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United States Government Accountability Office: 
GAO: 

U.S. Financial Condition and Fiscal Future Briefing: 

The Honorable David M. Walker: 
Comptroller General of the United States: 

2008 Economic Forecast Forum: 
Research Triangle Park, NC: 
January 2, 2008: 

GAO-08-395CG: 

The Case for Change: 

The federal government is on a “burning platform,” and the status quo 
way of doing business is unacceptable for a variety of reasons, 
including: 

* Past fiscal trends and significant long-range challenges; 

* Selected trends and challenges having no boundaries; 

* Additional resource demands due to Iraq, Afghanistan, incremental 
homeland security needs, and recent natural disasters in the United 
States; 

* Numerous government performance/accountability and high risk 
challenges; 

* Outdated federal organizational structures, policies, and practices; 

* Rising public expectations for demonstrable results and enhanced 
responsiveness. 

Composition of Federal Spending: 

[See PDF for image] 

There are three pie charts, containing the following compositions of 
spending by category: 

Year: 1966;
Defense: 43%;
Social Security: 15%; 
Medicare and Medicaid: 1%; 
Net Interest: 7%; 
All Other: 34%. 

Year: 1986;
Defense: 28%;
Social Security: 20%; 
Medicare and Medicaid: 10%; 
Net Interest: 14%; 
All Other: 29%. 

Year: 2006;
Defense: 20%;
Social Security: 21%; 
Medicare and Medicaid: 19%; 
Net Interest: 9%; 
All Other: 32%. 

Source: Office of Management and Budget and the Department of the 
Treasury. 

Note: Numbers may not add to 100 percent due to rounding. 

[End of figure] 

Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] 

There are three pie charts, containing the following compositions of 
spending by category: 

Year: 1966;
Discretionary: 67%; 
Mandatory: 26%; 
Net Interest: 7%. 

Year: 1986;
Discretionary: 44%; 
Mandatory: 42%; 
Net Interest: 14%. 

Year: 2006;
Discretionary: 38%; 
Mandatory: 53%; 
Net Interest: 9%. 

Source: Office of Management and Budget. 

[End of figure] 

Table: Fiscal Year 2006 and 2007 Deficits and Net Operating Costs: 

On-Budget Deficit, Fiscal Year 2006 ($ Billion): (434); 
On-Budget Deficit, Fiscal Year 2007 ($ Billion): (344); 

Unified Deficit[a], Fiscal Year 2006 ($ Billion): (248); 
Unified Deficit[a], Fiscal Year 2007 ($ Billion): (163); 

Net Operating Cost[b], Fiscal Year 2006 ($ Billion): (450); 
Net Operating Cost[b], Fiscal Year 2007 ($ Billion): (276); 

Sources: Office of Management and Budget and Department of the 
Treasury. 

[a] Includes $185 billion in Social Security surpluses for fiscal year 
2006 and $186 billion for fiscal year 2007; $1 billion in Postal 
Service surpluses for fiscal year 2006 and $5 billion for fiscal year 
2007. 

[End of table] 

Table: Major Fiscal Exposures ($ trillions): 

Explicit liabilities (Publicly held debt, Military & civilian pensions 
& retiree health, Other): 
2000: $6.9; 
2007: $10.8; 
Percent increase: 57. 

Commitments & contingencies (e.g., PBGC, undelivered orders): 
2000: 0.5; 
2007: 1.1; 
Percent increase: 97. 

Implicit exposures, 2000: 13.0; 
Implicit exposures, 2007: 40.8; 
Implicit exposures, Percent increase: 213; 
Future Social Security benefits, 2000: 3.8; 
Future Social Security benefits, 2007: 6.8; 
Future Medicare Part A benefits, 2000: 2.7; 
Future Medicare Part A benefits, 2007: 12.3; 
Future Medicare Part B benefits, 2000: 6.5; 
Future Medicare Part B benefits, 2007: 13.4; 
Future Medicare Part D benefits, 2000: [Empty]; 
Future Medicare Part D benefits, 2007: 8.4; 
Total, 2000: $20.4; 
Total, 2007: $52.7; 
Percent increase: 158. 

Source: 2000 and 2007 Financial Report of the United States 
Government. 

Note: Totals and percent increases may not add due to rounding. 
Estimates for Social Security and Medicare are at present value as of 
January 1 of each year and all other data are as of September 30. 

[End of table] 

Table: How Big is Our Growing Fiscal Burden? 

This fiscal burden can be translated and compared as follows: 

Total major fiscal exposures: $52.7 trillion; 
Total household net worth[1]: $58.6 trillion; 
Burden/Net worth ratio: 90 percent. 

Burden[2]: 
Per person: $175,000; 
Per full-time worker: $410,000; 
Per household: $455,000. 

Income: 
Median household income[3]: $48,201; 
Disposable personal income per capita[4]: $33,253. 

