America’s National Debt and Long-Term Outlook

An Overview of the Challenge

and the Implications for Young People

March 2009

2Overview of the Federal Budget Challenge

$184,000 Burden

That’s every baby’s burden, including current debt and

unfunded promises for Medicare and Social Security.

Unless we do something soon, it will only get worse.

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Debt vs. DeficitsDeficits: The annual imbalances between

revenues and spending

Debt: Accumulation of deficits over time• Public debt: U.S. government securities held by

Americans and foreigners• Debt held by the public net of financial assets: debt to

finance a loan to a private entity in which government acquires a financial asset

• Intragovernmental debt: Held by government trust funds (e.g., Social Security) and other accounts

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Benefits (e.g., Social Security or Medicare) promised to be paid in the future, with no dedicated source of revenue to fund them

Total U.S. government debt, liabilities, and unfunded promises: $56 trillion (Dec. 2008)

Equal to Americans’ total household net worth

Unfunded Liabilities

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Projecting the Future?

Projections of future deficits and debt are based on assumptions, such as:

– Economic growth or recessions– Changes in spending and tax policies– Population trends– Workforce participation rates

History shows that assumptions and projections are often wrong

Overview of the Federal Budget Challenge

U.S. Budget Deficits/ Surpluses, 1929-2010

Years, 1961-2008

6

Deficits rose from 0 in 1969 to $340 billion in 1992.

U.S. budget has $86 billion surplus in 2000.

Deficits rose to $568 billion in 2004 and $1.8 trillion in 2009.

Deficits as percent of GDP; source: The Washington Post

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National Debt, 1940-2009 (in non-inflation adjusted dollars)

National Debt (March 2009): $11 trillion

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8

Unless Changes are Made, the National Debt Will Grow Even Faster

$0

$50

$100

$150

$200

$250

$300

$350

$400

Tri

llio

ns

of

Do

llars

1962 ‘72 ‘82 ‘92 2002 ‘12 ‘22 ‘32 ‘42 ‘50Source: Heritage Foundation; CBO data

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Public Debt Projected to Soar

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Current Policy Trends Lead to Large Sustained Deficits

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Current fiscal policy is on an unsustainable path

Social Security

MedicaidMedicare

All Other

Interest

Source: Government Accountability Office, March 2008

Average tax revenue

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• SHORT TERM--Current economic crisis is causing rapidly rising deficits and debt

• LONG TERM--The real problem is the enormous mismatch between rapidly rising projected federal spending and insufficient revenues during the next 20-50 years

Current Deficits are Huge, But LONG-TERM Deficits are the Real Problem

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• The burden of growing long-term debt will fall on America’s younger generations as

• drastically higher taxes• cut benefits• lower living standards• fewer choices for public spending• ALL OF THE ABOVE

• This is about federal finances, U.S. economic well-being, and intergenerational equity

LONG-TERM Debt is an Intergenerational Issue

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The Short Term: The 2008-2009 Economic Crisis and Soaring Federal Deficits

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The Short Term: The Economic Crisis and Trillions in Federal Spending

16Overview of the Federal Budget Challenge

Where the Money Goes: President Obama’s FY 2010 Budget

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Entitlement Spending is Consuming an Ever Larger Share of the Federal Budget

Sources: Office of Management and Budget and the Department of the Treasury.

Note: Numbers may not add to 100 percent due to rounding.

1966 1986 2006

Defense Social Security

Net interest

Medicare & Medicaid

All other spending

2009

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Entitlements: Social Security and Medicare Part A Cumulative Cash Deficits

Surpluses and Deficits in Constant 2008 Dollars, 2008 through 2085

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

In B

illion

s o

f C

on

sta

nt

20

08

D

ollars

2008 2010 2020 2030 2040 2050 2060 2070 2080

Calendar YearSource: Social Security Trustees’ Report—March 2008 (Intermediate Projections)

$496 Billion: Cumulative Social Security Cash Surplus

-$27 Trillion: Cumulative Social Security Cash Deficits

-$55 Trillion: Cumulative Medicare Part A Cash Deficits

-82.6 Trillion: Cumulative Social Security and Medicare Part A Cash Deficits

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Rising Health Care Costs = The No. 1 Factor in Rising Federal Spending and Debt

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Medicare Obligations Will Explode as Health Care Costs Rise

Calendar Year

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State Governments Face Growing Deficits Costs, Squeezing Other Spending

Sources: National Association of State Budget Officers, State Expenditure Report 2006; and Center on Budget and Policy Priorities, Feb. 2009

• AT LEAST 46 STATES PROJECT DEFICITS IN 2009• OVER 40 STATES PLAN 2009 CUTS• $350 BILLION IN PROJECTED STATE DEFICITS, Mar. 2009-Sept. 2011

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Declining Personal Savings and Federal Debt: The RelationshipWe No Longer Owe National Debt to Ourselves

We Have Less to Supplement Social Security and Medicare • Americans saving at

lowest rate since Great Depression.

• 40% of Americans say they save nothing for retirement.

• One in four Americans say have no savings.

• Debt payments consume 15% of the average U.S. family’s income, and 40% of low-income families’

• 1 in 7 families is dealing with a debt collector

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Percent of Debt Held by the Public Owned by Foreigners

Source: United States Treasury Department

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Current Fiscal Policy Is Unsustainable

• The “Status Quo” is Not an Option– Large and growing structural deficits largely due to rising

health care costs and demographic trends

– Balancing the budget in 2040 could require cutting spending by 60 percent or raising federal taxes to double today's level.

• Faster Economic Growth Cannot Solve the Problem– Closing the current long-term fiscal gap would require 10%

average economic growth every year for the next 75 years

– From 2001 to 2007, U.S. economy grew by average of 2.2%

• Tough choices will be required

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Source: Peter G. Peterson Foundation, Feb. 2009

Americans Worried About Increasing Deficits

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The Sooner We Get Started, the Better

• Compound interest is currently working against us

• Less change would be needed, and there would be more time to make adjustments

• Demographic changes will make reform even more difficult over time

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This is an Issue for all Americans• Confronting and finding solutions is in the interests of all Americans• Restoring fiscal responsibility will strengthen America’s future• Reducing debt and rethinking national priorities can enhance bonds between young and old• This is not about one generation “winning” or “losing,” but about all Americans working for a common future

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Framing the Discussion– Long-term vs. short-term debt

– Which Federal programs and policies should be changed and how?

• Entitlement programs• Other spending• Tax policy

– How can budget processes and controls be reformed?

– What should be the roles of government, business and individuals in U.S. economy?

• Investing in the future (education, infrastructure, science, environment, etc.)

• Providing income security and good living standards • Providing health care for all Americans

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