This is the accessible text file for GAO report number GAO-07-983R 
entitled 'The Nation's Long-Term Fiscal Outlook: April 2007 Update' 
which was released on June 4, 2007. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 

GAO: 

The Nation's Long-Term Fiscal Outlook: 

April 2007 Update: 

GAO-07-983R: 

GAO's Long-Term Fiscal Simulations: 

Since 1992, GAO has published long-term fiscal simulations of what 
might happen to federal deficits and debt levels under varying policy 
assumptions. GAO developed its long-term model in response to a 
bipartisan request from Members of Congress who were concerned about 
the long-term effects of fiscal policy. 

GAO's simulations were updated with new estimates for Social Security 
and Medicare spending. GAO also modified its alternative simulation so 
that Medicare spending follows a more realistic path and revenues 
return to historical levels. 

GAO updates its simulations three times a year as new estimates become 
available from: 

* CBO's Budget and Economic Outlook (January), 

* Social Security and Medicare Trustees Reports (spring), and: 

* CBO's Budget and Economic Outlook: An Update (late summer). 

This product responds to congressional interest in receiving updated 
simulation results. Additional information about the GAO model, its 
assumptions, data, and charts can be found at 
http://www.gao.gov/special.pubs/longterm/. For more information, 
contact Susan J. Irving at (202) 512-9142 or irvings@gao.gov: 

The Bottom Line: Federal Fiscal Policy Remains Unsustainable: 

Figure 1: Figure 1: Unified Surpluses and Deficits as a Share of GDP 
under Alternative Fiscal Policy Simulations: 

[See PDF for image] 

Source: GAO's April 2007 analysis. 

[End of figure] 

As in previous updates , GAO's current long-term simulations show ever- 
larger deficits resulting in a federal debt burden that ultimately 
spirals out of control. Figure 1 shows two alternative fiscal paths. 
The first is "Baseline extended," which extends the Congressional 
Budget Office's baseline estimates beyond the 10-year projection 
period, and the second is an alternative based on recent trends and 
policy preferences. For this update we modified the alternative 
simulation to reflect a return to historical levels of revenue and a 
more realistic Medicare scenario for physician payments. Although the 
timing of deficits and the resulting debt build up varies depending on 
the assumptions used, both simulations show that we are on an 
unsustainable fiscal path. 

By definition, what is unsustainable will not be sustained. The 
question is how and when our current imprudent and unsustainable path 
will end. At some point, action will be taken to change the Nation's 
fiscal course. The longer action to deal with the Nation's long-term 
fiscal outlook is delayed, the greater the risk that the eventual 
changes will be disruptive and destabilizing. Acting sooner rather than 
later will give us more time to phase in gradual changes, while 
providing more time for those likely to be most affected to make 
compensatory changes. 

Simulations are not forecasts or predictions. They are designed to ask 
the question "what if?" GAO's "what ifs" include that discretionary 
spending may grow slower (as in Baseline extended) or faster (as in the 
alternative), and tax cuts may be allowed to expire (as in Baseline 
extended) or be extended (as in the alternative), but in both cases, 
the Nation's long-term fiscal future is at risk. Under both sets of 
expectations about future spending and revenues, the risks posed to the 
Nation's future financial condition are too high to be acceptable. 

What Drives Our Nation's Bleak Long-Term Fiscal Outlook? 

The long-term fiscal outlook results from a large and persistent gap 
between expected revenues and expected spending. 

The spending that drives the outlook is primarily spending on the large 
federal entitlement programs (i.e., Medicare, Medicaid, Social 
Security). The retirement of the baby boom generation is one key 
element of this. In 2008 the first boomers will be eligible to draw 
Social Security early retirement benefits, and in 2011 the first 
boomers will become eligible for Medicare. In the succeeding 2 decades 
America's population will age dramatically, and relatively fewer 
workers will be asked to support ever larger costs for retirees. 

Although Social Security is a major part of the fiscal challenge, it is 
far from our biggest challenge. Spending on the major federal health 
programs (i.e., Medicare and Medicaid) represents a much larger and 
faster growing problem. In fact, the federal government's obligations 
for Medicare Part D alone exceed the unfunded obligations for Social 
Security. Over the past several decades, health care spending on 
average has grown much faster than the economy, absorbing increasing 
shares of the Nation's resources, and this rapid growth is projected to 
continue. For this reason and others, rising health care costs pose a 
fiscal challenge not just to the federal budget but to American 
business and our society as a whole. 

