June 2008

Slide One (Title Page): Generational Outlook: The Federal Budget Now and in the Future

Slide Two: Composition of Actual FY 2007 federal government revenues and outlays

• This is a snapshot of where the money came from and where the money went
  
• Outlays exceed revenues by $163 billion. This creates a deficit for Fiscal Year (FY) 2007
  
• 42% of the spending is for Social Security, Medicare, and Medicaid, and the baby boom generation has not begun to retire. The first boomers will be eligible for early retirement benefits (age 62) in 2008

Slide Three: Mandatory spending is consuming a growing share of the budget

• The mix of mandatory and discretionary spending has changed over time
  
• In 1965, most of our spending was discretionary, particularly on defense. Today most is mandatory, specifically on Medicare, Medicaid, Social Security, and interest on the debt
  
• It is important to remember that mandatory spending is determined by formula and not voted on by Congress. Discretionary spending is voted on each year by Congress in the appropriations process. Much more of our spending is now on autopilot than determined annually by Congress

Slide Four: Social Security, Medicare, & Medicaid as a percentage of the federal budget

• This chart shows federal spending on the "Big Three" entitlement programs--Social Security, Medicare, & Medicaid--as compared to all other federal spending
  
• This chart demonstrates federal spending on these three entitlement programs before any of the Baby Boomers have retired or collected benefits

Slide Five: Outlays of select mandatory spending programs (FY 2008 Projected)

• This chart is a snapshot of what the government expects to spend on various Mandatory spending programs.
  
• This demonstrates that Mandatory spending is specifically related to Social Security, Medicare, and Medicaid. Of total mandatory spending, 80% is Social Security, Medicare, and Medicaid

Slide Six: Change in composition of discretionary spending

• The makeup of discretionary spending is changing. We used to spend more on defense

Slide Seven: Defense discretionary spending as a percentage of GDP

• The amount spent on defense has declined as a percentage of GDP since 1965

Slide Eight: Outlays of select discretionary non-defense programs (FY 2008 Projected)

• This shows where the discretionary dollars go
  
• Congress controls the amount of money that is allocated for each program by voting each year
  
• Not shown is defense
  
• Recall how much larger the amounts were in mandatory spending
  
• When you hear candidates discuss the need for spending restraint, but not on mandatory, defense or homeland security spending, you’d have to find savings from these specific programs. There are no categories labeled fraud, waste, and abuse

Slide Nine: Federal spending vs. Revenues as a percentage of GDP (FY 1980-2007)

• Our Economy is measured as a term called the Gross Domestic Product, currently at around $13 trillion per year
  
• Economists like to look at these things not necessarily in dollar terms, but as a share of our economy
  
• Average outlays have been 21% of GDP & Revenues have averaged 18.3% of GDP
  
• Major political battles are fought over these numbers
  
• Observation: since the tax cuts beginning in 2001, revenue as a percentage of GDP declined. Only recently has revenue began to increase.
  
• I’ll discuss later how we’re going to break out of this range and how much tougher the problem will be in the future.

Slide Ten: Current policy trends lead to large sustained deficits (Fiscal Years 2009-2018)

• This shows the plausible results of our short-term outlook
  
• This is Concord’s assessment of where fiscal policy is headed -- steadily rising deficits
  
• If the AMT (Alternative Minimum Tax) relief continues on an annual basis, there is a gradual phase-down of operational costs in Iraq and Afghanistan, all the expiring tax cuts are made permanent, and discretionary spending grows at the same rate of the economy, which is lower than today’s rate, Concord predicts $6.5 trillion in cumulative deficits, not counting what we will likely continue to borrow from Social Security and other trust fund surpluses

Slide Eleven: Debt held by the public as a percent of GDP (1980-2007)

• This chart demonstrates that the debt held by the public--as a percentage of GDP--is not at an all time high, but has been growing in recent years.
  
• Most experts agree that we should enter the coming fiscal challenges from a position of strength. Our levels of debt will reduce our ability to rely on borrowing.

