Program Spending Outside Social Security and Medicare, Already Low in Historical Terms, Is Projected to Fall Further
Belies Critics’ Claims that Spending Is "Out of Control"

PDF of this report (8pp.)

By Robert Greenstein, Joel Friedman, and Isaac Shapiro

Updated March 12, 2015

Related Areas of Research

Congressional leaders are expected to unveil budget proposals in coming weeks that would reduce projected deficits solely by cutting programs and to justify that approach by claiming that the size and reach of the federal government are growing dramatically.  The data do not support this claim.[1] 

TABLE 1

Program Spending as Percent of Gross Domestic Product Under Current Policies

 

Average
1975-2014

2015

2025

Non-interest Spending
18.4%
19.1%
19.2%
Less Social Security
14.1%
14.2%
13.5 %
Less Social Security
and Medicare
12.2%
11.3%
9.9 %
Note: Program spending includes all federal expenditures other than net interest on the debt.
Sources: OMB through 2014; CBPP analysis of CBO data thereafter.

To be sure, total federal spending, including interest payments, rose considerably as a percent of the economy (gross domestic product or GDP) during the Great Recession and remained high in 2010 and 2011.  Since then, however, federal spending has dropped significantly, reflecting the economic recovery as well as the fact that most of the 2009 Recovery Act was designed to be temporary.  In addition, policymakers have taken several steps to reduce the deficit since 2010, primarily through program cuts.[2] 

When only program spending (excluding interest payments on the debt) is considered:

  • Federal program spending outside Social Security and Medicare has fallen below its historical average and is projected to decline further under current policies.  As Table 1 indicates, total spending on federal programs outside Social Security and Medicare will fall to 11.3 percent of GDP in 2015 — below the 40-year average of 12.2 percent — and is projected to decline further over the next ten years, to 9.9 percent in 2025. 
  • The rise in Social Security and Medicare spending over time primarily reflects an aging population and rising health care costs.  Combined spending for these programs is projected to rise from 7.8 percent of GDP in 2015 to 9.3 percent by 2025.[3]  This compares to average spending on these two programs of 6.2 percent over the past 40 years.  The large majority of this growth is explained by the aging of the population as the baby boom generation retires.  In addition, growing per-capita costs in the nation’s health care system (both public and private), stemming in part from new treatments and medications that improve health and save lives but increase costs, continue to put upward pressure on Medicare costs, though health spending growth has slowed recently.
  • Total program spending is expected to change little by the end of the decade, as the increase in Social Security and Medicare is nearly offset by the fall in other program spending.  Overall, program spending is expected to tick upwards, from 19.1 percent of GDP in 2015 to 19.2 percent in 2025.

Total federal spending, including interest payments, fell from 24.4 percent of GDP in 2009 to an estimated 20.4 percent in 2015 — just below its 40-year average of 20.5 percent of GDP.  But, over the coming decade, it is expected to rise, reaching 22.1 percent of GDP in 2025.  Virtually all of that 1.7 percentage-point increase from 2015 to 2025 reflects a projected increase in net interest payments, from 1.3 percent of GDP to 2.9 percent.  Increases in interest costs do not themselves represent an expansion of the government’s activities or reach, as interest payments are not a federal program.    

When Americans hear talk of the government growing in size and reach, they usually don’t think this means that more people will receive Social Security and Medicare because the population is growing older, or that Medicare will cost more because of factors like the aging of the baby boomers and improvements in medical technology.  Yet outside of demographic and health cost factors, the portrait of a rapidly growing federal government is at odds with reality.  Indeed, the rest of government — reflecting nearly three-fifths of program spending today, including health reform’s coverage expansions — is projected to shrink relative to the size of the economy under current policies.

