Order Code RS20885
Updated November 14, 2002
CRS Report for Congress
Received through the CRS Web
Benefits for the Aged and the Federal Budget:
Short- and Long-Term Projections
James R. Storey
Specialist in Social Legislation
Domestic Social Policy Division
Summary
As the 108th Congress addresses short-term budget decisions, it may also want to
consider the long-run impacts of those decisions and the major shifts in budget
composition that are underway. Mandatory entitlements, particularly benefits for the
aged, are projected to become even more dominant in federal budget policy. Spending
on the aged under current policy as projected by the Congressional Budget Office will
account for 43% of all federal outlays by 2010. A Congressional Research Service
analysis of the President’s FY2003 budget found that one-half of all federal outlays will
benefit the aged, disabled, and survivors of deceased workers. While the retirement of
the Baby Boom generation will accelerate this trend, population aging is a long-term
phenomenon that will outlast the Baby Boomers. By 2075, continuation of current
policy may find these programs accounting for 18% of gross domestic product (GDP),
about twice their current GDP share. Furthermore, Congress may be pressed to add new
benefits in response to population aging, such as improved support for long-term care
and broader Medicare drug coverage. (This report will be updated as new information
becomes available.)
Congressional consideration of fiscal policy in the 21st century began under
circumstances far different from the deliberations of the late 20th century, as sizable
budget surpluses replaced 3 decades of annual deficits. However, after briefly
experiencing the “politics of budget surplus,” deficit spending has resumed for the near
term, brought on mainly by the recession, large tax cuts, and the costs of the war against
terrorism. While surpluses may return later in this decade, long-term fiscal policy must
allow for the expectation that financing problems related to population aging will mount
for Social Security and Medicare, placing added pressure on future budgets. The onset
of these funding problems could be delayed by legislative action or better-than-expected
economic performance, but avoiding them is unlikely under current policies. In addition,
other social policy issues may arise as the Baby Boom generation reaches old age, and
addressing them could place heavy new claims on federal revenue.
Congressional Research Service !
The Library of Congress
CRS-2
Policy questions related to the aging of the U.S. population may outlive the Baby
Boomers themselves, because the trend toward an older society predated the Baby Boom
and is likely to continue beyond that generation’s lifespan. Indeed, the U.S. population
has grown older almost without interruption since the country’s founding. For example,
in 1900 only 4% of the U.S. population was age 65 or older. By 1980, the proportion in
old age had nearly tripled to 11%. By the time all Baby Boomers will have reached age
65 in 2030, the Census Bureau projects that 20% of the population will be age 65 or older.
While the
rate of population aging should then slow, the aged sector of the population
will continue to rise slowly, reaching 23% by 2060.1
Short-Term Budget Projections
Federal programs that benefit the aged (Americans age 65 and older) are primarily
entitlements, the size of which are limited only by the laws that define benefit eligibility
and benefit amounts. These programs’ spending levels generally are not subject to control
through the annual appropriations process. The following presentation of budget trends
shows, first, the impact of entitlements and other mandatory spending on federal budget
totals and, second, the size of all spending that directly benefits the aged. The three
largest entitlement programs (Social Security, Medicare, and Medicaid) comprise a large
part of the federal “safety net” for older Americans, providing, respectively, an income
floor, insurance for acute health care, and open-ended nursing home stays.
Current Policy Budget Projections. Projections released by the Congressional
Budget Office (CBO) in August 2002 are summarized in
Table 1. These projections
show outlay and revenue estimates for the federal government by fiscal year through
FY2012 based on: (1) continuation of current laws pertaining to
mandatory spending and
taxation; (2) maintenance of
current services for other programs by allowing
discretionary spending to rise at the annual rate of inflation; and (3) a resumption of
economic growth, averaging 3% a year above the inflation rate. (Although the
congressional budget process excludes Social Security spending and revenue for some
purposes by placing that program “off budget,” this report includes Social Security budget
data in order to depict the full impact of benefits for the aged on the overall budget.)
Using the abovementioned assumptions, CBO projects that the budget surpluses
realized in FY2000 ($236 billion) and FY2001 ($127 billion) will yield to deficits for
FY2002-FY2005. Surpluses are projected to resume in FY2006, reaching $522 billion
in FY2012. (An excess of Social Security revenue over benefit payments accounts for
$337 billion of this FY2012 surplus.) These anticipated surpluses result from a projected
rise in revenue of 57% from FY2005 to FY2012, compared to an outlay increase of 31%.
While outlay growth is projected to lag revenue growth over that 7-year period, the
composition of outlays is expected to change dramatically. The proportion of yearly
outlays attributable to discretionary spending will change little, varying between 33% and
37% over the 12-year period shown in
Table 1. Net interest payments will fall from 12%
of total outlays to 5% because of recent surpluses and low interest rates. In contrast,
mandatory spending will rise from 53% of all spending in FY2000 to 62% in FY2012.
