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2016 Financial Report of the United States Government


Notes to the Financial Statements

Note 23. Long-Term Fiscal Projections

The Statement of Long-Term Fiscal Projections is prepared pursuant to SFFAS No. 36, Comprehensive Long-Term Projections for the U.S. Government, as amended. The basic financial statement, Note 23, and related unaudited required supplementary information (RSI) provide information to aid users in assessing whether current policies for Federal spending and taxation can be sustained and the extent to which the cost of public services received by current taxpayers will be shifted to future taxpayers under sustainable policies. This assessment requires prospective information about receipts and spending, the resulting debt, and how these amounts relate to the economy. A sustainable policy is defined as one where the ratio of Federal debt held by the public to GDP (the debt-to-GDP ratio) is ultimately stable or declining. The Financial Report does not address the sustainability of State and local government fiscal policy.

The projections and analysis presented here are extrapolations based on an array of assumptions described in detail below. A fundamental assumption is that current Federal policy will not change. This assumption is made so as to inform the question of whether current fiscal policy is sustainable and, if it is not sustainable, the magnitude of needed reforms to make fiscal policy sustainable. The projections are therefore neither forecasts nor predictions. If policy changes are implemented, perhaps in response to projections like those presented here, then actual financial outcomes will be different than those projected. The methods and assumptions underlying the projections are subject to continuing refinement.

The projections focus on future cash flows, and do not reflect either the accrual basis or the modified-cash basis of accounting. These cash-based projections reflect receipts or spending at the time cash is received or when a payment is made by the Government. In contrast, accrual-based projections would reflect amounts in the time period in which income is earned or when an expense or obligation is incurred. The cash basis accounting underlying the long-term fiscal projections is consistent with methods used to prepare the Statements of Social Insurance (SOSI) and the generally cash-based Federal budget.

The basic financial statement, Long-Term Fiscal Projections for the U.S. Government, displays the present value of 75-year projections for various categories of the Federal Government’s receipts and non-interest spending.11 The projections for fiscal years 2016 and 2015 are expressed in present value dollars and as a percentage of the present value of Gross Domestic Product (GDP)12 as of September 30, 2016 and September 30, 2015, respectively. The present value of a future amount, for example $1 billion in October 2091, is the amount of money that if invested on September 30, 2016 in an account earning the government borrowing rate would have a value of $1 billion in October 2091.13

The present value of a receipt or expenditure category over 75 years is the sum of the annual present value amounts. When expressing a receipt or expenditure category over 75 years as a percent of GDP, the present value dollar amount is divided by the present value of GDP over 75 years. Measuring receipts and expenditures as a percentage of GDP is a useful indicator of the economy’s capacity to sustain Federal Government programs.

Fiscal Projections

Receipt categories in the long-term fiscal projections include individual income taxes, Social Security and Medicare payroll taxes, and residual remaining category of “other receipts.” On the spending side, categories include: (1) discretionary spending that is funded through annual appropriations, such as spending for national security, and (2) mandatory (entitlement) spending that is generally financed with permanent or multi-year appropriations, such as spending for Social Security and Medicare. This year’s projections for Social Security and Medicare are based on the same economic and demographic assumptions that underlie the 2016 Social Security and Medicare trustees’ reports and the 2016 Statement of Social Insurance, while comparative information presented from last year’s report is based on the 2015 Social Security and Medicare trustees’ reports and the 2015 Statement of Social Insurance. Projections for the other categories of receipts and spending are consistent with the economic and demographic assumptions in the trustees’ reports. The projections assume the continuance of current policy which, as is explained below, can be different than current law in cases where lawmakers have in the past periodically changed the law in a consistent way.

The projections shown in the basic statement are made over a 75-year time frame, consistent with the time frame featured in the Social Security and Medicare trustees’ reports. However, these projections are for fiscal years starting on October 1, whereas the trustees’ reports feature calendar-year projections. This difference allows the projections to start from the actual budget results from fiscal years 2016 and 2015.