In their April 2007 report, the Medicare Trustees for the first time 
issued a Medicare funding warning of projected "excess general revenue 
funding" in the Medicare program. As required under the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, issuance 
of the warning will require the President to submit to Congress, within 
15 days after the release of the Fiscal Year 2009 Budget, proposed 
legislation to respond to the warning. Congress is then required to 
consider the legislation on an expedited basis.[Footnote 1]  

Figures 2 and 3 look behind the deficit path to the composition of 
federal spending under the two scenarios. Both figures show that the 
estimated growth in the major entitlement programs leads to an 
unsustainable fiscal future--whether revenues as a share of GDP are 
above historical levels over the past 20 or 40 years, as in Baseline 
extended, or at about historical levels as in the alternative 
simulation. 

Figure 2: Potential Fiscal Outcomes Under Baseline Extended: 

[See PDF for image] 

Source: GAO's April 2007 analysis. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2017 due to (1) real bracket creep, (2) more 
taxpayers becoming subject to the AMT, and (3) increased revenue from 
tax-deferred retirement accounts. After 2017, revenue as a share of GDP 
is held constant. 

[End of figure] 

Figure 3: Potential Fiscal Outcomes Under Alternative Simulation: 
Revenues and Composition of Spending: 

[See PDF for image] 

Source: GAO's April 2007 analysis. 

Note: Discretionary spending grows with GDP after 2007. AMT exemption 
amount is retained at the 2006 level through 2017 and expiring tax 
provisions are extended. After 2017, revenue as a share of GDP returns 
to its historical level of18.3 percent of GDP plus expected revenues 
from deferred taxes, i.e. taxes on withdrawals from retirement accounts.

[End of figure] 

In these figures the category "all other spending" includes much of 
what many think of as "government"--discretionary spending on such 
activities as national defense, homeland security, veterans health 
benefits, our national parks, highways and mass transit, foreign aid, 
plus mandatory spending on the smaller entitlement programs such as 
Supplemental Security Income, Temporary Assistance for Needy Families 
(TANF), and farm price supports.[Footnote 2] The growth in Social 
Security, Medicare, Medicaid, and interest on debt held by the public 
dwarfs the growth in all other types of spending. 

Under Baseline extended we follow the Congressional Budget Office (CBO) 
baseline for the first 10 years: tax provisions that are scheduled to 
expire are assumed to do so (including the temporary increase in the 
alternative minimum tax (AMT) exemption amount) and discretionary 
spending is assumed to grow with inflation. At the end of the 10-year 
period, revenues in Baseline extended are several points above the 20- 
year historical average and discretionary spending is several points 
below the 20-year historical average. For the remainder of the 
simulation period, revenues and discretionary spending are held 
constant as shares of the economy, and for Social Security and 
Medicare, we use the Trustees' April 2007 intermediate estimates. The 
Medicare estimates assume the continuation of current law, under which 
fees for physicians treating Medicare patients would be cut in future 
years.[Footnote 3]  

Under the alternative scenario in the first 10 years we assume that all 
expiring tax provisions are extended, and the 2006 exemption amount for 
the alternative minimum tax is continued but not indexed for inflation. 
After the first 10 years revenues are allowed to return to their 
historical share plus expected revenues from deferred taxes, i.e. taxes 
on withdrawals from retirement accounts. Discretionary spending grows 
with the economy throughout the simulation period. Over the long term, 
levels of discretionary spending are slightly under the 20-year 
historical average. The alternative scenario uses Medicare estimates 
developed by the Centers for Medicare and Medicaid Services (CMS) that 
assume payment rates to physicians will not be reduced as specified 
under current law.[Footnote 4] As in Baseline extended, after the first 
10 years the alternative scenario uses the Trustees' intermediate 
estimates for Social Security. 

These figures also show that waiting makes the size of the problem 
worse. For example, even under GAO's Baseline extended scenario--under 
which revenues rise to about 20 percent of GDP and discretionary 
spending falls to below 6 percent of GDP--waiting until 2040 to balance 
the budget would require drastic change. Taxes as a share of GDP would 
have to increase by about 40 percent or noninterest spending cut by 
about a third in order to balance the budget in that year. If changes 
in personal income taxes were the sole means used to balance the 
budget, these would increase by about 75 percent. Sudden, drastic 
changes of either kind--and revenues at such a level--are outside post- 
World War II historical experience in this country. 

The Fiscal Gap--Another Way to Measure the Challenge: 

Many ways exist to measure the long-term fiscal challenge. One 
quantitative measure is called "the fiscal gap." The fiscal gap is the 
amount of spending reduction or tax increases needed to keep debt as a 
share of gross domestic product (GDP) at or below today's ratio. 
Another way to say this is that the fiscal gap is the amount of change 
needed to prevent the kind of debt explosion implicit in figure 3. The 
fiscal gap can be expressed as a share of the economy or in present 
value dollars. (See table 1.) 

