2012   Financial Report of the United States Government

United States Government Required Supplementary Information (Unaudited) For the Years Ended September 30, 2012, and 2011

Statement on Long Term Fiscal Projections

Table 1 on the following page presents 75-year projections of the Federal Government’s receipts and non-interest spending1 for both the fiscal year 2012 and fiscal year 2011 Reports. Receipt categories include individual income taxes, Social Security and Medicare payroll taxes, and all other receipts. On the spending side, the projections are broken down into: (1) discretionary spending that is funded through annual appropriations, such as spending for national security, and (2) mandatory (entitlement) spending that is generally financed with permanent or multi-year appropriations, such as spending for Social Security and Medicare. This year’s projections for Social Security and Medicare are based on the same economic and demographic assumptions as are used for the 2012 Social Security and Medicare Trustees’ Reports and the Statement of Social Insurance, while comparative information presented from last year’s report is based on the 2011 Social Security and Medicare Trustees’ Reports. Projections for the other categories are consistent with the economic and demographic assumptions used from the trustees’ reports. The projections assume the continuance of current policy without change, which is different than current law in cases where lawmakers have in the past periodically changed the law in a predictable way. Current p`olicy differences from current law are explained in the section entitled "Departures of Current Policy from Current Law".

The projections in Table 1 are expressed in present value dollars, and as a percentage of the present value of GDP2 as of September 20, 2012 and 2011. The present value of a future amount, for example, $1 billion in October 2087, is the amount of money that if invested on September 30, 2012 in an account earning the government borrowing rate would have a value of $1 billion in October 2087.3 The present value of a receipt or expenditure category over 75 years is the sum of the annual present value amounts. When expressing a receipt or expenditure category over 75 years as a percent of GDP, the present value dollar amount is divided by the present value of GDP over 75 years. Measuring receipts and expenditures as a percentage of GDP is a useful indicator of the economy’s capacity to sustain federal government programs. As is true for all past Financial Reports, the assumptions for GDP, interest rates, and other economic factors underlying this year’s projections are the same assumptions that underlie the most recent Social Security and Medicare Trustees’ Report projections. The use of discount factors consistent with the Social Security trustees’ rate allows for consistent present value budget calculations over 75 years between this report and the trustees’ reports. Present value calculations under higher and lower interest rate scenarios are presented in the “Alternative Scenarios” section.

Table 1: Long Term Projections of Federal Receipts and Spending
75-Year Present Values 1
  Dollars in Trillions %GDP 2
Receipts: 2012 2011 Change 2012 2011 Change
  Social Security Payroll Taxes 42.1 39.1 3.0 4.3 4.4 -0.1
  Medicare Payroll Taxes 14.1 13.0 1.1 1.5 1.5 0.0
  Individual Income Taxes 97.5 93.5 4.0 10.0 10.5 -0.5
  Other Receipts 37.9 34.7 3.2 3.9 3.9 0.0
Total Receipts 191.6 180.2 11.4 19.7 20.3 -0.5
Non-interest Spending:            
  Social Security 57.5 51.8 5.7 5.9 5.8 0.1
  Medicare Part A 3 22.7 17.6 5.0 2.2 2.0 0.2
  Medicare Parts B&D 4 22.2 21.1 1.1 2.4 2.4 0.0
  Medicaid 26.1 24.0 2.2 2.7 2.7 0.0
  Security Discretionary 30.4 28.7 1.7 3.1 3.2 -0.1
  Non-security Discretionary 16.1 15.4 0.7 1.7 1.7 -0.1
  Other Mandatory 33.2 28.1 5.1 3.4 3.2 0.3
Total Non-interest Spending 208.2 186.7 21.5 21.4 21.0 0.5
Non-interesting Spending less Receipts 16.5 6.4 10.1 1.7 0.7 1.0

175-year present value projections for 2012 are as of 9/30/2012 for the period FY 2013-2087; projections for 2011 are as of 9/30/2011 for the period FY 2012-2086.
2The 75-year present value of nominal GDP, which drives the calculations above, is $971.3 trillion starting in FY 2013, and was $889.8 trillion starting in FY 2012.
3Represents portions of Medicare supported by payroll taxes.
4Represents portions of Medicare supported by general revenues. Consistent with the President’s Budget, Parts B & D are presented net of premiums, and Part D also net of state contributions.

NOTE: Totals may not equal the sum of components due to rounding.

The projections shown in Table 1 are made over a 75-year time frame, consistent with the time frame featured in the Social Security and Medicare trustees’ reports. However, these projections are for fiscal years starting on October 1, whereas the trustees’ reports feature calendar-year projections. This difference allows the projections to start from the actual budget results from fiscal years 2012 and 2011.

The overall 75-year present value net excess of non-interest spending over receipts expressed in Table 1 is $16.5 trillion (1.7 percent of the 75-year present value of GDP) for the 2012 projections. This imbalance can be expressed in terms of funding sources. There is a surplus of receipts over spending of $1.3 trillion or 0.1 percent of GDP among programs funded by the government’s general revenues, but an imbalance of $17.9 trillion4 or 1.8 percent of GDP among Social Security (OASDI) and Medicare Part A, which are funded by payroll taxes and which are not funded in any material respects by the government’s general revenues under current law.5 6 By comparison, the 2011 projections showed that programs funded by the government’s general revenues had an excess of receipts over spending of $6.0 trillion or 0.7 percent of GDP while the payroll tax funded programs had an imbalance of spending over receipts of $12.4 trillion or 1.4 percent of GDP.