 

 

Changes in Long-Term Fiscal Projections
Present Value (PV) of 75-Year Projections Trillions of $ % of 75-Year
Present
Value of
GDP
Non-Interest Spending Less Receipts as of September 30, 2015
4.1 
0.3 
Components of Change:
    Change due to Economic and Demographic Assumptions
1.8
0.1
    Change due to Program-Specific Actuarial Assumptions
(0.1)
-
    Change due to Updated Budget Data
2.9 
0.2 
    Change in Reporting Period
(0.1) 
    Change in Model Technical Assumptions
2.0 
0.2 
Total
6.5
0.5
Non-Interest Spending Less Receipts as of September 30, 2016
10.6 
0.8 
Note: Totals may not equal the sum of components due to rounding

This year’s estimate of the 75-year present value imbalance of non-interest spending over receipts expressed as a share of the 75-year present value of GDP is 0.8, compared to 0.3 as was projected in last year’s Financial Report.14 The above table reports the effects of various factors on the updated projections. The largest factor, increasing the imbalance by 0.2 percent of GDP ($2.9 trillion), is attributable to actual budget results for fiscal year 2016 and other budget data used in formulating the projection. Nearly half of this effect is due to slightly lower projections of effective tax rates for individual income taxes resulting from the extension of a number of tax expenditures in December 2015 in the Protecting Americans from Tax Hikes (PATH) Act (P.L. 114-113). The next largest change in the table – increasing the imbalance by 0.2 percent of GDP ($2.0 trillion) – is attributable to changes in technical assumptions underlying the model, including revised assumptions about mandatory sequestration and refinements to the Medicaid projections, as described later in this note. Changes in economic and demographic assumptions increased the imbalance by 0.1 percent of GDP ($1.8 trillion). Economic changes include lowering the assumed average interest rate over the period from 5.4 to 5.1 percent, which had the effect of increasing the 75-year present value of both non-interest spending and receipts, but had relatively little effect on the imbalance between the two.

The last row in the basic financial statement shows that this year’s estimate of the overall 75-year present value net excess of non-interest spending over receipts is 0.8 percent of the 75-year present value of GDP ($10.6 trillion, as compared to GDP of $1,302.8 trillion). This imbalance can be broken down by funding source. There is a surplus of receipts over spending of 0.7 percent of GDP ($8.7 trillion) among programs funded by the government’s general revenues, but an imbalance of 1.5 percent of GDP ($19.4 trillion15 ) for the combination of Social Security (OASDI) and Medicare Part A, which under current law are funded with payroll taxes and not in any material respect with general revenues. 16, 17 By comparison, the fiscal year 2015 projections showed that programs funded by the Government’s general revenues had an excess of receipts over spending of 1.1 percent of GDP ($13.2 trillion) while the payroll tax-funded programs had an imbalance of spending over receipts of 1.4 percent of GDP ($17.3 trillion).

Sustainability and the Fiscal Gap

As discussed further in RSI, the projections in this report indicate that current policy is not sustainable. If current policy is left unchanged, the projections show the debt-to-GDP ratio will fall about 6 percentage points between 2016 and 2024 before commencing a steady rise, exceeding its 2016 level  by 2030, exceeding 100 percent by 2039, and reaching 252 percent in 2091. Moreover, if the trends that underlie the 75-year projections were to continue, the debt-to-GDP ratio would continue to rise beyond the 75-year window.

The fiscal gap measures how much the primary surplus (receipts less non-interest spending) must increase in order for fiscal policy to achieve a target debt-to-GDP ratio in a particular future year. In these projections, the fiscal gap is estimated over a 75-year period, from 2017 to 2091, and the target debt-to-GDP ratio is equal to the ratio at the beginning of the projection period, in this case the debt-to-GDP ratio at the end of fiscal year 2016.

The 75-year fiscal gap under current policy is estimated at 1.6 percent of GDP, which is 7.9 percent of the 75-year present value of projected receipts and 7.6 percent of the 75-year present value of non-interest spending. This estimate of the fiscal gap is 0.4 percentage point larger than was estimated in 2015 (1.2 percent of GDP).

The projections show that projected primary deficits average 0.8 percent of GDP over the next 75 years under current policies. If policies were put in place that would result in a zero fiscal gap, the average primary surplus over the next 75 years would be 0.8 percent of GDP, 1.6 percentage points higher than the projected present value net excess of non-interest spending over receipts shown in the basic financial statement. Closing the fiscal gap requires that primary surpluses be substantially positive because the projections assume that interest rates will exceed the growth rate of GDP, so merely achieving primary balance would result in debt growing faster than GDP.  