Modest Future Program Spending Increases Reflect Demographics and Health Costs

Federal expenditures outside of interest payments on the debt stood at 19.1 percent of GDP in 2015 and are projected, even with complete implementation of the Affordable Care Act, to stand at 19.2 percent of GDP in 2025. [4]  While this would exceed the 18.4 percent average over the past 40 years (1975-2014), the increase is relatively modest, considering these two factors:

  • The aging of the population as the baby boomers continue to retire.  The share of the population aged 65 and over rose from 10.4 percent in 1975 to an estimated 14.7 percent in 2015 and will reach 18.5 percent in 2025.  Based on CBO data, we calculate that the aging of the population alone will raise Social Security and Medicare spending by more than 1 percentage point of GDP over the next decade — accounting for nearly three-quarters of the total increase in Social Security and Medicare spending as a percent of GDP between 2015 and 2025.[5] 
  • Rising per-person costs throughout the U.S. health care system.  These costs are much higher today than in earlier decades and are expected to continue rising faster than GDP per person.  While health care cost growth continues to be a major budget challenge, it has slowed noticeably in recent years.  In fact, CBO now projects that costs for federal health spending through 2020 — including the costs of health reform’s coverage expansions — will actually be significantly lower than it had previously projected without those expansions.[6] 
FIGURE 1

The general spending picture changes substantially once Social Security and Medicare are removed, as Figure 1 shows.  At 11.3 percent of GDP, total program spending outside Social Security and Medicare is already below its 40-year average of 12.2 percent of GDP and is projected to fall to 9.9 percent of GDP in 2025.

This decline reflects a substantial drop in annually appropriated, or “discretionary,” programs.  Discretionary spending is expected to decline from 6.5 percent of GDP in 2015 to 5.0 percent of GDP in 2025.  By 2017, these programs will reach their lowest level on record, with data going back to 1962.

Discretionary funding is limited by the Budget Control Act (BCA) caps, established in 2011 and further reduced starting in 2013 under a process known as “sequestration,” which was triggered by Congress’ failure to enact the additional deficit reduction that the BCA mandated.  Even without sequestration, the BCA caps would still push spending on appropriated programs to historically low levels.

Spending on entitlement programs outside Social Security and Medicare is projected to be effectively flat over the next decade at around 5 percent of GDP.  These programs include military and civilian retirement, veterans’ compensation, refundable tax credits such as the Earned Income Tax Credit (including the continuation of those provisions that expire after 2017), and key safety net programs such as SNAP (food stamps).[7]  Importantly, they also include Medicaid and health care subsidies provided under the Affordable Care Act. 

Rising Interest Payments Will Add to Federal Spending

Total federal spending, which also includes interest payments on the debt, will rise over the next decade under current policies from 20.4 percent of GDP in 2015 to 22.1 percent by 2025.  This essentially reflects a projected increase in net interest payments from 1.3 percent of GDP in 2015 to 2.9 percent in 2025. 

It must be noted, however, that increases in interest costs donot themselves represent an expansion of the government’s activities or reach; interest payments are not a federal program.  Further, deficits and thus debt can result as much from tax cuts and revenue shortfalls as from program increases.  Also, most of the increase in interest costs reflects CBO’s assumption of much higher interest rates as the economy recovers more fully from the recession.   

Nation Still Faces Long-Term Budget Challenge

The bottom line is that under existing policies, federal program spending is expected to grow very little over the next decade as a share of the economy, and the tiny expansion reflects the effects of an aging population and rising per-person health costs on Social Security and Medicare.  Outside these two programs, program spending is already historically low as a percent of GDP and will continue declining over the coming decade, despite the impact of rising per-person health care costs on Medicaid, veterans’ and military health programs, and health reform subsidies to help people afford marketplace coverage.

To be sure, total federal program spending will continue to grow slowly as a percent of GDP in subsequent decades as the population continues aging and health care costs continue rising.  One key factor is that average health care costs are considerably greater for people in their 80s and 90s than for people in their late 60s and early 70s, and the baby boomers will become very old in future decades.  The long-term projections that CBPP issued in May 2014 show total program expenditures rising to about 20 percent of GDP in the mid-2030s, when baby boom retirement is expected to peak, and then leveling off.  While revenues are also projected to rise as a percent of GDP, they are not adequate to cover program expenditures, and the resulting primary deficits — that is, the deficit excluding interest costs — will likely push up the ratio of debt to GDP.  This is the heart of the nation’s long-term fiscal challenge, as debt rises faster than GDP and interest costs swell.[8] 

The nation will need to address these issues.[9]  In doing so, policymakers should set spending and revenue levels somewhat higher than historical 40-year averages to better reflect the circumstances the country faces in future decades (see box).  But the portrait of a rapidly growing federal government is inaccurate.

