’s extended baseline shows the budget’s long-term path under most of the same assumptions that the agency uses, in accordance with statutory requirements, in constructing its 10-year baseline. Both baselines incorporate the assumptions that current law generally remains unchanged but that some mandatory programs are extended after their authorizations lapse and that spending for Medicare and Social Security continues as scheduled even if their trust funds are exhausted. Unless this report indicates otherwise, the years that it refers to are federal fiscal years, which run from October 1 to September 30 and are designated by the calendar year in which they end. Budgetary values, such as the ratio of debt or deficits to gross domestic product, are calculated on a fiscal year basis; economic variables, such as gross national product or interest rates, are calculated on a calendar year basis. Numbers in the text, tables, and figures may not sum to totals because of rounding. Unless the report specifies otherwise, Medicare outlays are presented net of offsetting receipts, which reduce outlays for the program. As referred to in this report, the Affordable Care Act comprises the Patient Protection and Affordable Care Act; the health care provisions of the Health Care and Education Reconciliation Act of 2010; and the effects of subsequent judicial decisions, statutory changes, and administrative actions. Data and supplemental information files—the data underlying the figures in this report, supplemental budget projections, and the demographic and economic variables underlying those projections—are posted along with the report on CBO’s website. The 2018 Long-Term Budget Outlook Summary policy over that 30-year period. All together, they consti- At 78 percent of gross domestic product (GDP), federal tute the agency’s extended baseline projections. debt held by the public is now at its highest level since shortly after World War II. If current laws generally CBO’s 10-year and extended baseline projections are remained unchanged, the Congressional Budget Office not predictions of budgetary outcomes. Rather, they projects, growing budget deficits would boost that represent the agency’s best assessment of future spending, debt sharply over the next 30 years; it would approach revenues, deficits, and debt under the assumption that 100 percent of GDP by the end of the next decade and current laws generally remain unchanged. They also give 152 percent by 2048 (see Table 1). That amount would lawmakers a point of comparison from which to measure be the highest in the nation’s history by far. Moreover, the effects of proposed legislation. if lawmakers changed current law to maintain certain policies now in place—preventing a significant increase Why Are Projected Deficits Rising? in individual income taxes in 2026, for example—the In CBO’s projections, the federal budget deficit, relative result would be even larger increases in debt.1 The to the size of the economy, would grow substantially over prospect of large and growing debt poses substantial risks the next several years, stabilize for a few years, and then for the nation and presents policymakers with significant grow again over the rest of the 30-year period. In total, challenges. deficits would rise from 3.9 percent of GDP in 2018 to 9.5 percent in 2048. (Adjusted to exclude the effects of In this report, CBO presents its projections of federal timing shifts that occur because fiscal year 2018 began spending, revenues, deficits, and debt for the next three on a weekend, the budget deficit in 2018 would be decades and describes some possible consequences of higher, at 4.2 percent of GDP).3 Those large budget defi- those budgetary outcomes. This report’s projections are cits would arise because spending would grow steadily consistent with the 10-year baseline budget and eco- under current law, and revenues would not keep pace nomic projections that CBO published in the spring with that spending growth (see Figure 1). of 2018.2 They extend most of the concepts underlying those projections for an additional 20 years, and they In particular, over the next 30 years, spending as a share reflect the macroeconomic effects of projected fiscal of GDP would increase for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt. In CBO’s projections, most of the spending growth for Social Security and Medicare 1. CBO will analyze the effects of alternative fiscal scenarios in a forthcoming report. results from the aging of the population: As members of 2. CBO bases its long-term projections on its most recent 10-year budget projections. Typically, those projections are from the 3. When the first day of the fiscal year (October 1) falls on a Budget and Economic Outlook; however, CBO made a number weekend, certain monthly payments (mostly for mandatory of relatively small changes to its baseline projections since the benefit programs such as Medicare, Supplemental Security publication of that report in April. As a result, the long-term Income, and certain programs for veterans) normally made on budget projections in this report are based on CBO’s adjusted that day are shifted to the preceding fiscal year. Accordingly, for April 2018 baseline. For information on those underlying those benefit programs, only 11 months of payments will be budget projections, see Congressional Budget Office, An made in that fiscal year rather than the usual 12, and the previous Analysis of the President’s 2019 Budget (May 2018), www.cbo. year will have one more payment. October 1 fell on a weekend in gov/publication/53884. For information on CBO’s most recent 2017, and that will happen again in 2022, 2023, and 2028. The economic projections, see Congressional Budget Office, The resulting shifts in payments noticeably boost projected spending Budget and Economic Outlook: 2018 to 2028 (April 2018), www. and deficits in 2022 and 2028; they reduce spending and the cbo.gov/publication/53651. deficit in 2018 and 2024. 2 The 2018 Long-Term Budget Outlook June 2018 Table 1 . Key Projections in CBO’s Extended Baseline Percentage of Gross Domestic Product Projected Annual Average 2018 2019–2028 2029–2038 2039–2048 Revenues Individual income taxes 8.2 8.9 10.1 10.7 Payroll taxes 5.9 5.9 6.0 6.0 Corporate income taxes 1.2 1.5 1.4 1.4 Other a 1.4 1.2 1.3 1.5 Total Revenues 16.6 17.5 18.8 19.5 Outlays Mandatory Social Security 4.9 5.5 6.2 6.3 Major health care programs b 5.2 6.0 7.4 8.7 Other 2.6 2.5 2.3 2.1 Subtotal 12.6 13.9 15.9 17.2 Discretionary 6.3 5.7 5.4 5.5 Net interest 1.6 2.7 3.6 5.3 Total Outlays 20.6 22.4 24.9 27.9 Deficit -3.9 -4.9 -6.1 -8.4 Debt Held by the Public at the End of the Period 78 96 118 152 Memorandum: Social Security Revenues c 4.4 4.5 4.6 4.5 Outlays d 4.9 5.5 6.2 6.3 Contribution to the Federal Deficit e -0.4 -1.0 -1.6 -1.9 Medicare Revenues c 1.4 1.5 1.6 1.6 Outlays d 3.5 4.3 5.7 6.8 Offsetting Receipts -0.6 -0.8 -1.0 -1.3 Contribution to the Federal Deficit e -1.5 -2.1 -3.0 -3.9 Gross Domestic Product at the End of the Period (Trillions of dollars) 20.1 29.8 44.1 65.0 Source: Congressional Budget Office. This table satisfies a requirement specified in section 3111 of S. Con. Res. 11, the Concurrent Resolution on the Budget for Fiscal Year 2016. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a.Consists of excise taxes, remittances to the Treasury from the Federal Reserve System, customs duties, estate and gift taxes, and miscellaneous fees and fines. b.Consists of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. c.Includes all payroll taxes for the program other than those paid by the federal government on behalf of its employees (which are intragovernmental transactions). Also includes income taxes paid on Social Security benefits, which are credited to the trust funds. Excludes interest credited to the trust funds. d.Excludes discretionary outlays related to administration of the program. e.The contribution to the deficit shown here differs from the change in the trust fund balance for the program because it excludes intragovernmental transactions, interest earned on balances, and outlays related to administration of the program. June 2018 The 2018 Long-Term Budget Outlook 3 Figure 1 . The Federal Budget in CBO’s Extended Baseline Percentage of Gross Domestic Product 2048 30 30.0 Net Interest Deficit 2018 If current laws generally 20 20.0 Other Noninterest remained unchanged, the Spendinga Other Revenuesc federal budget deficit would Corporate Income Taxes grow substantially over the next 30 years. Those large Payroll Taxes budget deficits would arise because spending would Major Health grow steadily and revenues 10 10.0 Care Programsb would not keep pace with that spending growth. Individual Income Taxes Social Security 0 0.0 Spending Revenues Spending Revenues Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a.Consists of all federal spending other than that for Social Security, the major health care programs, and net interest. b.Consists of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. c.Consists of excise taxes, remittances to the Treasury from the Federal Reserve System, customs duties, estate and gift taxes, and miscellaneous fees and fines. the baby-boom generation (people born between 1946 GDP. Discretionary spending is projected to decline and 1964) age and as life expectancy continues to rise, in most years over the next decade and then roughly the percentage of the population age 65 or older will stabilize as a percentage of GDP. (Mandatory spending grow sharply, boosting the number of beneficiaries of is generally governed by provisions of permanent law, those programs. Growth in spending on Medicare and whereas discretionary spending is controlled by annual the other major health care programs is also driven by appropriation acts.) rising health care costs per person. In addition, the fed- eral government’s net interest costs are projected to climb Revenues, in contrast, would take a different path. They sharply as a percentage of GDP as interest rates rise from are projected to be roughly flat over the next few years their currently low levels and as debt accumulates. relative to GDP, rise slowly, and then jump in 2026. Revenues would sharply increase that year because most That spending growth would be only partially offset of the provisions of Public Law 115-97 (originally called by declining spending for other programs. Mandatory the Tax Cuts and Jobs Act and called the 2017 tax act spending other than that for Social Security and the in this report) that directly affect the individual income major health care programs—such as spending for fed- tax rate are set to expire at the end of calendar year eral employees’ pensions and for various income security 2025. (The 2017 tax act lowered individual income taxes programs—is projected to decrease as a percentage of beginning in 2018.) Thereafter, revenues would continue 4 The 2018 Long-Term Budget Outlook June 2018 to rise relative to the size of the economy—although they CBO’s budget projections are built on its demographic would not keep pace with spending growth. and economic projections. CBO estimates that the population will grow more slowly than it has in the past The projected growth in revenues beyond 2028 is and will be older, on average. CBO also anticipates that largely attributable to increases in individual income if current laws generally did not change, real GDP—that tax receipts. Those receipts are projected to grow mainly is, GDP with the effects of inflation removed—would because income would rise more quickly than the price increase by 1.9 percent per year, on average, over the next index that is used to adjust tax brackets and other param- 30 years. That rate is nearly 1 percentage point lower eters of the tax system. As a result, more income would than the annual average growth rate of real GDP over be pushed into higher tax brackets over time. (Because of the past 50 years. That expectation of slower economic provisions of the 2017 tax act, the effect of real bracket growth in the future is attributable to several factors— creep in this year’s projections is slightly greater than the most notably, slower growth of the labor force. Projected effect that CBO projected in prior years.) Combined growth in output is also held down by the effects of receipts from all other sources are projected to increase changes in fiscal policy under current law—above all, by slightly as a percentage of GDP. the reduction in private investment that is projected to result from rising federal deficits. What Might Happen If Current Laws Remained Unchanged? How Uncertain Are Those Projections? Large and growing federal debt over the coming decades If current laws governing taxes and spending remained would hurt the economy and constrain future budget policy. generally the same, debt would rise as a percentage of The amount of debt that is projected under the extended GDP over the next 30 years, according to CBO’s central baseline would reduce national saving and income in the estimate (the middle of the distribution of potential long term; increase the government’s interest costs, putting outcomes). That projection is very uncertain, however, more pressure on the rest of the budget; limit lawmakers’ so the agency examined in detail how debt would change ability to respond to unforeseen events; and increase the if four key factors were higher or lower than their levels likelihood of a fiscal crisis. (In that event, investors would in the extended baseline. Those four factors are labor become unwilling to finance the government’s borrowing force participation, productivity in the economy, interest unless they were compensated with very high interest rates.) rates on federal debt, and health care costs per person. Other factors—such as an economic depression, a major How Does CBO Make Its Long-Term Budget Projections? war, or unexpected changes in rates of fertility, immi- CBO’s extended baseline, produced once a year, gration, or mortality—also could affect the trajectory of shows the budget’s long-term path under most of the debt. Taking into account a range of uncertainty around same assumptions that the agency uses in construct- CBO’s central projections of those four key inputs, CBO ing its 10-year baseline. Both baselines incorporate concludes that despite the considerable uncertainty of these assumptions: current laws will generally remain long-term projections, debt as a percentage of GDP unchanged, mandatory programs will be extended after would probably be greater—in all likelihood, much their authorizations lapse, and spending for Medicare greater—than it is today if current laws remained gener- and Social Security will continue as scheduled even ally unchanged. if their trust funds are exhausted. CBO makes those assumptions to conform to statutory requirements. How Large Would Changes in Spending or Revenues Need to Be to Reach Certain Goals for Federal Debt? Some projections, such as those for Social Security CBO estimated the size of changes that would be needed spending and collections of individual income taxes, to achieve a chosen goal for federal debt. For example, if incorporate detailed estimates of how people would be lawmakers wanted to reduce the amount of debt in 2048 affected by particular elements of programs or by the tax to 41 percent of GDP (its average over the past 50 years), code. Other projections reflect past trends and CBO’s they might cut noninterest spending, increase revenues, or assessments of how those trends would evolve if current take a combination of both approaches to make changes laws generally remained unchanged.4 Congressional Budget Office, An Overview of CBOLT: The 4. For more information about how CBO makes long-term Congressional Budget Office Long-Term Model (April 2018), projections about the economy and federal budget, see www.cbo.gov/publication/53667. June 2018 The 2018 Long-Term Budget Outlook 5 that equaled 3.0 percent of GDP each year starting in by 2022 (adjusted to exclude shifts in timing). The defi- 2019. (In dollar terms, that amount would total about cit would then continue to rise in dollar terms but sta- $630 billion in 2019.) If, instead, policymakers wanted bilize as a percentage of GDP for the rest of the 10-year debt in 2048 to equal its current share of GDP (78 per- baseline period—although it would remain much higher cent), the necessary changes would be smaller (although than its 50-year average of 2.9 percent. In the following still substantial), totaling 1.9 percent of GDP per year (or two decades, deficits would become notably larger again about $400 billion in 2019). The longer lawmakers waited relative to the size of the economy as the gap between to act, the larger the policy changes would need to be to spending and revenues grew (see Figure 2). As a result, reach any particular goal for federal debt. the deficit would rise from 4.8 percent of GDP in 2028 (adjusted to exclude shifts in timing) to 9.5 percent in How Have CBO’s Projections Changed Over the 2048. Past Year? Compared with last year’s projections, CBO’s current CBO projects that mandatory spending would rise projections of debt as a share of GDP are higher through significantly as a percentage of GDP under current law, 2041 and lower thereafter. CBO now projects that debt driving up spending relative to revenues. The aging of measured as a share of GDP would be 3 percentage the population will lead to increased outlays for Social points lower in 2047 than it projected last year. (The pre- Security and Medicare, mandatory programs that pri- vious edition of this volume showed projections through marily benefit people 65 or older. Medicare outlays 2047.)5 The increase in debt through 2041 stems primar- would also climb as a result of rising health care costs per ily from tax and spending legislation enacted since then person, in CBO’s estimation. By 2048, under current that boosted projected deficits through 2025—especially law, federal spending through those two programs as well the 2017 tax act, the Bipartisan Budget Act of 2018 as Medicaid—the federal health care program for people (P.L. 115-123), and the Consolidated Appropriations with limited income and resources—for people age 65 or Act, 2018 (P.L. 115-141). In particular, the budgetary older would account for about half of all federal nonin- effects of the tax act are expected to peak during the terest spending, compared with about two-fifths today. middle of the next decade. In later years, the effects are Moreover, because federal debt is projected to grow and expected to be modest, although their precise magni- interest rates are expected to rise from their currently low tudes are uncertain. levels, interest payments on the government’s debt would rise sharply. Deficits are smaller after 2025 than CBO projected last year because of lower projections as a share of GDP of All told, under CBO’s extended baseline, federal spend- noninterest spending and because of projections of rev- ing would increase from today’s 21 percent of GDP to enues that are the same or higher than CBO estimated 23 percent in 2028 (adjusted to exclude shifts in timing; last year. The smaller deficits result in lower debt as a that spending would be 24 percent if timing shifts were share of GDP after 2041 than CBO projected last year. included) and to 29 percent by 2048. (Federal spending has averaged 20 percent of GDP over the past 50 years.) The Budget Outlook for the Next 30 Years CBO’s extended baseline shows a substantial imbal- Meanwhile, if current laws generally remained ance in the federal budget over the next three decades. unchanged, revenues would remain near 16.6 percent Growing budget deficits would lead to rising amounts of of GDP for a few years (their current level), rise steadily federal debt, which in turn would increase pressures on to 17.5 percent by 2025, and then increase sharply the federal budget and dampen economic growth. in 2026 following the scheduled expiration of many provisions of the 2017 tax act.6 Revenues are projected Rising Budget Deficits to increase to 18.1 percent of GDP in that year and then If current laws generally remained unchanged, the federal rise to 18.5 percent by 2028. Beyond 2028, revenues budget deficit would grow substantially over the next few would grow faster than the economy but more slowly years. It would rise to 4.2 percent of GDP this year (up from 3.5 percent last year) and then climb to 5.1 percent 6. That law made many significant changes to the individual and corporate income tax systems. Those changes, on net, lowered taxes owed by most individuals and businesses beginning in 5. See Congressional Budget Office, The 2017 Long-Term Budget calendar year 2018. Nearly all of the changes to individual Outlook (March 2017), www.cbo.gov/publication/52480. income taxes are set to expire at the end of calendar year 2025. 6 The 2018 Long-Term Budget Outlook June 2018 Figure 2 . Federal Debt, Spending, and Revenues Percentage of Gross Domestic Product 160 Actual Projected 140 120 100 In CBO’s extended baseline, 80 Federal Debt Held federal debt held by the by the Public public rises… 60 40 20 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 30 Spending 25 20 Revenues …because growth in total spending outpaces growth in 15 total revenues, resulting in larger budget deficits. 10 5 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. GDP = gross domestic product. Continued than spending. In part, revenues would rise because and activities.7 Measuring debt as a percentage of GDP of real bracket creep, which pushes more income into is useful for comparing amounts of debt in different higher tax brackets as people’s income rises faster than inflation. In addition, revenues would grow rapidly from 7. When the federal government borrows in financial markets, it a new excise tax on certain employment-based health competes with other participants for financial resources and, insurance plans if that law took effect, as scheduled, in in the long term, crowds out private investment, thus reducing economic output and income. By contrast, federal debt held by 2022. All told, CBO projects, revenues would reach trust funds and other government accounts represents internal 19.8 percent of GDP in 2048. Although that share transactions of the government and does not directly affect would exceed the 50-year average of about 17 percent, it financial markets. (Together, that debt and debt held by the would still fall short of projected spending. public make up gross federal debt.) For more discussion, see Congressional Budget Office, Federal Debt and Interest Costs Greater Accumulation of Federal Debt (December 2010), www.cbo.gov/publication/21960. Several factors not directly included in the budget totals also affect the Debt held by the public represents the amount that the government’s need to borrow from the public. They include federal government has borrowed in financial markets fluctuations in the government’s cash balance, as well as the cash by issuing Treasury securities to pay for its operations flows of the financing accounts used for federal credit programs. June 2018 The 2018 Long-Term Budget Outlook 7 Figure 2. Continued Federal Debt, Spending, and Revenues Percentage of Gross Domestic Product 15 Actual Projected Spending on certain components of the budget—Social Security, 10 Major Health Care Programsa the major health care programs, Other Noninterest Spendingb and net interest—is projected to Social Security rise relative to GDP; other Net Interest spending, in total, is projected 5 to decline. 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 15 Spending Increases in individual income Individual Income Taxes taxes account for most of the 10 rise in total revenues relative Revenues to GDP. Receipts from all other sources, taken together, are Payroll Taxes projected to be slightly higher 5 in 2048 than they are today. Other Revenuesc Corporate Income Taxes 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 a.Consists of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. b.Consists of all federal spending other than that for Social Security, the major health care programs, and net interest. c.Consists of excise taxes, remittances to the Treasury from the Federal Reserve System, customs duties, estate and gift taxes, and miscellaneous fees and fines. years because it accounts for changes in price levels, 70 percent. Since then, the upward trajectory has gener- population, output, and income—all of which affect ally continued, and debt is projected to reach 78 percent the nation’s ability to finance the debt. The ratio of debt of GDP by the end of this year—a very high amount to GDP places the effects of potential adjustments to by historical standards. (For comparison, such debt has the budget within the context of the nation’s resources. averaged 41 percent of GDP over the past 50 years.) Examining whether debt as a percentage of GDP is During only one other period in U.S. history—from increasing is therefore a simple and meaningful way to 1944 through 1950, because of the surge in federal assess the budget’s sustainability. spending during World War II—has that debt exceeded 70 percent of GDP (see Figure 3). Federal debt held by the public has ballooned over the past decade. At the end of 2007, that debt stood If current laws generally remained unchanged, the gap at 35 percent of GDP, but deficits arising from the between spending and revenues would grow substantially 2007–2009 recession and the resulting policy responses through 2022, stabilize for a few years, and then continue caused it to grow sharply over the next five years. By the to widen. As a result, federal debt as a percentage of GDP end of 2012, debt as a share of GDP had doubled to would reach unprecedented levels. CBO projects that debt 8 The 2018 Long-Term Budget Outlook June 2018 Figure 3 . Federal Debt Held by the Public Percentage of Gross Domestic Product 160 Actual Projected 140 120 World War II High and rising federal debt would reduce national saving 100 and income, boost the government’s interest 80 payments, limit lawmakers’ ability to respond to 60 unforeseen events, and Great Depression increase the likelihood of a 40 Civil War World War I fiscal crisis. 