Assumptions Used and Relationship to Other Financial Statements

A fundamental assumption underlying the projections is that current Federal policy (defined below) does not change. The projections are therefore neither forecasts nor predictions, and do not consider large infrequent events such as natural disasters, military engagements, or economic crises. If policy changes are enacted, perhaps in response to projections like those presented here, then actual fiscal outcomes will be different than those projected.

Even if policy does not change, actual expenditures and receipts could differ materially from those projected here. Long-range projections are inherently uncertain and are necessarily based on simplifying assumptions. For example, one key simplifying assumption is that interest rates paid on debt held by the public remain unchanged, regardless of the amount of debt outstanding. To the contrary, it is likely that future interest rates would increase if the debt-to-GDP ratio rises as in these projections. To help illustrate this uncertainty, projections that assume higher and lower interest rate scenarios are presented in the “Alternative Scenarios” discussion in the RSI section of this Financial Report.

As is true for prior fiscal year projections, the assumptions for GDP, interest rates, and other economic factors underlying this year’s projections are the same assumptions that underlie the most recent Social Security and Medicare trustees’ report projections, adjusted for historical revisions that occur annually. The use of discount factors consistent with the Social Security trustees’ rate allows for consistent present value calculations over 75 years between the Statements of Long-Term Fiscal Projections and the Statements of Social Insurance.

The following bullets summarize the key assumptions used for the categories of receipts and spending presented in the basic financial statement and the disclosures:

