A presentation on the fiscal challenges facing the US from the Committee for a Responsible Federal Budget. For more info go to http://crfb.org/.

1. Averting a Fiscal Crisis
The Committee for a Responsible Federal Budget

2. Deficit Projections
(Percent of GDP)
12% 1991-2011 Average Deficit: 2.8%
10%
2012-2021 Average Current Policy Deficit: 4.3%
8%
6%
4%
2%
0%
-2%
-4%
Current Policy Current Law
Note: Estimates based on CRFB Realistic Baseline.
1

3. Gap Between Revenue and Spending
(Percent of GDP)
26%
Actual Projected
24%
Avg. Historical Spending (1970-2010): 20.8%
22%
20%
18%
16%
Avg. Historical Revenues (1970-2010): 18.0%
14%
12%
10%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Current Law Spending Current Law Revenues
CRFB Realistic Spending CRFB Realistic Revenues
Note: Estimates based on CRFB Realistic Baseline.
2

4. Components of Revenue and Spending
Revenues and Financing Outlays
Interest
6% Medicare
13%
Medicaid &
Non-Defense Other Health
Borrowing Individual Income
18% 8%
36% Tax
27%
2011
Social Security
20%
Corporate Tax Defense
5% 20%
Other Social Insurance
6% Other Mandatory
Taxes
23% 15%
Total Revenues = $2.314 Trillion Total Outlays = $3.597 Trillion
Total Financing = $3.598 Trillion
3

5. Debt Projections
(Percent of GDP)
450%
Realistic Projections
400%
2010: 62%
350% 2025: 90%
300%
2040: 145%
2080: 399%
250%
200%
150%
CRFB Realistic Debt
100%
50%
Current Law
0%
Note: Estimates based on CRFB Realistic Baseline.
4

6. Consequences of Debt
 “Crowding Out” of public sector
investment leading to slower economic
growth
 Higher Interest Payments displacing
other government priorities
 Intergenerational Inequity as future
generations pay for current
government spending
 Unsustainable Promises of high
spending and low taxes
 Uncertain Environment for businesses
to invest and households to plan
 Eventual Fiscal Crisis if changes are not
made
5

7. The Risk of Fiscal Crisis
“Rising Debt increases the likelihood of a fiscal crisis during which investors would
lose confidence in the government's ability to manage its budget and the
government would lose its ability to borrow at affordable rates.
-Doug Elmendorf, Director of the Congressional Budget Office
“Our national debt is our biggest national security threat.”
-Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff
“One way or another, fiscal adjustments to stabilize the federal budget must occur
… [if we don’t act in advance] the needed fiscal adjustments will be a rapid and
painful response to a looming or actual fiscal crisis.”
-Ben Bernanke, Chairman of the Federal Reserve
6

8. Debt Drivers
Short-Term Long-Term
 Economic Crisis  Rapid Health Care Cost Growth
(lost revenue and increased spending from (causing Medicare and Medicaid costs
automatic stabilizers) to rise)
 Economic Response  Population Aging
(stimulus spending/tax breaks and (causing Social Security and Medicare
financial sector rescue policies) costs to rise, and revenue to fall)
 Tax Cuts  Growing Interest Costs
(in 2001, 2003, and 2010) (from continued debt accumulation)
 War Spending  Insufficient Revenue
(in Iraq and Afghanistan) (to meet the costs of funding government)
7

9. Growing Entitlement Spending
Federal Spending and Revenues (Percent of GDP)
60%
Actual Projected
50%
Average Historical
Revenues
40% Interest
Revenues
30%
20% Health Care
Social Security
10%
Other Spending
0%
Note: Estimates based on CRFB Realistic Baseline.
8

10. Why Is Entitlement Spending Growing?
Drivers of Entitlement Spending Growth (Percent of GDP)
26%
24%
22%
20%
56%
18%
Excess Health Care
16%
Cost Growth
14%
36%
12% 44%
64% Aging
10%
8%
Source: CBO Long-term Budget Outlook, 2011.
9

11. Why Is Federal Health Spending Increasing?
 The Population Is Aging due to increased life
expectancy and retirement of the baby boom
generation, adding more beneficiaries to
Medicare and Medicaid
 Per Beneficiary Costs Are Growing faster than
the economy in both the public and private
sector. Causes of this excess cost growth include:
 Americans Are Unhealthy when compared to
populations in similar economies
 Americans Are Wealthy and Willing to Pay More
 Fragmentation and Complexity between
insurers, providers, and consumers make normal
market competition difficult
 Incentives Are Backwards by hiding true costs of
care through insurance and by hiding costs of
insurance enrollment through employer
sponsorship, incentivizing overspending
10