20 0 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 Source: Congressional Budget Office. would rise to 96 percent of GDP by 2028, and six years Less National Saving and Lower Income later, in 2034, it would surpass the peak of 106 percent Large federal budget deficits over the long term would recorded in 1946. By 2048, federal debt would reach reduce investment, resulting in lower national income 152 percent of GDP—significantly larger than the average and higher interest rates than would otherwise be the of the past five decades—and would be on track to grow case. If the government borrowed more money, a greater even larger. Moreover, if lawmakers changed current laws amount of household and business saving would be used to maintain certain policies now in place—preventing a to buy Treasury securities, thus crowding out private significant increase in individual income taxes in 2026, for investment. Both the government and private borrowers example—the result would be even larger increases in debt. would face higher interest rates to compete for savings. Although those higher rates would strengthen the incen- Consequences of a Large and Growing tive to save, the increased government borrowing would Federal Debt exceed the rise in saving by households and businesses. The burgeoning federal debt over the coming decades As a result, total saving by all sectors of the economy would have these effects: (national saving) would be lower, as would private investment and economic output. (Private investment •• Reduce national saving and income in the long term; would be affected less than national saving because higher interest rates tend to attract more foreign capital •• Increase the government’s interest costs, putting more to the United States and induce U.S. savers to keep more pressure on the rest of the budget; of their money at home.) With less investment in capital goods—such as factories and computers—workers •• Limit lawmakers’ ability to respond to unforeseen would be less productive. Because productivity growth events; and is the main driver of growth in people’s real compensa- tion, decreased investment also would reduce average •• Increase the likelihood of a fiscal crisis, a situation in compensation per hour, making people less inclined to which the interest rate on federal debt rises abruptly, work. CBO’s extended baseline incorporates those eco- dramatically increasing the cost of government nomic effects as well as the feedback to the budget from borrowing. negative effects on the economy. June 2018 The 2018 Long-Term Budget Outlook 9 Greater Pressure on the Budget From Higher Interest have been if that spending had not been reduced.10 In Costs contrast, if reductions in, say, Social Security benefits Current net interest costs are relatively small because were made to lessen spending, people might feel com- interest rates have been so low. Under CBO’s extended pelled to work more to replace that lost income, thus baseline, however, rising interest rates and increased fed- increasing output. eral borrowing boost net interest costs substantially. By 2045, those costs would surpass discretionary spending Reduced Ability to Respond to Unforeseen Events for the first time since 1962 (the earliest year for which When outstanding debt is relatively small, the federal relevant data are available). government is able to borrow money at lower rates to cover unexpected costs, such as those that arise from Over the next few years, the unemployment rate is recessions, financial crises, natural disasters, or wars. By expected to decline and inflation is projected to rise. contrast, when outstanding debt is large, the government CBO expects the Federal Reserve to respond to those has less flexibility to address financial and economic developments by continuing to raise the federal funds crises. A large debt also can compromise a country’s rate to keep inflation close to the central bank’s long- national security by constraining military spending in term goal.8 In addition, long-term interest rates are pro- times of international crisis or by limiting the govern- jected to rise gradually relative to short-term rates as the ment’s ability to prepare for (or respond to) such a crisis. term premium (the premium paid to bondholders for the extra risk associated with holding longer-term bonds) At the outset of the 2007–2009 recession, when federal moves up from its recent low levels. The term premium debt held by the public was below 40 percent of GDP, is projected to rise as investors gain more confidence lawmakers had the flexibility necessary to respond to in global economic growth, the demand for long-term the financial crisis. The recession resulted in lower output Treasury securities as a hedge against unexpected declines and income, which caused sharp declines in tax reve- in inflation dissipates, and the Federal Reserve reduces nues and increases in mandatory spending. The policy its holdings of long-term assets. CBO projects that responses included increases in federal spending to interest rates would eventually settle at levels consistent stabilize the financial sector, boost investment in infra- with factors such as productivity growth, the demand structure, and add to income security programs, along for investment, and federal deficits. Under the extended with temporary decreases in business and payroll taxes. baseline, interest costs are much higher than they would As a result, by 2012, federal debt as a percentage of GDP be if deficits were smaller and interest rates were lower. had doubled from its 2007 level. The higher the government’s interest costs, the more If another recession or fiscal crisis occurred and if federal difficult it would be to achieve any particular target for debt was at its current level or higher, the government deficit reduction. That is because, in order to reduce the might have a more difficult time implementing similar deficit, tax increases, spending reductions, or both would costly actions in response. As a result, such events could have to be greater. Such policy changes could affect have larger negative effects on the economy and on the economy and people’s well-being. If, for example, people’s well-being. Moreover, the reduced financial flexi- policy changes included an increase in marginal tax rates bility and increased dependence on foreign investors that (the rates that apply to an additional dollar of income), would accompany high and rising debt could weaken people’s incentives to work and save would diminish as U.S. international leadership. tax rates rose.9 Alternatively, if policy changes included a reduction in federal spending for investment, both Greater Chance of a Fiscal Crisis output and income would be lower than they would A large and growing federal debt would increase the chance of a fiscal crisis in the United States—a situa- tion in which it would become increasingly difficult to finance federal borrowing and investors would have to 8. The federal funds rate is the interest rate financial institutions be compensated with continuously increasing interest charge each other for overnight loans of their monetary reserves. 9. See Congressional Budget Office, How the Supply of Labor 10. For more information, see Congressional Budget Office, The Responds to Changes in Fiscal Policy (October 2012), www.cbo. Macroeconomic and Budgetary Effects of Federal Investment gov/publication/43674. (June 2016), www.cbo.gov/publication/51628. 10 The 2018 Long-Term Budget Outlook June 2018 rates.11 Those concerns could perpetuate a cycle: Higher responding. The government would need to undertake interest rates would increase concerns over repayment, some combination of three approaches: restructure the which would continue to raise interest rates even further. debt (that is, seek to modify the contractual terms of Even in the absence of a full-blown crisis, such risks existing obligations), use monetary policy to raise infla- would lead to higher rates and borrowing costs for the tion above expectations, or implement large and abrupt U.S. government and the private sector. spending cuts or tax increases. In a fiscal crisis, dramatic increases in Treasury rates would Demographic and Economic Trends That reduce the market value of outstanding government secu- Underlie CBO’s Long-Term Projections rities, and the resulting losses—for mutual funds, pension Demographic and economic projections are key determi- funds, insurance companies, banks, and other holders of nants of the long-term budget outlook. Through 2028, government debt—could be large enough to cause some the projections in this report are the same as those that financial institutions to fail. Because the United States underlie CBO’s 10-year baseline; for later years, the currently benefits from the U.S. dollar being the world’s agency projects conditions according to its assessment of reserve currency and because the federal government long-term trends. (Appendix A describes CBO’s demo- borrows in dollars, it is less likely that a sudden fiscal crisis graphic and economic projections.) In addition, the would lead to a catastrophic financial crisis similar to those economic projections take into account the effects that that befell Argentina, Greece, or Ireland. As one example, projected fiscal policies—in particular, increased federal in the event of a dramatic increase in interest rates, the borrowing and rising effective marginal tax rates—would Federal Reserve could buy Treasury securities and thereby have on the economy. Such effects would result in a limit losses to bondholders. However, such moves, if smaller labor supply, a smaller stock of capital, and lower extensive, would ultimately lead to high inflation, a sharp output than would otherwise be the case. depreciation in the value of the dollar, or both.12 Those developments would reduce the value of U.S. assets. Demographic Projections The size and age profile of the U.S. population affect the No one can accurately predict whether or when a fiscal federal budget and the nation’s economy. For example, crisis might occur in the United States or how it would the composition of the population influences the size of unfold. In particular, the debt-to-GDP ratio has no the labor force and the number of beneficiaries of Social identifiable tipping point to indicate that a crisis is likely Security and other federal programs. In CBO’s projec- or imminent. Nonetheless, a large and rising federal debt tions, the U.S. population increases from 332 million would almost certainly increase the risk of a fiscal crisis.  at the beginning of this year to 392 million in 2048, expanding by 0.6 percent per year, on average. That The likelihood of a fiscal crisis also depends on economic annual rate of growth is slower than the rate of the past conditions. If investors anticipate continued economic 50 years (0.9 percent). The share of the population age growth and low interest rates, they are generally less con- 65 or older also rises over the coming decades, maintain- cerned about the government’s debt burden. Conversely, ing a long-standing historical trend. By 2048, 22 percent substantial debt can reinforce a more generalized concern of the population would be age 65 or older, compared about the economy. Thus, fiscal crises around the world with 16 percent today (see Figure 4). often have begun during recessions and, in turn, have exacerbated them. To estimate growth in the U.S. population, CBO projects rates of fertility, immigration, and mortality. If a fiscal crisis occurred in the United States, policymak- The total fertility rate is calculated as the sum of fertil- ers would have limited—and unappealing—options for ity rates for women between 15 and 49 in a given year and represents the average number of children that a 11. For more information, see Congressional Budget Office, Federal woman would have in her lifetime.13 In general, that Debt and the Risk of a Fiscal Crisis (July 2010), www.cbo.gov/ rate tends to decline during recessions and rebound publication/21625. That report points out, for example, that during recoveries. Instead of rebounding after the during past fiscal crises, Argentina, Greece, and Ireland were forced to make difficult choices in the face of sharp increases in 13. The total fertility rate can also be defined as the average number interest rates on government debt. of children that a woman would have if, in each year of her life, 12. Over time, such currency debasement would erode the status of she experienced the birth rates observed or assumed for that year the U.S. dollar as the world’s reserve currency. and if she survived her entire childbearing period. June 2018 The 2018 Long-Term Budget Outlook 11 Figure 4 . Population, by Age Group Millions of People 400 Actual Projected Age 65 or Older 300 The share of the population age 65 or older is projected to 200 Ages 20 to 64 rise over the coming decades, maintaining a long-standing historical trend. 100 Ages 0 to 19 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Source: Congressional Budget Office. This figure shows actual data through calendar year 2015, the most recent year for which such data are available. 2007–2009 recession, however, the fertility rate fell. In slightly faster than the average rate of growth in the U.S. 2007, the rate was 2.1 births per woman, but it declined population overall.15 to 1.9 by 2010 and has remained below that point since then. CBO expects the total fertility rate to be 1.9 for Mortality rates are projected to improve over the next the next 30 years.14 30 years, on average. Those rates, which measure the number of deaths per thousand people in the popula- Under current law, the rate of net annual immigration tion, are projected to decline at the same rates that were to the United States is expected to rise slightly over the recorded for each age and sex group from 1950 to 2014. next three decades. CBO projects that rate would inch Improved, or lower, mortality rates mean higher life up from an average of 3.1 per thousand people in the expectancy. CBO projects an average life expectancy at U.S. population over the next decade to 3.2 in 2048. birth of 82.8 years in 2048, compared with 79.2 years That rate, which accounts for anyone who either enters in 2018.16 Similarly, CBO projects life expectancy at age or leaves the United States in any year, is slightly higher 65 in 2048 to be 21.7 years, or 2.2 years longer than life than the average net annual immigration rates since the expectancy at age 65 in 2018. end of the 2007–2009 recession. On balance, CBO projects that the increase in net annual immigration over Economic Projections the next decade would be mostly driven by higher num- The performance of the U.S. economy in coming bers of legal permanent residents. The annual increase decades will affect the federal government’s spending, in the number of legal temporary and unauthorized revenues, and debt accumulation. CBO makes its eco- immigrants is projected to be relatively steady over the nomic projections by projecting trends in key economic next 10 years. Beyond 2028, the annual average rate of growth is the same for different categories of immigrants 15. That rate is based on the Census Bureau’s projections for late in CBO’s projections. Using that simplified approach, in the coming decade. See Census Bureau, “2014 National CBO projects that net annual immigration would grow Population Projections: Summary Tables,” Table 1, https://go.usa. gov/xQAbu. The Census Bureau has recently released a new set of at an average rate of 0.6 percent annually through 2048, projections, but information from those projections has not been incorporated in this analysis. In those projections, the population is slightly smaller than the Census Bureau projected in 2014. 14. Recent data show that low total fertility rates have persisted since the recession, remaining below 1.9. See Brady E. Hamilton 16. Life expectancy as used here is period life expectancy, which is and others, Births: Provisional Data for 2017, Vital Statistics the amount of time that a person in a given year would expect to Rapid Release Report 4 (National Center for Health Statistics, survive beyond his or her current age on the basis of that year’s May 2018), www.cdc.gov/nchs/nvss/vsrr/reports.htm. mortality rates for various ages. 12 The 2018 Long-Term Budget Outlook June 2018 Figure 5 . Average Annual Growth of Real Potential GDP in CBO’s Extended Baseline Percent 4.0 4 Historical Projected 3.4 3.2 3.3 3 2.4 0.7 2.4 Growth in potential GDP is 1.7 2.0 projected to be slower than 1.9 1.8 1.9 2 it has been in the past, driven 1.4 1.5 mostly by slower growth of Potential the labor force. 2.5 1.4 1.6 Labor Force 1 1.6 0.9 Productivity 1.6 1.7 1.2 1.0 0.5 0.5 0.4 Potential 0.3 Labor Force 0 1950– 1974– 1982– 1991– 2002– 2008– 2018– 2029– 2039– 1973 1981 1990 2001 2007 2017 2028 2038 2048 Source: Congressional Budget Office. Real potential GDP is the maximum sustainable output of the economy adjusted to remove the effects of inflation. The two contributing factors are potential labor force productivity (the ratio of potential GDP to the potential labor force) and the potential labor force (the labor force adjusted for ups and downs in the business cycle). GDP = gross domestic product. variables, such as the size and composition of the labor stability (after rising for decades) in the share of women force, capital accumulation, productivity, inflation, and participating in the labor force.17 interest rates. The agency also considers ways in which fiscal policy influences economic activity. In CBO’s projections, total factor productivity grows more slowly than its historical average, increasing by In CBO’s projections, growth in potential (maximum 1.2 percent per year, on average, from 2018 to 2048. sustainable) GDP in the future is slower than it has been That rate, which measures the average real output per over the past 50 years. Under its extended baseline, CBO unit of combined labor and capital services, is slower projects an increase in real potential GDP of 1.9 percent than the annual average of 1.5 percent since 1950. per year, on average, over the next 30 years, compared Factors influencing that projection include slower with its historical growth rate of 2.8 percent. That slower productivity growth over the past several decades economic growth is attributable to several factors—most (except during a period of rapid growth in the late notably, slower growth of the potential labor force (the 1990s and early 2000s), modest growth in labor quality labor force adjusted for ups and downs in the business (a measure of workers’ skills), and a projected reduc- cycle). In CBO’s projections, the potential labor force tion in federal investment as a share of GDP. Potential grows by 0.4 percent per year, on average, through labor productivity—defined as real potential output 2048 (see Figure 5); the average annual growth rate over per potential hour of labor—is likewise projected to the 1968–2017 period was 1.5 percent. That slower grow more slowly than it has in the past, reflecting less projected growth of the potential labor force mainly results from the aging of the population and the relative 17. For more details about how CBO projects labor force participation rates, see Joshua Montes, CBO’s Projection of Labor Force Participation Rates, Working Paper 2018-04 (Congressional Budget Office, March 2018), www.cbo.gov/publication/53616. June 2018 The 2018 Long-Term Budget Outlook 13 private investment in capital goods. Since 1950, labor income face higher tax rates. Higher marginal tax rates productivity has expanded by 1.7 percent per year, on on labor income would lessen people’s incentive to average; through 2048, that growth rate is projected to work, and the increase in the marginal tax rate on capital average 1.5 percent per year (see Figure 5). income would reduce their incentive to save. All told, less private domestic investment and a smaller labor sup- Interest rates, in CBO’s projections, rise as the economy ply would result in lower economic output and income continues to expand but remain lower than they have than would otherwise be the case. been historically. Slower growth of the labor force and lower inflation push interest rates down from their his- Projected Spending Through 2048 torical levels, and those factors are projected to outweigh Spending for all of the government’s programs and the effects of rising federal debt and other factors that activities, combined with net interest costs, is projected tend to push interest rates up. In CBO’s latest economic to account for a larger percentage of GDP in coming projections, the interest rate on 10-year Treasury notes years than it has, on average, over the past 50 years. rises from 2.4 percent at the end of 2017 to 3.7 percent From 1968 to 2017, federal outlays other than those for in 2028. That rate is projected to rise to 4.8 percent the government’s net interest costs averaged 18 percent in 2048—1 percentage point below the 5.8 percent of GDP. The percentage was higher over the past decade, average recorded over the 1990–2007 period. (That when noninterest spending averaged 20 percent of GDP, period is used for comparison because it was character- because of underlying demographic trends and because ized by fairly stable expectations for inflation and by a of temporary conditions in the economy (namely, the lack of significant financial crises or severe economic financial crisis, the weak recovery, and the federal policies downturns.) that were created to address those circumstances). Under current law, noninterest outlays are projected to rise from The average interest rate on all federal debt held by 19 percent in 2018 to 20 percent in 2028 (adjusted to the public tends to be lower than the rate on 10-year exclude shifts in timing; the share would be 21 percent Treasury notes. (Interest rates generally are lower on if timing shifts were included). Over the next decade, shorter-term debt than on longer-term debt, and the mandatory spending (which includes spending on Social average term to maturity of federal debt has been less Security and the major health care programs, along with than 10 years since the 1950s.) Based on projections of many smaller programs) is generally projected to increase interest rate spreads and the term structure of rates on as a share of the economy, and discretionary spending is federal debt, the average interest rate on federal debt is generally projected to decrease. projected to be about 0.4 percentage points lower than the interest rate on 10-year Treasury notes after 2028.18 After 2028, under the assumptions that govern the As a result, in CBO’s projections, the average interest extended baseline, noninterest spending would con- rate on federal debt rises to 4.4 percent by 2048. tinue to rise relative to the size of the economy, reaching 23 percent of GDP by 2048. (For a summary of CBO’s CBO’s economic projections incorporate the macro- assumptions about spending and revenues, see Table 2.) economic effects of federal tax and spending policies. In That increase would mostly result from larger outlays for particular, the agency projects that increased borrowing the two biggest mandatory programs: Social Security and by the federal government under current law generally Medicare (see Figure 6). would crowd out some private investment in productive capital in the long term. Less private investment in capi- Under current law, net interest costs would rise from tal goods would make workers less productive, leading to 1.6 percent of GDP in 2018 to 3.1 percent in 2028, lower wages and a smaller supply of labor. Furthermore, CBO projects, as debt accumulates and as interest rates the extended baseline incorporates the economic effects increase from their currently low levels. By 2048, net of higher marginal tax rates. As more income is pushed interest costs would equal 6.3 percent of GDP, boosting into higher tax brackets over time, labor and capital total federal spending to 29 percent of GDP. Spending has exceeded that amount only once, for a three-year 18. Term structure is the relationship between interest rates or bond period during World War II. For those years, when yields and different terms or maturities. 