Table 2 breaks down the sources of the change in the projection of the 75-year present value imbalance of spending over receipts from last year. The difference is primarily due to the changes in model technical assumptions, such as (i) the inclusion of cost for health insurance exchange subsidies, (ii) the assumption in this year’s Report that all of the 2001/2003 tax cuts will be extended indefinitely, rather than being allowed to expire for high income taxpayers, and (iii) an improved methodology for projecting Medicare costs.

Table 2:
Components of Change (PV Dollars in Trillions)
Non-Interest Spending Less Receipts: FY 2010 6.4
Components of Change:
    Change in Model Technical Assumptions 9.0
    Change due to Updated Acturial Reports 2.6
    Change due to Updated Budget Data -1.9
    Change in Economic and Demographic Assumptions 0.9
    Change in Reporting Period -0.5
Total 10.1
    Non-Interest Spending Less Receipts: FY 2012 16.5

Another large source of change since 2011 was due to the 2012 actuarial reports for Social Security, Medicare, and the 2011 actuarial report for Medicaid that raised the 75-year present value imbalance by $2.6 trillion.7 Updated actual budget results for fiscal year 2012 lowered the projected 75-year present value imbalance by $1.9 trillion. Also reflected in Table 2 are revised economic and demographic assumptions that raised the 75-year present value imbalance by $0.9 trillion and the change in the reporting period from 2012-2086 to 2013-2087 that lowered the 75-year fiscal imbalance by $0.5 trillion.

The projections presented in this report were finalized prior to the enactment of the American Taxpayer Relief Act of 2012 (ATRA) in January 2013. Among the important provisions included in that law are: (i) an extension of the 2001/2003 tax cuts for individuals with incomes up to $400,000 and families with incomes up to $450,000, but not for higher income individuals and families, (ii) permanent indexation of the Alternative Minimum Tax (AMT) for inflation, (iii) a 2-month delay in the implementation of automatic spending cuts called for in the Budget Control Act of 2011, and (iv) extension of a number of smaller tax measures. The only significant departure of the ATRA from the assumptions underlying the projections in this report is the expiration of the 2001/2003 tax cuts on high income earners. Updating the projections in this report to account for ATRA would therefore modestly reduce projected long term fiscal imbalances.


1 For the purposes of this analysis, spending is defined in terms of outlays. In the context of Federal budgeting, spending can either refer to budget authority – the authority to commit the government to spend an amount – or to outlays, which reflect actual payments made.(Back to Content)

2GDP is the total market value of all final goods and services produced domestically during a given period of time. The components of GDP are: private sector consumption and investment, government consumption and investment, and net exports (exports less imports). Equivalently, GDP is a measure of the gross income generated from domestic production over the same time period. (Back to Content)

3Present values recognize that a dollar paid or collected in the future is worth less than a dollar today because a dollar today could be invested and earn interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are summed. (Back to Content)

4The 75-year present value earmarked imbalance of $17.9 trillion is comprised of several line items from Table 1 – Social Security outlays net of Social Security Payroll Taxes ($15.3 trillion) and Medicare Part A outlays net of Medicare Payroll Taxes ($8.6 trillion) – as well as subcomponents of these programs not presented separately in the table. These subcomponents include Social Security and Medicare Part A administrative costs that are classified as non-security discretionary spending ($0.6 trillion) and Social Security and Medicare Part A revenue other than payroll taxes: taxation of benefits (-$3.0 trillion), Federal employer share (-$1.2 trillion), and other income (-$2.5 trillion). (Back to Content)

5General fund transfers received by the OASDI trust fund, primarily in 2011 and 2012, to account for lost payroll taxes resulting from enactment of the temporary 2 percent reduction of the employee payroll taxes are not included in the 75-year present value of OASDI payroll taxes. Social Security and Medicare Part A expenditures can exceed payroll tax revenues in any given year to the extent that there are sufficient balances in the respective trust funds, balances that derive from past excesses of payroll tax revenues over expenditures and interest earned on those balances. When spending does exceed payroll tax revenues, as has occurred in every year since 2008 for Medicare Part A and 2010 for Social Security, the excess spending is financed from general revenues or borrowing. Under current law, benefits for Social Security and Medicare Part A can be paid only to the extent that there are sufficient balances in the respective trust funds. In order for the projections here to reflect the full size of these program’s commitments to future benefits, the projections assume that all scheduled benefits will be financed with borrowing to the extent necessary after the trust funds are exhausted.(Back to Content)

6The fiscal imbalances reported in Table 1 are limited to future outlays and receipts. They do not include the initial level of publicly-held debt, which was $11.3 trillion, and therefore they do not by themselves answer the question of how large fiscal reforms must be to make fiscal policy sustainable, or how those reforms divide between reforms to Social Security and Medicare Part A and to other programs. Other things equal, past cash flows (primarily surpluses) for Social Security and Medicare Part A reduced federal debt at the end of 2012 by $3.0 trillion (the trust fund balances at that time); the contribution of other programs to federal debt at the end of 2012 was therefore $14.3 trillion. Because the $17.9 trillion imbalance between outlays and receipts over the next 75 years for Social Security and Medicare Part A does not take account of the Social Security and Medicare Part A trust fund balances, it overstates the magnitude of reforms necessary to make Social Security and Medicare Part A solvent over 75 years by $3.0 trillion. The $3.0 trillion combined Social Security and Medicare Part A trust fund balance represents a claim on future general revenues.(Back to Content)

7The majority of this increase is due to changes in the 2012 Medicare Trustees’ Report, which projected larger imbalances in 2012 than in 2011 for a variety of reasons including assuming greater utilization of skilled nursing homes and home health agencies over the near term and faster growth in health costs per beneficiary over the long run. (Back to Content)

Last Updated:  February 27, 2013