This is the accessible text file for GAO report 'Long-Term Federal Budget Simulations' which was released on April 10, 2014. 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: Long-Term Federal Budget Simulations: Spring 2014 Update: Interpreting Long-Term Simulations: * Long-term simulations provide illustrations-—not precise forecasts—- of the relative outcomes associated with different sets of broad fiscal policy assumptions. * These simulations are not predictions of what will happen in the future, as policymakers would likely take action to prevent damaging out-year fiscal consequences. GAO's Fiscal Policy Simulations: From Fiscal Years 2014 to 2024: * The Baseline Extended simulation follows the Congressional Budget Office's (CBO) February 2014 baseline projections, which generally reflect current law. Discretionary spending reflects the caps and automatic enforcement procedures in effect through 2021 under current law; from 2022 to 2024 discretionary spending grows with inflation. [Footnote 1] The Baseline Extended simulation also assumes that, as provided under current law, tax provisions that have expired, such as the research and experimentation tax credit, or are scheduled to expire, such as the expansion of the earned income tax credit, do so and that payment rates for physicians treating Medicare patients are cut in future years as scheduled under the sustainable growth rate (SGR) system. * In the Alternative simulation, changes are made to the following assumptions to reflect historical trends: 1. Discretionary and other mandatory spending are adjusted to reflect the assumption that automatic enforcement procedures are canceled. 2. Expiring tax provisions, including those that expired at the end of 2013, are extended. 3. Medicare spending is based on the Centers for Medicare & Medicaid Services Office of the Actuary's (CMS Actuary) projections that assume that physician payment rates grow by 0.7 percent annually rather than being cut as scheduled under the SGR system and that other policies that would restrain Medicare cost growth begin to phase out after 2019. The Longer Term (2025 to 2088): * In the Baseline Extended simulation, discretionary spending remains constant at the 2024 level-–5.2 percent of gross domestic product (GDP) (lower than at any other point over the past 50 years). Revenue is held constant as a share of GDP at the 2024 level of 18.4 percent—- implicitly assuming that action is taken to offset increased revenue from real bracket creep, tax-deferred retirement accounts, and an excise tax on high cost employer-sponsored health plans. Long-term Social Security and Medicare spending is based on intermediate projections by the Trustees of the Social Security and Medicare trust funds (Trustees), which generally follow current law. Long-term spending on Medicaid, the Children's Health Insurance Program (CHIP), and exchange subsidies is consistent with CBO's long-term assumptions for the number and age composition of enrollees and the Medicare Trustees' intermediate assumptions for excess cost growth. * Several of the Alternative simulation's assumptions differ from those used in the Baseline Extended, including: 1. Discretionary spending as a share of GDP gradually rises to the 20- year historical average of 7.3 percent after 2021. 2. Revenue is brought back to its 40-year historical average of 17.4 percent of GDP after 2024. 3. Medicare spending is based on the CMS Actuary projections that assume physician payment rates are not reduced as scheduled and that policies intended to restrain Medicare cost growth phase out over time. 4. Spending on exchange subsidies is based on CBO's alternative assumption that a policy that would slow the growth of per-participant subsidies for health insurance coverage is not in effect and eligibility thresholds are modified to maintain the share of the population eligible for subsidies. 5.Other mandatory spending is held constant as a share of GDP at the 2024 level of 2.2 percent. Figure: Federal Budget Surpluses and Deficits Under Two Fiscal Policy Simulations: [Refer to PDF for image: multiple line graph] Percentage of GDP: Baseline Extended and Alternative, 2000-2060. Source: GAO. Note: Data are from GAO's Spring 2014 simulations based on the Trustees' assumptions for Social Security and the Trustees' and CMS Actuary's assumptions for Medicare. [End of figure] Figure: Debt Held by the Public Under Two Fiscal Policy Simulations: [Refer to PDF for image: multiple line graph] Percentage of GDP: Historical high: 109% in 1946. Fiscal year: 2000; Baseline extended: 34.72%; Alternative: 34.72%. Fiscal year: 2001; Baseline extended: 32.46%; Alternative: 32.46%. Fiscal year: 2002; Baseline extended: 33.58%; Alternative: 33.58%. Fiscal year: 2003; Baseline extended: 35.64%; Alternative: 35.64%. Fiscal year: 