14 The 2018 Long-Term Budget Outlook June 2018 Table 2 . Assumptions About Spending and Revenues Underlying CBO’s Extended Baseline Assumptions About Spending  a Social Security As scheduled under current law Medicare As scheduled under current law through 2028; thereafter, projected spending depends on the estimated number of beneficiaries and health care costs per beneficiary (for which excess cost growth is projected to move smoothly to a rate of 1.0 between 2029 and 2048) a Medicaid As scheduled under current law through 2028; thereafter, projected spending depends on the estimated number of beneficiaries and health care costs per beneficiary (for which excess cost growth is projected to move smoothly to a rate of 1.0 between 2029 and 2048) Children's Health Insurance Program As projected in CBO's baseline through 2028; constant as a percentage of GDP thereafter Subsidies for Health Insurance Purchased As scheduled under current law through 2028; thereafter, projected spending depends on the estimated Through the Marketplaces Established number of beneficiaries, an additional indexing factor for subsidies, and excess cost growth for private health Under the Affordable Care Act insurance premiums (which is projected to move smoothly to an annual rate of 1.0 between 2029 and 2048) Other Mandatory Spending As scheduled under current law through 2028; thereafter, refundable tax credits are estimated as part of r ­ evenue projections, and the rest of other mandatory spending is assumed to decline as a percentage of GDP at roughly the same annual rate at which it is projected to decline between 2023 and 2028 b Discretionary Spending As projected in CBO's baseline through 2028; roughly constant as a percentage of GDP thereafter c Assumptions About Revenues Individual Income Taxes As scheduled under current law Payroll Taxes As scheduled under current law Corporate Income Taxes As scheduled under current law Excise Taxes As scheduled under current law d Estate and Gift Taxes As scheduled under current law Other Sources of Revenues As scheduled under current law through 2028; constant as a percentage of GDP thereafter Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. For CBO’s most recent 10-year baseline projections, see Congressional Budget Office, An Analysis of the President’s 2019 Budget (May 2018), www.cbo.gov/publication/53884. Excess cost growth refers to the extent to which the growth rate of nominal health care spending per person—adjusted for demographic characteristics of the relevant populations—exceeds the growth rate of potential GDP per person. (Potential GDP is the maximum sustainable output of the economy.) GDP = gross domestic product. a.Assumes the payment of full benefits as calculated under current law, regardless of the amounts available in the program’s trust funds. b.In that projection, GDP includes the macroeconomic effects of the policies underlying the extended baseline. If it did not, the rest of other mandatory spending after 2028 would decline at the same rate at which it is projected to decline between 2023 and 2028 (excluding the decline in spending for the Supplemental Nutrition Assistance Program). c.In that projection, GDP includes the macroeconomic effects of the policies underlying the extended baseline. If it did not, discretionary spending after 2028 would remain the same (measured as a percentage of GDP) as the amount projected for 2028. d.The exception to the current-law assumption applies to expiring excise taxes dedicated to trust funds. The Balanced Budget and Emergency Deficit Control Act of 1985 requires CBO’s baseline to reflect the assumption that those taxes would be extended at their current rates. That law does not stipulate that the baseline include the extension of other expiring tax provisions, even if they have been routinely extended in the past. June 2018 The 2018 Long-Term Budget Outlook 15 Figure 6 . Spending and Revenues in the Past and in CBO’s Extended Baseline Percentage of Gross Domestic Product Spending Major Health Other Noninterest Total Social Security Care Programsa Spendingb Net Interest Spending 1968 2.6 0.7 15.3 1.2 19.8 1988 4.2 2.1 11.4 2.9 20.6 2018 4.9 5.2 8.9 1.6 20.6 2028 6.0 6.8 7.9 3.1 23.6 2048 6.3 9.2 7.6 6.3 29.3 Revenues Individual Corporate Other Revenue Total Income Taxes Income Taxes Payroll Taxes Sourcesc Revenues 1968 7.6 3.2 3.8 2.4 17.0 1988 7.8 1.8 6.5 1.5 17.6 2018 8.2 1.2 5.9 1.4 16.6 2028 9.8 1.5 6.0 1.2 18.5 2048 10.9 1.4 5.9 1.6 19.8 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a.Consists of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. b.Consists of all federal spending other than that for Social Security, the major health care programs, and net interest. c.Consists of excise taxes, remittances to the Treasury from the Federal Reserve System, customs duties, estate and gift taxes, and miscellaneous fees and fines. defense spending increased sharply, total federal spending Spending for Social Security and the Major  topped 40 percent. Health Care Programs Mandatory programs have accounted for a rising share CBO projects that the growth in spending for Social of the federal government’s noninterest spending over Security, the major health care programs, and net interest the past few decades. Most of the growth has occurred would continue to reshape the spending patterns of the because Social Security and Medicare provide benefits U.S. government (see Figure 7). Spending for net interest mainly to people age 65 or older, a group that has been would account for a much greater portion of total federal growing significantly. spending by 2048 than it does today, and spending on Social Security and the major health care programs Social Security. Created in 1935, Social Security is the would account for a much larger share of all federal non- largest single program in the federal budget. Its two interest spending. components pay benefits to 62 million people in all. 16 The 2018 Long-Term Budget Outlook June 2018 Figure 7 . Composition of Federal Spending in CBO’s Extended Baseline Percent Total Spending Noninterest Spending 100 100 8 21 Net Interest Other Noninterest 80 80 33 Spendinga 47 60 60 Major Health 92 Noninterest 40 40 40 Care Programsb 79 27 Spending 20 20 26 27 Social Security 0 0 2018 2048 2018 2048 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a.Consists of all federal spending other than that for Social Security, the major health care programs, and net interest. b.Consists of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. The larger of the two, Old-Age and Survivors Insurance is consistent with a statutory requirement that CBO’s (OASI), pays benefits to retired workers, to their eligible 10-year baseline projections incorporate the assumption dependents, and to some survivors of deceased workers. that funding for such programs is adequate to make all The smaller program, Disability Insurance (DI), makes payments required by law.20 payments to disabled workers and to their dependents until those workers are old enough to claim full retire- The Social Security program is funded by dedicated tax ment benefits under OASI. revenues from two sources. Currently, 96 percent comes from a payroll tax; the rest is collected from income taxes Under current law, CBO projects, spending for Social on Social Security benefits. Revenues from the payroll Security would increase noticeably as a share of the tax and the tax on benefits are credited to the Old-Age economy, continuing the trend of the past five decades. and Survivors Insurance Trust Fund and the Disability That spending would increase from 4.9 percent of Insurance Trust Fund, which finance the program’s GDP in 2018 to 6.3 percent in 2048 (see Figure 6 on benefits. page 15), and the number of beneficiaries would rise from 62 million to nearly 99 million. In CBO’s extended A common measure of the sustainability of a program baseline projections, Social Security is assumed to pay that has a trust fund and a dedicated revenue source is benefits as scheduled under current law, regardless of its estimated actuarial balance over a given period—that the status of the program’s trust funds.19 That approach available from U.S. House of Representatives, Committee on Ways and Means, 2014 Green Book, Chapter 1: Social Security, 19. The balances of the trust funds represent the total amount that “Social Security Congressional Research Service Reports” the government is legally authorized to spend for those purposes. (accessed April 19, 2018), http://go.usa.gov/cCXcG. For more details about the legal issues related to exhaustion of a trust fund, see Noah P. Meyerson, Social Security: What 20. Sec. 257(b)(1) of the Balanced Budget and Emergency Deficit Would Happen If the Trust Funds Ran Out? Report for Congress Control Act of 1985 (Deficit Control Act), Public Law 99-177 RL33514 (Congressional Research Service, August 28, 2014), (codified at 2 U.S.C. §907(b)(1) (2016)). June 2018 The 2018 Long-Term Budget Outlook 17 is, the sum of the present value of projected tax revenues Table 3 . and the current trust fund balance minus the sum of the Financial Measures for Social Security present value of projected outlays and a year’s worth of benefits at the end of the period.21 For Social Security, Actuarial that difference is traditionally presented as a percentage Projection Period Balance of the present value of taxable payroll over 75 years.22 (Calendar years) Income Rate Cost Rate (Difference) As a Percentage of Gross Domestic Product Over the next 75 years, if current laws remained in place, 25 Years (2018 to 2042) 5.1 6.2 -1.0 the program’s actuarial shortfall would be 1.5 percent 50 Years (2018 to 2067) 4.8 6.2 -1.4 of GDP, or 4.4 percent of taxable payroll, CBO projects 75 Years (2018 to 2092) 4.7 6.2 -1.5 (see Table 3).23 According to CBO’s projections, there- As a Percentage of Taxable Payroll fore, it would be possible to pay the benefits prescribed 25 Years (2018 to 2042) 14.6 17.5 -2.9 by current law and maintain the necessary trust fund 50 Years (2018 to 2067) 14.0 18.0 -4.0 balances through 2092 if payroll taxes were raised 75 Years (2018 to 2092) 13.9 18.3 -4.4 immediately and permanently by about 4.4 percent of taxable payroll, if scheduled benefits were reduced by Source: Congressional Budget Office. an equivalent amount, or if some combination of tax These projections incorporate the assumption that spending for Social increases and spending reductions of equal present value Security continues as scheduled even if its trust funds are exhausted. was adopted.24 Through 2048, the projections incorporate macroeconomic feedback caused by rising federal debt and marginal tax rates. After 2048, they do not account for such feedback. 21. A present value expresses a flow of past and future income or payments as a single amount received or paid at a specific time. Over each projection period, the income rate is the present value of The value depends on the rate of interest, known as the discount annual tax revenues plus the initial trust fund balance, and the cost rate rate, used to translate past and future cash flows into current is the present value of annual outlays plus the present value of a year’s dollars at that time. To account for the difference between a trust worth of benefits as a reserve at the end of the period, each divided fund’s current balance and the balance desired for the end of the by the present value of gross domestic product or taxable payroll. (The period, the balance at the beginning is added to the projected tax present value of a flow of revenues or outlays over time expresses that revenues, and an additional year of costs at the end of the period flow as a single amount received or paid at a specific time. The present is added to projected outlays. value depends on a rate of interest, known as the discount rate, that is used to translate past and future cash flows into current dollars.) The 22. Taxable payroll is the total amount of earnings (wages and actuarial balance is the difference between the income and cost rates. self-employment income) for employment covered by Social Security that is below the applicable annual taxable maximum ($128,400 in 2018). Another commonly used measure of Social Security’s 23. The 75-year projection period used here begins in calendar sustainability is a trust fund’s date of exhaustion. CBO year 2018 and ends in calendar year 2092. The Social Security projects that, under current law, the DI trust fund would trustees have estimated that the program’s 75-year actuarial be exhausted in fiscal year 2025 and the OASI trust fund shortfall would be 2.8 percent of taxable payroll, which is about would be exhausted in calendar year 2032. If their balances 1.6 percentage points less than CBO’s projection. For details on were combined, the OASDI trust funds would be exhausted the trustees’ projections, see Social Security Administration, The in calendar year 2031, according to CBO’s estimate. 2018 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (June 2018), www.ssa.gov/oact/tr/2018. The Major Health Care Programs. Outlays for the major health care programs consist of spending for Medicare, 24. A policy that either increased revenues or reduced outlays by the same percentage of taxable payroll each year that would be Medicaid, and the Children’s Health Insurance Program required to eliminate the 75-year shortfall would not necessarily (CHIP), as well as outlays to subsidize health insurance place Social Security on a permanently stable financial path. purchased through the marketplaces established under Estimates of the actuarial shortfall do not account for revenues the Affordable Care Act (ACA) and related spending.25 or outlays after the 75-year projection period. Because shortfalls Medicare, which provides health insurance to about are smaller earlier in the 75-year projection period than they are later, such a policy would create surpluses in the next 25. Spending related to subsidies for insurance purchased through several decades but result in deficits later and leave the system the marketplaces includes spending for subsidies for insurance financially unbalanced after calendar year 2092. Additionally, provided through the Basic Health Program and spending for the the calculation of the actuarial balance excludes the effects of any risk-adjustment and reinsurance programs that were established macroeconomic feedback that would result from an increase in by the ACA to stabilize premiums for health insurance purchased taxes or a reduction in benefits. by individuals and small employers. 18 The 2018 Long-Term Budget Outlook June 2018 Figure 8 . Federal Spending on the Major Health Care Programs, by Category Percentage of Gross Domestic Product 10 Actual Projected 8 Medicaid, CHIP, and Medicare spending, net of Marketplace Subsidiesa 6 offsetting receipts, would account for about three- quarters of the increase in 4 spending for the major health care programs over the next Medicareb 2 30 years. 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. CHIP = Children’s Health Insurance Program; GDP = gross domestic product. a.“Marketplace Subsidies” refers to spending to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and insurance provided through the Basic Health Program, as well as spending to stabilize premiums for health insurance purchased by individuals and small employers. b.Refers to net spending for Medicare, which accounts for offsetting receipts that are credited to the program. Those offsetting receipts are mostly premiums paid by beneficiaries to the government. 59 million people (most of whom are at least 65 years GDP, CBO projects. If current laws generally remained old), accounts for more than half of that spending. in place, net outlays for those programs would increase to 9.2 percent in 2048, with Medicare spending, net of CBO projects federal spending for the government’s major offsetting receipts (mostly premiums paid by enrollees), health care programs for 2018 through 2028 under the growing by about 3 percent of GDP, and spending on assumption that the laws governing those programs will, Medicaid and CHIP, combined with outlays for market- in general, remain unchanged. As with Social Security, place subsidies and related spending, growing by about CBO assumes that Medicare will pay benefits as sched- 1 percent of GDP (see Figure 8).26 uled under current law, regardless of the amounts in the program’s trust funds. For longer-term projections, Causes of Growth in Spending for Social Security and considerable uncertainty surrounds the evolution of the Major Health Care Programs health care delivery and financing systems. That uncer- The aging of the population and rising health care costs tainty leads CBO to employ a formulaic approach for its per person are reasons for the sharp rise in projected projections beyond 2028: It combines estimates of the spending for Social Security and the major federal number of expected beneficiaries of the government’s health care programs over the next 30 years. The extent health care programs with mechanical estimates of the to which health care costs per person, adjusted for growth in spending per beneficiary. demographic changes, grow faster than potential GDP per person is known as excess cost growth. Over the past five decades, spending for the major health care programs has steadily grown faster than the 26. In CBO’s projections, the outlays for subsidies for insurance economy, and that trend continues in CBO’s extended purchased through the marketplaces and related spending are baseline. In 2018, net federal spending for the major presented in combination with outlays for Medicaid and CHIP. health care programs is estimated to equal 5.2 percent of Most of those outlays constitute federal subsidies for health insurance for low- and moderate-income households. June 2018 The 2018 Long-Term Budget Outlook 19 Figure 9 . Spending Growth in Social Security and the Major Health Care Programs in CBO’s Extended Baseline Percentage of Gross Domestic Product Spending for Spending for Spending for the Social Security and the Social Security Major Health Care Programs Major Health Care Programs 20 20 20 16.9 Because of Excess Cost 15 15 15 3.2 Growth After 2018 10.8 Because of Aging 10.6 3.3 After 2018 10 10 10 3.0 6.3 5.9 4.9 0.1a 1.8 If Aging and Excess 5 1.5 5 5 10.4 Cost Growth Did Not Occur After 2018 4.6 b 5.8 0 0 0 2018 2048 2018 2048 2018 2048 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. Outlays for the major health care programs consist of gross spending for Medicare (which does not account for offsetting receipts that are credited to the program), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. Those outlays have been adjusted to exclude the effects of shifting payments from one fiscal year into another so that those payments are not made on a weekend. Excess cost growth refers to the extent to which the growth rate of nominal health care spending per person—adjusted for demographic characteristics of the relevant populations—exceeds the growth rate of potential gross domestic product per person. (Potential gross domestic product is the maximum sustainable output of the economy.) This figure highlights the most important effects of aging and excess cost growth. a.Excess cost growth accounts for a small portion of the increase in spending for Social Security as a share of GDP in 2048 because greater spending on federal health care programs leads to larger deficits, which in turn slow the growth of GDP. b.If aging and excess cost growth did not occur after 2018, spending on Social Security as a share of GDP would be lower in 30 years, mainly because of the scheduled increase in the full retirement age for Social Security. In developing its projections, if CBO had set the shares increase of 3.3 percentage points, or roughly half of the of the population by age at today’s proportions and had difference. Excess cost growth, at an increase of 3.2 per- set excess cost growth at zero, spending on those pro- centage points, accounts for the other half. grams as a share of GDP in 2048 would be 0.4 percent- age points below the 10.8 percent estimated for 2018 The Aging Population. In CBO’s projections, the aging (adjusted to exclude shifts in timing).27 In the extended of the baby-boom generation and continued gains in life baseline, however, that spending reaches 16.9 percent expectancy increase the share of the population that is of GDP by 2048 (see Figure 9).28 Aging accounts for an age 65 or older from 16 percent to 22 percent between 2018 and 2048. 27. Excluding aging and excess cost growth, spending on those Aging accounts for nearly all of the projected long-term programs as a percentage of GDP would be lower in 30 years, mainly because of the scheduled increase in the full retirement increase in Social Security spending as a percentage of age for Social Security. 28. This analysis of causes of spending growth includes gross spending on Medicare. 20 The 2018 Long-Term Budget Outlook June 2018 GDP.29 Because of growth in the share of the population activities, including education, transportation, housing that is 65 or older, a larger segment of the population assistance, veterans’ health care, health-related research will consist of Social Security beneficiaries, and their and public programs, administration of justice, and benefits will require greater federal spending. international affairs. Aging also contributes to the projected increase in the Over the past half-century, discretionary spending has share of GDP taken up by spending for the major health diminished markedly as a percentage of GDP: Between care programs, particularly Medicare, which is the largest 1968 and 2017, it declined from 13.1 percent to 6.3 per- such program. Most beneficiaries qualify for Medicare cent. In CBO’s baseline, discretionary outlays remain at age 65. As that group becomes larger and older, on at about that level through next year before decreasing average, Medicare spending will increase because the again, to 5.4 percent of GDP by 2028. number of beneficiaries will rise and because people tend to require more health care as they age. In CBO’s Through 2021, most discretionary funding is limited by projections for the 2018–2048 period, aging explains caps on annual discretionary appropriations that were about one-third of the increase in spending for the major originally specified in the Budget Control Act of 2011 health care programs as a share of GDP. (P.L. 112-25, as amended). The Bipartisan Budget Act of 2018 increased limits on discretionary funding that Rising Health Care Costs per Person. Even though otherwise would have been in place for 2018 and 2019. growth in health care costs per person has slowed The subsequent decline in discretionary outlays relative recently, over the next 30 years it is projected to still to GDP reflects lower statutory limits on discretionary be faster than growth in potential GDP per person. In funding in 2020 and 2021 and the assumption (required CBO’s extended baseline, excess cost growth accounts by law) that discretionary funding will grow at the rate for about two-thirds of the increase in spending for the of inflation—which is slower than projected growth major health care programs as a share of GDP between in GDP—beginning in 2022. After 2028, in CBO’s 2018 and 2048. Such cost growth also leads to greater extended baseline projections, discretionary spending is federal debt, which slows the growth of GDP and assumed to remain roughly constant as a percentage of slightly raises projected spending as a share of GDP. GDP (see Figure 10).30 Other Noninterest Spending Other Mandatory Spending. Since the mid-1960s, man- In the extended baseline, total federal spending for datory spending other than that for Social Security and everything other than Social Security, the major health the major health care programs has generally remained care programs, and net interest declines to a smaller between 2 percent and 4 percent of GDP. (An exception percentage of GDP than has been the case for more than was the spike to 5.1 percent in 2009 because of higher 70 years. During the past 50 years, such spending has spending in response to the severe recession.) That averaged 11 percent of GDP, but it has been as high as category of mandatory spending includes retirement 15 percent (in 1968) and as low as 8 percent (in the late programs for federal civilian and military employees, 1990s and early 2000s). Other noninterest spending in certain veterans’ programs, the Supplemental Nutrition 2018 is estimated to equal 8.9 percent of GDP. Under Assistance Program (SNAP), Supplemental Security the assumptions used for this analysis, that spending is projected to fall to 7.9 percent of GDP in 2028 and to 30. CBO assumed that discretionary spending after 2028 would 7.6 percent of GDP in 2048. remain constant as a percentage of GDP before the agency accounted for the effect on the economy of the fiscal policies projected under the extended baseline. Because CBO estimates Discretionary Spending. About half of all discretion- that fiscal policy under the extended baseline would dampen ary spending is dedicated to national defense, and the economic growth, its projection of discretionary spending would rest is for an array of federally funded investments and not grow at precisely the same rate as GDP. Although discretionary spending would decline relative to GDP 29. Excess cost growth accounts for a small portion of the increase from 2018 to 2028 in CBO’s projections, historical evidence in spending for Social Security as a share of GDP in 2048, suggests that such a decline is unlikely to persist: Discretionary amounting to about 0.1 percent of GDP, because greater spending has historically been a larger share of economic output spending on federal health care programs leads to larger deficits, than it is projected to be in 2028. For that reason, CBO did not which in turn slow the growth of GDP. assume that the share would decline further. June 2018 The 2018 Long-Term Budget Outlook 21 Figure 10 . Other Federal Noninterest Spending in CBO’s Extended Baseline Percentage of Gross Domestic Product 15 Actual Projected Measured as a percentage of economic output, other 10 federal noninterest spending in CBO’s extended baseline declines between 2018 and Other Mandatory Spendinga 2048, mainly because of a 5 projected decrease in discretionary spending over Discretionary Spending the next decade. 