The Budget and Entitlements:

Time to Take Action

David JohnThe Heritage Foundation

Federal spending will more than double, driven by Medicare, Medicaid and Social

Secuirty

Medicare

Medicaid

Social Security

Other

Net Interest

45-Year Historical Level of Tax Revenue

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1975 1985 1995 2005 2015 2025 2035 2045

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Total Federal Spending and Tax Revenue as a Percentage of GDP

Defense

Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees Data (discretionary spending held constant).

The “Big Three” Entitlements Will Grow Dramatically As Nation Ages

Medicare2.7%

Medicare3.5%

Medicare4.7%

Medicare6.5%

Medicare8.0%

Medicare9.0%

Medicaid1.7%

Medicaid2.3%

Medicaid2.8%

Medicaid3.4%

Medicaid4.0%

Social Security4.4%

Social Security4.5%

Social Security5.5%

Social Security6.6%

Social Security6.9%

Social Security6.9%

Medicaid1.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

2005 2010 2020 2030 2040 2050

Spending on Three Entitlements as a Percentage of GDP

Source: Spending and Revenues from CBO Long-Term Budget Outlook, December 2005 (Scenario 2 Data), 2006 Social Security and Medicare Trustees Report.

Total = 9.7%

Total = 18.2%

Total = 15.9%

Total =12.5%

Total = 19.9%

Total = 8.6%

Absent action under current law deficits not a problem soon – but then skyrocket to

unprecedented levelsFederal Deficit as a Percentage of GDP

Federal Deficit

45-YearHistorical Average

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1962 1972 1982 1992 2002 2012 2022 2032 2042

Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees Data (discretionary spending held constant).

Entitlements will crowd out everything else and collide with historical long-term level of

taxes

Medicare

Medicaid

Social Security

Historical Level of Tax Revenues

0%

5%

10%

15%

20%

25%

1965 1975 1985 1995 2005 2015 2025 2035 2045

0%

5%

10%

15%

20%

25%

Source: Spending and Revenues from CBO Long-Term Budget Outlook, December 2005 (Scenario 2 Data), 2006 Social Security and Medicare Trustees Report.

Three Major Entitlements and Tax Revenues as a Percentage of GDP

Medicare

Medicaid

Social Security

Other

Net Interest

45-Year Historical Level of Tax Revenue

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Total Federal Spending and Tax Revenue as a Percentage of GDP

Defense

Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees Data (discretionary spending held constant).

Even eliminating defense will not solve the problem

Bush 2008 Medicare proposal has significant savings—trimming 2014 long-term costs

Total Federal Spending and Tax Revenues as a Percentage of GDP

MedicareMedicaid

Social Security

Defense

Other

Interest Tax Revenue

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Defense

Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees Data (discretionary spending held constant).

2008 House Budget: No Entitlement Savings, but huge tax increases

Total Federal Spending and Tax Revenues as a Percentage of GDP

MedicareMedicaid

Social Security

Defense

Other

Interest

Tax Revenue

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Defense

Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees Data (discretionary spending held constant).

Projected Federal Tax Revenue for Three Tax Policy Scenarios

as a Percentage of GDP

But under current law taxes will rise sharply thanks to pre-Bush laws, despite Bush tax

changes

Current Law: Bush Tax Cuts Expire

With Bush Tax Cuts Extended

With Bush Tax Cuts Extended and AMT Fix

16%

18%

20%

22%

24%

2005 2015 2025 2035 2045

Projected Federal Tax Revenue for Three Tax Policy Scenarios as a Percentage of GDP (2005-2050)

Source: CBO Long-Term Budget Outlook, December 2005 and Budget and Economic Outlook, January 2007.

Average Tax Burden, 1966-2006 = 18.2%

Highest Tax Burden in U.S. History = 20.5%

Medicare

Medicaid

Social Security

Other

Net Interest

45-Year Historical Level of Tax Revenue

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Total Federal Spending and Tax Revenue as a Percentage of GDP

Defense

Source: Calculations based on Congressional Budget Office (CBO) and Medicare and Social Security Trustees Data (discretionary spending held constant).

Raising revenue to balance the budget would lead to European level taxes

But European-level taxes = European-level growth

3.3%

2.7%

2.1%

1.3%1.4%

2.2%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

U.S. Sweden France Italy Germany EU-15

Real GDP Growth Over Ten-years (1995-2005)

Source: OECD in Figures, 2006-2007 Edition.

Slow European-style growth = Lower incomes in US

$41,900

$32,700

$30,200

$28,500$29,800 $29,900

$33,264

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

U.S. Sweden France Italy Germany EU-15 Alabama

Source: Country GDP data from OECD in Figures, 2006-2007 Edition; State GSP data from BEA.

GDP per Capita for 2005 (Using Current PPPs)

Slow European-style growth = Unemployment

5.1%

7.8%

10.0%

7.8%

11.2%

8.3%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

U.S. Sweden France Italy Germany EU-15

Source: OECD in Figures, 2006-2007 Edition.

Unemployment Rate for 2005

Conclusion: Take Action on Retirement Entitlements

• Amend the Medicare drug bill• Raise the retirement age• Target Medicare and Social Security to

those with most need• Transform entitlements into 30-year

budgeted programs, balanced against other needs

• Measure impact of policy changes on long-term obligations