  • Social Security:  Projected Social Security (OASDI) spending excludes administrative expenses, which are classified as discretionary spending, and is based on the projected expenditures in the 2016 Social Security trustees’ report for benefits and for the Railroad Retirement interchange. The projections of Social Security payroll taxes and Social Security spending are based on future spending and for payroll taxes as are projected in the 2016 Social Security trustees’ report, adjusted for presentational differences and converted to a fiscal year basis. More information about the assumptions for Social Security cost growth can be found in Note 22 and the RSI discussion of Social Insurance.
  • Medicare:  Projected Medicare spending is also shown net of administrative expenses and is based on projected incurred expenditures from the 2016 Medicare trustees’ report. The projections here make some adjustments to the trustees’ report projections. Medicare Part B and D premiums, as well as State contributions to Part D, are subtracted from gross spending in measuring Part B and Part D outlays, just as they are subtracted from gross cost to yield net cost in the financial statements.18  Here, as in the Federal budget, premiums are treated as “negative spending” rather than receipts since they represent payment for a service rather than payments obtained through the Government’s sovereign power to tax. This is similar to the financial statement treatment of premiums as “earned” revenue as distinct from all other sources of revenue, such as taxes. The projections are based on Medicare spending in the Medicare trustees’ report adjusted for presentational differences and converted to a fiscal year basis. Medicare Part A payroll taxes are projected similarly. More information about the assumptions for Medicare cost growth can be found in Note 22 and the Required Supplementary Information for Social Insurance. As discussed in Note 22 , there is uncertainty about whether the reductions in health care cost growth projected in the Medicare trustees’ report will be fully achieved. Note 22 illustrates this uncertainty by considering Medicare cost growth assumptions under varying policy assumptions.
  • Medicaid:  The Medicaid spending projections start with the projections from the 2015 Actuarial Report on the Financial Outlook for Medicaid prepared by the Office of the Actuary, Centers for Medicare & Medicaid Services (CMS)19.  These projections are based on recent trends in Medicaid spending, the demographic, economic, and health cost growth assumptions in the 2015 Medicare Trustees’ Report, and projections of the effect of the Affordable Care Act (ACA) on Medicaid enrollment. The projections, which end in 2024, are adjusted to accord with the actual Medicaid expenditures in fiscal year 2016. After 2024, the projections assume no further expansion in State Medicaid coverage under the ACA , with the number of Medicaid beneficiaries expected to grow at the same rate as total population, and Medicaid costs per beneficiary assumed to grow at the same rate as Medicare benefits per beneficiary, as is generally consistent with the experience since 1987. Between 1987 and 2015, the average annual growth rate of outlays per beneficiary for Medicaid and Medicare were within 0.2 percentage point of each other. Projections of Medicaid spending are subject to added uncertainty related to: (1) assumed reductions in health care cost growth discussed above in the context of Medicare, and (2) the projected size of the Medicaid enrolled population, which depends on a variety of factors, including the future extent of the ACA Medicaid expansion.
  • Other Mandatory Spending:  Other mandatory spending, which includes Federal employee retirement, veterans’ disability benefits, and means-tested entitlements other than Medicaid, is projected in two steps. First, spending prior to the automatic spending cuts called for by the enforcement provisions of the Budget Control Act (BCA) is projected and, second, the effect of the BCA enforcement is projected through 2025. With regard to pre-BCA spending: (a) Current mandatory spending components that are judged permanent under current policy are assumed to increase by the rate of growth in nominal GDP starting in 2017, implying that such spending will remain constant as a percentage of GDP20; and (b) Projected spending for insurance exchange subsidies starting in 2017 grows with growth in the non-elderly population and with the National Health Expenditure (NHE) projected per enrollee cost growth for other private health insurance for the NHE projection period (through 2025 for the fiscal year 2016 projections), and with growth in per enrollee health care costs as projected for the Medicare program after that period. As discussed in Note 22, there is uncertainty about whether the reductions in health care cost growth projected in the Medicare trustees’ report will be fully achieved. Exchange subsidy spending as a percentage of GDP remains below the failsafe provision in the ACA that limits this spending to 0.504 percent of GDP.
  • Defense and Non-defense Discretionary Spending: Through 2021, discretionary spending other than for Overseas Contingency Operations (OCO) is dictated by the spending caps and automatic spending cuts called for by the BCA. After 2021, this spending is assumed to grow at the same rate as nominal GDP, and thus plateaus at a long-term level of 5.0 percent of GDP. The BCA is projected to reduce the present value of spending by $0.3 trillion through 2021, and by an additional $4.3 trillion between 2022 and 2091 because of the lower base spending in 2021. Projected OCO spending steadily declines and is fully phased out after 2026, and amounts to $0.1 trillion in present value. To illustrate uncertainty, present value calculations under alternative discretionary growth scenarios are presented in the “Alternative Scenarios” RSI section.
  • Receipts (Other than Social Security and Medicare):  It is assumed that individual income taxes will equal the same share of wages and salaries as in the Administration’s latest Budget current law baseline projection. That baseline accords with current policy as defined above, and incorporates the effects of the economic recovery and bracket creep. After reaching about 22 percent of wages and salaries in 2024, individual income taxes increase gradually to 28 percent of wages and salaries in 2091 as real taxable incomes rise over time and an increasing share of total income is taxed in the higher tax brackets. The ratio of all other receipts combined to GDP is projected to remain at 3.6 percent of GDP, based on a long-run historical average. To illustrate uncertainty, present value calculations under higher and lower receipts growth scenarios are presented in the “Alternative Scenarios” section.
  • Debt and Interest Spending: Interest spending is determined by projected interest rates and the level of outstanding debt held by the public. The long-run interest rate assumptions accord with those in the 2016 Social Security trustees’ report.21 The average interest rate over the projection period is 5.1 percent. These rates are also used to convert future cash flows to present values as of the start of fiscal year 2017. Debt at the end of each year is projected by adding that year’s deficit and other financing requirements to the debt at the end of the previous year.

The methods described above include several refinements from those used to produce the fiscal year 2015 projections. First, automatic spending cuts due to BCA enforcement are no longer assumed to be extended past their statutory expiration date. Even though these enforcement mechanisms have been extended several times in recent years, these extensions have been enacted as savings measures to offset increases to the discretionary spending caps. Second, the Medicaid projections are refined by recognizing the differences in per capita costs of different beneficiary categories, such as the aged and disabled populations.

Departures of Current Policy from Current Law

The long-term fiscal projections are made on the basis of current Federal policy, which in some cases is different from current law. The notable differences between current policy that underlies the projections and current law are: (1) projected spending and receipts imply violation of the current statutory limit on Federal debt, (2) continued discretionary appropriations are assumed throughout the projection period, (3) scheduled Social Security and Medicare benefit payments are assumed to occur beyond the projected point of trust fund exhaustion, and (4) many mandatory programs with expiration dates prior to the end of the 75-year projection period are assumed to be reauthorized. As is true in the Medicare trustees’ report and in the Statement of Social Insurance, the projections incorporate programmatic changes already scheduled in law, such as the ACA productivity adjustment for non-physician Medicare services.

