2011   Financial Report of the United States Government

Management's Discussion & Analysis

The Long-Term Fiscal Outlook:  “Where We Are Headed”

While the Government’s immediate priority is to continue to foster economic recovery, there are longer term fiscal challenges that must ultimately be addressed.  Persistent growth of health care costs and the aging of the population due to the retirement of the “baby boom” generation and increasing longevity will make it increasingly difficult to fund critical social programs, including Medicare, Medicaid, and Social Security.

Fiscal Sustainability

An important purpose of the Financial Report is to help citizens and policymakers assess whether current fiscal policy is sustainable and, if it is not, to highlight the urgency and magnitude of policy reforms necessary to make it sustainable.  A sustainable policy is one where the ratio of debt held by the public (publicly-held debt) to Gross Domestic Product (the debt–to-GDP ratio) is stable in the long run.  Sustainability concerns only whether long-run revenues and expenditures are in balance; it does not concern fairness or efficiency implications of the reforms necessary to achieve sustainability.

To determine if current fiscal policies are sustainable, the projections discussed here assume current policies will be sustained indefinitely and draw out the implications for the growth of debt held by the public as a share of GDP.20  The projections are therefore neither forecasts nor predictions.  If policy changes are enacted, then actual financial outcomes will of course be different than those projected.

The projections in this Report indicate that the trajectory of current policy is not sustainable.  The debt-to-GDP ratio is projected to reach 287 percent in 2086 and to rise continuously thereafter.  Closing the gap between spending and receipts over the next 75 years (the “75-year fiscal gap”) is estimated to require some combination of spending reductions and revenue increases that amount to 1.8 percent of GDP over the period.  While the precise size of the fiscal gap is highly uncertain, there is little question that current fiscal policies cannot be sustained indefinitely.

It is important to address the Nation’s fiscal imbalances soon.  Delaying action increases the magnitude of spending reductions and/or revenue increases necessary to stabilize the debt-to-GDP ratio.  For example, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap is 60 percent larger if reforms are concentrated into the last 55 years of the 75-year period than if they are spread over the entire 75 years.

The estimates of the cost of policy delay in this Report assume policy does not affect GDP (or interest rates).  Reducing deficits too abruptly would be counterproductive if it slows the economy’s recovery.  In the near term, it is crucial to strike the proper balance between deficit reduction and economic growth.

The Primary Deficit, Interest, and Debt

The primary deficit - the difference between non-interest spending and receipts – is the only determinant of the ratio of publicly-held debt to GDP that the Government controls directly.  (The other determinants are interest rates and growth in GDP).  Chart I shows receipts, non-interest spending, and the difference – the primary deficit – expressed as a share of GDP.  The primary deficit-to-GDP ratio grew rapidly in 2009 and stayed large in 2010 and 2011 due to the financial crisis and the recession and the policies pursued to combat both. The primary deficit-to-GDP ratio is projected to fall rapidly between 2012 and 2019 (turning to surplus in 2015) as spending reductions called for in the Budget Control Act (BCA) of 2011 take effect and the economy recovers.  Between 2019 and 2035, however, increased spending for Social Security and health programs due to continued aging of the population is expected to cause the primary balance to steadily deteriorate.  A primary deficit is expected to reappear in 2025 that reaches 1.3 percent of GDP in 2035.  After 2035, the projected primary deficit-to-GDP ratio slowly declines as the impact of the baby boom generation retiring dissipates.  Between 2035 and 2086, the projected primary deficit averages 0.9 percent of GDP.

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The revenue share of GDP fell substantially in 2009 and 2010 and increased only modestly in 2011 because of the recession and tax reductions enacted as part of the ARRA and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and is projected to return to near its long-run average as the economy recovers and these temporary tax cuts expire.  After the economy is fully recovered, receipts are projected to grow slightly more rapidly than GDP as increases in real incomes cause more taxpayers and a larger share of income to fall into the higher individual income tax brackets.  These projections assume that Congress and the President will continue to enact legislation to prevent the share of income subject to the Alternative Minimum Tax from rising.