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a. “Other Mandatory Spending” is all mandatory spending other than that for Social Security and the major health care programs. It includes the refundable portions of the earned income and child tax credits and of the American Opportunity Tax Credit. Income, unemployment compensation, and refundable part, that reduction reflects the effects of further growth tax credits.31 in income on eligibility for refundable tax credits. It also reflects the assumption that other mandatory spending, Other mandatory spending is projected to decline excluding outlays for such tax credits, would decline slightly as a share of the economy over the next 10 years. roughly in line with projections for such spending That category accounts for 2.6 percent of GDP today between 2023 and 2028.33 and, if current laws generally remained unchanged, it would decline to 2.4 percent of GDP in 2028, CBO Net Interest Costs projects.32 That small decrease primarily reflects the Over the past 50 years, the government’s net interest effects of growth in average income on eligibility for costs have averaged 2.0 percent of GDP, although they some programs and refundable tax credits as well as have been as high as 3.2 percent and as low as 1.2 per- reductions in the average payment per beneficiary (when cent. In CBO’s extended baseline, net interest costs are measured relative to average income) for certain large projected to roughly double as a share of the economy programs. over the next decade—from 1.6 percent of GDP in 2018 to 3.1 percent by 2028—as greater federal borrowing In CBO’s extended baseline, other mandatory spending boosts debt-service costs and as currently low interest is projected to fall to 2.1 percent of GDP by 2048. In 33. For the years after 2028, mandatory spending excluding that for 31. Refundable tax credits reduce a filer’s overall income tax liability; Social Security, the major health care programs, and refundable if the credit exceeds the rest of the filer’s income tax liability, tax credits was not projected in detail because of the number the government pays all or some portion of that excess to the of programs involved and the variety of factors that influence taxpayer (and the payment is treated as an outlay in the budget). spending on them. Instead, CBO used an approximate method See Congressional Budget Office, Refundable Tax Credits to project spending for those programs as a group. Except for the (January 2013), www.cbo.gov/publication/43767. outlays for refundable tax credits, such spending is assumed to 32. Sec. 257(b)(2) of the Deficit Control Act, which governs CBO’s decline relative to GDP (excluding any effects that fiscal policy baseline projections, makes exceptions regarding current law for may have on the economy) after 2028 at the same rate at which some programs, such as SNAP, that have expiring authorizations it is projected to fall between 2023 and 2028 (excluding the but that are assumed to continue as currently authorized. decrease in spending for SNAP). 22 The 2018 Long-Term Budget Outlook June 2018 rates rise. In the extended baseline, those costs reach CBO’s extended baseline, revenues would continue to 6.3 percent of GDP by 2048, a higher amount than grow faster than GDP beyond 2028 and, two decades has ever been experienced (see Figure 6 on page 15). later, would total 19.8 percent of GDP. Increases in Those costs would exceed mandatory spending other receipts from individual income taxes account for most than that for Social Security and the major health care of the projected rise of 3.2 percentage points in total programs in the next few years, exceed all discretionary revenues as a share of GDP over the next three decades. spending by 2045, and be about equal to spending for All told, receipts from all other sources combined Social Security by 2048. are projected to increase slightly as a share of GDP (see Figure 6 on page 15). In CBO’s projections, deficits and debt rise because of the growing gap between spending and revenues, and The projected increase in total revenues through higher interest costs are a major contributor to that 2048 reflects structural features of the income tax system, growing gap. Between 2018 and 2048, more than half of new and expiring tax provisions, demographic trends, the increase in spending as a percentage of GDP results changes in the distribution of income, and other factors. from higher net interest costs. In large part, those rising interest costs stem from increases in interest rates that Structural features of the income tax system are the reflect long-term economic trends, which CBO projects largest contributor to the increase in total revenues (see would occur even if debt did not rise beyond its current Table 4). If current laws remained generally unchanged, level. But greater federal borrowing places additional real bracket creep would continue to gradually push upward pressure on interest rates and thus on interest up taxes relative to income over the next three decades, costs. Moreover, growth in net interest costs and growth CBO projects. That occurs because most income tax in debt reinforce one another: Rising interest costs would brackets, exemptions, and other tax thresholds are boost deficits and debt, and rising debt would push up indexed only to inflation. When income grows faster interest costs. than inflation, as generally happens during economic expansions, tax receipts grow faster than income.35 Projected Revenues Through 2048 In CBO’s extended baseline, revenues are generally Under current law, some provisions of tax law will expire projected to constitute a larger share of GDP than and others will take effect during the next decade. In they have, on average, in recent decades. Over the total, those changes lead to higher tax revenues in the past 50 years, revenues as a share of GDP have aver- extended baseline. The most significant change is the aged about 17 percent, but the number has fluctuated expiration, after calendar year 2025, of nearly all provi- between 15 percent and 20 percent of GDP because of sions in the 2017 tax act that affect individual income changes in tax laws and interactions between those laws taxes. The expiration of those provisions boosts individ- and economic conditions. ual income tax receipts relative to GDP by 0.7 percent- age points, CBO projects. In addition, a new tax on cer- If current laws generally remained unchanged, reve- tain employment-based health insurance plans with high nues would increase as a share of GDP over the coming premiums is scheduled to take effect in 2022. Although decade, CBO projects. Revenues would remain near the revenues raised by that tax would be small initially, 16.6 percent of GDP through 2021, rise steadily to rapid growth in health care costs would cause revenues 17.5 percent by 2025, and then increase sharply in from that tax to rise rapidly over subsequent decades. 2026—to 18.1 percent of GDP—following the sched- Also, some rules that allow businesses to accelerate uled expiration of many temporary provisions of the 2017 tax act. By 2028, revenues are projected to total 18.5 percent of GDP. funds. The Deficit Control Act requires CBO’s baseline to reflect the assumption that those taxes would be extended at their current rates. That law does not stipulate that the baseline include For years beyond 2028, revenues are projected follow- the extension of other expiring tax provisions, even if lawmakers ing the assumption that the rules for all tax sources will have routinely extended them before. evolve as scheduled under current law.34 Thus, under 35. The 2017 tax act changed the measure of inflation used to index many parameters of the tax system to an alternative measure that 34. The sole exception to the current-law assumption during the grows more slowly. Consequently, the effect of real bracket creep baseline period applies to expiring excise taxes dedicated to trust is slightly greater than CBO projected in prior years. June 2018 The 2018 Long-Term Budget Outlook 23 Table 4 . Reasons for Growth in Total Revenues in CBO’s Extended Baseline, 2018 to 2048 Percentage of Gross Domestic Product Reason for Growth 2018–2028 2029–2048 Total, 2018–2048 Structural Features of the Individual Income Tax a 0.5 0.9 1.4 New and Expiring Tax Provisions 0.8 0.4 1.2 Aging and the Taxation of Retirement Income 0.2 0.1 0.3 Changes in the Distribution of Income (Effect on individual income taxes) 0.1 0.1 0.2 Changes in the Distribution of Income (Effect on payroll taxes) -0.1 -0.1 -0.2 Other Factors 0.4 -0.1 0.3 Total Growth in Revenues Between 2018 and 2048 1.9 1.3 3.2 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a.Includes real bracket creep, which occurs as more income is pushed into higher tax brackets because people’s income rises faster than inflation. deductions for investment expenses are scheduled to be generally stayed in place, so a larger share of each addi- phased out by the end of December 2027, increasing tional dollar of income that households earned would go revenues as a result. to pay taxes (see Table 5). The increase in the marginal tax rate on labor income would reduce people’s incentive As the population ages, distributions from tax-deferred to work, and the increase in the marginal tax rate on retirement accounts (including individual retirement capital income would reduce their incentive to save, thus accounts, 401(k) plans, and traditional defined benefit dampening economic activity, in CBO’s estimation.36 pension plans) will tend to grow more rapidly than GDP. (For a discussion of the long-term economic effects of Those rising taxable distributions would also boost rev- the 2017 tax act, see Box 1on page 26.) enues relative to GDP, mainly between 2018 and 2028, CBO projects. Uncertainty of CBO’s Long-Term Projections Even if future tax and spending policies did not vary Earnings are projected to grow faster for higher-income from those specified in current law, budgetary outcomes people than for other people over the next 30 years. That would undoubtedly differ from those in CBO’s baseline trend would cause a larger share of income to be taxed projections because of unexpected changes in the econ- at higher rates under the individual income tax, pushing omy, demographics, and other factors. To illustrate the up revenues relative to GDP by nearly 0.2 percentage uncertainty of its projections, CBO examined the extent points. That increase would be largely offset by a pro- to which federal debt as a percentage of GDP would jected decrease of nearly the same amount in payroll tax differ from the amounts in its extended baseline if the receipts, as a greater share of earnings would be above agency varied four key factors in its analysis:37 the maximum amount subject to Social Security payroll taxes. •• The labor force participation rate,38 As a result of those factors, the effects of the tax system in 2048 would differ substantially from the effects today, 36. Even though the marginal tax rate on capital income is projected to both because of the changes in tax rules scheduled under rise under current law, it would still be lower than in recent years. current law and because of structural features in the tax 37. For additional details about this analytical approach, code that gradually push up taxes relative to income. see Congressional Budget Office, The 2016 Long-Term Average taxpayers at every income level would pay more Budget Outlook (July 2016), Chapter 7, www.cbo.gov/ publication/51580. of their income in taxes in 2048 than similar taxpayers do now, primarily because of real bracket creep. Effective 38. The labor force participation rate is the percentage of people in marginal federal tax rates also would rise if current laws the civilian noninstitutionalized population who are age 16 or older and either working or actively seeking work. 24 The 2018 Long-Term Budget Outlook June 2018 Table 5 . factors were varied such that projected deficits decreased, Effective Marginal Federal Tax Rates in debt after 30 years would be 67 percentage points below the central estimate (see Figure 11). CBO’s Extended Baseline Percent Those calculations do not cover the full range of possi- 2018 2028 2048 ble outcomes, and they do not address other sources of Marginal Tax Rate on Labor Income 27.2 30.8 32.4 uncertainty in the budget projections, such as the risk of Marginal Tax Rate on Capital Income 14.7 16.5 17.0 an economic depression or a major war or catastrophe, or the possibility of unexpected changes in rates of birth, Source: Congressional Budget Office. immigration, or mortality. Nonetheless, they show that The extended baseline generally reflects current law, following CBO’s the main implications of this report apply under a wide 10-year baseline budget projections through 2028 and then extending range of possible values for some key factors that influ- most of the concepts underlying those baseline projections for the rest ence federal spending and revenues. In 30 years, if cur- of the long-term projection period. rent laws remained generally unchanged, federal debt— The effective marginal tax rate on labor income is the share of an which is already high by historical standards—would additional dollar of such income that is paid in federal individual income taxes and payroll taxes, averaged among taxpayers, with weights probably be at least as high as it is today and would most proportional to their labor income. The effective marginal tax rate likely be much higher. on capital income is the share of the return on an additional dollar of investment made in a particular year that will be paid in taxes over the Policymakers could take that uncertainty into account life of that investment. The before- and after-tax rates of return used in various ways as they make choices for fiscal policy.41 to calculate that effective tax rate are weighted averages of the rates for every combination of asset type, industry, form of organization, For example, they might design policies that reduced the and source of financing; the weights used are the asset values of each budgetary implications of certain unexpected events. Or combination. they might decide to provide a buffer against events with negative budgetary implications by aiming for lower debt than they would in the absence of such uncertainty. •• The growth rate of total factor productivity, •• Interest rates on federal debt held by the public, and The Size and Timing of Policy Changes Needed to Meet Various Goals for Deficit •• Excess cost growth for Medicare and Medicaid Reduction spending. CBO estimated the size of changes in spending or revenues that would be needed if lawmakers wanted to The degree of variation was based on historical move- achieve some specific targets for federal debt held by the ments and on possible future developments. The result- public. CBO also assessed the extent to which the size of ing estimates show that if CBO varied one factor at policy adjustments would change if such deficit reduc- a time, federal debt held by the public after 30 years tion was delayed, and it examined the effects of waiting would range from 42 percentage points of GDP below to resolve the long-term fiscal imbalance on different the agency’s central estimate—152 percent of GDP—to generations of the U.S. population. 60 percentage points above it.39 The Size of Policy Changes Needed to Meet Various If all four factors were varied simultaneously such that Goals for Deficit Reduction projected deficits increased, federal debt held by the If lawmakers set out to ensure that debt in 2048 matched public in 2048 would be about 96 percent of GDP its current level of 78 percent of GDP, they could achieve above CBO’s central estimate.40 Conversely, if all four of the four factors because the chances of federal debt being above or below the estimates when all four factors are at the high 39. CBO’s estimates of federal debt with each factor varied or low ends of their ranges are much smaller than when each individually are presented in the supplemental data individual factor is at the high or low end of its range. accompanying this report at www.cbo.gov/publication/53919. 41. See Alan J. Auerbach and Kevin Hassett, “Uncertainty and the 40. When CBO varied all factors simultaneously, it varied each factor Design of Long-Run Fiscal Policy,” in Auerbach and Ronald by only 60 percent of the amount of variation in each factor D. Lee, eds., Demographic Change and Fiscal Policy (Cambridge individually. The agency used only part of the full range for each University Press, 2001), pp. 73–92, http://tinyurl.com/p93enfp. June 2018 The 2018 Long-Term Budget Outlook 25 Figure 11 . Federal Debt Given Different Rates of Labor Force Participation, Productivity Growth, Federal Borrowing, and Excess Cost Growth for Federal Spending on Medicare and Medicaid Percentage of Gross Domestic Product 300 Actual Projected 250 247 Given Rates That Raise Projected Deficits 200 150 152 Extended Baseline 100 85 Given Rates That Lower Projected Deficits 50 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. Federal debt refers to debt held by the public. Values are CBO’s central estimates from ranges determined by alternative assessments of two factors: how much deficits crowd out investment in capital goods, such as factories and computers (because a larger portion of private saving is being used to purchase government securities), and how much people respond to changes in after-tax wages by adjusting the number of hours they work. The labor force participation rate is the percentage of people in the civilian noninstitutionalized population who are age 16 or older and either working or actively seeking work. Productivity growth is the growth of total factor productivity—that is, the growth of real (inflation-adjusted) output that is not explained by the growth of labor and capital. The federal borrowing rate is the interest rate on the federal debt. Excess cost growth refers to the extent to which the growth rate of nominal health care spending per person—adjusted for demographic characteristics of the relevant populations—exceeds the growth rate of potential gross domestic product per person. (Potential gross domestic product is the maximum sustainable output of the economy.) For this figure, CBO used values for four factors with a deviation from the extended baseline that was about 60 percent as large as the deviation the agency used when it varied each factor separately. The alternative projections for the four factors begin in 2019. that result by cutting noninterest spending or raising to lower the debt to 41 percent of GDP (its average revenues (or both) in each year beginning in 2019 by over the past 50 years) by 2048, they could achieve that amounts totaling 1.9 percent of GDP (see Figure 12 outcome by increasing revenues or cutting noninterest on page 28). (In 2019, 1.9 percent of GDP would be spending (relative to amounts under current law) or by about $400 billion, or $1,200 per person.) If the changes adopting some combination of those two actions begin- came entirely from revenues or entirely from spending, ning in 2019 by amounts totaling 3.0 percent of GDP they would amount, roughly, to an 11 percent increase in each year. (In 2019, 3.0 percent of GDP would be about revenues or a 10 percent cut in noninterest spending (in $630 billion, or $1,900 per person.) comparison with amounts in the extended baseline). If lawmakers wanted to lower debt to its average over the Increases in revenues or cuts in noninterest spending past 50 years by increasing all revenues or by cutting all would need to be larger than 1.9 percent of GDP to noninterest spending, the following changes would be reduce debt to the percentages of GDP that are more necessary: typical of those in recent decades. If lawmakers wanted 26 The 2018 Long-Term Budget Outlook June 2018 Box 1 . Effects of the 2017 Tax Act on the Long-Term Budget Outlook The Congressional Budget Office’s extended baseline generally •• Changes in the inflation adjustments for most tax parame- reflects current law, including the economic and budgetary ters, including for income tax brackets; effects of changes to legislation enacted over the past year— notably, the 2017 tax act (Public Law 115-97, originally called •• Elimination of the penalty for not having health insurance; and the Tax Cuts and Jobs Act). Those long-term projections are consistent with CBO’s prior estimates of the 2017 tax act’s •• Changes in the taxation of foreign income and measures to effects on the U.S. economy—including higher investment, reduce profit shifting. employment, and output—over the 2018–2028 period.1 Budgetary Effects Without Macroeconomic Feedback Because various provisions of the 2017 tax act expire by the The 2017 tax act has significant direct effects on CBO’s budget end of 2026, the economic and budgetary effects of the act projections. Those direct effects do not take into account any as a whole are expected to peak during the early to middle changes to the aggregate economy. part of the next decade. Beyond 2028, the effects of the major permanent provisions are expected to be modest, although Budgetary Effects for 2018 to 2028. Before incorporating their precise magnitudes are highly uncertain. CBO has not macroeconomic feedback, CBO estimated that the tax act performed a detailed, quantitative analysis of the long-run would increase the primary deficit (that is, the deficit excluding effects of the 2017 tax act but is able to describe the qualitative the costs of servicing the debt) by a cumulative $1.843 trillion effects of its most significant provisions. from 2018 to 2028 as a result of higher deficits through 2026. Once the temporary provisions have expired and scheduled Major Provisions of the 2017 Tax Act changes to certain business provisions have taken effect, the The 2017 tax act has temporary and permanent provisions. For permanent provisions are projected to reduce, on net, the the next eight years, the major individual income tax changes primary deficit in 2027 and 2028. Because of the increased are lower rates, a larger standard deduction, limits on the deficits, debt-service costs are higher in every year by growing deductibility of mortgage interest and state and local taxes, amounts, totaling $471 billion over the period. The total direct elimination of personal exemptions, expansion of the child tax effect on the deficit through 2028 would be $2.314 trillion. credit, changes to the treatment of “pass-through” business income, changes to the individual alternative minimum tax, Budgetary Effects for 2029 to 2048. After 2028, CBO estimates, and increases in the tax exemptions for property transferred the permanent provisions of the act would continue to reduce at death and for certain gifts. For the next five years, the the primary deficit, on net, over the next 20 years. In particu- act allows businesses to immediately deduct the full cost lar, the change in the inflation indexing of tax parameters and of their investments for eligible equipment and software; elimination of the penalty for not having health insurance (which that bonus-depreciation provision then phases out over the causes fewer people to enroll in health insurance programs subsequent five years. subsidized by the federal government) would reduce the deficit by more than the revenues lost through lower corporate taxes. Following the expiration of most of the individual provisions at the end of 2025 and the phaseout of bonus depreciation by Economic Effects of the 2017 Tax Act the end of 2026, the major permanent provisions of the act The largest effects on investment, employment, and