Table 1: Fiscal Gap 2007-2081: 

Baseline; 
Fiscal gap: Trillions of 2007 Dollars: $27.2; 
Fiscal Gap: Share of GDP: 3.7%; 
Change Required to Close Gap: Percentage Increase in Revenue: 19.9%; 
Change Required to Close Gap: Percentage Increase in Individual Income 
Taxes: 44.0%; 
Change Required to Close Gap: Percentage Decrease in Non-Interest 
Spending: 20.3%. 

Alternative; 
Fiscal gap: Trillions of 2007 Dollars: $54.5; 
Fiscal Gap: Share of GDP: 7.4%; 
Change Required to Close Gap: Percentage Increase in Revenue: 40.0%; 
Change Required to Close Gap: Percentage Increase in Individual Income 
Taxes: 88.1%; 
Change Required to Close Gap: Percentage Decrease in Non-Interest 
Spending: 40.7%. 

Source: GAO analysis. 

[End of table] 

To close the fiscal gap under Baseline extended would require revenue 
increases or programmatic spending cuts (i.e., in all discretionary 
spending and spending on federal entitlement programs) equal to about 
20 percent each and every year over the next 75 years. Under GAO's 
alternative simulation, the required action would be even more 
dramatic--about 40 percent. These annual tax increases and spending 
cuts would exceed the fiscal year 2006 deficit of 1.9 percent of GDP. 
Delaying action would make things worse. Under our alternative 
simulation, waiting even 10 years would require a revenue increase of 
about 50 percent or non-interest spending cuts of about 45 percent. 

This gap is too large for us to grow our way out of the problem. It 
would require decades of double-digit real economic growth, but the 
U.S. has not had a single year of double-digit real economic growth 
since World War II. To be sure, additional economic growth would 
certainly help the Nation's financial condition and our ability to 
address our fiscal gap, but it will not eliminate the need for action. 

Other ways to think about the size of the long-term challenge may also 
be found in http://www.gao.gov/cghome.htm: 

What Is Assumed in GAO's Simulations? 

GAO's two simulations project current policies on revenue and spending 
forward. The first, Baseline extended, takes the 10-year baseline 
estimates[Footnote 5] of the Congressional Budget Office (CBO) and 
extends them over a 75-year period and the second, Alternative 
simulation, is based on recent trends and policy preferences. As CBO 
recognized in its January 2007 Budget and Economic Outlook, its 
baseline estimates incorporate some very problematic assumptions that 
we adjust for in our alternative simulation as summarized below. 

Table 2: Assumptions for Baseline Extended and Alternative Simulations:

Model inputs: Revenue; 
Baseline Extended: CBO’s January 2007 baseline through 2017; thereafter 
remains constant at 20.1 percent of GDP (CBO’s projection in 2017); 
Alternative Simulation: All expiring tax provisions are extended 
through 2017; thereafter equal to 40-year historical average of 18.3% 
of GDP plus CBO’s estimate of revenue from tax-deferred retirement 
plans. 

Model inputs: Social Security spending (OASDI); 
Baseline Extended: CBO’s January 2007 baseline through 2017; thereafter 
based on 2007 Social Security Trustees’ intermediate projections; 
Alternative Simulation: Same as Baseline Extended. 

Model inputs: Medicare Spending; 
Baseline Extended: CBO’s January 2007 baseline through 2017, thereafter 
based on 2007 Medicare Trustees’ intermediate projections; 
Alternative Simulation: Throughout simulation period, CMS’s 
intermediate projections with alternative assumption of zero percent 
physician payment updates. 

Model inputs: Medicaid spending; 
Baseline Extended: CBO’s January 2007 baseline through 2017; thereafter 
based on CBO’s December 2005 long-term projections under Scenario 2 
that assume per enrollee Medicaid spending grows with GDP per capita 
plus 1 percent over the long term; 
Alternative Simulation: Same as Baseline Extended. 

Model inputs: Other mandatory spending; 
Baseline Extended: CBO’s January 2007 baseline through 2017; thereafter 
increases at the rate of economic growth (i.e., remains constant as a 
share of GDP); 
Alternative Simulation: Same as Baseline Extended. 

Model inputs: Discretionary spending; 
Baseline Extended: CBO’s January 2007 baseline through 2017; thereafter 
increases at the rate of economic growth; 
Alternative Simulation: Increases at the rate of economic growth 
starting in 2007. 

Source: GAO. 

[End of table] 

What Changed in This Update? 

Despite some improvement in the near-term projections for Social 
Security and Medicare, the long-term outlook has not changed: it 
remains unsustainable. 

GAO’s simulations were updated using estimates from the Social Security 
and Medicare Trustees. The Trustees’ April 2007 reports can be accessed 
at: 

Hyperlink, http://www.ssa.gov/OACT/TR/index.html] 

This product is based on GAO’s work on the long–term fiscal challenge, 
including reports and testimonies. These efforts were conducted in 
accordance with generally accepted government auditing standards. 