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Non-interest spending share of GDP is projected to fall from its current level of 22.6 percent to about 20 percent in 2013, to stay at or below that level until 2026,  and then to rise gradually and plateau at about 22 percent beginning in about 2040.  The reduction in the non-interest spending share of GDP over the next two years is mostly due to caps on discretionary spending and further automatic spending reductions enacted in the BCA, and the subsequent increase is principally due to growth in Medicare, Medicaid, and Social Security spending.  (See Chart J.)  The retirement of the baby boom generation over the next 25 years is projected to increase the Social Security, Medicare, and Medicaid spending shares of GDP by about 1.4 percentage points, 1.3 percentage points, and 1.0 percentage points, respectively.  After 2035, the Social Security spending share of GDP is relatively steady, while the Medicare and Medicaid spending share of GDP continues to increase, albeit at a slower rate, due to projected increases in health care costs.   The Affordable Care Act (ACA)21 significantly reduces projected Medicare and Medicaid cost growth from the levels projected in the 2009 Financial Report.  However, there is uncertainty about whether the projected cost savings, productivity improvements, and reductions in physician payment rates will be sustained in a manner consistent with the projected cost growth over time.

The primary deficit projections in Chart I, along with those for interest rates and GDP, determine the projections for the ratio of publicly-held debt to GDP that are shown in Chart K.  That ratio was 68 percent at the end of fiscal year 2011 and under current policy is projected to exceed 76 percent in 2022, 125 percent in 2042, and 287 percent in 2086.  This continuous rise of the debt-to-GDP ratio illustrates that current policy is unsustainable.

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The change in debt held by the public from one year to the next is essentially equal to the unified budget deficit, the difference between total spending (which consists of non-interest spending plus interest spending) and total receipts.  Chart L shows that the rapid rise in total spending and the unified deficit is almost entirely due to projected interest payments on the debt.  Interest spending was 1.5 percent of GDP in 2011 and under current policies is projected to reach 5 percent in 2031 and nearly 16 percent in 2086.

This year’s projections are somewhat more favorable than were the projections in the 2010 Financial Report.  Last year’s report projected a debt-to-GDP ratio to reach 352 percent in 2085, which compares with 283 percent projected in this year’s report.  The more favorable outlook is mainly due to spending reductions called for in the BCA that are partly offset by somewhat less favorable economic and technical assumptions.

The Fiscal Gap and the Cost of Delaying Policy Reform

Table 7: Costs of Delaying Fiscal Consolidation
Period of Delay Change in Average Primary Surplus
No Delay: Reform in 2012 1.8 percent of GDP between 2012 and 2086
Ten Years: Reform in 2022 2.2 percent of GDP between 2022 and 2086
Thirty Years: Reform in 2032 2.8 percent of GDP between 2032 and 2086

It is estimated that preventing the debt-to-GDP ratio from rising over the next 75 years would require running primary surpluses over the period that average 1.1 percent of GDP.  This compares with an average primary deficit of 0.7 percent of GDP under current policy.  The difference, the “75-year fiscal gap,” is 1.8 percent of GDP, which is about 9 percent of the 75-year present value of projected receipts and non-interest spending.

Table 7 illustrates the cost of delaying policy to close the fiscal gap by comparing three policies closing the fiscal gap that begin on different dates.  The first policy begins immediately; it increases the primary surplus by 1.8 percent of GDP in every year between 2012 and 2086.  This is accomplished by invoking some combination of spending reductions and revenue increases that amounts to an average of 1.8 percent of GDP in every year.  The second policy shown in Table 7 begins in 2022.  Because debt grows unabated between 2011 and 2021 and the same fiscal consolidation must be compressed into 10 fewer years, the primary surplus must increase by 2.2 percent of GDP in every year between 2022 and 2086 in order to close the 75-year fiscal gap.  Similarly, beginning the policy change in 2032 requires that the primary surplus increase by 2.8 percent of GDP in every year between 2032 and 2086 in order to close the 75-year fiscal gap.  The difference between the primary surplus boost starting in 2022 and 2032 (2.2 and 2.8 percent of GDP, respectively) and the primary surplus boost starting in 2012 (1.8 percent of GDP) is a measure of the additional burden policy delay would impose on future generations.  Future generations are harmed by policy delay because the higher the primary surplus is during their lifetimes the greater the difference is between the taxes they pay and the programmatic spending they benefit from.