12. Health Care Spending by Country
Percent of GDP (2008)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Public Private
Source: 2008 Data from the Organization for Economic Cooperation and Development.
11

13. Number of Workers for Every Social Security Retiree Is Falling
1950 1960 2011 2035
16:1 5:1 3:1 2:1
Source: 2011 Social Security Trustees Report.
12

14. Living Longer, Retiring Earlier
90
85
80 Average Age of Retirement
75
Normal Retirement Age
70
65
60
55 Early Retirement Age
50 Life Expectancy
45
40
Source: Social Security Administration and U.S. Census Bureau.
13

15. Looming Social Security Insolvency
Social Security Costs and Revenues (Percent of Taxable Payroll)
20% Scheduled Benefits
Payable Benefits
18%
16%
14%
12%
10%
Revenues
8%
6%
Source: 2011 Social Security Trustees Report.
14

16. Interest as a Share of the Budget
(Percent of GDP)
2010 2030 2050
Primary Interest Interest
Primary Primary
Interest 19% 27%
Spending 6% Spending Spending
94% 81% 73%
Total Spending = 24% of GDP Total Spending = 27% of GDP Total Spending = 34% of GDP
Note: Estimates based on CRFB Realistic Projections.
15

17. Insufficient Revenue
 Unpaid for Tax Cuts in 2001, 2003, and
2010 lowered revenue collection without
making corresponding spending cuts or
tax increases to offset the budgetary
effect
 Spending in the Tax Code Costs $1 Trillion
annually in lost revenues through so called
"tax expenditures," which make the tax
code more complicated, less efficient, and
force higher rates
16

18. Excessive Spending Through the Tax Code (Tax Expenditures)
Tax Expenditures as a Percent of Primary Large Tax Expenditures
Spending if Included in the Budget and Their 2011 Costs (billions)
Employer Health Insurance Exclusion $174
Mortgage Interest Deduction $89
Defense
Discretionary 401(k)s and IRAs $77
Tax
16%
Expenditures
24% Earned Income Tax Credit $62
Non-Defense Special Rates for Capital Gains and $61
Discretionary
15%
Dividends
Health Spending
18% State & Local Tax Deduction $57
Social Secutity Charitable Deduction $49
16%
Other Mandatory Child Tax Credit $45
12%
Source: Joint Committee on Taxation.
Source: Office of Management and Budget.

19. How to Reduce the Deficit
 Domestic Discretionary Cuts
 Defense Spending Cuts
 Health Care Cost Containment
 Social Security Reform
 Other Spending Cuts
 Tax Reform and Tax Expenditure
Cuts
 Budget Process Reform
18

20. The Bowles-Simpson Fiscal Commission Plan
Discretionary Spending
 Equal cuts to defense and non-defense in
2013 totaling $1.2 trillion.
Social Security
 Progressive benefit changes, retirement
age increase, tax increase for high earners
totaling $300 billion.
Health Care Spending
 Cuts to providers, lawyers, drug
companies, & beneficiaries totaling $400
billion.
Other Mandatory Programs
 Reforms to farm, civilian/military
retirement, & other programs saving $290
billion.
Tax Reform and Revenue
 Comprehensive reform to lower tax
19

21. The Bowles-Simpson Fiscal Commission Plan
(Deficits as Percent of GDP)
10% 18%
9% 16%
8% 14%
7%
12%
6%
10%
5%
8%
4%
6%
3%
2% 4%
1% 2%
0% 0%
Plausible Baseline Commission Plan
20

22. It’s Time for a Fiscal Reform Plan
Reasons to Enact a Plan Size of Adjustment to Close 25-year Fiscal Gap,
Sooner Rather than Later Depending on Start Year (Percent of GDP)
 Allows for gradual phase in
201
 Improves generational fairness 2
4.9%
 Gives taxpayers 201
5.9%
5
businesses, and entitlement
beneficiaries time to plan 202
8.1%
0
 Creates “announcement
effect” to improve growth 202
5
12.5%
 Reduces size of necessary
0% 2% 4% 6% 8% 10% 12% 14%
adjustment
Source: Congressional Budget Office
21

23. The Time For Action Is Now
“If not addressed, burgeoning deficits
will eventually lead to a fiscal crisis, at
which point the bond markets will
force decisions upon us. If we do not
act soon to reassure the markets, the
risk of a crisis will increase, and the
options available to avert or remedy
the crisis will both narrow and
become more stringent.”
-Erskine Bowles and Sen. Alan Simpson, Former
co-chairs of the National Commission on Fiscal
Responsibility and Reform
22