output that continue are these: are estimated to occur in the early to middle part of the 2018–2028 period, when both individual and corporate income •• Lower corporate income taxes (a single rate of 21 percent); tax rates are lower and when other temporary provisions and investment incentives (notably, full bonus depreciation) are in •• Higher thresholds for deducting the cost of a tangible asset in the year it is placed in service under section 179 of the place. Most of the tax act’s positive effects on the growth of tax code; real (inflation-­ djusted) gross domestic product (GDP) would a occur in the first few years of CBO’s projection period. The pos- •• Amortization of spending for research and experimentation; itive effects on the economy would diminish over the following several years and are expected to be modest after 2028. •• Limitations on net interest deductions and the use of net operating losses; Economic Effects for 2018 to 2028. The 2017 tax act would boost the level of real GDP by 0.7 percent, on average, through 2028, with a peak effect of 1.0 percent in 2022. By lowering 1. See Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028 (April 2018), Appendix B, www.cbo.gov/publication/53651. the corporate income tax rate, the act would give businesses Continued June 2018 The 2018 Long-Term Budget Outlook 27 Box 1. Continued Effects of the 2017 Tax Act on the Long-Term Budget Outlook incentives to boost investment, and by decreasing individual Economic Effects for 2029 to 2048. In CBO’s assessment, the income tax rates through 2025, it would give people incen- various permanent provisions of the act would continue to tives to increase their participation in the labor force and work boost the level of real GDP, on net, for a few years after 2028; more hours, expanding the labor supply and employment. over the longer term, the economic effects of the different pro- Although some provisions of the tax act would deter residential visions are expected to be modest, but the net effect is uncer- investment, the overall effect on investment is estimated to be tain. The accelerated bracket creep resulting from the change positive. However, private investment gains would be partially in the indexing of tax parameters for inflation and the perma- crowded out by higher federal deficits. Altogether, the largest nent change to amortization of research and experimentation positive effects on the economy would occur from 2022 to expenses would tend to lower output by modestly reducing 2024 (before the individual income tax provisions expire at the the supply of labor and capital, respectively. Elimination of the close of 2025). penalty for not having health insurance is expected to partially offset the negative effect on labor, and the permanent reduc- The effect of the tax act on real GDP is more modest over the tion in the corporate income tax rate and lower federal deficits following few years, and by 2028, real GDP would be 0.5 per- would tend to increase output modestly by boosting investment. cent higher than it would have been otherwise. Between 2026 and 2028, investment would be boosted by the permanent The tax act’s international provisions are expected to increase reduction in the corporate income tax rate. However, the per- GDP slightly over the long term, although their overall eco- manent change to amortization of research and experimenta- nomic effects are uncertain. Those effects would depend on tion expenses (instead of immediate expensing) would reduce how companies adjusted their international business structures the incentive for that type of investment. and transactions and how foreign governments changed their tax rules in response. The effects on the supply of labor are projected to be mixed. Marginal personal income tax rates would be higher after 2025 Overall, the net impact on output would depend on the balance than under prior law because of the change in how various of all those effects. Individually and collectively, the effects parameters of the tax system, including income tax brackets, are become increasingly uncertain over the last 20 years of the adjusted for inflation. That change would tend to reduce the sup- projection period. ply of labor, as more income is pushed into higher tax brackets for a given amount of income growth because the new measure Budgetary Effects With Macroeconomic Feedback of inflation is expected to rise more slowly than the measure it CBO estimates that macroeconomic feedback from the tax replaced. In contrast, the permanent elimination of the penalty act—that is, the ways in which the act would affect the budget for not having health insurance would tend to increase the sup- by changing the overall economy—would subtract a total of ply of labor, in part because under prior law the penalty rose as $571 billion from primary deficits over the 2018–2028 period. household income grew, causing it to act as a tax on income. That reduction would mainly result from the act’s boost to taxable income, which would increase revenues. With that From 2026 to 2028, the pattern of the economic effects of macroeconomic feedback incorporated, CBO projects that the the act reflects the transition from all the major provisions of act would increase primary deficits by $1.272 trillion through the tax act being in place to only the permanent provisions 2028. Incorporating the act’s effects on debt-service costs remaining in effect. As a result, the positive effects on labor, from changes in federal borrowing and changes in interest investment, and real GDP would diminish. Nonetheless, those rates would push the deficit to an estimated $1.854 trillion over positive effects would be boosted by the reduction in the bud- the 2018–2028 period. get deficit by 2027 that results from the tax act, which makes additional resources available for private investment. The net effects of the tax act on real GDP and other economic variables are expected to be modest after 2028 but the magni- Furthermore, the tax act’s international provisions are expected tudes are uncertain (in part because a number of factors tend to change the reported location of profits in a way that boosts to offset each other). As a result, the macroeconomic feedback GDP through 2028, without changing the location of labor or to federal spending and revenues is also expected to be small capital. As a result, the provisions are expected to raise total but uncertain in those years. Despite that uncertainty, the factor productivity slightly over time. overall effects of the permanent provisions of the act, including their macroeconomic feedback, are projected to reduce the primary deficit somewhat from 2029 to 2048. 28 The 2018 Long-Term Budget Outlook June 2018 Figure 12 . The Size of Policy Changes Needed to Make Federal Debt Meet Two Possible Goals in 2048 If lawmakers aimed for debt in 2048 to equal... 41% of GDP 78% of GDP (Its 50-year average) (Its Current Level) Each year, they would need to reduce deficits as a share of GDP by... 17% increase in revenues 11% increase in revenues 3.0% of GDP, or a 1.9% of GDP, or a which is equal to a which is equal to a 15% cut in spending 10% cut in spending In 2019, that would amount to… $630 billion $400 billion If the changes were increases (of equal percentage) in all types of revenues, one effect in 2019 is that taxes per household would be higher than they would be under current law by… $14,000 $13,300 Current Law + $2,000 + $1,300 Values are for households in the middle fifth of the income distribution. Under current law, their taxes are projected to average $12,000. If the changes were cuts (of equal percentage) in all types of noninterest spending, one effect in 2019 is that initial Social Security benefits would be lower than they would be under current law by… Current Law $16,200 $17,200 - $2,800 - $1,800 Values are averages for people in the middle fifth of the lifetime earnings distribution who were born in the 1950s and who would claim benefits at age 65. Under current law, their benefits are projected to be $19,000. Source: Congressional Budget Office. In this figure, the indicated sizes of the policy changes are relative to CBO’s extended baseline, which generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. The projected effects of the policy changes on debt include the direct effects of the policy changes and the feedback to the federal budget that would be attributable to faster economic growth. The effects on growth and the feedback to the federal budget reflect the positive economic effects of lowering the debt but do not reflect any assumptions about the specific details of the policy changes. GDP = gross domestic product; n.a. = not applicable. June 2018 The 2018 Long-Term Budget Outlook 29 •• If collections of the various types of revenues were projections under current law. However, that dampening increased proportionally, total revenues would need effect would be temporary, CBO expects, because of the to rise by about 17 percent each year over the 2019– response of prices and interest rates to the reductions 2048 period. On average, that adjustment would in demand and to the resulting actions by the Federal result in federal taxes that were about $2,000 higher Reserve. Those responses to changing demand would be than they are under current law for households in the stronger over the next few years than they would be if middle fifth of the income distribution in 2019. the economy was weaker. •• If all types of noninterest spending were cut by an By contrast, if policymakers waited several years to equal percentage, spending overall would need to reduce federal spending or increase taxes, more debt decrease by about 15 percent in each of the next would accumulate over the long term, which would slow 30 years. For example, such cuts would lower initial long-term growth in output and income. Thus, reaching annual Social Security benefits by about $2,800, on any chosen target for debt would require larger changes. average, for people in the middle fifth of the lifetime Nonetheless, if policymakers waited several years to enact earnings distribution who were born in the 1950s and deficit-reduction policies, the economy probably would who first claimed benefits at age 65. be affected less over the short term than would be the case if immediate changes were made. In all of those examples, the projected effects on debt include both the direct effects of the policy changes and Faster or slower implementation of policies to reduce the feedback to the federal budget that would result from budget deficits would tend to impose different bur- faster economic growth. Those economic effects reflect dens on different generations. Reducing deficits sooner the reduction in debt but do not reflect any assump- would probably require older workers and retirees to tions about the specific details of the policy changes. For sacrifice more but would benefit younger workers and example, such changes could alter productivity growth future generations. Reducing deficits later would require and people’s incentives to work and save, which would smaller sacrifices from older people but greater ones from then affect overall economic output and have macro- younger workers and future generations. economic feedback effects on the federal budget. CBO has analyzed those trade-offs in two ways. First, it The Timing of Policy Changes Needed to Meet Various estimated the extent to which the size of policy adjust- Goals for Deficit Reduction ments would change if deficit reduction was delayed. For The size of the policy changes that would be needed to example, if lawmakers sought to reduce debt as a share achieve a particular goal for federal debt would depend, of GDP to its historical 50-year average of 41 percent in part, on how quickly that goal was expected to be in 2048 and if the necessary policy changes did not take reached. Regardless of the chosen goal for federal debt, effect until 2024, the annual deficit reduction would lawmakers would face trade-offs in deciding how quickly need to amount to 3.6 percent of GDP rather than the to implement policies designed to put federal debt on 3.0 percent that would accomplish the same goal if the a sustainable path. The benefits of reducing the defi- changes were made in 2019 (see Figure 13). If lawmakers cit sooner would include a smaller accumulated debt, chose to wait another five years to implement the policies smaller policy changes required to achieve long-term out- (having them take effect in 2029 instead), even larger comes, and less uncertainty about the policies lawmak- changes would be necessary; the required annual deficit ers would adopt. However, if lawmakers implemented reduction in that case would amount to 4.6 percent of spending cuts or tax increases too quickly, people might GDP. have insufficient time to plan for or adjust to the new system. Second, CBO studied the effects on various generations from waiting to resolve the long-term fiscal imbalance. Over the next few years, such policy changes would In 2010, CBO compared economic outcomes under dampen overall demand for goods and services, thus two policies. One would stabilize the debt-to-GDP decreasing output and employment relative to CBO’s ratio starting in a particular year; the other would wait 30 The 2018 Long-Term Budget Outlook June 2018 Figure 13 . How Timing Affects the Size of Policy Changes Needed to Make Federal Debt Meet Two Possible Goals in 2048 Starting Year The annual reduction in noninterest spending or increase in revenues needed to make federal debt held by the public in 2048 equal… 1.9 …its current share of GDP (78 percent) or 2019 3.0 …its 50-year average (41 percent) 2.3 2024 3.6 2.9 2029 4.6 0 1 2 3 4 5 Percentage of GDP Source: Congressional Budget Office. GDP = gross domestic product. 10 years to do so.42 That analysis suggested that people making decisions about them sooner would offer two in generations born after the earlier implementation date main advantages. First, people would have more time to would be worse off under the second option. However, prepare. Second, policy changes that reduced the debt people born more than 25 years before the earlier would hold down longer-term interest rates and could implementation date would be better off if action was lessen uncertainty—thus enhancing businesses’ and con- delayed—largely because they would partly or entirely sumers’ confidence. Those factors would boost output avoid the policy changes needed to stabilize the debt. and employment in the near term. Generations born between those two groups could either gain or lose from delayed action, depending on the Changes From Last Year’s Long-Term  details of the policy changes.43 Budget Outlook Compared with last year’s projections of federal debt, Even if lawmakers waited several years to implement those presented in this report are higher through 2041 policy changes to reduce deficits in the long term, and slightly lower thereafter. Most of the increases in debt through 2041 stem from larger projected deficits through 2025 that arise from tax and spending legis- 42. See Congressional Budget Office, Economic Impacts of Waiting lation enacted since last March: the 2017 tax act, the to Resolve the Long-Term Budget Imbalance (December 2010), www.cbo.gov/publication/21959. That analysis was based on a Bipartisan Budget Act of 2018, and the Consolidated projection of slower growth in debt than CBO now projects, so Appropriations Act, 2018. After 2025, deficits are the estimated effects of a similar policy today would be close, smaller as a share of GDP than CBO projected last year but not identical, to the effects estimated in that analysis. For a because of lower projected noninterest spending and different approach to analyzing the costs of debt reduction for similar or higher projected revenues. Those lower deficits different generations, see Felix Reichling and Shinichi Nishiyama, The Costs to Different Generations of Policies That Close the Fiscal ultimately result in lower projected debt as a share of Gap, Working Paper 2015-10 (Congressional Budget Office, GDP. (Appendix A describes the differences in demo- December 2015), www.cbo.gov/publication/51097. graphic and economic projections between last year’s 43. Those conclusions do not incorporate the possible negative effects report and this year’s, and Appendix B describes key of a fiscal crisis or effects that might arise from the government’s revisions to the budgetary projections since last year that reduced flexibility to respond to unexpected challenges. are summarized in this section.) June 2018 The 2018 Long-Term Budget Outlook 31 As a percentage of GDP, noninterest spending is gen- equal either today’s level or the 50-year historical aver- erally lower than the amount projected last year. That age (as a share of GDP) are similar to the changes CBO slowdown is driven by lower projected spending as a projected would be required in last year’s report. share of GDP for Social Security, the major health care programs, and other mandatory spending. Those declines The 75-year actuarial deficit currently projected for are partially offset by increases in discretionary spending. Social Security is 1.5 percent of GDP (the same amount Revenues are lower as a share of GDP through 2026, that CBO estimated last year) or 4.4 percent of tax- largely unchanged for most of the next two decades, and able payroll (slightly smaller than last year’s estimate of slightly higher by 2048. Those changes reflect provisions 4.5 percent). The projected actuarial deficit declined of the 2017 tax act. since last year because CBO boosted its projection of the share of earnings that are subject to Social Security Under the extended baseline, CBO projects that debt payroll taxes over the next 30 years and because CBO would reach 148 percent of GDP in 2047, which projects slightly smaller benefits relative to GDP and tax- is lower than the amount the agency projected last able payroll and, over the next two decades, higher inter- year. Projected deficits as a share of GDP in this year’s est rates. Offsetting those changes is an adjustment to the report are larger from 2018 through 2025 and smaller 75-year period of analysis, which ends in 2092 in this thereafter than those in last year’s report. The budgetary report and thus includes an additional year of deficits. changes needed to make federal debt 30 years from now APPENDI X A CBO’s Projections of Demographic and Economic Trends T he Congressional Budget Office’s assessment of past. In the agency’s projections, over the 30-year period, the long-term outlook for the federal budget the share of the population that is 65 or older grows, is based on projections over the next three whereas the share that is of working age (defined as decades of trends in a host of demographic those between ages 20 and 64) shrinks. As a result, CBO and economic variables. Through 2028, the economic projects, a growing portion of the population will receive and demographic projections presented in this report benefits from the Social Security and Medicare programs are the same as those that CBO published in April.1 For while a shrinking portion will pay into the trust funds the years beyond 2028, CBO’s projections generally that support them. reflect historical trends and anticipated demographic changes. (Average values for 2018 to 2048, the period Fertility encompassed by CBO’s extended baseline, as well as for CBO projects a total fertility rate of 1.9 children per shorter periods, are shown in Table A-1.2 The table also woman for the 2018–2048 period.3 (That rate, which provides historical data for comparison. A set of annual represents the average number of children that a woman projections is included in this report’s supplemental data, would have in her lifetime, is calculated as the sum of available online at www.cbo.gov/publication/53919.) fertility rates for all ages between 15 and 49 in a given year.)4 The total fertility rate for the 1988–2007 period Demographic Variables averaged 2.0 children per woman. Fertility rates often Both the size and composition of the U.S. population decline during recessions and rebound during recoveries. influence the overall growth of the economy and affect However, the U.S. fertility rate did not recover after the federal tax revenues and spending. Rates of fertility, 2007–2009 recession; the rate (which was 2.1 in 2007) immigration, and mortality determine the population and dropped and has remained below 1.9.5 CBO’s projected thus the size of the labor force and the number of people rate is consistent with the rate recommended to the Social receiving benefits from federal programs such as Social Security Advisory Board by its 2015 Technical Panel on Security and Medicare. CBO projects the population to be Assumptions and Methods, the board’s most recent panel.6 about the same in the future as it projected last year. 3. In CBO’s long-term model, the likelihood that a particular Population woman will have a child depends on such factors as that woman’s In CBO’s projections, the total population increases education, marital status, immigration status, and childbearing from 332 million at the beginning of 2018 to 392 mil- history. lion in 2048, and its annual growth rate gradually 4. The total fertility rate can also be defined as the average number of declines from 0.7 percent in 2018 to 0.4 percent in children that a woman would have in her lifetime if, in each year 2048. The population is projected not only to grow more of her life, she experienced the birth rates observed or assumed for slowly but also to become older, on average, than in the that year and if she survived her entire childbearing period. 5. Recent data show that total fertility rates have remained below 1. See Congressional Budget Office, The Budget and Economic 1.9. See Brady E. Hamilton and others, Births: Provisional Data Outlook: 2018 to 2028 (April 2018), www.cbo.gov/ for 2017, Vital Statistics Rapid Release Report 4 (National publication/53651. Center for Health Statistics, May 2018), www.cdc.gov/nchs/nvss/ vsrr/reports.htm. 2. The extended baseline generally reflects current law, following CBO’s 10-year baseline projections through 2028 and then 6. See 2015 Technical Panel on Assumptions and Methods, Report extending most of the concepts underlying those baseline to the Social Security Advisory Board (September 2015), p. 9, projections for the rest of the long-term projection period. https://go.usa.gov/cJYR5 (PDF, 3.4 MB). 