Historical Spending and Revenue Levels Not Adequate Guides for Future

This paper uses historical averages to help provide context for the analysis. But this approach does not imply, as some commentators urge, that historical levels of spending — and revenue — should serve as a guide for the future. Neither is adequate to meet national needs in coming years. As this paper shows, the aging of the population and continuing increases in medical costs will necessitate higher levels of federal spending than over the previous 40 years, even when programs outside Social Security and Medicare are shrinking relative to the economy. This, in turn, means that higher revenue will be needed to avoid drastic cuts in important programs.

An aging population and higher medical costs already influence spending levels and will do so beyond the ten-year window described in this paper. In 2035, for instance, the elderly will constitute 20 percent of the U.S. population, up from 14.7 percent in 2015 and 18.5 percent in 2025. And per-person health care costs are rising faster than per-person GDP, partly due to improvements in medical technologies. This increase in the number of elderly cannot be reversed, and medicine should not be limited to the technologies and treatments of 40 years ago, or even of today.

In addition, interest payments on government debt are expected to rise in coming years, apart from the impact of any further deficits, as today’s exceptionally low interest rates return to more typical levels. That, too, would require additional revenues.

The patterns of the past 40 years also suggest that historical levels of revenues were insufficient to match expenditures even when the population was younger and health care costs were lower.

  • Between 1975 and 2014, federal revenues averaged about 17.3 percent of GDP. Revenues at this level would not have balanced the budget in any of the last 40 years.
  • The only balanced budgets over this period occurred from 1998 through 2001, when revenues ranged between 19 and 20 percent of GDP, above the 40-year average.
  • As a result of this mismatch between revenues and funding needs, deficits averaged 3.2 percent of GDP between 1975 and 2014, large enough to raise the ratio of debt to GDP substantially.

The conclusion is that meeting national needs in coming decades, while also placing the budget on a sustainable path over the long term, will require spending and revenue at levels above their historical averages. Thus, when approaching the issue of how best to address the nation’s long-term fiscal challenges, policymakers should not focus on historical averages as a benchmark to guide their efforts. Rather, they should establish meaningful principles to ensure, for instance, that deficit-reduction efforts are crafted in a way that does not increase poverty and inequality, shortchange investments important for future economic growth, reduce health care coverage or quality, or impede economic recovery.

Technical Note

This analysis uses CBPP budget projections over the next ten years (2016-2025), which are largely based on CBO’s March 2015 baseline projections.[10]  As in previous years, CBPP adjusts the CBO projections in a few respects.  Specifically, CBPP assumes that:

  • the United States will reduce troop levels in Afghanistan to 30,000 by 2017.  (Due to CBO scoring rules, the CBO baseline mechanically assumes that costs for operations in Afghanistan will remain at today’s levels, adjusted for inflation, for each of the next ten years.)  This adjustment uses CBO’s alternative estimate on the costs of overseas military operations;
  • improvements to refundable tax credits (the Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit) enacted in the 2009 Recovery Act — which policymakers have extended twice — will continue to be extended rather than expiring at the end of 2017; and
  • funding for appropriated (or “discretionary”) programs will grow with inflation and population after the BCA caps on this funding expire in 2021.  CBO adjusts these programs only for inflation after 2021.

In all other cases, CBPP projections are fully consistent with CBO’s ten-year projections.  As a result, like CBO, CBPP assumes that:

  • Congress will adhere to the BCA caps on discretionary funding, including the additional reductions required by sequestration, and that the costs of any relief in that area will be offset;
  • the sustainable growth rate (SGR) provision that constrains Medicare’s payment rates to physicians will stay in place or Congress will offset the cost of SGR fixes; and
  • the “tax extenders,” a set of primarily corporate tax provisions that expired at the end of 2014, will remain expired or Congress will offset the cost of continuing these provisions.

As the following table indicates, the resulting CBPP baseline produces deficit estimates very close to those of CBO’s baseline.  Over the decade ahead, CBPP projects total deficits that are 3 percent below CBO’s.  The deficit projections for 2025 are virtually identical.