The United States took potentially significant steps towards fiscal sustainability by enacting the ACA in 2010 and the BCA in 2011.  The ACA holds the prospect of lowering the long-term growth trend for Medicare and Medicaid spending, and the BCA significantly curtails discretionary spending.  Together, these two laws substantially reduce the estimated long-term fiscal gap.  But even with the new law, the debt-to-GDP ratio is projected to increase continually over the next 75 years and beyond if current policies are kept in place, which means current policies are not sustainable.  Subject to the important caveat that policy changes are not so abrupt that they slow the economy’s recovery, the sooner policies are put in place to avert these trends, the smaller are the revenue increases and/or spending decreases necessary to return the Nation to a sustainable fiscal path.

While this Report’s projections of expenditures and receipts under current policies are highly uncertain, there is little question that current policies cannot be sustained indefinitely.  These and other issues concerning fiscal sustainability are discussed in further detail in the Supplemental Information section of this Report.

Statement of Social Insurance – Challenges Continue

Table 8: Social Insurance Future Expenditures in Excess of Future Revenues
Dollars in Billions 2011 2010 Increase / (Decrease)
$ %
Open Group (Net):        
  Social Security (OASDI) $(9,157) $(7,947) $1,210 15%
  Medicare (Parts A, B, & D) $(24,572) $(22,813) $1,759 8%
  Other $(101) $(97) $4 4%
  Total Social Insurance Expenditures, Net
  (Open Group)
$(33,830) $(30,857) $2,974 10%
  Total Social Insurance Expenditures, Net
  (Closed Group)
$(46,273) $(43,057) $3,217 7%
Social Insurance Net Expenditures as a % of Gross Domestic Product (GDP)*
Open Group 2011 2010  
  Social Security (OASDI) -1.0% -0.9%    
  Medicare (Parts A, B, & D) -2.8% -2.7%    
  Other 0.0% 0.0%    
Total (Open Group) -3.8% -3.7%    
Total (Closed Group) -5.3% -5.1%    
Source: Statement of Social Insurance (SOSI). Amounts equal estimated present value of projected revenues and expenditures for scheduled benefits over the next 75 years of certain 'Social Insurance' programs (e.g., Social Security, Medicare). 'Open Group' totals reflect all curent and projected program participants during the 75-year projection period. 'Closed Group' totals reflect only current participants.

* GDP values from the 2011 & 2010 Social Security and Medicare Trustees Reports represent the present value of GDP over the 75 years. As the GDP used for Social Security and Medicare differ slightly in the Trust Fund Reports, the two values are averaged to estimate the 'Other' and Total Net Social Insurance Expenditures as % of GDP.

Note - some totals may not equal sum of components due to rounding.

The preceding analysis of the Government’s long-term fiscal projections considered Government receipts and spending as a whole.  A more focused perspective can be achieved through analysis of the Government’s “social insurance” programs: Social Security, Medicare, Railroad Retirement, and Black Lung.  For these programs, the Statement of Social Insurance (SOSI) reports: (1) the actuarial present value of all future program revenue (mainly taxes and premiums) - excluding interest - to be received from or on behalf of current and future participants; (2) the estimated future scheduled expenditures to be paid to or on behalf of current and future participants; and (3) the difference between (1) and (2).  Amounts reported in the SOSI and in the supplemental information in this Report are based on each program’s official actuarial calculations.  By accounting convention, the transfers of general revenues are eliminated in the consolidation of the financial statements at the government-wide level and as such, the general revenues that are used to finance Medicare Parts B and D are not included in these calculations even though the expenditures on these programs are included.  SOSI programs and amounts are included in the broader fiscal sustainability analysis in the previous section, although on a slightly different basis (as described in the Supplemental Section of this Report).

The SOSI provides perspective on the Government’s long-term estimated exposures and costs for social insurance programs.  While these expenditures are not considered Government liabilities, they do have the potential to become expenses and liabilities in the future, based on the continuation of the social insurance programs' provisions contained in current law. The social insurance trust funds account for all related program income and expenses. Medicare and Social Security taxes, premiums, and other income are credited to the funds; fund disbursements may only be made for benefit payments and program administrative costs.  Any excess revenues are invested in special non-marketable U.S. Government securities at a market rate of interest. The trust funds represent the accumulated value, including interest, of all prior program surpluses, and provide automatic funding authority to pay for future benefits.

