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Long run trends are vital in predicting the outcome given a certain set of data.

There is great uncertainty in store for the future if we continue to sustain such high levels of debt and spending. In this report we shall take a look at the long term deficit and debt problem by examining specific outlay and revenue trends that may cause the deficit and debt to reach unsustainable levels in the future. We will achieve this by looking at specific subcategories under both areas that may have the most impact on the deficit and debt. We will investigate and determine what the possible consequences may be if nothing is done to reverse these trends. We will also look at some specific policy recommendations for reversing these trends, and the points of disagreement between policy advocates, and we will synthesize the information to try and determine a balance for dealing with the deficit and debt. Spending on Medicare and Medicaid is growing at a rapid rate due to the rising costs of healthcare and the increase in the aging population due to the incoming retirees from the Baby-boomer generation, who are eligible at age 65, and to the increase in life expectancy. The total spending for both private and public health care has increased from 4.7 percent of GDP in 1960 to 14.9 percent of GDP in 2005, thats an average of about . 22 percent over 45 years. There have been many recent advances that can be attributed to the rise in costs, all of which drive up the prices. Medicare and Medicaid spending has increased from 1 percent of GDP in 1970, to 4 percent of GDP in 2007 (CBO 2007), which averages to about .08 percent of GDP a year over the 37 year period (CBO 2007). Medicare spending in 2006 has totaled $374.9 billion, with 32 percent of that going to Inpatient Hospital Services, and 23 percent to Physicians and Suppliers Services (CBO 2007), both eating up the largest share of the pie. Medicaid with a total of 60.9 million enrollees had a yearly federal payment of $160.9 billion in 2006 (CBO 2007). Under the Congressional Budget Office (CBO) current projections, spending on Medicare and Medicaid will grow from at 4 percent of GDP to a fraction of 9 percent of GDP by 2035, then up to 19 percent of GDP in 2082; an average increase of roughly .2 percent over 75 years. In terms of current GDP, it equates to an increase of about $30 million a year for 75 years at a grand total of an estimated $2146 billion. Social Security (SS) is the Governments single largest program, where spending is projected to increase from a change in the nations demographic structure (CBO 2007). The Baby-boomer generation will soon reach retirement age, and in the next 30 years the number of people aged 65 and older is expected to double, while the number of people aged 20 to 64 will grow at only 11 percent (CBO 2007). The result is, in that time frame the elder population will be roughly 30 percent larger than the younger segment, for a grand total of 86 million people over the current 50 million people, who will receive SS benefits, enlarging the average benefit by 29 percent in real terms (CBO 2007). Spending on the program will rise from 4.3 percent of GDP in 2007, to 6.1 percent of GDP in 2030, and due to increased life spans 6.4 percent of GDP in 2082 (CBO 2007). That equates to an average growth rate of about 0.03 percent per year for 75 years, in present terms that is about $4.3 billion a year. Government revenues vary in size and composition based on decisions made by policymakers, so there can be many different scenarios that play out. Historically

revenues as a percentage of GDP have fluctuated between 16.1 and 20.9 percent, for an average value of 18.1 percent. Individual income taxes make up the lions share, which are around 7 to 10 percent of GDP, while Social Insurance taxes have gone from 2 to 6.5 percent of GDP, corporate taxes take up around 1 to 2 percent of GDP, and other taxes and duties make up between 1 and 3 percent (CBO 2007). There are four factors affecting future revenue. First is a progressive tax rate, which raises the tax as income gets higher (CBO 2007). Second, the individual income tax includes an alternative minimum tax (AMT), which subjects more taxpayers to as higher tax rate (CBO 2007). Third, the Economic Growth Tax Relief Reconciliation Act of 2003 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), will expire in 2010 reverting to prior law (CBO 2007). Fourth, the Government will received deferred taxes, such as income on retirement funds which were previously tax free, but are subject to tax upon withdrawal (CBO 2007). These factors can go either way in affecting future revenues. Due to the current downturn the loss in jobs will affect income from personal income taxes by decreasing revenue. Both EGTRRA and JGTRRA may be repealed and future projected income may also decrease, but the CBO projects a decrease in taxable income from both personal and corporate sources due to the rising costs of non-taxable fringe benefits, which in turn reduce taxable income from both parties The Center on Budget and Policy Priorities (CBPP) suggests that without amendment to current policies our deficit and debt will grow to uncontrollable levels that may leave long lasting effects on the economy. The current projections show that if nothing is done then the federal debt, now placed at 46 percent of GDP in 2009 will rise to a staggering 279 percent of GDP in 2050, 179 percent higher than the nations total income (CBPP 2008). This is forecasted to happen because of the projected rise in program expenditures from 19.2 percent of GDP in 2008 to 24.6 percent of GDP in 2050, while revenues will decline to 17.2 percent, 1.2 percent lower than the average for the last 30 years (CBPP 2008). The single largest main factor in the rise of expenditures is contributed to the longrun rising cost in the U.S. health care system and the increase in the portion of the population over 65, with cots per beneficiary growing 2 percent faster than per-capita GDP (CBPP 2008). The budget deficit is forecasted to rise from the current 3 percent of GDP, to a more considerable 21 percent of GDP in 2050, which is seven times larger than in 2009. The topic of privatizing social security has been gaining some favor in some circles with its promise of no compromises or sacrifices. Privatization transforms government pension liabilities into explicit government debt, this then only increases pension funding by as much as it decreases funding the rest of Government (Mariger 1997). In essence national saving is not increased. Some privatization plans claim efficient resource allocation, and being able to close the funding gap, but these alternatives raise taxes and lower expected pensions than with the current system; overall effect is the same (Mariger 1997). Privatization does not make the burden of future taxes less, because it does not make it less dependent on aggregate wage growth. Privatization will lead to different risk factors and varied expected returns than the current system (Mariger 1997).