Source: GAO analysis. 

Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 
2007:Q3 (December 6, 2007); (2) Burdens are calculated using estimated 
total U.S. population as of 10/1/2007, from the U.S. Census Bureau; 
full-time workers reported by the Bureau of Economic Analysis, in NIPA 
table 6.5D (Aug. 1, 2007); and households reported by the U.S. Census 
Bureau, in Income, Poverty, and Health Insurance Coverage in the United 
States: 2006(Aug. 2007); (3) U.S. Census Bureau, Income, Poverty, and 
Health Insurance Coverage in the United States: 2006(Aug. 2007); and 
(4) Bureau of Economic Analysis, Personal Income and Outlays, table 2, 
(Nov. 29, 2007). 

[End of table] 

Potential Fiscal Outcomes Under Baseline Extended (January 2001); 
Revenues and Composition of Spending as a Share of GDP: 

[See PDF for image] 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2005, 2015[a], 2030[a], and 2040[a]. 

The following data is depicted:

Fiscal year 2005: 
Net interest: 0.8%; 
Social Security: 4.3%; 
Medicare & Medicaid: 3.7%; 
All other spending: 7.994%; 
Revenue: 20.3%.

Fiscal year 2015: 
Net interest: 0%; 
Social Security: 5.1%; 
Medicare & Medicaid: 4.9%; 
All other spending: 5.574%; 
Revenue: 20.4%.

Fiscal year 2030: 
Net interest: 0%; 
Social Security: 6.6%; 
Medicare & Medicaid: 9.4%; 
All other spending: 3.991%; 
Revenue: 20.4%.

Fiscal year 2040: 
Net interest: 0%; 
Social Security: 6.7%; 
Medicare & Medicaid: 9%; 
All other spending: 4.361%; 
Revenue: 20.4%.

Source: GAO’s January 2001 analysis. 

[a] All other spending is net of offsetting interest receipts. 

[End of graph]

Potential Fiscal Outcomes Under Alternative Simulation; Revenues and 
Composition of Spending as a Share of GDP: 

[See PDF for image] 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2006, 2015, 2030, and 2040. 

The following data is depicted: 

Fiscal year 2006: 
Net interest: 1.7%; 
Social Security: 4.2%; 
Medicare & Medicaid: 3.9%; 
All other spending: 10.6%; 
Revenue: 18.4%. 

Fiscal year 2015: 
Net interest: 2.3%; 
Social Security: 4.8%; 
Medicare & Medicaid: 5.7%; 
All other spending: 9.6%; 
Revenue: 18%. 

Fiscal year 2030: 
Net interest: 5.8%; 
Social Security: 6.6%; 
Medicare & Medicaid: 8.8%; 
All other spending: 9.6%; 
Revenue: 18.6%. 

Fiscal year 2040: 
Net interest: 11.6%; 
Social Security: 7.2%; 
Medicare & Medicaid: 10.8%; 
All other spending: 9.6%; 
Revenue: 18.6%. 

Source: GAO’s August 2007 analysis. 

Notes: AMT exemption amount is retained at the 2006 level through 2017 
and expiring tax provisions are extended. After 2017, revenue as a 
share of GDP returns to its historical level of 18.3 percent of GDP 
plus expected revenues from deferred taxes, i.e. taxes on withdrawals 
from retirement accounts. Medicare spending is based on the Trustees 
April 2007 projections adjusted for the Centers for Medicare and 
Medicaid Services alternative assumption that physician payments are 
not reduced as specified under current law. 

[End of graph] 

Growth in Spending for Social Security, Medicare, and Medicaid Expected 
to Outpace Economic Growth: 

[See PDF for image] 

This image is a bar graph depicting Growth in Spending for Social 
Security, Medicare, and Medicaid Expected to Outpace Economic Growth. 
The vertical axis of the graph represents growth in constant dollars, 
2007-2032 in percentage from 0 to 150. The horizontal axis represents 
spending growth in the four areas. The following data is depicted: 

Growth in Constant dollars, 2007-2032:
GDP: 71%; 
Social Security Spending: 127%; 
Medicaid Spending: 224%; 
Medicare Spending: 235%.

Source: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration; Office of the Actuary,Centers 
for Medicare and Medicaid Services; and the Congressional Budget 
Office. 

Notes: Social Security and Medicare projections based on the 
intermediate assumptions of the 2007 Trustees’ Reports. Medicaid 
projections based on CBO’s August 2007 short-term Medicaid estimates 
and CBO’s December 2005 long-term Medicaid projections under mid-range 
assumptions. 

[End of graph]

Social Security, Medicare, and Medicaid Spending as a Percent of GDP: 

[See PDF for image] 

This is a line graph with three stacked lines (Social Security, 
Medicaid, and Medicare). The vertical axis represents Percent of GDP 
and the horizontal axis represents fiscal years 2000 through 2080. 
The following data is depicted: 

2000: 
Social Security: 4.229; 
Medicaid: 1.23; 
Medicare: 2.277. 