34 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 Table A-1. Average Annual Values for Demographic and Economic Variables That Underlie CBO’s Extended Baseline Overall, 1988–2017 2018–2028 2029–2038 2039–2048 2018–2048 Demographic Variables Growth of the Population (Percent) 0.9 0.7 0.5 0.4 0.6 Fertility Rate (Children per woman) 2.0 1.9 1.9 1.9 1.9 Immigration Rate (Per 1,000 people in the U.S. population) 3.7 3.1 3.2 3.2 3.2 Life Expectancy at Birth, End of Period (Years) a 79.1 80.5 81.7 82.8 82.8 Life Expectancy at Age 65, End of Period (Years) a 19.4 20.2 20.9 21.7 21.7 Economic Variables (Percent) Growth of GDP Real GDP 2.5 1.9 1.9 1.9 1.9 Nominal GDP (Fiscal Year) 4.7 4.1 4.0 4.0 4.0 Growth of the Labor Force 1.0 0.5 0.4 0.4 0.4 Labor Force Participation Rate 65.6 62.1 60.3 59.6 60.7 Unemployment Unemployment rate 5.9 4.4 4.8 4.7 4.6 Natural rate of unemployment 5.1 4.6 4.5 4.5 4.5 Growth of Average Hours Worked -0.1 * -0.1 -0.1 * Growth of Total Hours Worked 1.0 0.5 0.3 0.4 0.4 Earnings as a Share of Compensation 81 81 81 81 81 Growth of Real Earnings per Worker 0.9 1.5 1.2 1.1 1.2 Share of Earnings Below the Taxable Maximum 85 81 81 80 81 Growth of Productivity Total factor productivity 1.2 1.1 1.2 1.2 1.2 Labor productivity b 1.5 1.4 1.6 1.6 1.5 Inflation Growth of the CPI-U 2.6 2.4 2.4 2.4 2.4 Growth of the GDP price index 2.1 2.1 2.0 2.0 2.0 Interest Rates Real rates On 10-year Treasury notes and Social Security bonds 2.3 1.4 1.6 2.1 1.7 Nominal rates On 10-year Treasury notes and Social Security bonds 4.9 3.8 4.0 4.5 4.1 On all federal debt held by the public c 5.0 3.1 3.6 4.1 3.6 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2028 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. CPI-U = consumer price index for all urban consumers; GDP = gross domestic product; * = between -0.05 percent and 0.05 percent. a.Life expectancy as used here is period life expectancy, which is the amount of time that a person in a given year would expect to survive beyond his or her current age on the basis of that year’s mortality rates for various ages. b.The measure of labor productivity reported here is the ratio of real output to hours worked in the economy. Note that elsewhere CBO reports different measures of labor productivity, such as the ratio of potential real output to the potential labor force. c.The interest rate on all federal debt held by the public equals net interest payments in the current fiscal year divided by debt held by the public at the end of the previous fiscal year. APPENDIX A THE 2018 LONG-TERM BUDGET OUTLOOK 35 Immigration For projections beyond the next decade, CBO employed Under current law, CBO projects, net immigration to a simplified approach: After 2028, under current law, the the United States (a measure that accounts for all people agency projects that net immigration would grow at an who either enter or leave the United States in any year) average rate of 0.6 percent annually, slightly faster than would grow by an average of 0.7 percent per year over the overall average rate of population growth.8 the next decade. Thereafter, net immigration is projected to grow more slowly, at a rate of 0.6 percent per year. Mortality On the basis of those projections, CBO expects net The mortality rate, which is the number of deaths per annual immigration to rise from 1.1 million people in thousand people, has generally declined in the United 2018 to 1.3 million people in 2048. Expressed another States for at least the past half century. For the most way, the rate of net annual immigration per thousand part, the mortality rate has dropped more quickly for people in the U.S. population would rise from an aver- younger people than for older people during that period. age of 3.1 over the next decade to 3.2 in 2048. Mortality rates for each five-year age group are projected to decline at the same average pace each group experi- CBO’s projection of net immigration over the next enced from 1950 through 2014. After projecting average decade is informed by the agency’s economic projections mortality rates for men and women in each age group, and by recent demographic trends, both of which have CBO incorporates differences in those rates on the basis particularly important implications for projections of of marital status, education, disability insurance status, net unauthorized immigration. CBO’s projections of and lifetime household earnings. CBO projects lower unauthorized immigration are the result of two offset- mortality rates and thus longer life expectancies for ting effects, to which the agency gave equal weight in its people who are married, have more education, do not analysis. On the one hand, in CBO’s estimation, periods receive benefits through the Social Security Disability of moderate growth in the U.S. economy over the past Insurance (DI) program, or are in higher-income two decades have been associated with increases in unau- groups.9 (For people under 30, the mortality projections thorized immigration; consequently, CBO’s projections account for age and sex only.) of economic growth suggest growth in such immigration over the coming decade. On the other hand, although CBO’s projections result in an average life expectancy at unauthorized immigration is very difficult to measure, birth of 82.8 years in 2048, compared with 79.2 years historical estimates indicate that the number of unau- in 2018.10 Similarly, CBO projects life expectancy at age thorized immigrants in the United States in 2015 was about the same as in 2005. The implication is that factors 8. That rate is based on the Census Bureau’s projections for late other than the strength of the economy have been more in the coming decade. See Census Bureau, “2014 National Population Projections: Summary Tables,” Table 1, https://go.usa. important recently and may continue to be in the future.7 gov/xQGwc. The Census Bureau has recently released a new set of projections, but information from those projections has CBO projects that the increase in net immigration over not been incorporated in this analysis. In those projections, the the next decade would be mostly driven by increases in population is slightly smaller than the Census Bureau projected the number of legal permanent residents. The annual in 2014. increase in the number of legal temporary and unautho- 9. For more information about mortality differences among groups rized immigrants is projected to be relatively steady over with different earnings, see Tiffany Bosley, Michael Morris, the next 10 years. and Karen Glenn, Mortality by Career-Average Earnings Level, Actuarial Study 124 (Social Security Administration, April 2018), https://tinyurl.com/yct5qdew (PDF, 301KB); Congressional Budget Office, Growing Disparities in Life Expectancy (April 7. For the most recent estimates, see Jens Manuel Krogstad, 2008), www.cbo.gov/publication/41681; and Julian P. Cristia, Jeffrey S. Passel, and D’Vera Cohn, As Mexican Share Declined, The Empirical Relationship Between Lifetime Earnings and U.S. Unauthorized Immigrant Population Fell in 2015 Below Mortality, Working Paper 2007–11 (Congressional Budget Recession Level (Pew Research Center, April 2017), https://tinyurl. Office, August 2007), www.cbo.gov/publication/19096. com/mn5zbb5. For more details, see Jeffrey S. Passel and D’Vera Cohn, Overall Number of U.S. Unauthorized Immigrants Holds 10. Life expectancy as used here is period life expectancy, which is Steady Since 2009 (Pew Research Center, September 2016), the amount of time that a person in a given year would expect to https://tinyurl.com/j45zw05. Official data on unauthorized survive beyond his or her current age on the basis of that year’s immigrants do not exist, so historical estimates are very uncertain. mortality rates for various ages. 36 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 65 to be 21.7 years in 2048, or 2.2 years longer than life as the growth of gross domestic product (GDP), the size expectancy at age 65 in 2018.11 and composition of the labor force, the number of hours worked, earnings per worker, capital accumulation, and Changes in Demographic Projections Since Last Year productivity. Over the short term, the effects also depend CBO’s projections of population growth in most years on variables that fluctuate over the business cycle, such are very similar to those published in last year’s report, as inflation and interest rates. The agency also considers except for small changes to CBO’s projections of net ways in which fiscal policy influences economic activity. immigration and mortality rates. Net immigration was projected to grow, on average, more quickly in the Gross Domestic Product decade following 2017 in last year’s report than it is pro- CBO expects total output in the economy to grow jected to grow in the decade following 2018 in this year’s moderately over the 2018–2048 period. In the agency’s report. That is because last year’s projections included projections, real GDP growth over that period averages growth in 2017 that was higher than in the rest of the 1.9 percent per year, about what was projected last year 10-year period. The average growth in net immigration for the 2017–2047 period. However, the pattern of that over the decade following 2018 in this year’s report does growth is different in this year’s projections; CBO now not include that year of higher growth. projects that real GDP grows faster over the next few years. As a result, the level of real GDP remains higher The life expectancies CBO now projects are only slightly over the projection period. different from those reported last year. Life expectancy at birth is projected to be 82.7 years in 2047, 0.1 year Projections of GDP. CBO anticipates that recent shorter than CBO projected last year, and life expec- changes to the tax code, changes in discretionary spend- tancy at age 65 is projected to be 21.6 years, 0.1 year ing, and continuing increases in aggregate demand longer than in last year’s projection. Those changes reflect will spur a pickup in the growth of real GDP over the recent data that show higher mortality rates than CBO next few years (see Box 1on page 26 for details on expected last year for people ages 15 to 74 and lower the effects of the recent changes to the tax code).12 mortality rates than expected last year for people 75 or Thereafter, growth in real GDP is projected to make a older. Those data led CBO to increase its projection of transition to a pace that reflects the increases in the sup- mortality rates for people ages 15 to 74 in the near term ply of labor, capital services, and productivity described and to reduce their rates of mortality improvement over below. That projected pace also takes into consideration the next three decades, which reduced CBO’s projection the influences of the marginal tax rates and increases in of life expectancy at birth. In contrast, for people 75 or federal debt that CBO projects in its extended baseline.13 older, CBO decreased its projection of mortality rates and increased the rate of mortality improvement, which Over the long term, total GDP is projected to be increased CBO’s projection of life expectancy at age 65 one-half of one percent below its potential (maximum throughout the 30-year period. sustainable) amount, as it has roughly been, on average, over past decades. Those projected outcomes reflect Economic Variables CBO’s assessment that, during and after economic The performance of the U.S. economy in coming downturns, actual output has fallen short of potential decades will affect the federal government’s tax revenues, output to a greater extent and for longer periods than spending, and debt accumulation. In CBO’s analysis, the actual output has exceeded potential output during eco- long-term effects depend on key economic variables such nomic booms.14 12. Aggregate demand is total purchases by consumers, businesses, 11. CBO projects life expectancy in 2090 to be 86.9 years at birth government, and foreigners of a country’s output of final goods and 24.4 years at age 65. CBO’s projections of life expectancies and services during a given period. are longer than those of the Social Security trustees (85.8 and 13. The marginal tax rate is the percentage of an additional dollar of 23.5 years, respectively) but shorter than the projections (88.3 income from labor or capital that is paid in taxes. and 25.3 years, respectively) recommended by the 2015 Technical Panel on Assumptions and Methods in Report to the Social 14. See Congressional Budget Office, Why CBO Projects That Actual Security Advisory Board (September 2015), pp. 13–20, https:// Output Will Be Below Potential Output on Average (February go.usa.gov/cJYR5 (PDF, 3.4 MB). 2015), www.cbo.gov/publication/49890. APPENDIX A THE 2018 LONG-TERM BUDGET OUTLOOK 37 Projected real GDP growth over the next three decades labor force participation rate would stay roughly con- is slower than the average annual rate of 2.5 percent stant over the next 30 years, in CBO’s judgment.15 recorded over the past three decades, primarily because the labor force is anticipated to grow more slowly in the The effects of several other trends and fiscal policies coming years. Moreover, with the labor force growing roughly offset one another. Three trends put downward more slowly than the overall population, per capita real pressure on the participation rate: GDP is expected to increase at a slower pace than it has in the past—at an average annual rate of 1.4 percent over •• Men of the generations that followed the baby the 2018–2048 period, compared with 1.6 percent for boomers tend to participate in the labor force at the past 30 years. lower rates than male baby boomers did at the same age. (The participation of women from generations Changes in Projections of GDP Since Last Year. In following the baby boomers has remained relatively CBO’s current projections, the level of real GDP is about constant.) 1.4 percent higher in 2027 than the agency projected last year. That gap shrinks over the next two decades; by •• The share of people receiving DI benefits is generally 2047 real GDP is 0.7 percent higher than it was last year. projected to continue to rise, and people who receive The higher level of real GDP in this year’s projections such benefits are less likely to work. stems primarily from three factors: revisions to historical data, changes in federal fiscal policy, and improvements •• The marriage rate is projected to continue to fall, in analytical methods. especially among men, and unmarried men tend to participate in the labor force at lower rates than The Rate of Labor Force Participation married men. The size of the labor force is determined by the size of the population and the rate at which people participate CBO expects those forces to be mostly offset by two in the labor market. CBO has slightly raised its projec- trends. As the population becomes more educated, labor tion of the labor force participation rate since last year. participation rates are expected to increase because work- ers with more education tend to participate in the labor Projections of the Labor Force Participation Rate. In force at higher rates than do people with less education. CBO’s projections, the rate of labor force ­ articipation— p Second, increasing longevity is expected to lead people to that is, the share of the civilian noninstitutionalized continue working to increasingly older ages.16 population age 16 or older that is either working or seeking work—declines from 62.8 percent in 2018 to In addition to the effects of those demographic trends, 61.0 percent in 2028 and to 59.5 percent in 2048. The recent changes in tax law, combined with economic and aging of the population is the most important factor budgetary trends, would also affect the labor force: driving down the overall participation rate over the next 30 years; the effects of other factors roughly offset •• CBO estimates that, under current law, lower tax one another. rates on labor would increase participation in the labor force over most of the next decade because Because older people tend to participate in the labor individuals would see a greater return on their labor. force at lower rates than younger people, the aging of However, the lower tax rates are scheduled to expire the population is expected to significantly dampen the rate of participation over the next 30 years. The share of 15. That calculation includes an adjustment for age and sex, but the people over the age of 65 is projected to increase from sex composition of the population is projected to change only 16 percent in 2018 to 22 percent in 2048, and the share slightly. Therefore, the decline in the labor force participation rate of the population ages 20 to 64 is expected to decline is attributable almost entirely to aging. from 59 percent to 55 percent during that 30-year 16. The agency recently updated its methods for projecting labor period. Without the effects of an aging population—that force participation to more adequately account for recent trends is, if the age-and-sex composition of the population in educational attainment and aging. See Josh Montes, CBO’s Projection of Labor Force Participation Rates, Working Paper remained the same as it is expected to be in 2018—the 2018-04 (Congressional Budget Office, March 2018), www.cbo.gov/publication/53616. 38 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 at the end of 2025, reducing the incentive to work, Other Labor Market Outcomes which would in turn reduce participation in the labor Among the factors accounted for in CBO’s labor market force toward the end of the decade. projections—in addition to the size of the population and the rate of labor force participation—are the unem- •• In addition, major tax legislation enacted in 2017 ployment rate, the average and total number of hours adopted an alternative measure of inflation for the that people work, and various measures of workers’ tax code that grows slightly more slowly than the earnings. The agency has changed its projections of those inflation measure used previously. Tax brackets, which variables over the past year because of updates to histori- are set to increase with inflation, will increase more cal data and reexamination of recent trends. slowly because of this new measure. Consequently, real income growth in the future will cause an Unemployment. In CBO’s projections, the unemploy- increased share of labor income to be pushed into ment rate, which was 4.1 percent at the end of 2017, higher tax brackets. Over time, under an assumption declines to 3.3 percent in 2019, gradually rises to that current laws remain unchanged, that bracket 4.8 percent by 2024, and then remains at that level, on creep would reduce incentives to work. average, through 2028. In the meantime, the natural rate of unemployment (the rate that results from all sources •• Rising federal deficits are projected to slow growth other than fluctuations in overall demand related to the in the stock of private capital and limit the growth business cycle) is projected to remain at 4.6 percent from of after-tax wages, also reducing the supply of labor. 2018 to 2028. From 2024 onward, the unemployment However, recent changes to the tax code provide rate is expected to remain about one-quarter of one greater incentives to invest, mitigating some of the percentage point above the natural rate, a difference that effects of higher deficits on the stock of private is consistent both with the historical average relationship capital. between the two measures and with the projected gap of one-half of one percent between actual and potential Changes in Projections of the Labor Force Participation GDP. Rate Since Last Year. CBO’s current projections of the labor force participation rate through 2025 are higher After 2028, both the actual and the natural rates of than its projections last year because of the enactment of unemployment are projected to decline gradually as the individual tax provisions that raise after-tax wages during labor force ages and becomes increasingly more edu- the next several years. Last year, CBO projected the par- cated. (Older and more educated workers tend to have ticipation rate would be 61.3 percent by 2025. This year, lower actual and natural rates of unemployment.) By CBO projects the participation rate to be 61.7 percent 2048, the natural rate of unemployment is projected to in 2025. be slightly less than 4.4 percent, and the actual rate is projected to be about 4.7 percent. Beyond 2025, participation rates over the next three decades are slightly higher than the rates published last Average Hours Worked. Different subgroups of the labor year. Last year, the participation rates were projected to force work different numbers of hours, on average. Men be 61.0 percent in 2027 and 59.3 percent in 2047. In tend to work more hours than women do, for exam- the current projections, those rates are 61.2 percent and ple, and people between the ages of 30 and 40 tend to 59.5 percent, respectively. work more hours than people between the ages of 50 and 60. In CBO’s estimation, those differences among When combined with CBO’s projections of the pop- groups will remain stable. However, over the long term, ulation, the projected rates of labor force participation the composition of the labor force is projected to shift imply that the labor force grows by 0.4 percent per toward groups that tend to work less (such as older work- year, on average, over the 2018–2048 period. That rate ers). As a result, the average number of hours worked by is slightly less than the 0.5 percent per year projected a the labor force as a whole is expected to decline slightly. year ago. By 2048, the average number of hours that people work is expected to be about 1 percent less than it is today. APPENDIX A THE 2018 LONG-TERM BUDGET OUTLOOK 39 Total Hours Worked. On the basis of projections of the distribution of earnings affects revenues from income size of the labor force, average hours worked, and unem- taxes and payroll taxes, among other things. Income ployment, total hours worked are estimated to increase taxes are affected by the earnings distribution because of at an average annual rate of 0.4 percent between 2018 the progressive rate structure of the income tax; people and 2048. with lower earnings pay a smaller share of their earnings than people with higher earnings. Earnings as a Share of Compensation. Workers’ total compensation consists of taxable earnings and non- Social Security payroll taxes are also affected by the earn- taxable benefits such as employers’ contributions to ings distribution. Those taxes are levied only on earnings health insurance and pensions. Over the years, the up to a certain annual amount ($128,400 in 2018). share of total compensation paid in the form of earn- Below that amount, earnings are taxed at a combined ings has declined—from about 90 percent in 1960 to rate of 12.4 percent, split between the employer and about 81 percent in 2017—mainly because the cost employee (self-employed workers pay the full amount); of health insurance has risen more quickly than total no tax is paid on earnings above the cap. The taxable compensation.17 maximum has remained a nearly constant proportion of the average wage since the mid-1980s, but because earn- CBO expects that trend in health care costs to continue, ings have grown more for higher earners than for others, which would further decrease the proportion of com- the portion of covered earnings on which Social Security pensation that workers receive as earnings. However, payroll taxes are paid has fallen from 90 percent in 1983 under current law, a new excise tax on certain employ- to 83 percent in 2016.18 The portion of earnings subject ment-based health insurance plans that have premiums to Social Security taxes is projected to fall to about 81 above specified amounts is scheduled to take effect in percent by 2028 and to fall below 80 percent by 2048. 2022. Some employers and workers are expected to respond by shifting to less expensive plans, thereby Changes in Projections of Other Labor Market reducing the share of compensation consisting of health Outcomes Since Last Year. Projections of most other insurance premiums and increasing the share that con- labor market outcomes are similar to what CBO sists of earnings. In CBO’s projections, the effects of the projected last year. For example, CBO’s long-term tax on the mix of compensation roughly offset the effects projection of the natural rate of unemployment is only of rising costs for health care until the effects of rising slightly lower than its projection a year ago because of costs outweigh those of the excise tax late in the projec- updates to historical data and trends. tion period. As a result, the share of compensation that workers receive as earnings is projected to remain close to An important change since last year in the labor market 81 percent through most of the 2018–2048 period. outcomes discussed in this section is to the projected distribution of earnings. Data for the past few years show Growth of Real Earnings per Worker. Projections of smaller-than-expected increases in the share of wages prices, nonwage compensation (such as employment-­ and salaries received by higher earners. In response, the based health insurance), average hours worked, and labor agency made a downward revision to projected increases productivity (discussed below) imply that real earnings in that share over the next decade. As a result, in this per worker grow by an average of 1.2 percent annually year’s projections, households with lower individual over the 2018–2048 period. That rate is higher than the income tax rates earn a larger share of total income than average annual growth—0.9 percent—of real earnings CBO projected last year, and total income tax revenues per worker over the last 30 years. are lower than would otherwise be the case. Distribution of Earnings. Over the past several decades, Additionally, with a smaller share of wages and salaries earnings have grown faster for higher earners than for received by higher earners, a larger share is received by lower earners. In CBO’s projections, the unequal growth in earnings continues for the next three decades. The 18. Covered earnings are those received by workers in jobs subject to Social Security payroll taxes. Most workers pay payroll taxes 17. For more details, see Congressional Budget Office, How CBO on their earnings, although a small number—mostly in state and Projects Income (July 2013), www.cbo.gov/publication/44433. local government jobs or in the clergy—are exempt. 