Table 9: Changes in Social Insurance Projections
Dollars in Billions
Net Present Value (NPV) - Open Group (FY 2010) (30,857)
Change In:  
    Valuation Period ($ 1,518)
    Demographic data and assumptions ($ 859)
    Economic data and assumptions $ (145)
    Law or policy $ (14)
    Methodology and programmatic data $ 56
    Economic and other healthcare assumptions $ (463)
    Change in projection base $ (31)
Net Change in Open Group measure $ (2,974)
NPV - Open Group (FY 2011) (33,830)

Table 8 on the previous page, which summarizes amounts reported in the SOSI, shows that net social insurance expenditures are projected to be approximately $34 trillion as of January 1, 2011 for the “Open Group,” an increase of approximately $3 trillion over net expenditures of $31 trillion projected in the 2010 Report.22  Table 9 summarizes the principal reasons for the changes in projected social insurance amounts during FY 2011.  Most of the change from the past year is attributable to the change in valuation period.  For a 75-year projection period, the change in valuation period measures the effect of replacing the first projection year from the prior year with a new 75th year in the current reporting year. Another significant variable was changes in demographic (e.g., birth, mortality, and immigration) and economic (e.g., taxable earnings, unemployment, and interest rates) assumptions.  For the Old-Age, Survivors, and Disability Insurance (OASDI) programs administered by the Social Security Administration, the largest component for change was the change in demographic assumptions.  For the Medicare programs (Parts A, B, and D) the most significant components of change were the changes in valuation period and in economic assumptions.

As was reported in the FY 2010 Financial Report of the U.S. Government, projected Medicare costs declined significantly reflecting provisions of the ACA. As reported last year and again this year in Note 26, there continues to be uncertainty about whether the projected reductions in health care cost growth will be fully achieved.  Note 26 includes an alternative projection to illustrate the uncertainty of projected Medicare costs.   As indicated earlier, GAO disclaimed opinions on the 2011 and 2010 SOSI, because of these significant uncertainties.

The retirement of the “baby boom generation” and increases in health care costs are still anticipated to have a prolonged impact on the long-run financial condition of Medicare and Social Security, which is analyzed annually in the Medicare and Social Security Trustees’ Reports.  According to the Medicare Trustees’ Report, under current law, including the assumption of the full implementation of ACA program changes, spending on Medicare is projected to rise from 3.7 percent of GDP in 2011 to 5.6 percent in 2035 and 6.2 percent in 2085.  The Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2024, five years earlier than estimated in last year’s report, after which point tax income is estimated to be sufficient to pay 90 percent of benefits, declining to 76 percent in 2050 and then increasing to 88 percent by 2085.

As for Social Security (the Old-Age, Survivors, and Disability Insurance Trust Funds or OASDI), combined spending is projected to increase gradually from its current level of 4.8 percent of GDP to 6.2 percent in 2035, declining to about 6.0 percent by 2050 and remaining at about that level through 2085.  The Social Security Trustees’ Report indicates that annual OASDI income, including interest on trust fund assets, will exceed annual cost and trust fund assets will increase every year until 2023, at which time it will be necessary to begin drawing down on trust fund assets to cover part of expenditures until assets are exhausted in 2036, one year earlier than estimated in the prior year’s Trustees’ Report.  After trust fund exhaustion, continuing tax income would be sufficient to pay 77 percent of scheduled benefits in 2036 and 74 percent in 2085.23

As noted earlier, it is apparent that these programs are on a fiscally unsustainable path (as was previously discussed and as noted in the Trustees’ Reports).  Additional information from the Trustees Reports may be found in the Supplemental Information section of this Report.


20 Current policy in the projections is based on current law, but includes extension of certain policies that expire under current law but are routinely extended or otherwise expected to continue, such as extension of relief from the Alternative Minimum Tax (AMT).(Back to Content)

21 P.L. 111-148 as amended by P.L. 111-152.(Back to Content)

22 'Closed' Group and 'Open' Group differ by the population included in each calculation.  From the SOSI, the 'Closed' Group includes: (1) participants who have attained eligibility and (2) participants who have not attained eligibility.  The 'Open' Group adds future participants to the 'Closed' Group.  See ‘Social Insurance’ in the Supplemental Information section in this report for more information.(Back to Content)

23 A Summary of the 2011 Annual Social Security and Medicare Trust Fund Reports, p. 10.(Back to Content)

Last Updated:  February 16, 2012