Slide Twelve: Percent of debt held by the public owned by foreigners

• A new element is how much we need to borrow from abroad to finance our budget
  
• It may help to keep our interest rates low, but it represents a certain vulnerability and shows we’re not saving enough now
  
• As of April 2008, the top two major foreign holders of treasury securities were Japan ($592.2 billion) and China ($502.0 billion)

Slide Thirteen: Automatic Growth in the Big Three Entitlements Swamps Growth of Appropriations

• As you can see in just the next ten years, the growth in mandatory spending far surpasses--by $4 trillion dollars--the projected growth in discretionary spending during that same period.

Slide Fourteen: America's population is aging

• From 2007, the percentage of the population age 65 and over will gradually increase until it grows to over 20% of the population by 2047.

Slide Fifteen: Health care costs are rising faster than the economy

• The major driver behind this problem is health care costs
  
• Health care costs have risen faster than growth in the economy. Historically, the growth in health care costs has been 2.5 percentage points higher than GDP. If this growth continues, it will exceed (in the year 2050) the costs of all federal expenditures in Fiscal Year 2006.
  
• The dotted blue line represents the growth rate--1.0 percent greater than GDP--that the Medicare Trustees assume. This assumes a rate lower than the historical average.
  
• The demographics and rising health care costs present the key drivers to unsustainable budgets in our future.

Slide Sixteen: Americans are living longer and having fewer children

• This chart shows one key driver to the challenges we face in the future. The shift effects our ability to pay Social Security, Medicare, and Medicaid in particular, because there are fewer workers paying into the system for each beneficiary

Slide Seventeen: Benefits promised far exceed dedicated tax revenues

• This shows the gap between promised Social Security benefits and expected revenues
  
• In 2016, Social Security outlays will exceed revenue into the system

Slide Eighteen: Medicare costs soar in the coming decades

• This shows that general revenue (non-payroll taxes) and premiums will be increasingly needed to finance Medicare
  
• In other words, payroll taxes and premiums will have to be accompanied by higher income taxes
  
• We are already using general revenues for Medicare, but we’ll need much more.

Slide Nineteen: Social Security and Medicare Part A cumulative cash surpluses and deficits

• If we do nothing to reform Social Security and Medicare, this chart shows the outlook for the programs
  
• Here are the cash deficits facing Social Security and Medicare over the actuarial horizon, or 75 years
  
• Again, we have promised far more in benefits than we anticipate receiving in revenues.

Slide Twenty: Current fiscal policy is on an unsustainable course

• This chart demonstrates how our future spending compares with spending in the past. Also noted is the average tax revenue.

• This is the path we’re on
  
• By 2030, we could cover interest on the debt, Social Security, and part of Medicare & Medicaid with expected revenues. This means that there will be many valuable programs--both mandatory and discretionary programs--that will not be covered.
  
• This is utterly unsustainable and cannot occur. The sooner we act the better

Slide Twenty-one: Social Security, Medicare, Medicaid and Interest consume all federal revenues in under 20 years

• This is the same idea as the previous chart. Mandatory spending and interest consume every tax dollar in less than twenty years

Slide Twenty-two: Policy changes matter

• The chart demonstrates the effect that policy change can have on the long-term fiscal outlook.
  
• A few choices like allowing discretionary spending to grow only with inflation instead of the economy and allowing the tax cuts to expire could have a drastic impact.

Slide Twenty-three: Washington needs a fiscal wake-up call from “We the People”

• The prominent speakers of the national “Fiscal Wake Up Tour” include Comptroller General of the U.S. David Walker and speakers from the Concord Coalition, Heritage Foundation, and Brookings Institution. The tour has visited over thirty cities on the tour, but the points of the tour come to you today and we’re trying to share this message with every citizen
  
• The man on the horse is Paul Revere

Slide Twenty-four: Key Points of agreement

• The members of the Fiscal Wake-Up Tour demonstrate that different perspectives can agree when discussing the topic.