40 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 people whose annual earnings are below the maximum slower than the average annual rate of 1.5 percent amount subject to Social Security payroll taxes. Thus, observed since 1950 and slightly slower than the average the share of earnings below the taxable maximum is rate recorded since 1990. expected to decline more slowly than CBO projected last year. In last year’s projections, the share of earnings The projected path for TFP reflects several consider- below the taxable maximum declined until 2027 and ations that, in CBO’s judgment, suggest slower growth then remained at roughly that level through the end of in coming decades than the long-term historical average. the projection period. In this year’s projections, the share For example, with the exception of a period of rapid of earnings below the taxable maximum declines gradu- growth in the late 1990s and early 2000s, productivity ally through 2048. By 2027 that share is 1.4 percentage has tended to grow more slowly in recent decades than points higher than in last year’s projections, and declines it did during the 1950s and 1960s. The long-term trend to roughly the same level in 2047 as CBO projected last suggests that projections for the next few decades should year. Over the 30-year period, that share is about half place greater weight on more recent, slower growth than of a percentage point higher, on average, than CBO on the relatively rapid growth of the more distant past. estimated last year. Thus, although CBO projects an acceleration of TFP growth from its unusually slow recent rate, the agency Capital Accumulation and Productivity anticipates it to return to a rate that is slower than its In addition to growth in the labor force and the number long-term historical average. of hours worked, two other important factors affect the growth in output. One is the accumulation of capital, A number of developments support slow-growth projec- including physical structures, equipment, land, and tions for TFP. One is the anticipated slowing of growth inventories used in production, along with intangible in labor quality, a measure of workers’ skills that accounts capital such as computer software. The accumulated stock for educational attainment and work experience that, in contributes a stream of services to production. The second CBO’s analysis, is implicitly a part of TFP. Following a is the growth of total factor productivity (TFP), which is relatively rapid rise during the 1980s and 1990s, growth the growth of real output per unit of combined labor and in labor quality slowed after 2000. In CBO’s judgment, capital services—that is, the growth of output that is not that change results both from a gradual slowdown in the explained by the growth of labor and capital. Combined, increase in average educational attainment and from the the growth rates projected for the labor supply, the capital burgeoning retirement of a relatively large and skilled stock, and TFP result in a projection of the average portion of the workforce—the baby-boom generation. In growth of labor productivity (output per worker). coming decades, however, the slowdown in the growth of labor quality is expected to be partly offset by the aging Capital Services. Over the longer term, in CBO’s view, of those remaining in the labor force, especially as better growth in the nation’s stock of capital will be driven by health and longer life expectancy lead people to stay private saving, federal borrowing, and international flows in the workforce longer than did members of previous of financial capital. Private saving and international capi- generations. (An older workforce generally has a larger tal flows tend to move with the after-tax rate of return on proportion of more highly educated workers because investment, which measures the extent to which invest- they tend to remain in the labor force longer than do ment in the stock of capital results in a flow of income. workers with less education.) Nevertheless, CBO antici- That rate is affected both by tax rates and by the growth pates slower growth in labor quality than in the past. of TFP. Recent reductions in statutory tax rates on corporations permanently increase incentives to invest in Another factor that is projected to slow the growth of capital and consequently raise the level of capital services. TFP relative to its long-term average is the projected reduction in spending for federal investment. Under Total Factor Productivity. The annual growth of TFP the assumptions used for CBO’s baseline, the govern- is projected to increase from about 0.9 percent in 2018 ment’s nondefense discretionary spending is projected to to about 1.2 percent in 2022 and then to remain at that decline over the next decade to a much smaller percent- rate through 2048, yielding an average annual growth age of GDP than it has averaged in the past. About half rate of roughly 1.2 percent from 2018 to 2048. That of nondefense discretionary spending from the 1980s projected growth rate is about 0.3 percentage points onward has consisted of federal investment in physical APPENDIX A THE 2018 LONG-TERM BUDGET OUTLOOK 41 capital (such as roads and other infrastructure), educa- Prices of Consumer Goods and Services. One measure tion and training, and research and development—all of of consumer price inflation is the annual rate of change which, in CBO’s judgment, contributed to TFP growth. in the consumer price index for all urban consumers Consequently, lower nondefense discretionary spending (CPI-U). Over the 2018–2048 period, inflation in that as a percentage of GDP would mean less federal invest- measure averages 2.4 percent in CBO’s projections. That ment, causing TFP to grow more slowly. long-term rate is slightly less than the average rate of inflation since 1990 of 2.5 percent per year. CBO proj- In contrast, changes to the tax code are projected to raise ects that, under a chained measure of inflation, prices productivity by discouraging multinational corporations’ grow at a rate 0.25 percent less than the annual increase profit-shifting strategies that historically have reduced in the consumer price index.21 official estimates of TFP. Because TFP is a component of GDP, CBO projects an increase in GDP as tax incentives Prices of Final Goods and Services. After 2018, the encourage firms to claim as domestic production the ser- annual inflation rate for all final goods and services vices of intellectual property that were previously claimed produced in the economy, as measured by the rate of as production abroad. CBO has slightly increased its pro- increase in the GDP price index, is projected to average jections of TFP to account for this anticipated increase in 0.4 percentage points less than the annual increase in output, which is not matched by an increase in produc- the consumer price indexes. The GDP price index grows tion inputs. more slowly than the consumer price indexes because it is based on the prices of a different set of goods and Labor Productivity. Taken together, the projections of services and a different method of calculation. labor supply, capital services, and TFP result in labor productivity that is expected to grow by 1.5 percent Changes in Projections of Inflation Since Last Year. annually over the 2018–2048 period.19 Inflation in both measures of consumer prices is pro- jected to be roughly the same as the rates CBO projected Changes in Projections of Capital Accumulation and last year for the 2017–2047 period. Productivity Since Last Year. CBO projects roughly the same average TFP growth that it projected last year. Interest Rates However, CBO’s projection of capital services is above CBO projects the interest rates, both real and nominal, the level it projected last year, largely because of stronger that apply to federal borrowing, including the rate on investment incentives in the tax code that cause busi- 10-year Treasury notes and special-issue Social Security nesses to raise investment. bonds. It also projects the average nominal interest rates on federal debt held by the public and on the bonds held Inflation in the Social Security trust funds. Those rates influence CBO projects rates of inflation for two categories: prices the cost of the government’s debt burden and the evolu- of consumer goods and services and prices of final goods tion of the trust funds. and services in the economy.20 Those rates influence nominal (current year) levels of income and interest After considering a number of factors, including slower rates and thereby influence tax revenues, various types of growth of the labor force, CBO expects real interest rates federal expenditures that are indexed for inflation, and on federal borrowing to be lower in the future than they interest payments on federal debt. have been, on average, over the past few decades. The 21. The chained CPI-U tends to grow more slowly than the standard CPI-U because it uses a formula that better accounts for households’ tendency to substitute similar goods and services for 19. The measure of labor productivity reported here is the ratio of each other when relative prices change and because, unlike the real output to hours worked in the economy. Note that elsewhere CPI-U, it is little affected by statistical bias related to the sample CBO reports different measures of labor productivity, such as the sizes that the Bureau of Labor Statistics uses in computing each ratio of potential real output to the potential labor force. index. Historically, inflation as measured by the chained CPI-U 20. Final goods and services are those purchased directly by has been 0.25 percentage points lower, on average, than inflation consumers, businesses (for investment), and governments, as as measured by the CPI-U. CBO’s projections reflect that average well as net exports. difference between the two measures. 42 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 real interest rate on 10-year Treasury notes (calculated the long term.24 That period was chosen for comparison by subtracting the rate of increase in the consumer price because it featured fairly stable expectations of inflation index from the nominal yield on those notes) averaged and no severe economic downturns or significant finan- roughly 2.9 percent between 1990 and 2007.22 That rate cial crises. has averaged 1.0 percent since 2009 and is projected to be 1.4 percent in 2028. In CBO’s projections, the rate Some factors reduce interest rates; others increase them. continues to rise thereafter, reaching 2.4 percent in 2048, In CBO’s estimates for the 2018–2048 period, several 0.5 percentage points below its average over the 1990– factors tend to reduce interest rates on government secu- 2007 period. CBO’s projections of interest rates this year rities relative to their 1990–2007 average: are higher than last year’s. •• The labor force is projected to grow much more Factors Affecting Interest Rates. Interest rates are deter- slowly than it did from 1990 to 2007. That slower mined by a number of factors. CBO projects the rates by growth in the number of workers would tend to comparing how the values of those factors are expected increase the amount of capital per worker in the long to differ in the long term relative to their average values term, reducing the return on capital and, therefore, in the past. However, conclusions from such analyses also reducing the return on government bonds and depend greatly on the period being considered, as some other investments.25 recent decades show: Real interest rates were low in the 1970s because of an unexpected surge in inflation. In the •• The share of total income received by higher-income 1980s, when inflation declined at an unexpectedly rapid households is expected to be larger in the future pace, real rates were high.23 Interest rates fell sharply than during the 1990–2007 period. Higher-income during the financial crisis and recession that began in households tend to save a greater proportion of 2007. their income, so the difference in the distribution of income is projected to increase the total amount of To avoid using any of those possibly less representative saving available for investment, other things being periods, CBO considered average interest rates and equal. As a consequence, the amount of capital per their determinants over the 1990–2007 period and then worker is projected to rise and interest rates are judged how different those determinants might be over expected to be lower. 22. Between 1970 and 2007, the real interest rate on 10-year •• TFP is projected to grow more slowly in the future Treasury notes averaged 2.8 percent; the average from 1954 to than it did from 1990 to 2007. For a given rate of 2007 was 2.6 percent. Historical inflation rates are taken from investment, lower productivity growth reduces the the consumer price index, adjusted to account for changes over return on capital and results in lower interest rates, all time in the way that the index measures inflation. See Bureau of else being equal. Labor Statistics, “CPI Research Series Using Current Methods (CPI-U-RS)” (March 28, 2018), www.bls.gov/cpi/cpiurs.htm. •• CBO expects investors’ preferences for Treasury 23. CBO calculates real interest rates by subtracting expected rates securities relative to riskier assets to remain elevated of inflation from nominal interest rates. In general, borrowers and lenders agree to nominal interest rates after accounting compared with inclinations over the 1990–2007 for their expectations of what inflation will be. However, if period. Investors began to have less appetite for risk inflation ends up being higher than was expected when the rates were agreed to, real interest rates will turn out to be lower 24. A Bank of England study identified a similar set of determinants than anticipated. If inflation ends up lower than expected, the that account for the decline in real interest rates over the past opposite will occur. CBO uses the actual consumer price index, 30 years. See Rachel Lukasz and Thomas D. Smith, Secular adjusted to account for changes over time in the way that the Drivers of the Global Real Interest Rate, Staff Working Paper index measures inflation, as a proxy for both what expectations 571 (Bank of England, December 2015), https://tinyurl.com/ of inflation have been in the past and what they will be in the z6zqnb7 (PDF, 1.8 MB). future. One drawback is that if inflation fluctuates rapidly over time, changes in expectations may lag behind changes in 25. For more information about the relationship between the actual inflation. Although CBO’s approach could mismeasure growth of the labor force and interest rates, see Congressional expectations of inflation and real interest rates in some years, the Budget Office, How Slower Growth in the Labor Force Could way inflation has varied over time suggests that CBO’s approach Affect the Return on Capital (October 2009), www.cbo.gov/ is a useful proxy over long periods, on average. publication/41325. APPENDIX A THE 2018 LONG-TERM BUDGET OUTLOOK 43 in the early 2000s, and the demand for low-risk assets the historical average. In CBO’s estimation, a larger was strengthened by the economic fallout from the share of income accruing to owners of capital would financial crisis, the slow subsequent recovery, and directly boost the return on capital and, thus, interest financial institutions’ response to increased regulatory rates. oversight. Moreover, in the past several years, the perception that investments in emerging market •• The retirement of members of the baby-boom economies were riskier than investments in the generation and slower growth of the labor force United States probably contributed to the increased will reduce the number of workers in their prime demand for U.S. assets (particularly federal debt) saving years relative to the number of older people that are considered to be relatively risk-free. The rise who are drawing down their savings, CBO projects. in demand for Treasury securities from those sources As a result, in CBO’s estimates, the total amount contributed to lower returns (that is, to lower interest of saving available for investment decreases (all else rates). CBO expects preferences for Treasury securities being equal), which tends to reduce the amount of relative to riskier assets to gradually decline over the capital per worker and thereby push up interest rates. next three decades but to remain above their average (CBO estimates that this effect only partially offsets levels from 1990 to 2007. the positive effect of increased income inequality on saving, leaving a net increase in savings available for At the same time, in CBO’s estimates, several factors investment.) tend to boost interest rates on government securities relative to their average over the 1990–2007 period: Some factors mentioned above are easier than others to quantify. For instance, the effect of labor force growth •• Under CBO’s extended baseline, federal debt is and rising federal debt can be estimated from available projected to be much larger as a percentage of GDP data, theoretical models, and estimates in the literature. than it was before 2007—reaching 96 percent by The extent to which other factors will affect interest 2028 and 152 percent by 2048. The latter figure is rates is more difficult to estimate. A shift in preferences more than three and a half times the average over for low- rather than high-risk assets is not directly the 1990–2007 period. Greater federal borrowing observable, for example. And although the distribution tends to crowd out private investment in the long of income is observable, neither models nor empirical term, reducing the amount of capital per worker estimates offer much guidance for quantifying its effect and increasing both interest rates and the return on on interest rates. capital over time. In light of those sources of uncertainty, CBO relies not •• CBO anticipates that emerging market economies only on economic models and findings from the research will attract a greater share of foreign investment in literature but also on information from financial markets coming decades than they did in the 1990–2007 to guide its assessments of the effects of various factors period. As economic and financial conditions in on interest rates over the long term. The current rate those economies continue to improve, they will on 30-year Treasury bonds, for example, reflects mar- become increasingly attractive destinations for foreign ket participants’ judgments about the path that interest investment. CBO projects that development to put rates on short-term securities will take 30 years into the upward pressure on interest rates in the United States. future. That market forecast informs CBO’s assessment of market expectations for the risk premium—the pre- •• The capital share of income—the percentage of total mium paid to investors for the extra risk associated with income that is paid to owners of capital—has been holding longer-term bonds—and for investment oppor- on an upward trend for the past few decades. The tunities in the United States and abroad, and it points to share is projected to decline over the next decade considerably lower interest rates well into the future than from its current, elevated level but remain higher those of recent decades. than its average over recent decades. The factors that appear to have contributed to the rise in income for Projections of Interest Rates. CBO anticipates consider- owners of capital (such as technological change and able movement in long-term interest rates over the first globalization) are likely to persist, keeping it above 11 years of the projection. For the next few years, CBO 44 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 projects interest rates to rise as GDP expands beyond 2018–2048 period and reaches 4.8 percent in 2048. The its potential and the Federal Reserve tightens monetary corresponding real rates are 1.7 percent, on average, over policy. Beginning in late 2021, CBO expects long-term the full period and 2.4 percent in 2048. interest rates to decline as GDP growth slows and the economy moves back towards its historical relationship Because interest rates have been low for much of the past with potential output. Beginning in 2024, long-term decade, CBO projects the average interest rate earned by interest rates in CBO’s projections gradually rise in all bonds held (both new and previously issued) by the response to increases in the ratio of debt to GDP. Social Security trust funds to be slightly lower than the interest rate on newly issued bonds over the next decade. The nominal interest rate on 10-year Treasury notes The average interest rate on all bonds, which CBO uses is projected to average 4.1 percent over the 2018– to calculate the present value of future streams of reve- 2048 period and to reach 4.8 percent in 2048. The real nues and outlays for those funds, is projected to average interest rate on 10-year Treasury notes is projected to 3.8 percent for the 2018–2048 period.27 average about 1.7 percent and, at the end of the period, to be 2.4 percent. Changes in Projections of Interest Rates Since Last Year. CBO’s projections of interest rates this year are The average interest rate on all federal debt held by higher than last year’s. The real rates on 10-year Treasury the public tends to be lower than the rates on 10-year notes and the Social Security bonds are projected to aver- Treasury notes because interest rates are generally lower age 1.7 percent over the 2018–2048 period and to be on shorter-term debt than on longer-term debt and 2.3 percent in 2047. Last year, CBO projected both rates because Treasury securities are expected to mature, on would average 1.5 percent over the 2017–2047 period average, over periods of less than 10 years.26 CBO proj- and would be 2.3 percent in 2047. ects a 0.4 percentage-point difference between the rate on 10-year Treasury notes and the effective rate on fed- The path of interest rates is higher in this year’s pro- eral debt over the 2029–2048 period. That difference is jections than in last year’s. Long-term interest rates are projected to average 0.6 percentage points over the next poised to end the first half of 2018 roughly half a per- decade. The difference is larger over the coming decade centage point higher than CBO projected last year. The than for later years because a significant portion of higher rate probably reflects the expectation of tighter federal debt that will be outstanding during the next 10 monetary policy (in response to a stronger labor mar- years was issued at the very low interest rates prevailing ket and greater inflationary pressure) as well as reduced in the aftermath of the 2007–2009 recession. (The aver- demand for long-term Treasury bonds. Both trends age interest rate on all federal debt changes more slowly are expected to continue over the next several years. In than the 10-year rate because only a portion of federal addition, CBO projects greater federal borrowing to debt matures each year.) Thus, in CBO’s projections, the push up interest rates. The upward revision to 10-year average nominal interest rate on all federal debt held by Treasury rates is anticipated to peak at 1 percentage the public is about 3.6 percent for the 2018–2048 period point in 2020. The upward revision is predicted to be and reaches 4.4 percent in 2048. smaller in later years, as economic growth returns to its historical relationship with potential output growth and The Social Security trust funds hold special-issue bonds downward revisions to projected deficits gradually reduce that generally earn interest at rates that are higher the upward revision to the stock of debt. From 2023 to than the average rate on federal debt. In CBO’s pro- 2047, the 10-year Treasury rate is roughly unchanged in jections, the nominal interest rate on bonds newly this year’s report compared to last year’s projection. issued to the trust funds averages 4.1 percent over the 27. A present value is a single number that expresses a flow of past and future income or payments in terms of an equivalent lump 26. In particular, from 2018 to 2028, the difference between the sum received or paid at a specific time. The value depends on rate on 3-month Treasury bills and the rate on 10-year Treasury the rate of interest, known as the discount rate, that is used to notes shrinks from 1.2 percentage points to its longer-run level of translate past and future cash flows into current dollars at that 1 percentage point. time. APPENDI X B Changes in Long-Term Budget Projections Since March 2017 T he 30-year projections of federal spending GDP this year to 148 percent in 2047; last year, CBO and revenues presented in this report differ projected that it would rise from 77 percent of GDP from the projections that the Congressional in 2018 to 150 percent in 2047 (see Figure B-1).3 The Budget Office published in 2017 because of revised projections of debt resulted from changes in both certain changes in law, revisions to some of the agency’s spending and revenue projections, all of them presented assumptions and methods, the availability of more recent here as a percentage of GDP: data, and changes to the agency’s projections of demo- graphic and economic variables.1 For the same reasons, •• Projected noninterest spending is lower than CBO CBO’s 10-year projections have also changed since 2017, anticipated last year, though the difference shrinks and they serve as the foundation for the 30-year projec- toward the end of the 30-year projection period. tions. The 10-year projections are typically published The main cause is downward revisions to outlays for in The Budget and Economic Outlook; however, since Social Security and the major health care programs the publication of that report in April, the agency has in CBO’s projections, though those reductions in adjusted them.2 As a result, the long-term projections in mandatory spending are partially offset by increases this report are based on those adjusted projections (see in discretionary spending.4 Table B-1). •• Net spending for interest is projected to be higher This appendix compares CBO’s current long-term bud- through the late 2030s than it was in last year’s get projections with those published last year. Because projections and lower thereafter. The initial difference most of the projections in the 2017 report ended in results from higher projected interest rates and greater 2047, the appendix compares projections only through projected levels of debt held by the public than CBO that year. projected last year. That relationship reverses later in the projection period as deficits become smaller than Measured as a percentage of gross domestic product projected a year ago, a change that leads to lower (GDP), federal debt held by the public is now projected interest costs and slower accumulation of debt. to be higher through 2041, and lower thereafter, than CBO projected last year. Under the extended baseline, •• Projected revenues are lower through 2026 than they debt is projected to grow from about 78 percent of were in last year’s projections, similar for most of the following two decades, and then slightly higher by the 1. See Congressional Budget Office, The 2017 Long-Term Budget end of the 30-year projection period. Those changes Outlook (March 2017), www.cbo.gov/publication/52480. The reflect provisions of Public Law 115-97, which is changes in demographic and economic projections are described referred to here as the 2017 tax act. in Appendix A of this report. 