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Letter to the Honorable Jeb Hensarling 1 (March 2007)

handle is hein.congrec/cbo8636 and id is 1 raw text is: O CONGRESSIONAL BUDGET OFFICE Peter R. Orszag, Director U.S. Congress Washington, DC 20515 March 8, 2007 Honorable Jeb Hensarling U.S. House of Representatives Washington, DC 20515 Dear Congressman Hensarling: This letter responds to your inquiry regarding the state of America's entitlement programs and the effect of the future growth of those programs on the economy. In fiscal year 2007, spending by the federal government will amount to $2.7 trillion, or one-fifth of the nation's economic output, the Congressional Budget Office (CBO) projects. The three major federal entitlement programs-Medicare, Medicaid, and Social Security-will account for about 45 percent of those outlays, or about 9 percent of gross domestic product (GDP). If policymakers leave current laws unchanged, federal outlays will claim a sharply increasing share of the nation's output over coming decades, driven primarily by growth in the health-related entitlement programs.I Many observers have noted that the aging of the population increases spending in all three major entitlement programs. Today, for every person age 65 or older, there are five people 20 to 64 years old. That figure is projected to fall to below three by 2030. Even after the retirement of the baby-boom generation, the population will continue to age, demographers project, as life expectancy continues to increase and fertility rates remain low by historical standards. The aging of the population is not the primary factor affecting the growth of entitlement programs, however. Instead, the most important cause is the projected increase in health care costs. Federal health spending, mostly in the Medicare and Medicaid programs, has been consuming a growing share of the nation's economic output for several decades. Costs per beneficiary, even after adjusting for changes in the population, have, on average, increased about 2.5 percentage points faster than has average per capita GDP . The rate of growth in health costs is unusually difficult to project, but even if growth falls well below historical levels, spending on Medicare and Medicaid will continue to grow faster than the economy and faster than other maj or government programs. 1. See Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2017 (January 2007) and The Long-Term Budget Outlook (December 2005). 2. See The Growth of Health Care Costs, Box 1-3 in CBO's The Long-Term Budget Outlook.

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