What We Are Facing

From a recent report from the Government Accountability Office:

Table 1: Challenges Affecting the Federal Budget in the Near Term

2008: Oldest members of the baby-boom generation became eligible for early Social Security retirement benefits

2008: Medicare Hospital Insurance (HI) outlays exceeded cash income

2010: Social Security runs first cash deficit since 1984

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

2014: 45 percent of Medicare outlays funded by general revenue

2016: Social Security begins running consistent annual cash deficits and redeeming trust fund assets (i.e., non-marketable Treasury securities) in order to pay beneficiaries

2017: Medicare HI trust fund exhausted. Income sufficient to pay about 81 percent of benefits

2020: Debt held by the public under GAO’s Alternative simulation exceeds the historical high reached in the aftermath of World War II

There are many ways to describe the federal government’s long-term fiscal challenge. One method for capturing the challenge in a single number is to measure the “fiscal gap.” The fiscal gap represents the difference, or gap, between revenue and spending in present value terms over a certain period, such as 75 years, that would need to be closed in order to achieve a specified debt level (e.g., today’s debt to GDP ratio) at the end of the period.2 From the fiscal gap, one can calculate the size of action needed—in terms of tax increases, spending reductions, or, more likely, some combination of the two—to close the gap; that is, for debt as a share of GDP to equal today’s ratio at the end of the period. For example, under our Alternative simulation, the fiscal gap is 9.0 percent of GDP (or a little over $76 trillion in present value dollars) (see table 2). This means that revenue would have to increase by about 50 percent or noninterest spending would have to be reduced by 34 percent on average over the next 75 years (or some combination of the two) to keep debt at the end of the period from exceeding its level at the beginning of 2010 (53 percent of GDP).