Fiscal Solutions Tour
San Jose, CA
Friday, September 24, 2010
David M. Walker
President and CEO
The Peter G. Peterson Foundation
and
Former Comptroller General of the United States
Total Federal Spending
(As Percentage of U.S. Economy)
Total Spending
2%
1800
2010
2040
24%
38%
Size of the Total
Economy: $8.8 Billion
Projected Size of the Total
Economy: $14.4 Trillion
Projected Size of the Total
Economy: $28.7 Trillion
(Constant 2009 Dollars)
(Constant 2009 Dollars)
(Constant 2009 Dollars)
SOURCES: Data from the Congressional Budget Office; Long-Term Budget Outlook: June 2010, alternative fiscal scenario. Data from Historical Statistics of the
United States, Millennial Edition On Line, Cambridge 2006. Compiled by PGPF.
NOTE: The alternative fiscal scenario includes several changes to current law that are widely anticipated to occur (i.e. adjustments to Medicare payment rates).
1
Composition of Federal Spending
(% of Total Spending)
Medicare and Medicaid
Net Interest
20%
Social Security
Defense
4%
43%
15%
12%
42%
Other Mandatory
Other Discretionary
19%
21%
61%
20%
34%
19%
7%
Total Spending 1970:
$900 Billion (Constant 2009 Dollars)
6%
15%
Total Spending 2010 (estimated):
$3.5 Trillion (Constant 2009 Dollars)
SOURCES: Data from the Office of Management and Budget, A New Era of Responsibility: The 2011 Budget, Historical Tables; and the
Congressional Budget Office, Preliminary Analysis of the President’s Budget: March 2010. Compiled by PGPF.
2
Since 1800, U.S. Debt Held by the Public has exceeded 60 percent of GDP
(the maximum debt ceiling used by the European Monetary Union) only
during World War II
Percentage of GDP
120
WWII
100
80
TARP &
Recession
60
Great
Depression
40
Civil War
WWI
20
0
1800
1830
1860
1890
1920
1950
1980
2010
SOURCES: Data from the Congressional Budget Office, Long-Term Budget Outlook: June 2009; the Government Accountability Office, The
Federal Government’s Long-Term Fiscal Outlook: January 2010 Update, alternative simulation using Congressional Budget Office
assumptions. Compiled by PGPF.
NOTE: Debt held by the public refers to all federal debt held by individuals, corporations, state or local governments, and foreign entities.
3
The following table illustrates the U.S. government’s explicit
liabilities, commitments, and unfunded social insurance promises
In Trillions of Dollars
 Explicit liabilities
2009
$6.9
$14.1

Publicly held debt
3.4
7.6

Military & civilian pensions & retiree health
2.8
5.3

Other Major Fiscal Exposures
0.7
1.3
0.5
2.0
13.0
45.8
 Commitments & contingencies

E.g., Pension Benefit Guaranty Corporation, undelivered orders
 Social insurance promises
Total
2000