 

Footnotes

11For the purposes of this analysis, spending is defined in terms of outlays. In the context of Federal budgeting, spending can either refer to budget authority – the authority to commit the government to make a payment; to obligations – binding agreements that will result in payments, either immediately or in the future; or to outlays – actual payments made. (Back to Content)

12GDP is a standard measure of the overall size of the economy and represents the total market value of all final goods and services produced domestically during a given period of time. The components of GDP are: private sector consumption and investment, government consumption and investment, and net exports (exports less imports). Equivalently, GDP is a measure of the gross income generated from domestic production over the same time period. (Back to Content)

13Present values recognize that a dollar paid or collected in the future is worth less than a dollar today because a dollar today could be invested and earn interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are summed. (Back to Content)

14More information on the projections in last year’s Financial Report can be found in Note 24 to the Financial Statements (Back to Content)

15The 75-year present value imbalance for Social Security and Medicare Part A of $19.4 trillion is comprised of several line items from the long-term fiscal projections – Social Security outlays net of Social Security Payroll Taxes ($19.3 trillion) and Medicare Part A outlays net of Medicare Payroll Taxes ($7.7 trillion) – as well as subcomponents of these programs not presented separately in the table. These subcomponents include Social Security and Medicare Part A administrative costs that are classified as non-defense discretionary spending ($0.7 trillion) and Social Security and Medicare Part A revenue other than payroll taxes: taxation of benefits (-$3.9 trillion), Federal employer share (-$1.2 trillion), and other income (-$3.2 trillion). (Back to Content)

16As an example of General Fund transfers to these programs, the OASDI trust fund received General Fund transfers, primarily in 2011 and 2012, to account for lost payroll taxes resulting from enactment of the temporary 2 percent reduction of the employee payroll taxes. Social Security and Medicare Part A expenditures can exceed payroll tax revenues in any given year to the extent that there are sufficient balances in the respective trust funds, balances that derive from past excesses of payroll tax revenues over expenditures and interest earned on those balances and represent the amount the General Fund owes the respective trust fund programs. When spending does exceed payroll tax revenues, as has occurred each year since 2008 for Medicare Part A and 2010 for Social Security, the excess spending is financed first with interest due from the General Fund and secondly with a drawdown of the General Fund’s loan balance; in either case, the spending is ultimately supported by general revenues or borrowing. Under current law, benefits for Social Security and Medicare Part A can be paid only to the extent that there are sufficient balances in the respective trust funds. In order for the projections here to reflect the full size of these program’s commitments to pay future benefits, the projections assume that all scheduled benefits will be financed with borrowing to the extent necessary after the trust funds are exhausted. (Back to Content)

17 The fiscal imbalances reported in the long-term fiscal projections are limited to future outlays and receipts. They do not include the initial level of publicly-held debt, which was $14.2 trillion in 2016 and $13.1 trillion in 2015, and therefore they do not by themselves answer the question of how large fiscal reforms must be to make fiscal policy sustainable, or how those reforms divide between reforms to Social Security and Medicare Part A and to other programs. Other things equal, past cash flows (primarily surpluses) for Social Security and Medicare Part A reduced Federal debt at the end of 2016 by $3.0 trillion (the trust fund balances at that time); the contribution of other programs to Federal debt at the end of 2016 was therefore $17.2 trillion. Because the $19.4 trillion imbalance between outlays and receipts over the next 75 years for Social Security and Medicare Part A does not take account of the Social Security and Medicare Part A trust fund balances, it overstates the magnitude of reforms necessary to make Social Security and Medicare Part A solvent over 75 years by $3.0 trillion. The $3.0 trillion combined Social Security and Medicare Part A trust fund balance represents a claim on future general revenues. (Back to Content)

18Medicare Part B and D premiums and State contributions to Part D are subtracted from the Part B and D spending displayed in the basic financial statement. The total 75-year present value of these subtractions is $12.1 trillion, or 0.9 percent of GDP. (Back to Content)

19Christopher J. Truffer, Christian J. Wolfe, and Kathryn E. Rennie, 2015 Actuarial Report on the Financial Condition for Medicaid, Office of the Actuary, Centers for Medicare and Medicaid Services, United States Department of Health and Human Services, December 2015. (Back to Content)

20This assumed growth rate for other mandatory programs exceeds the growth rate in the most recent OMB and CBO 10-year budget baselines. (Back to Content)

21As indicated in the more detailed discussion of Social Insurance in Note 22 to the financial statements.(Back to Content)

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