2004; Baseline extended: 36.76%; Alternative: 36.76%. Fiscal year: 2005; Baseline extended: 36.9%; Alternative: 36.9%. Fiscal year: 2006; Baseline extended: 36.51%; Alternative: 36.51%. Fiscal year: 2007; Baseline extended: 36.25%; Alternative: 36.25%. Fiscal year: 2008; Baseline extended: 40.32%; Alternative: 40.32%. Fiscal year: 2009; Baseline extended: 53.52%; Alternative: 53.52%. Fiscal year: 2010; Baseline extended: 62.8%; Alternative: 62.8%. Fiscal year: 2011; Baseline extended: 67.72%; Alternative: 67.72%. Fiscal year: 2012; Baseline extended: 72.8%; Alternative: 72.8%. Fiscal year: 2013; Baseline extended: 76.1%; Alternative: 78.6%. Fiscal year: 2014; Baseline extended: 76.6%; Alternative: 82.4%. Fiscal year: 2015; Baseline extended: 73.8%; Alternative: 82.8%. Fiscal year: 2016; Baseline extended: 70.8%; Alternative: 82.8%. Fiscal year: 2017; Baseline extended: 67.9%; Alternative: 82.9%. Fiscal year: 2018; Baseline extended: 65.2%; Alternative: 83.2%. Fiscal year: 2019; Baseline extended: 63.2%; Alternative: 84.4%. Fiscal year: 2020; Baseline extended: 61.4%; Alternative: 85.9%. Fiscal year: 2021; Baseline extended: 59.8%; Alternative: 87.7%. Fiscal year: 2022; Baseline extended: 58.5%; Alternative: 89.9%. Fiscal year: 2023; Baseline extended: 57.8%; Alternative: 93.1%. Fiscal year: 2024; Baseline extended: 57.5%; Alternative: 97.4%. Fiscal year: 2025; Baseline extended: 57.8%; Alternative: 102.6%. Fiscal year: 2026; Baseline extended: 58.2%; Alternative: 108.4%. Fiscal year: 2027; Baseline extended: 59%; Alternative: 114.5%. Fiscal year: 2028; Baseline extended: 60%; Alternative: 121.2%. Fiscal year: 2029; Baseline extended: 61.2%; Alternative: 128.5%. Fiscal year: 2030; Baseline extended: 62.6%; Alternative: 136.2%. Fiscal year: 2031; Baseline extended: 64.2%; Alternative: 144.4%. Fiscal year: 2032; Baseline extended: 66%; Alternative: 152.9%. Fiscal year: 2033; Baseline extended: 67.8%; Alternative: 161.6%. Fiscal year: 2034; Baseline extended: 69.8%; Alternative: 170.5%. Fiscal year: 2035; Baseline extended: 71.9%; Alternative: 179.7%. Fiscal year: 2036; Baseline extended: 74.2%; Alternative: 189.1%. Fiscal year: 2037; Baseline extended: 76.6%; Alternative: 198.8%. Fiscal year: 2038; Baseline extended: 79.1%. Fiscal year: 2039; Baseline extended: 81.7%. Fiscal year: 2040; Baseline extended: 84.4%. Fiscal year: 2041; Baseline extended: 87.1%. Fiscal year: 2042; Baseline extended: 89.9%. Fiscal year: 2043; Baseline extended: 92.7%. Fiscal year: 2044; Baseline extended: 95.7%. Fiscal year: 2045; Baseline extended: 98.7%. Fiscal year: 2046; Baseline extended: 101.9%. Fiscal year: 2047; Baseline extended: 105.3%. Fiscal year: 2048; Baseline extended: 108.6%. Fiscal year: 2049; Baseline extended: 112.1%. Fiscal year: 2050; Baseline extended: 115.6%. Fiscal year: 2051; Baseline extended: 119.1%. Fiscal year: 2052; Baseline extended: 122.8%. Fiscal year: 2053; Baseline extended: 126.5%. Fiscal year: 2054; Baseline extended: 130.2%. Fiscal year: 2055; Baseline extended: 134%. Fiscal year: 2056; Baseline extended: 138%. Fiscal year: 2057; Baseline extended: 142.1%. Fiscal year: 2058; Baseline extended: 146.2%. Fiscal year: 2059; Baseline extended: 150.4%. Fiscal year: 2060; Baseline extended: 154.7%. Source: GAO. Note: Data are from GAO's Spring 2014 simulations based on the Trustees' assumptions for Social Security and the Trustees' and CMS Actuary's assumptions for Medicare. [End of figure] Figure: Daily Average Number of People Turning 65 Each Year: Year: 2000: 5,500. Year: 2001: 5,500. Year: 2002: 5,500. Year: 2003: 5,800. Year: 2004: 5,800. Year: 2005: 6,000. Year: 2006: 6,200. Year: 2007: 6,700. Year: 2008: 7,200. Year: 2009: 7,200. Year: 2010: 7,200. Baby boomers begin turning 65. Year: 2011: 7,600. Year: 2012: 9,100. Year: 2013: 9,200. Year: 2014: 9,100. Year: 2015: 9,400. Year: 2016: 9,400. Year: 2017: 9,700. Year: 2018: 10,000. Year: 2019: 10,200. Year: 2020: 10,700. Year: 2021: 10,700. Year: 2022: 11,000. Year: 2023: 11,200. Year: 2024: 11,200. Year: 2025: 11,600. Year: 2026: 11,400. Year: 2027: 11,400. Year: 2028: 11,300. Year: 2029: 11,400. Source: GAO analysis of U.S. Census Bureau data. [End of figure] Figure: Potential Fiscal Outcomes: Revenues and Composition of Spending in the Baseline Extended Simulation: [Refer to PDF for image: stacked vertical bar and line graph] Percentage of GDP: For the years 2010, 2020, 2030, and 2040. Net interest; Social Security; Medicare, Medicaid, CHIP, and exchange subsidies; All other spending. Source: GAO. Note: Data are from GAO's Spring 2014 simulation based on the Trustees' assumptions for Social Security and Medicare. [End of figure] Figure: Potential Fiscal Outcomes: Revenues and Composition of Spending in the Alternative Simulation: [Refer to PDF for image: stacked vertical bar and line graph] Percentage of GDP: For