Future Social Security benefits
3.8
7.7

Future Medicare benefits
9.2
38.2

Future Medicare Part A benefits
2.7
13.8

Future Medicare Part B benefits
6.5
17.2

Future Medicare Part D benefits
--
7.2
$20.4
$61.9
SOURCE: Data from the Department of Treasury, 2009 Financial Report of the United States Government. Compiled by PGPF.
NOTE: Numbers may not add due to rounding. Estimates for Medicare and Social Security benefits are from the Social Security and Medicare Trustees
reports, which are as of January 1, 2009 and show social insurance promises for the next 75 years. Future liabilities are discounted to present value
based on a real interest rate of 2.9 percent and CPI growth of 2.8 percent. The totals do not include liabilities on the balance sheets of Fannie Mae,
Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included. Does not include civil service and military retirement funds,
unemployment insurance, and debt held by other government accounts outside of Social Security and Medicare.
4
Without reforms, by 2022, future revenues will only cover Social
Security, Medicare, Medicaid, and interest on the debt. By 2046,
revenues won’t even cover interest costs.
50
45
Percentage of GDP
40
35
9%
Revenue
30
25
20
15
10
5
2%
Other Mandatory
9%
Medicare &
Medicaid
9%
9%
2%
4%
7%
5%
5%
5%
0
2010
1%
Discretionary
Spending
6%
Social Security
Net Interest
18%
6%
2022
2046
SOURCE: Data from the Government Accountability Office The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update,
alternative simulation using Congressional Budget Office assumptions. Compiled by PGPF.
NOTE: Baseline interest rate is assumed to be 5.0 percent.
5
Future U.S. Debt Held by the Public is projected to soar if current
policies remain unchanged
900
Percentage of GDP
800
Actual
854%
Projected
700
650%
600
483%
500
400
300
200
344%
60 %
of GDP
233%
146%
87%
100
0
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
SOURCES: Data from the Congressional Budget Office, Long-Term Budget Outlook: June 2009; Long-Term Budget Outlook: June 2010, alternative fiscal scenario.
Compiled by PGPF.
NOTE: Debt held by the public refers to all federal debt held by individuals, corporations, state or local governments, and foreign entities. The alternative fiscal
scenario includes several changes to current law that are widely anticipated to occur (i.e. adjustments to Medicare payment rates).
6
Current Treasury interest rates are low by historical standards
16
3- Month
14
10-Year
12
Average
Interest Rate:
6.5% over past
30 years
30-Year
10
8
6
4
2
0
1980
1985
1990
1995
2000
2005
Aug-10
SOURCE: Data from the Federal Reserve Statistical Release, Table H.15, Selected Interest Rates, Historical Data, accessed August 16, 2010.
Complied by PGPF.
NOTE: The U.S. Treasury Department did not offer 30-year bonds between 2003 and 2006.
7
Social Security Cash Surpluses (+) and
Deficits (-) as a Percentage of GDP
Since its inception, the Social Security program has experienced more
surpluses than deficits
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
1936
1944
1952
1960
1968
1976
1984
1992
2000
2008
SOURCE: Data from the Office of Management and Budget, FY 2011 Budget, Historical Tables, February 2010 and Social Security
Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability
Insurance Trust Funds, August 2010. Compiled by PGPF.
NOTE: Excludes interest earnings.
8
Social Security Surpluses /Deficits In Percent of GDP
In the future, persistent cash deficits are projected for Social Security
0.0
2000 Social Security Surplus
0.9 % of GDP ($114 Billion*)
0.0
In 2015, OASDI will begin operating
with a permanent cash flow deficit.
0.0
0.0
2080
Deficit
1.4 %
($722
billion*)
0.0
0.0
0.0
Actual
0.0
1970
1980
1990
2000
Projected
2010
2020
2030
2040
2050
2060
2070
2080
SOURCE: Data from the Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds. Compiled by PGPF.
NOTE: CBO projections show negative cash deficits in 2010 and 2011. Excludes interest earnings.
* In 2009 Dollars.
9
Key Dates and Data regarding the financial condition of
the Social Security and Medicare Trust Funds
Medicare 3
Social Security
Current Beneficiaries
53 million
46.3 million
Year the Trust Fund begins
permanently operating with a
negative cash flow
20151
2008 (HI Trust Fund)
Trust fund exhaustion year
2037
2029
Discounted Present Value (PV)
of unfunded promises2
$7.9 trillion
$22.8 trillion
Actuarial Balance as a % of GDP
0.71%
1.8%
SOURCE: Data from the Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds; and Centers for Medicare & Medicaid Services, 2010 Medicare Trustees Report, August 2010.
Compiled by PGPF.
1. Estimated to operate with a negative cash flow in 2010 and 2011, and briefly return to positive cash flow in 2012 through 2014.
2. Excludes current “assets” in the Social Security and Medicare trust funds.
3. The projected financial position of combined Medicare Trust Funds under the 2010 Trustees’ Annual Report showed substantial improvements
from the new health care reform law, which are highly debatable and resulted in an adverse opinion from the Medicare’s Office of the Chief
Actuary.
10
State and local governments face short and long term fiscal
challenges as their negative operating balances continue to
grow
3
Percentage of GDP
2.5
2
1.5
1
0.5
0
-0.5
-1
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
SOURCE: Data from the General Accountability Office State and Local Government’s Fiscal Outlook March 2010 Update, alternative simulation.
Compiled by PGPF.
11
Federal and State Employee Retirement Liabilities
in Fiscal Year 2008
State Pension Liabilities