2. In total, the adjustments reduced the projected deficit for 3. The extended baseline generally reflects current law, following 2018 by $12 billion and reduced projected deficits over CBO’s 10-year baseline budget projections and then extending the 2019–2028 period by a cumulative $17 billion. For most of the concepts underlying those baseline projections for the the April report, see Congressional Budget Office, The rest of the long-term projection period. Budget and Economic Outlook: 2018 to 2028 (April 2018), www.cbo.gov/publication/53651. For the adjusted projections, 4. Mandatory spending is generally governed by provisions of see Congressional Budget Office, An Analysis of the President’s permanent law, whereas discretionary spending is controlled by 2019 Budget (May 2018), www.cbo.gov/publication/53884. annual appropriation acts. 46 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 Table B-1. Comparison of CBO’s Adjusted April 2018 Baseline and January 2017 Baseline Billions of Dollars 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Adjusted April 2018 Baseline Revenues 3,339 3,490 3,680 3,829 4,016 4,232 4,448 4,667 5,003 5,301 5,520 Outlays 4,131 4,463 4,683 4,947 5,290 5,505 5,693 6,020 6,324 6,616 7,047 Deficit -793 -973 -1,003 -1,118 -1,275 -1,273 -1,245 -1,352 -1,321 -1,314 -1,527 Debt Held by the Public at the End of the Year a 15,676 16,743 17,804 18,970 20,290 21,609 22,904 24,310 25,687 27,058 28,642 January 2017 Baseline Revenues 3,604 3,733 3,878 4,019 4,176 4,346 4,527 4,724 4,931 5,140 n.a. Outlays 4,091 4,334 4,562 4,816 5,135 5,346 5,554 5,890 6,228 6,548 n.a. Deficit -487 -601 -684 -797 -959 -1,000 -1,027 -1,165 -1,297 -1,408 n.a. Debt Held by the Public at the End of the Year a 15,416 16,092 16,845 17,704 18,721 19,776 20,858 22,078 23,430 24,893 n.a. Difference Between Adjusted April 2018 Baseline and January 2017 Baseline Revenues -265 -243 -199 -190 -160 -114 -79 -57 72 161 n.a. Outlays 40 129 121 132 155 158 139 130 96 68 n.a. Deficit b -305 -372 -320 -322 -315 -272 -217 -187 -24 93 n.a. Debt Held by the Public at the End of the Year a 260 650 959 1,266 1,569 1,832 2,046 2,232 2,257 2,165 n.a. Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. n.a. = not applicable. a.The net amount that the Treasury borrows is determined primarily by the annual budget deficit. In addition, several factors—collectively labeled “other means of financing” and not directly included in budget totals—also affect the government’s need to borrow from the public. b.Negative numbers indicate that CBO’s projection of the deficit has grown. Over most of the coming decade, the decrease relative Noninterest Spending to last year’s projections, measured as a share of GDP, As a share of GDP, noninterest spending—that is, is larger for revenues than for noninterest spending spending for Social Security, spending for the major (see Figure B-2). The result is that projected deficits federal health care programs, and other noninterest through 2025 are now markedly larger than previously spending—is projected to be about the same in 2018 as projected. Beginning in 2026, however, they are smaller projected last year and lower thereafter. Specifically, it than previously projected. is projected to equal 19.0 percent of GDP in 2018 and to reach 23.0 percent of GDP by 2047 (0.2 percentage Changes in Projected Spending points lower than in last year’s projection). In CBO’s extended baseline, noninterest spending as a percentage of GDP is slightly lower than anticipated last Social Security Spending. CBO projects that outlays for year, mainly because the agency’s projections of outlays Social Security as a percentage of GDP will be slightly for Social Security and the major health care programs lower than the agency anticipated last year. That change have fallen. CBO’s projections of discretionary spend- reflects slightly lower projections of nominal outlays over ing, by contrast, are higher than they were a year ago. the next 10 years and higher projections of GDP. Projections of net interest costs are higher than previ- ously projected through the late 2030s and then lower. The revisions to nominal outlays over the next 10 years include a downward adjustment of projected spending APPENDIX B THE 2018 LONG-TERM BUDGET OUTLOOK 47 Figure B-1. Comparison of CBO’s 2017 and 2018 Projections of Federal Debt Held by the Public and the Deficit in the Extended Baseline Percentage of Gross Domestic Product Federal Debt Held by the Public 160 150 2017 Projection 148 2018 Projection 140 120 100 80 60 2017 2022 2027 2032 2037 2042 2047 Deficit 10 0 -9.3 2018 Projection -10 -9.8 2017 Projection 2017 2022 2027 2032 2037 2042 2047 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. on Disability Insurance (DI), which is a component of based are indexed to growth in average wages. When that the Social Security program, and lower projections of growth is lower, the resulting benefits are also lower.) average wage rates through 2020. The DI projections are lower mainly because caseloads have been lower Major Federal Health Care Spending. CBO’s cur- than anticipated over the past year, which led CBO to rent long-term projection of federal spending for the reduce its projection of the number of DI beneficiaries major health care programs, measured as a percentage initially as well as projections of growth in the number of of GDP, is lower than last year’s projection. Spending beneficiaries over the next several years. The projections for Medicare net of offsetting receipts (that is, premi- of average wage rates are lower because of downward ums paid by beneficiaries) is now projected to equal revisions to historical data. (Lower projections of average 2.9 percent of GDP in 2018 (0.1 percent of GDP wage rates reduce projected spending on Social Security lower than projected last year) and then to rise steadily benefits because the earnings on which initial benefits are to 5.8 percent of GDP in 2047 (0.3 percent of GDP 48 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 Figure B-2. Comparison of CBO’s 2017 and 2018 Projections of Spending and Revenues in the Extended Baseline Percentage of Gross Domestic Product Noninterest Spending 25 23.2 2017 Projection 23.0 2018 Projection 20 15 10 2017 2022 2027 2032 2037 2042 2047 Revenues 25 20 19.8 2018 Projection 19.6 2017 Projection 15 10 2017 2022 2027 2032 2037 2042 2047 Revenues Minus Noninterest Spending 5 0 -3.2 2018 Projection -3.6 2017 Projection -5 2017 2022 2027 2032 2037 2042 2047 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. APPENDIX B THE 2018 LONG-TERM BUDGET OUTLOOK 49 lower than projected last year). That reduction occurred For Medicare, the average annual rate of excess cost mostly because CBO has increased its projections of growth implicit in CBO’s baseline projections is about GDP. Outlays for Medicaid and the Children’s Health 1.0 percent from 2019 through 2028, slightly lower Insurance Program (CHIP), combined with spending than last year’s average of 1.1 percent from 2018 through to subsidize health insurance purchased through the 2027. The rate of excess cost growth for 2029 is 1.2 per- marketplaces established under the Affordable Care Act cent, the same as last year’s estimate. Excess cost growth and related spending, are projected to be lower than is projected to average 1.1 percent over the full projec- previously anticipated through the late 2030s and higher tion period, the same as last year’s estimate but lower thereafter, totaling 3.3 percent of GDP in 2047, slightly than the historical average of 1.3 percent from 1985 larger than the sum projected last year. That larger to 2016. ultimate amount results from faster growth of Medicaid spending in the second and third decades than projected For Medicaid, the average annual rate of excess cost a year ago. growth implicit in CBO’s baseline projections for the federal share of such spending is 1.5 percent from 2019 To project long-term spending for the major health care through 2028, up by 0.3 percentage points from last programs, CBO used the same method that it used last year’s estimate for 2018 through 2027. The rate for 2029 year. Namely, it combined estimates of the number of is 1.6 percent, up by 0.9 percentage points from last people who are projected to receive benefits from those year’s estimate. That change was the cumulative result of programs with fairly mechanical estimates of the growth many updates that CBO made to its baseline projections of spending per beneficiary (adjusted to account for for legislative, economic, and technical reasons—with demographic changes to the beneficiaries in each pro- the largest contribution resulting from an update to gram). CBO has estimated such growth by combining CBO’s methods that made the agency’s estimates of projected growth in potential GDP per person with pro- growth in costs per beneficiary more consistent through- jected excess cost growth for each program.5 (From 2018 out the 10-year projection period. The rate of excess cost to 2027, potential GDP per person is projected to grow growth is projected to average 1.4 percent over the full at an average rate of about 3.4 percent per year, up from projection period, which is 0.4 percentage points higher the 3.1 percent estimated last year; from 2018 to 2047, than last year’s estimate and 0.4 percentage points higher the average growth rate is projected to be about 3.4 per- than the 1985–2016 average. cent per year, roughly the same as last year’s estimate.) For private health insurance premiums, which CBO uses For each category of spending except CHIP, through as an input to its calculation of marketplace subsidies, 2028, CBO used the rate of excess cost growth implicit the average annual rate of excess cost growth implicit in in the agency’s 10-year baseline projections.6 For 2029, CBO’s baseline projections is about 2 percent from 2019 the rate equals the average rate from 2024 to 2028 (the through 2028 (the same as last year’s estimate). The rate last 5 years of the 10-year baseline projections). The for 2029 is also about 2 percent, which again is similar rates of excess cost growth for Medicare, Medicaid, and to last year’s estimate. The rate is projected to decline private health insurance therefore all differ in 2029. After from 2029 to 2048 and to be lower in 2048 than its 2029, the rate for each category moves linearly, by the historical average. same fraction of a percentage point each year, from that category-specific rate to a rate of 1.0 percent in 2048.7 Other Noninterest Spending. Over the next 10 years, other noninterest spending—total federal spending on 5. Potential GDP is the maximum sustainable output of the everything other than Social Security, the major federal economy. Excess cost growth is the extent to which health care health care programs, and net interest—is projected to costs per person, after being adjusted for demographic changes, be slightly higher as a percentage of GDP than projected grow faster than potential GDP per person. last year and roughly the same thereafter. For most 6. Spending for CHIP is projected differently. Outlays for CHIP are of the next 10 years, the part of that spending that is projected to be a constant percentage of GDP after 2028. mandatory is slightly lower than previously projected as 7. For more information, see Congressional Budget Office, The a share of GDP because CBO has revised its projections 2016 Long-Term Budget Outlook (July 2016), Chapter 3, of GDP upward. But that decline is more than offset www.cbo.gov/publication/51580. 50 THE 2018 LONG-TERM BUDGET OUTLOOK June 2018 Figure B-3. Comparison of CBO’s 2017 and 2018 Projections of Net Spending for Interest in the Extended Baseline Percentage of Gross Domestic Product 7 6.2 2017 Projection 6 6.0 2018 Projection 5 4 3 2 1 0 2017 2022 2027 2032 2037 2042 2047 Source: Congressional Budget Office. The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. by an increase in projected discretionary spending. That After the late 2030s, smaller deficits and eventually increase stems primarily from legislative changes that smaller debt result in lower net interest costs. For the increased funding for defense and nondefense spend- coming decade, net interest costs are projected to average ing limited by caps on annual appropriations and that 2.5 percent of GDP; last year, the projected average was increased funding for emergency requirements. 2.2 percent. They are projected to equal 3.1 percent of GDP by 2028 (up 0.2 percentage points from last year’s Beyond 2028, other noninterest spending as a share of projections) and 6.0 percent of GDP by 2047 (down GDP is projected to be about the same as projected last 0.2 percentage points from last year’s projections). year, reflecting lower projections of other mandatory spending offset by higher projections of discretionary Changes in Projected Revenues spending. The projections of other mandatory spending In CBO’s current projections, revenues measured as a as a percentage of GDP are lower because such spend- percentage of GDP are lower through 2026 than they ing is projected to be slightly smaller after 10 years, and were in last year’s projections, similar for most of the CBO projects that it will decline in relation to GDP at following two decades, and then slightly higher by the same rate by which it is projected to fall between the end of the 30-year projection period. They equal 2023 and 2028, although at a slightly slower rate than 16.6 percent of GDP this year (which is 1.5 percentage last year. The projections of discretionary spending are points lower than last year’s estimate) and then rise to higher than they were last year because such spending, at 18.1 percent of GDP in 2026 (which is 0.2 percentage the end of the 10-year period, is now higher than it was points lower than last year’s estimate). Those downward in last year’s projections. (CBO assumes that discretion- revisions are the result of recently enacted legislative ary spending will remain roughly constant as a share of changes and increased projections of GDP. In particu- GDP after 2028.) lar, provisions of the 2017 tax act temporarily reduced individual income tax rates, nearly doubled the standard Interest Costs deduction, modified or eliminated certain deductions or In CBO’s projections, net interest costs are higher exemptions, and temporarily allowed firms to deduct the through the late 2030s and lower thereafter than they cost of capital investments immediately. were a year ago (see Figure B-3). Those costs are higher initially because the agency’s projections of interest rates Measured as a share of GDP, revenues in 2027 are pro- and federal debt held by the public are likewise higher. jected to be largely the same as in last year’s projections, APPENDIX B THE 2018 LONG-TERM BUDGET OUTLOOK 51 following the scheduled expiration of most of the indi- benefits at the end of the period.10 When that balance is vidual income tax provisions of the 2017 tax act.8 From negative, it is a deficit. 2027 to 2038, projected revenues average 18.8 percent of GDP (which is equal to last year’s estimate). But by The 75-year actuarial deficit currently projected for 2047, revenues are projected to be 0.2 percentage points Social Security is 1.5 percent of GDP (which is the same higher than projected a year ago. That is because individ- as estimated last year) or 4.4 percent of taxable payroll ual income taxes are now projected to grow more quickly (which is smaller than last year’s estimate of 4.5 percent). through most of the projection period as a result of a That reduction resulted from a number of factors. CBO change in the price index that is used to adjust tax brack- has lowered its projection of nominal outlays for Social ets.9 As a consequence, income will be pushed into higher Security over the next 10 years and increased its projec- tax brackets more quickly than projected a year ago. tion of the share of earnings that are subject to Social Security payroll taxes over the next 30 years.11 In addi- Those effects are partially offset by a change in CBO’s tion, the agency projects slightly higher interest rates over projection of the distribution of earnings. Specifically, the 75-year period. Partially offsetting those effects is an the agency has lowered its projection of the share of earn- increase in the actuarial deficit that results each year from ings that will accrue to the highest earners over the next incorporating another year of relatively large deficits into 30 years (though it still projects that earnings will grow the analysis.12 more quickly for higher-income people than for others). The change causes a smaller share of income to be taxed Another commonly used measure of Social Security’s at higher rates under the individual income tax, reducing sustainability is its trust funds’ date of exhaustion. CBO receipts from that tax source. That decrease is largely off- projects that if current law did not change, the Disability set by an increase in projected payroll taxes, as a smaller Insurance Trust Fund would be exhausted in fiscal year increase in the share of income accruing to the highest 2025, the Old-Age and Survivors Insurance (OASI) Trust earners results in more earnings falling below the maxi- Fund would be exhausted in calendar year 2032, and the mum amount subject to Social Security payroll taxes. combined trust funds would be exhausted in calendar year 2031. Last year, those exhaustion dates were two Changes in Social Security’s years earlier for the DI trust fund, one year earlier for Projected Finances the OASI trust fund, and one year earlier for the com- A common measure of the sustainability of a program bined funds. The changes in those dates are the result of that has a trust fund and a dedicated revenue source is the lower projections of nominal outlays from the trust its estimated actuarial balance over a given period—that funds, the higher projections of interest rates on balances is, the sum of the present value of projected tax revenues in the trust funds, and higher projections of revenues into and the current trust fund balance minus the sum of the the trust funds. The revenues are projected to be higher present value of projected outlays and a year’s worth of because of increased projections of earnings relative to last year and because the projected share of earnings that is subject to Social Security payroll taxes has grown. 8. For more information about the effects of the 2017 tax act, see The Budget and Economic Outlook: 2018 to 2028 (April 2018), 10. A present value is a single number that expresses a flow of past Appendix B, www.cbo.gov/publication/53651, and Box 1on and future income or payments in terms of an equivalent lump page 26 of this report. sum received or paid at a specific time. The value depends on the 9. Beginning in 2018, the measure used for adjusting most rate of interest, known as the discount rate, used to translate past parameters of the tax system will be changed from the standard and future cash flows into current dollars at that time. To account consumer price index for urban consumers (CPI-U) to the chained for the difference between the trust fund’s current balance and CPI-U. The chained CPI-U tends to grow more slowly than the the balance desired for the end of the period, the balance at the standard CPI-U because it uses a formula that better accounts for beginning is added to projected tax revenues, and an additional households’ tendency to substitute similar goods and services for year of costs at the end of the period is added to projected outlays. each other when relative prices change and because, unlike the 11. Beyond the 30-year projection period, the share of earnings subject CPI-U, it is little affected by statistical bias related to the sample to Social Security payroll taxes is held constant in CBO’s projections. sizes that the Bureau of Labor Statistics uses in computing each index. Historically, inflation as measured by the chained CPI-U 12. The actuarial deficit includes the trust fund balance at the has been 0.25 percentage points lower, on average, than inflation beginning of the projection period, and that balance represents as measured by the standard CPI-U. CBO’s projections reflect that the present value of all income and costs to the trust funds since average difference between the two measures. their beginning. List of Tables and Figures Tables 1. Key Projections in CBO’s Extended Baseline 2 2. Assumptions About Spending and Revenues Underlying CBO’s Extended Baseline 14 3. Financial Measures for Social Security 17 4. Reasons for Growth in Total Revenues in CBO’s Extended Baseline, 2018 to 2048 23 5. Effective Marginal Federal Tax Rates in CBO’s Extended Baseline 24 A-1. Average Annual Values for Demographic and Economic Variables That Underlie CBO’s Extended Baseline 34 B-1. Comparison of CBO’s Adjusted April 2018 Baseline and January 2017 Baseline 46 Figures 1. The Federal Budget in CBO’s Extended Baseline 3 2. Federal Debt, Spending, and Revenues 6 3. Federal Debt Held by the Public 8 4. Population, by Age Group 11 5. Average Annual Growth of Real Potential GDP in CBO’s Extended Baseline 12 6. Spending and Revenues in the Past and in CBO’s Extended Baseline 15 7. Composition of Federal Spending in CBO’s Extended Baseline 16 8. Federal Spending on the Major Health Care Programs, by Category 18 9. Spending Growth in Social Security and the Major Health Care Programs in CBO’s Extended Baseline 19 10. Other Federal Noninterest Spending in CBO’s Extended Baseline 21 11. Federal Debt Given Different Rates of Labor Force Participation, Productivity Growth, Federal Borrowing, and Excess Cost Growth for Federal Spending on Medicare and Medicaid 25 12. The Size of Policy Changes Needed to Make Federal Debt Meet Two Possible Goals in 2048 28 13. How Timing Affects the Size of Policy Changes Needed to Make Federal Debt Meet Two Possible Goals in 2048 30 B-1. Comparison of CBO’s 2017 and 2018 Projections of Federal Debt Held by the Public and the Deficit in the Extended Baseline 47 B-2. Comparison of CBO’s 2017 and 2018 Projections of Spending and Revenues in the Extended Baseline 48 B-3. Comparison of CBO’s 2017 and 2018 Projections of Net Spending for Interest in the Extended Baseline 50 About This Document This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office issues each year. In keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no recommendations. Overseen by Julie Topoleski and prepared with guidance from Devrim Demirel, Ed Harris, John Kitchen, John McClelland, David Weaver, and Jeff Werling, the report represents the work of many analysts at CBO. Stephanie Hugie Barello wrote the main text of the report. Aaron Betz, Edward Gamber, and Charles Pineles-Mark wrote Appendix A. Ricci Reber wrote Appendix B. Susan Beyer, Barry Blom, Tom Bradley, Sebastien Gay, Lori Housman, Jamease Kowalczyk, Sarah Masi, Eamon Molloy, Sam Papenfuss, Lisa Ramirez-Branum, Dan Ready, Robert Stewart, and Rebecca Yip contributed to the analysis. Michael Simpson developed the long-term budget simulations with assistance from Stephanie Hugie Barello, Marina Miller, Xiaotong Niu, and Charles Pineles-Mark. Aaron Betz and Robert Shackleton prepared the macroeconomic simulations. Ed Harris coordinated the revenue simulations, which were prepared by Paul Burnham, Shannon Mok, Cecilia Pastrone, Kurt Seibert, and Joshua Shakin. Justin Lee, Claire Sleigh, and Adam Staveski fact-checked the report. The report builds on the 10-year projections of the economy and budget that CBO released earlier this year, which reflected the contributions of more than 100 people at the agency. Wendy Edelberg, Mark Hadley, Jeffrey Kling, and Robert Sunshine reviewed the report. Christine Bogusz, Benjamin Plotinsky, and Elizabeth Schwinn edited it, and Casey Labrack prepared it for publication. Charles Pineles-Mark and Ricci Reber prepared the supplemental data. The report is available on CBO’s website (www.cbo.gov/publication/53919). Keith Hall Director June 2018