the years 2010, 2020, 2030, and 2040. Net interest; Social Security; Medicare, Medicaid, CHIP, and exchange subsidies; All other spending. Source: GAO. Note: Data are from GAO's Spring 2014 simulations based on the Trustees' assumptions for Social Security and CMS Actuary's assumptions for Medicare. [End of figure] Table: Federal Fiscal Gap (2014 to 2088): Fiscal gap: Average percentage change required to close gap: Baseline Extended: If action is taken today: Percentage of GDP: 3.8%; Solely through increases in revenue: 20.8%; Solely through decreases in noninterest spending: 17.8%; If action is delayed until 2024: Solely through increases in revenue: 24.9%; Solely through decreases in noninterest spending: 20.9%. Alternative: If action is taken today: Percentage of GDP: 7.7%; Solely through increases in revenue: 43.2%; Solely through decreases in noninterest spending: 31.1%; If action is delayed until 2024: Solely through increases in revenue: 51.8%; Solely through decreases in noninterest spending: 35.9%. Source: GAO. Notes: Data are from GAO's Spring 2014 simulations based on the Trustees' assumptions for Social Security and the Trustees' and CMS Actuary's assumptions for Medicare. The fiscal gap is the amount of spending reductions or tax increases on average over the 75-year period to keep debt held by the public as a share of GDP in 2088 from exceeding its level at the beginning of 2014 (roughly 72.1 percent of GDP). [End of table] Table: Total Federal Revenue and Discretionary Spending: Historical Averages and GAO's Long-Term Assumptions: Percentage of GDP: Total revenue: 20-year historical average: 17.2%; 40-year historical average: 17.4%; Baseline Extended assumptions: 18.4%; Alternative assumptions: 17.4%. Total discretionary spending: 20-year historical average: 7.3%; 40-year historical average: 8.3%; Baseline Extended assumptions: 5.2%; Alternative assumptions: 7.3%. Sources: CBO and GAO. Note: The Baseline Extended revenue and spending assumptions are held constant from year 2024 through the end of the simulation period. The Alternative revenue assumption is gradually phased in over several years from 2024 and thereafter held constant through the remainder of the simulation period. The Alternative discretionary spending assumption is gradually phased in from 2021 through 2030 and then held constant as a share of GDP through the remainder of the simulation period. [End of table] [End of section] Appendix I: Assumptions Underlying GAO Simulations: Table: Key Budget Assumptions Model inputs: Revenue; Baseline Extended simulation: CBO's February 2014 baseline that assumes tax provisions expire as scheduled under current law and growth of real income causes a greater proportion of taxpayers' income to be taxed in higher brackets through 2024; thereafter remains constant at 18.4 percent of GDP (CBO's projection in 2024); Alternative simulation: CBO's estimates that assume expiring tax provisions are extended through 2024; thereafter phases into the 40- year historical average of 17.4 percent of GDP. Model inputs: Discretionary spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024, which reflects the caps and automatic enforcement procedures established by the Budget Control Act and revised by subsequent legislation;a thereafter remains constant at 5.2 percent of GDP (CBO's projection in 2024); Alternative simulation: Follows the caps established by the Budget Control Act and revised by subsequent legislation through 2021 but not the lower caps triggered by the automatic enforcement procedures;a thereafter it gradually phases up to 7.3 percent of GDP (the 20-year historical average). Model inputs: Other mandatory spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024, which incorporates the reductions in spending scheduled to occur under the automatic enforcement procedures established by the Budget Control Act and revised by subsequent legislation;a thereafter remains constant at 2.2 percent of GDP (implied by CBO's projection in 2024); Alternative simulation: CBO's February 2014 baseline adjusted to exclude the effects of the automatic enforcement procedures established by the Budget Control Act and revised by subsequent legislation through 2024;a thereafter remains constant as a share of GDP at 2.2 percent (the level reached in 2024). Source: GAO. Notes: CBO's projections are from The Budget and Economic Outlook: 2014 to 2024 (Feb. 4, 2014). [A] The BCA established discretionary spending limits for 2012 through 2021. The BCA also established the Joint Select Committee on Deficit Reduction, which was tasked with proposing legislation to reduce the deficit by at least $1.2 trillion by fiscal year 2021. The Joint Committee did not enact legislation, which triggered automatic enforcement procedures to achieve the spending reductions. At the time that CBO