Unfunded
16%
Funded
84%
State Health Liabilities
Funded
5%
Unfunded
95%
SOURCE: Pew Center on the States, The Trillion Dollar Gap February 2010; U.S. Treasury Department Financial Report of the U.S. Government 2008.
NOTE: Data is as of the end of fiscal year 2008. The unfunded liability is the difference between the present discounted value of future liabilities and current
assets. For the purposes of converting future liabilities into present value, most states use a discount rate of approximately 8%, based on assumed returns on
investing their pension funds.
** The data have a few limitations. States have different methods in computing their obligations, and different assumptions of retirement ages and life spans. They
also conduct actuarial valuations at different times of the year, which can cause their funding levels to appear better or worse off depending on economic
conditions .
12
Share of State Revenue in Percent
Actuarially Required Contribution to Retiree Health and Pension
Funds (as a Share of State Revenue) in Fiscal Year 2008 **
30
25
20
Retiree Pension Benefits
16.4 %
14.5 %
Retiree Health Benefits
16 %
15
10
5
0.6 %
12.1 %
11.8 %
9.5 %
6.6 %
0
New Jersey Alabama
Hawaii
Iowa
10.5 %
0.6 %
1.4 %
5.7 %
4.3 %
4.4 %
Minnesota Wisconsin California
NOTE: The actuarially required contribution is the annual contribution to the retiree pension and health funds required for future assets to be in
line with future liabilities within 30 years. It has two components: a normal contribution to keep up with new benefit obligations accrued, and a
catch-up payment to make up for the current gap between pension assets and liabilities. The data for both revenues and unfunded obligations are
for fiscal year 2008. Most states end their fiscal year in June of 2008, and therefore these numbers do not include losses in the stock market that
led to losses in most pension funds.
** The data have a few limitations. States have different methods in computing their obligations, and different assumptions of retirement ages and
life spans. They also conduct actuarial valuations at different times of the year, which can cause their funding levels to appear better or worse off
depending on economic conditions .
13
Moody’s Rating Structure
Obligation Rating
Top Rating/
Minimal Risk
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
Caa1
B2
B3
Caa2
Caa3
CA
C
Bottom Rating/
Typically in Default
SOURCE: Data from Moody’s Investors Service, Government-Related Issuers: Methodology Update, July 22, 2010. Compiled by PGPF.
14
State and City Moody’s Ratings
State
City
Georgia –Aaa
Alexandria, VA - Aaa
Texas - Aaa
Jacksonville, FL – Aa1
Alabama – Aa1
San Jose – Aa1
Florida –Aa1/Aa2
Atlanta – Aa2/A1
Connecticut - Aa2
Washington – Aa2/Aa1
New York – Aa2
Chicago – Aa2
New Jersey –Aa2/Aa3
Houston – Aa2
California – A1
New York – Aa2
Illinois - A1
Bridgeport, CT - A1
SOURCE: Data from Moody’s website, Look-up a Ratings. Compiled by PGPF.
15
A Way Forward
Federal:
•
Implement statutory budget controls that address discretionary and
mandatory spending as well as tax preferences in order to stabilize our
debt/ GDP at a reasonable level
•
Achieve Social Security reform that makes the program solvent,
sustainable, secure and more savings oriented
•
Reduce the rate of increase in health care costs and more effectively
target related taxpayer subsidies and tax preferences
•
Ensure that all future health care reforms adequately consider coverage,
cost quality and personal responsibility
•
Pursue comprehensive tax reform that makes the system more
streamlined, understandable, equitable and competitive while also
generating adequate revenues
16
A Way Forward- Continued
•
Review, re-prioritize and re-engineer the base of the federal government,
including national security strategies, to focus on the future, eliminate waste,
generate real results and ensure sustainability
•
Ensure that we have process that will enable us to achieve the above
objectives within a reasonable period of time
State and Local:
•
Reform pension and health systems to make them reasonable, affordable and
sustainable
•
Review, re-prioritize and re-engineer the base of government.
•
Pursue comprehensive tax reform in coordination with the federal
government.
•
Consider an exchange of primary roles, functions and revenue sources as part
of a new federalism or devolution effort (e.g., health care, education,
infrastructure)
17
Illustrative Social Security Policy Options
•
Make little or no changes to those who are near retirement or are already
retired, and make a number of adjustments that would affect younger
workers:
•
Phase in increases in the normal and early retirement ages, and
index to life expectancy (with a modified disability access provision
•
Modify the current benefit formula to reduce the replacement rate
for middle and upper income workers, and possibly increase it for
lower income workers
•
Consider a modest adjustment to the COLA formula (e.g., a 0.5
reduction) so that everyone contributes something to the overall
reform
18
Illustrative Social Security Policy Options (cont.)
•
Make little or no changes to those who are near retirement or are
already retired, and make a number of adjustments that would affect
younger workers:
•
Increase taxable wage base, if necessary
•
Address equity and other considerations
•
Consider mandatory supplemental individual savings accounts on a
payroll deduction basis (e.g., a minimum 2 percent payroll
contribution and a program designed much like the Federal thrift
Savings Plan with a real trust fund and real investments)
19