Additional information and related products can be found at: 

Hyperlink, 
http://www.gao.gov/special.pubs/longterm/longtermproducts.html] 

Appendix: Update of GAO's January 2007 Alternative Simulation: 

GAO periodically revises the assumptions of its alternative simulation 
to better illustrate a fiscal path that embodies recent trends and 
policy preferences. For the April update, as described earlier in this 
report, we revised the revenue and Medicare assumptions from those used 
in January. Had we not made these revisions, the updated simulation 
would have looked as shown in Figure 4.  A comparison with the 
corresponding January 2007 chart (fig. 5) shows that the substitution 
of the Trustees 2007 Social Security and Medicare estimates for their 
2006 estimates did not materially affect the long-term fiscal outlook. 

Figure 4: Potential Fiscal Outcomes Under Alternative Simulation: GAO's 
April 2007 Analysis: 

Revenues and Composition of Spending Assuming Discretionary Spending 
Grows with GDP After 2007 and All Expiring Tax Provisions Are Extended: 

[See PDF for Image] 

Source: GAO's April 2007 analysis. 

Notes: AMT exemption amount is retained at the 2006 level through 2017 
and expiring tax provisions are extended. After 2017, revenue as a 
share of GDP is held constant—implicitly assuming that action is taken 
to offset increased revenue from real bracket creep, the AMT, and tax-
deferred retirement accounts. 

[End of figure] 

Figure 5: Potential Fiscal Outcomes Under Alternative Simulation: GAO's 
January 2007 Analysis: 

[See PDF for Image] 

Source: GAO's January 2007 analysis. 

Notes: AMT exemption amount is retained at the 2006 level through 2017 
and expiring tax provisions are extended. After 2017, revenue as a 
share of GDP is held constant—implicitly assuming that action is taken 
to offset increased revenue from real bracket creep, the AMT, and tax-
deferred retirement accounts. 

[End of figure] 

[End of section] 

FOOTNOTES 

[1] The 2003 act requires the President to submit a proposal to 
Congress for action if the Medicare Trustees determine in 2 consecutive 
years that the general revenue share of Medicare spending is projected 
to exceed 45 percent during a 7-year period. For the purpose of this 
Medicare trigger, general revenue is defined as the difference between 
program outlays and dedicated financing sources (that is, Hospital 
Insurance (HI) payroll taxes, the HI share of income taxes on Social 
Security benefits, state transfers for Part D prescription drug 
benefits, premiums paid under Parts A, B, and D, and any gifts received 
by the trust funds). For more information on trigger mechanisms such as 
the one in the 2003 legislation and the sustainable growth rate, which 
governs the formula used to update physician fees, see Mandatory 
Spending Using Budget Triggers to Constrain Growth, GAO-06-276 
(Washington, D. C.: January 31, 2006). 

[2] Discretionary spending refers to spending based on authority 
provided in annual appropriations acts. Mandatory spending refers to 
spending that Congress has authorized in legislation other than 
appropriations acts that entitles beneficiaries to receive payment or 
that otherwise obligates the government to make payment. 

[3] The Trustees noted in their April 2007 report that Medicare 
expenditures "are substantially understated because projected current-
law physician payment updates are unrealistically reduced under the 
sustainable growth rate system [the statutory formula that governs fee 
updates] by about 10 percent in 2008 and 5 percent in each subsequent 
year through 2016. In practice, Congress is virtually certain to 
prevent some or all of the scheduled reductions through new 
legislation, as it has for 2003 through 2007." 

[4] This reflects the fact that Congress has generally acted to prevent 
payment rates from being reduced.  CMS developed two illustrative 
Medicare estimates that vary from the intermediate estimates. One set 
of estimates assumes a 0.0 percent update to physician fees; the other 
assumes updates for medical inflation. GAO’s alternative simulation 
uses the 0-percent update estimates. For more information on these 
estimates, see CMS’ April 2007 memorandum "Projected Medicare Part B 
Expenditures under Two Illustrative Scenarios with Alternative 
Physician Payment Updates," available at Hyperlink, 
http://www.cms.hhs.gov/ReportsTrustFunds/05_alternativePartB.asp. 

[5] The Balanced Budget and Emergency Deficit Control Act of 1985, 
which established rules that govern the calculation of CBO’s baseline, 
expired on September 30, 2006. Nevertheless, CBO continues to prepare 
baselines according to the methodology prescribed in that law. 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to www.gao.gov and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 441 G Street NW, Room LM 
Washington, D.C. 20548: 

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202) 
512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S. 
Government Accountability Office, 441 G Street NW, Room 7125 
Washington, D.C. 20548: 

Public Affairs: 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: