America’s National Debt and Long-Term Outlook An Overview of the Challenge and the Implications for Young People March 2009

2Overview of the Federal Budget Challenge $184,000 Burden That’s every baby’s burden, including current debt and unfunded promises for Medicare and Social Security. Unless we do something soon, it will only get worse.

Overview of the Federal Budget Challenge3 Debt vs. Deficits Deficits: The annual imbalances between revenues and spending Debt: Accumulation of deficits over time Public debt: U.S. government securities held by Americans and foreigners Debt held by the public net of financial assets: debt to finance a loan to a private entity in which government acquires a financial asset Intragovernmental debt: Held by government trust funds (e.g., Social Security) and other accounts

Overview of the Federal Budget Challenge4 Benefits (e.g., Social Security or Medicare) promised to be paid in the future, with no dedicated source of revenue to fund them Total U.S. government debt, liabilities, and unfunded promises: $56 trillion (Dec. 2008) Equal to Americans’ total household net worth Unfunded Liabilities

Overview of the Federal Budget Challenge5 Projecting the Future? Projections of future deficits and debt are based on assumptions, such as: –Economic growth or recessions –Changes in spending and tax policies –Population trends –Workforce participation rates History shows that assumptions and projections are often wrong

Overview of the Federal Budget Challenge U.S. Budget Deficits/ Surpluses, Years, Deficits rose from 0 in 1969 to $340 billion in U.S. budget has $86 billion surplus in Deficits rose to $568 billion in 2004 and $1.8 trillion in Deficits as percent of GDP ; source: The Washington Post

Overview of the Federal Budget Challenge7 National Debt, (in non-inflation adjusted dollars) National Debt (March 2009): $11 trillion

Overview of the Federal Budget Challenge 8 Unless Changes are Made, the National Debt Will Grow Even Faster 1962 ‘72 ‘82 ‘ ‘12 ‘22 ‘32 ‘42 ‘50 Source: Heritage Foundation; CBO data

Overview of the Federal Budget Challenge9 Public Debt Projected to Soar

Overview of the Federal Budget Challenge10 Current Policy Trends Lead to Large Sustained Deficits

Overview of the Federal Budget Challenge11 Current fiscal policy is on an unsustainable path Social Security Medicaid Medicare All Other Interest Source: Government Accountability Office, March 2008 Average tax revenue

Overview of the Federal Budget Challenge12 SHORT TERM--Current economic crisis is causing rapidly rising deficits and debt LONG TERM--The real problem is the enormous mismatch between rapidly rising projected federal spending and insufficient revenues during the next years Current Deficits are Huge, But LONG- TERM Deficits are the Real Problem

Overview of the Federal Budget Challenge13 The burden of growing long-term debt will fall on America’s younger generations as drastically higher taxes cut benefits lower living standards fewer choices for public spending ALL OF THE ABOVE This is about federal finances, U.S. economic well-being, and intergenerational equity LONG-TERM Debt is an Intergenerational Issue

Overview of the Federal Budget Challenge14 Deficits up from $455 billion in 2008 to $1.8 trillion in 2009 due to federal spending associated with the current economic crisis The Short Term: The Economic Crisis and Soaring Federal Deficits

Overview of the Federal Budget Challenge15 The Short Term: The Economic Crisis and Trillions in Federal Spending

16Overview of the Federal Budget Challenge Where the Money Goes: President Obama’s FY 2010 Budget

Overview of the Federal Budget Challenge17 Entitlement Spending is Consuming an Ever Larger Share of the Federal Budget Sources: Office of Management and Budget and the Department of the Treasury. Note: Numbers may not add to 100 percent due to rounding Defense Social Security Net interest Medicare & Medicaid All other spending 2009

Overview of the Federal Budget Challenge18 Entitlements: Social Security and Medicare Part A Cumulative Cash Deficits Surpluses and Deficits in Constant 2008 Dollars, 2008 through 2085 In Billions of Constant 2008 Dollars Calendar Year Source: Social Security Trustees’ Report—March 2008 (Intermediate Projections) $496 Billion: Cumulative Social Security Cash Surplus -$27 Trillion: Cumulative Social Security Cash Deficits -$55 Trillion: Cumulative Medicare Part A Cash Deficits Trillion: Cumulative Social Security and Medicare Part A Cash Deficits

Overview of the Federal Budget Challenge19 Rising Health Care Costs = The No. 1 Factor in Rising Federal Spending and Debt

Overview of the Federal Budget Challenge20 Medicare Obligations Will Explode as Health Care Costs Rise Calendar Year

Overview of the Federal Budget Challenge21 State Governments Face Growing Deficits Costs, Squeezing Other Spending Sources: National Association of State Budget Officers, State Expenditure Report 2006; and Center on Budget and Policy Priorities, Feb AT LEAST 46 STATES PROJECT DEFICITS IN 2009 OVER 40 STATES PLAN 2009 CUTS $350 BILLION IN PROJECTED STATE DEFICITS, Mar Sept. 2011

Overview of the Federal Budget Challenge22 Declining Personal Savings and Federal Debt: The Relationship We No Longer Owe National Debt to Ourselves We Have Less to Supplement Social Security and Medicare Americans saving at lowest rate since Great Depression. 40% of Americans say they save nothing for retirement. One in four Americans say have no savings. Debt payments consume 15% of the average U.S. family’s income, and 40% of low-income families’ 1 in 7 families is dealing with a debt collector

Overview of the Federal Budget Challenge23 Percent of Debt Held by the Public Owned by Foreigners Source: United States Treasury Department

Overview of the Federal Budget Challenge24 Current Fiscal Policy Is Unsustainable The “Status Quo” is Not an Option –Large and growing structural deficits largely due to rising health care costs and demographic trends –Balancing the budget in 2040 could require cutting spending by 60 percent or raising federal taxes to double today's level. Faster Economic Growth Cannot Solve the Problem –Closing the current long-term fiscal gap would require 10% average economic growth every year for the next 75 years –From 2001 to 2007, U.S. economy grew by average of 2.2% Tough choices will be required

Overview of the Federal Budget Challenge25 Source: Peter G. Peterson Foundation, Feb Americans Worried About Increasing Deficits

Overview of the Federal Budget Challenge26 The Sooner We Get Started, the Better Compound interest is currently working against us Less change would be needed, and there would be more time to make adjustments Demographic changes will make reform even more difficult over time

Overview of the Federal Budget Challenge27 This is an Issue for all Americans Confronting and finding solutions is in the interests of all Americans Restoring fiscal responsibility will strengthen America’s future Reducing debt and rethinking national priorities can enhance bonds between young and old This is not about one generation “winning” or “losing,” but about all Americans working for a common future

Overview of the Federal Budget Challenge28 Framing the Discussion –Long-term vs. short-term debt –Which Federal programs and policies should be changed and how? Entitlement programs Other spending Tax policy –How can budget processes and controls be reformed? –What should be the roles of government, business and individuals in U.S. economy? Investing in the future (education, infrastructure, science, environment, etc.) Providing income security and good living standards Providing health care for all Americans

Overview of the Federal Budget Challenge29