1 These “middle series” projections assume that recent demographic trends will continue with
respect to longevity increases, fertility rates, and immigration levels.
t.
983
456
527
762
141
474
329
147
164
522
2012
es
1,853
2,999
3,521
t.
965
452
514
717
136
446
301
171
183
323
2011
es
1,771
2,920
3,243
t.
936
436
500
675
132
412
276
162
195
177
.
2010
es
1,657
2,788
2,965
le
is tab
t.
912
424
488
637
126
384
253
160
204
133
f th
2009
es
1,560
2,676
2,809
es o
.
t.
88
n
889
413
476
602
122
357
232
158
209
569
658
” lin
2008
es
1,471
2,
2,
g
flatio
in
d
en
t.
52
864
399
465
571
118
331
213
153
212
sp
2007
es
1,386
2,461
2,513
2002.
rice in
ary
n
t.
15
ugust
845
393
452
542
113
306
196
152
213
A
2006
es
1,309
2,366
2,381
e.
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iscretio
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t.
e sam
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827
387
440
516
109
292
180
151
208
(39)
2005
es
1,248
2,283
2,244
th
3
in
ed
t.
d
CRS-
Federal Budget, FY2000-FY2012
803
376
428
494
105
273
166
162
191
look: An Updat
a
2004
es
1,200
2,195
2,083
(111)
ill rise at th
clu
($ in billions)
w
g
c Out
in
t.
d
s is in
782
368
414
474
101
263
155
168
164
2003
es
1,161
2,107
1,962
(145)
en
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g
sp
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.
t.
97
g
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t p
733
349
384
452
253
147
164
170
in
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2002
es
1,113
2,017
1,860
(157)
and Economi
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93
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649
306
343
429
238
129
119
206
127
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2001
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1,864
1,991
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88
617
295
322
949
406
216
117
122
223
236
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CRS-4
Projected Spending on the Aged. A comparison of estimated federal spending
on benefits for the aged is shown for FY1990, FY2000, and FY2010 (
Table 2). (These
estimates were released by CBO in July 2000 and, thus, are based on earlier budget
projections for FY2010 than are the
Table 1 figures.) Benefits for the aged, which totaled
$360 billion in FY1990, rose to $615 billion in FY2000 and are projected to breach the
$1 trillion level in FY2010, a 71% increase over 10 years. These benefits will rise as a
share of overall federal spending as well, from 29% in FY1990 to 35% in FY2000 and to
43% in FY2010. As a share of gross domestic product (GDP), benefits for the aged will
grow from 6.4% of GDP in FY2000 to 7.1% in FY2010.2
Viewed more broadly, the large federal retirement systems benefit individuals under
age 65 as well, including younger retirees, disabled workers, and survivors of deceased
workers. Federal programs for low-income individuals aid disabled adults who have not
yet reached old age. The Congressional Research Service, using this broader perspective
to analyze data from the President’s FY2003 budget, found that benefits serving all retired
workers, disabled adults, and survivors, regardless of age, account for 49% of all federal
spending in the current budget year.
Long-Term Budget Projections
Under current policies, spending on the aged over the next 40 years will rise
substantially relative to the size of the economy. A recent CBO study projects that the
three largest entitlement programs (Social Security, Medicare, Medicaid)3 will rise from
7.6% of GDP in 2000 to 8.9% in 2010, 13.9% in 2030, and 15.1% in 2040.4 These
programs’ share of GDP will grow to 21.1% in 2075. Thus, these entitlements, which in
FY2000 provided 86% of all federal benefits for the aged and comprised 35% of all
federal spending, will nearly triple relative to the size of the economy in 75 years. By
2075, the three entitlement programs will account for 53% of all federal spending, a shift
driven largely by population aging and the rising cost of health care.5
These spending projections assume no new entitlements, but Congress may be
pressed to consider new benefits as the needs of an increasingly elderly population are
assessed. For example, Social Security or Supplemental Security Income benefits could
2 In addition to the benefits the aged receive from these federal programs, the largest category of
tax expenditures (reductions in tax liability granted for specific purposes) is intended to enhance
income in old age. This tax expenditure (the net deferral of income taxation on pension plans and
retirement accounts) lowered federal revenue by an estimated $109 billion in FY2000. Also,
favorable income tax treatment for Social Security and Railroad Retirement benefits and the
additional income tax exemption for the elderly lowered FY2000 revenue by $20 billion.
3 These long-term projections provide data for these programs in their entirety. While Social
Security and Medicare serve primarily an aged population, Medicaid provides significant benefits
to all age groups. In FY2000, 29% of Medicaid spending benefitted the aged.
4 Congressional Budget Office.
A 125-Year Picture of the Federal Government’s Share of the
Economy, 1950 to 2075. Long-Range Fiscal Policy Brief. July 3, 2002.
Table 2.