published its projections, current law provided that the spending reductions were to be achieved through a combination of lowering the discretionary spending limits from 2016 to 2021 and sequestering mandatory spending, including Medicare, through fiscal year 2023. Subsequently, legislation was enacted extending the sequestration of mandatory spending until 2024. [End of table] Table: Key Budget Assumptions (continued): Model inputs: Social Security spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024; thereafter phases into the 2013 Social Security Trustees' intermediate projections; Alternative simulation: Same as Baseline Extended Model inputs: Medicare spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024 that assumes cuts in physician payment rates will occur as scheduled under current law at the time[A] and the automatic enforcement procedures established by the Budget Control Act and revised by subsequent legislation reduce spending;[B] thereafter phases into the 2013 Medicare Trustees' intermediate projections in which cost containment mechanisms, including those enacted in the Patient Protection and Affordable Care Act, reduce excess cost growth to 0.2 percentage points on average over the long term[C]; Alternative simulation: Based on CMS Actuary's alternative scenario that assumes physician payment rates grow by 0.7 percent annually over the next 10 years[A]; Medicare physician spending growth then gradually transitions to a long-term growth rate equal to the per capita increase in overall health spending; spending reductions scheduled under current law do not occur[B] and policies that would restrain Medicare cost growth are applied fully through 2019 but begin to phase out thereafter; excess cost growth averages 0.8 percentage points over the long term[C]. Model inputs: Medicaid, the Children's Health Insurance Program (CHIP), and exchange subsidies spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024; thereafter growth in spending for these programs is consistent with CBO's September 2013 long-term assumptions for the number and age composition of enrollees and the 2013 Trustees' intermediate assumptions for excess cost growth; excess cost growth averages 0.7 percentage points over the long term[C]; Alternative simulation: CBO's February 2014 baseline through 2024; thereafter growth in spending for these programs is consistent with CBO's September 2013 long-term assumptions for the number and age composition of enrollees under CBO's alternative assumption that a policy that would slow the growth of per-participant subsidies for health insurance coverage is not in effect and eligibility thresholds are modified to maintain the share of the population eligible for subsidies; as in Baseline Extended, excess cost growth averages 0.7 percentage points over the long term[C]. Source: GAO. Notes: CBO's projections are from The Budget and Economic Outlook: 2014 to 2024 (Feb. 4, 2014) and CBO's The 2013 Long-Term Budget Outlook (Sept. 17, 2013). Trustees projections are from The 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds and The 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, which were both issued on May 31, 2013. Projections from the CMS Actuary are based on “Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers” (May 31, 2013). We assume that Social Security and Medicare benefits are paid in full regardless of the amounts available in the trust funds. [A] When CBO prepared its baseline, physician payment rates were scheduled to be reduced by roughly 24 percent in 2014 and smaller amounts in subsequent years under the sustainable growth rate (SGR) system. However, in April 2014, legislation was enacted to delay the reduction in payment rates for one year. Since 2003, Congress has taken a series of legislative actions to override scheduled reductions in physician payment rates that would otherwise occur under current law at the time. The CMS Actuary's assumption of 0.7 percent reflects the average annual update to physician fee payments over the 10-year period preceding the projections. [B] In addition to limits on discretionary budget authority, the Budget Control Act required reductions in nonexempt mandatory spending, including Medicare, through 2021. The Bipartisan Budget Act extended these reductions to 2023. [C] Excess cost growth refers to the annual growth rate of health care spending per enrollee in excess of the annual growth rate of potential GDP, adjusted for demographic characteristics. [End of table] Table: Key Economic Assumptions Used in Both Sets of Simulations: Model inputs: Real GDP growth; All simulations: CBO's February 2014 baseline through 2024; thereafter averages 2.1 percent based on the intermediate assumptions of the 2013 Social Security and Medicare Trustees reports. Model inputs: Inflation (percentage