TABLE 2

Effect on Projected Deficits of CBPP Adjustments (dollars in billions)

 

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Total

CBO baseline deficits
455
455
489
607
696
763
900
907
899
1,038
7,209
Troop levels phase down
-12
-28
-39
-46
-51
-53
-55
-56
-57
-58
-455
Certain tax credits continue
 
 
3
29
29
29
29
28
28
28
203
Appropriations grow w/ population
 
 
 
 
 
 
6
15
26
36
84
Debt service on adjustments
0
-1
-2
-3
-4
-5
-6
-7
-8
-8
-44
Resulting CBPP baseline deficits
443
426
451
587
670
733
874
888
888
1,037
6,996
Note: Components may not add to totals due to rounding.

End notes:

[1] The figures used in this paper are based on CBPP projections, which in most respects reflect the same assumptions as the CBO baseline.  The ways in which the two baselines differ are discussed in a technical note at the end of this paper.  

[2] Richard Kogan and William Chen, “Projected Ten-Year Deficits Have Shrunk by Nearly $5 Trillion Since 2010, Mostly Due to Legislative Changes,” Center on Budget and Policy Priorities, March 19, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4106.

[3] In this analysis, our figures for Social Security and Medicare spending reflect the costs of benefits, and not the costs of administering the programs.

[4] Spending rises as a percent of GDP between 2015 and 2016, largely for one-time reasons, and then trends down until 2018.  After 2018, it begins to rise gradually, reaching 19.2 percent of GDP in 2025.

[5] According to the Congressional Budget Office, over the next decade the aging of the population accounts for about 40 percent of growth in Medicare relative to GDP, with the remainder reflecting higher per capita health care costs.  See “The Economic and Budget Outlook:  2015 to 2025,” CBO, January 2015, p. 67, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/49892-Outlook2015.pdf.  Only the aging of the population affects the projections of spending for Social Security.  See “The 2014 Long-Term Budget Outlook,” CBO, July 2014, p. 22, at http://www.cbo.gov/sites/default/files/45471-Long-TermBudgetOutlook_7-29.pdf.  The estimate in the text combines these CBO Medicare and Social Security findings.

[6] See Paul Van de Water, “Health Costs Continue to Slow, Improving Budget Outlook,” Off the Charts blog, March 9, 2015, http://www.offthechartsblog.org/health-costs-continue-to-slow-improving-budget-outlook/.  Specifically, CBO now projects that spending on the major health entitlements over the period 2011 to 2020 will be $682 billion lower than CBO projected in 2010 before health reform was enacted.

[7] For instance, spending on SNAP rose considerably during the Great Recession, leveled off in 2012 and 2013 as a percent of GDP, and started to decline in 2014.  CBO projects SNAP will decline further as a percent of GDP over the next decade, returning to its mid-1990s level by 2020.  For a full analysis of these trends, see Dottie Rosenbaum and Brynne Keith-Jennings, “SNAP Costs Declining, Expected to Fall Much Further,” Center on Budget and Policy Priorities, February 9, 2015, http://www.cbpp.org/cms/index.cfm?fa=view&id=4054.

[8] See Richard Kogan, Kathy Ruffing, Paul N. Van de Water, and William Chen, “CBPP's Updated Projections Show Long-Term Budget Outlook Is Significantly Improved but Remains Challenging,” Center on Budget and Policy Priorities, May 5, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4139

[9] As discussed in CBPP’s May 2014 report, for instance (see previous footnote), the long-term outlook will improve considerably when policymakers take steps to improve the long-run solvency of the Social Security and Medicare Hospital Insurance (HI) trust funds.  Their trustees project that the HI fund will be exhausted in 2026 and the combined Social Security trust funds will be exhausted in 2033; after those dates, partial benefits could be paid, but not full benefits.  Bringing the Social Security and HI trust funds into full solvency — through tax increases, benefit cuts, or some combination of the two — would forestall almost all the rise in the debt-to-GDP ratio projected outside the ten-year budget window. 

[10] See footnote 5.

  1. Jobs
  2. RSS
  3. Contact Us
 

Sign Up for E-Mail Alerts

RSS Feeds

Multimedia

Browse Reports