5 Although the Social Security and Medicare trust funds are projected to become insolvent before
2075 under current policies, CBO’s projections assume that all benefit rights under current law
will be honored. Program reforms to avoid insolvency could result in more or less spending,
depending on the specific reforms.
CRS-5
be increased for the most vulnerable beneficiary groups. (To erase poverty for the aged
would cost at least $6 billion a year.) Prescription drug coverage could be expanded for
Medicare eligibles. (CBO has estimated that covering half of beneficiaries’ expenses
would cost $728 billion over 10 years.) Federal assistance could be broadened for long-
term care. (Individuals spent an estimated $31 billion out-of-pocket for long-term care
in 2000 according to the Centers for Medicare and Medicaid Services.) Tax expenditures
associated with retirement saving could be expanded. (Retirement-related provisions of
the Economic Growth and Tax Relief Reconciliation Act of 2001, passed by the 107th
Congress, will cost $50 billion over 10 years, and further tax incentives for retirement
saving and long-term care insurance have been proposed.)
Table 2. Estimated Federal Spending on Benefits for the Aged,
FY1990, FY2000, and FY2010
($ in billions)
Federal spending on
benefits for ageda
Program
1990
2000
2010
Social Security (OASI) and Railroad Retirement (Tier 1)
196
307
471
Fed. employee retirement (CSRS, FERS, other civilian employee ret.)
21
33
50
Military retirement
7
14
21
Retired federal employees’ health benefits
2
4
9
Special benefits for coal miners (black lung benefits)
1
1
1
Supplemental Security Income (SSI)
4
6
10
Veterans’ compensation and pensions
7
9
14
Medicare (HI, SMI)
96
189
377
Medicaid
14
33
73
Food stamps
1
1
1
Housing assistance
4
7
10
Veterans’ medical care
6
9
13
Services funded by Administration on Aging
1
1
1
b
b
Low Income Home Energy Assistance Program (LIHEAP)
1
Total federal spending on persons age 65 and older
360
615
1,050
Total spending on aged as percent of all federal spending
28.7
34.8
42.8
Total spending on aged as percent of GDP
6.3
6.4
7.1
Source: Congressional Budget Office.
Federal Spending on the Elderly and Children. July 2000.
aFigures in this table are estimates of each program’s spending that benefits persons age 65 and older.
bLess than $500 million.
CRS-6
Implications of Spending Trends
Assuming continuation of current policy, mandatory spending programs, particularly
spending on benefits for the aged, will become increasingly prominent. By 2012, over
half of federal spending will be accounted for by Social Security, Medicare, and
Medicaid. By 2030, CBO projects that the budget will return to deficit status under some
scenarios.6 These trends, driven in the short run by the retirement of the unusually large
Baby Boom generation, are expected to continue beyond that generation’s lifespan
because of the long-term trend of population aging.
The congressional budget process focuses on the next few years. However, if
Congress takes a longer view, it may anticipate growing budget pressures that come from
demographic forces (lengthening lifespans, low fertility rates) and promised benefits to
the aged. Unless countervailing trends develop (e.g., older workers delaying their
retirement dates), these long-run pressures will force a choice among three fiscal policy
alternatives: (1) reforms in programs for the aged to curtail the spending growth that will
occur under current law; (2) reduced spending in other sectors of government below
current policy levels; and/or (3) an increase in the size of government relative to the
economy to accommodate societal aging without large cuts in government spending.
The first option (program reform) would require legislative action to restructure the
big entitlements, with action needed soon, given the political difficulties associated with
the scaling back of benefits for those nearing old age. The second option (reduced
spending on other government programs) would require significant cuts in government
services to which the public is accustomed (e.g., worldwide deployment of the armed
forces, space exploration, an extensive national park system). The third option (allowance
for growth in the share of GDP channeled through government programs) would require
higher taxes and/or increased borrowing. Currently, federal spending amounts to 20% of
GDP. The CBO long-term projection cited earlier shows spending will double to 40% of
GDP by 2075, a level exceeded in the past only during World War II (when spending
peaked at 44% of GDP).7
In the long run, either the way we live in old age will change markedly, with longer
working lives and more reliance on individual saving, or the relative size of government
will reach unprecedented levels. Since it is preferable that major changes in old-age
entitlements be made well in advance of the time when the consequences are felt, near-
term decisions by Congress may need to consider these long-run questions.
6 Congressional Budget Office.
A 125-Year Picture of the Federal Government’s Share of the
Economy, 1950 to 2075. Long-Range Fiscal Policy Brief. July 3, 2002.
Table 3.
7 Some nations that have experienced population aging in advance of the United States have seen
an increase in their public sectors. From 1970 to 2000, government receipts as a share of GDP
have risen by about one-half in Japan and Italy, by about 30% in France, and by about 20% in
Germany. (CRS Report RL30560,
The U.S. Fiscal Position Compared to Selected Industrial
Nations, by Gregg A Esenwein, May 19, 2000;
Table 1.) Of course, these changes are related
to many factors, of which demographic change is only one.