change in GDP price index); All simulations: CBO's February 2014 baseline through 2024; 2 percent thereafter (CBO's projection in 2024). Model inputs: Interest rate (on debt held by the public); All simulations: Rate implied by CBO's February 2014 baseline net interest payment projections through 2024; phasing to 5.2 percent by 2030 and then constant thereafter (CBO's September 2013 long-term projection). Source: GAO. Note: GDP in GAO's simulations does not incorporate the negative effect of long-term deficits on the economy. [End of table] [End of section] Appendix II: Simulations Using CBO's Entitlement Spending Projections: Table: Key Budget Assumptions That Change in Simulations Using CBO's Entitlement Spending Projections: Model inputs: Social Security spending; Baseline Extended simulation: BO's February 2014 baseline through 2024; thereafter based on CBO's September 2013 long-term projections for Social Security; Alternative simulation: Same as Baseline Extended Model inputs: Medicare spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024; thereafter based on CBO's September 2013 long-term projections under its extended-baseline scenario that assumes policies that would restrain spending growth are not in effect after 2029 and excess cost growth averages 1.1 percentage points per year over the long term[A]; Alternative simulation: Based on CBO's projections under its alternative fiscal scenario that assumes physician payment rates do not decline as scheduled under current law; spending reductions under the BCA do not occur and policies to restrain growth are not in effect after 2023. Model inputs: Medicaid, CHIP, and exchange subsidies spending; Baseline Extended simulation: CBO's February 2014 baseline through 2024; thereafter based on CBO's September 2013 long-term projections under its extended-baseline scenario which follows current law and assumes that excess cost growth averages 0.7 percentage points per year over the long term for Medicaid and CHIP and transitions to the underlying rate for private insurance premiums after 2029 for exchange subsidies[A]; Alternative simulation: CBO's February 2014 baseline through 2024; thereafter CBO's September 2013 projections under its alternative fiscal scenario in which a policy that would slow the growth of per- participant subsidies for health insurance coverage is assumed not to be in effect. Source: GAO. Notes: CBO's projections are from The Budget and Economic Outlook: Fiscal Years 2014 to 2024 (Feb. 4, 2014) and CBO's The 2013 Long-Term Budget Outlook (Sept. 17, 2013). CBO assumes that full benefits are paid regardless of the amounts available in the trust funds. [A] Excess cost growth refers to the annual growth rate of health care spending per enrollee in excess of the annual growth rate of potential GDP, adjusted for demographic characteristics. [End of table] Figure: Debt Held by the Public: Comparison of Simulations with Different Assumptions for Major Entitlement Programs: [Refer to PDF for image: multiple line graph] Graphs depicts Percentage of GDP for the years 2000-2060 for the following: Baseline Extended: Trustees Intermediate Social Security and Medicare; CBO Social Security and extended baseline health. Alternative: Trustees Social Security and CMS Actuary alternative Medicare; CBO Social Security and alternative health. Source: GAO. Note: Data are from GAO's Spring 2014 simulations. [End of figure] Figure: Federal Budget Surpluses and Deficits: Comparison of Simulations with Different Assumptions for Major Entitlement Programs [Refer to PDF for image: multiple line graph] Graphs depicts Percentage of GDP for the years 2000-2060 for the following: Baseline Extended: Trustees Intermediate Social Security and Medicare; CBO Social Security and extended baseline health. Alternative: Trustees Social Security and CMS Actuary alternative Medicare; CBO Social Security and alternative health. Source: GAO. Note: Data are from GAO's Spring 2014 simulations. [End of figure] [End of section] Footnote: [1] The Budget Control Act (BCA) established discretionary spending limits for 2012 through 2021. The BCA also established the Joint Select Committee on Deficit Reduction, which was tasked with proposing legislation to reduce the deficit by at least $1.2 trillion by fiscal year 2021. The Joint Committee did not enact legislation, which triggered automatic enforcement procedures to achieve the spending reductions. At the time that CBO published its projections, current law provided that the spending reductions were to be achieved through a combination of lowering the discretionary spending limits from 2016 to 2021 and sequestering mandatory spending, including Medicare, through fiscal year 2023. Subsequently, legislation was enacted extending the sequestration of mandatory spending until 2024. [End of document]