2001: 
Social Security: 4.334; 
Medicaid: 1.322; 
Medicare: 2.433. 

2002: 
Social Security: 4.409; 
Medicaid: 1.44; 
Medicare: 2.523. 

2003: 
Social Security: 4.371; 
Medicaid: 1.501; 
Medicare: 2.56. 

2004: 
Social Security: 4.283; 
Medicaid: 1.516; 
Medicare: 2.629. 
		
2005:	
Social Security: 4.254; 
Medicaid: 1.457; 
Medicare: 2.7. 

2006:	
Social Security: 4.28; 
Medicaid: 1.383; 
Medicare: 3.072. 

2007:	
Social Security: 4.29; 
Medicaid: 1.401; 
Medicare: 3.185. 

2008: 
Social Security: 4.24; 
Medicaid: 1.449; 
Medicare: 3.255. 

2009:	
Social Security: 4.26; 
Medicaid: 1.490; 
Medicare: 3.333. 

2010:	
Social Security: 4.32; 
Medicaid: 1.531; 
Medicare: 3.414. 

2011:	
Social Security: 4.36; 
Medicaid: 1.578; 
Medicare: 3.49. 

2012:	
Social Security: 4.44; 
Medicaid: 1.630; 
Medicare: 3.588. 

2013:	
Social Security: 4.54; 
Medicaid: 1.683; 
Medicare: 3.694. 

2014:	
Social Security: 4.65; 
Medicaid: 1.739; 
Medicare: 3.806. 

2015:	
Social Security: 4.76; 
Medicaid: 1.799; 
Medicare: 3.918. 

2016:	
Social Security: 4.86; 
Medicaid: 1.864; 
Medicare: 4.044. 

2017:	
Social Security: 4.976; 
Medicaid: 1.930 
Medicare: 4.183. 

2018:	
Social Security: 5.08; 
Medicaid: 2.2; 
Medicare: 4.331. 

2019:	
Social Security: 5.2; 
Medicaid: 2.2; 
Medicare: 4.483. 

2020:	
Social Security: 5.31; 
Medicaid: 2.3; 
Medicare: 4.642. 

2021:	
Social Security: 5.41; 
Medicaid: 2.3; 
Medicare: 4.809. 

2022:	
Social Security: 5.22; 
Medicaid: 2.4; 
Medicare: 4.988. 

2023: 	
Social Security: 5.61; 
Medicaid: 2.4; 
Medicare: 5.173. 
		
2024:	
Social Security: 5.71; 
Medicaid: 2.5; 
Medicare: 5.359. 

2025:	
Social Security: 5.8; 
Medicaid: 2.6; 
Medicare: 5.547. 

2026:	
Social Security: 5.89; 
Medicaid: 2.6; 
Medicare: 5.739. 

2027:	
Social Security: 5.97; 
Medicaid: 2.7; 
Medicare: 5.935. 

2028:	
Social Security: 6.05; 
Medicaid: 2.7; 
Medicare: 6.131. 

2029:	
Social Security: 6.12; 
Medicaid: 2.8; 
Medicare: 6.322. 

2030:	
Social Security: 6.17; 
Medicaid: 2.8; 
Medicare: 6.505. 

2031:	
Social Security: 6.22; 
Medicaid: 2.9; 
Medicare: 6.682. 

2032:	
Social Security: 6.27; 
Medicaid: 2.9; 
Medicare: 6.851. 

2033:	
Social Security: 6.3; 
Medicaid: 3; 
Medicare: 7.017. 

2034:	
Social Security: 6.32; 
Medicaid: 3.1; 
Medicare: 7.279. 

2035:	
Social Security: 6.33; 
Medicaid: 3.1; 
Medicare: 7.34. 

2036:	
Social Security: 6.34; 
Medicaid: 3.2; 
Medicare: 7.498. 

2037:	
Social Security: 6.34; 
Medicaid: 3.3; 
Medicare: 7.643. 

2038:	
Social Security: 6.34; 
Medicaid: 3.3; 
Medicare: 7.774. 

2039:	
Social Security: 6.33; 
Medicaid: 3.4; 
Medicare: 7.894. 

2040:	
Social Security: 6.31; 
Medicaid: 3.4; 
Medicare: 8.01. 

2041:	
Social Security: 6.3; 
Medicaid: 3.5; 
Medicare: 8.121. 

2042:	
Social Security: 6.28; 
Medicaid: 3.6; 
Medicare: 8.229. 

2043: 
Social Security: 6.27; 
Medicaid: 3.6; 
Medicare: 8.334. 

2044:	
Social Security: 6.25; 
Medicaid: 3.7; 
Medicare: 8.437. 

2045:	
Social Security: 6.24; 
Medicaid: 3.7; 
Medicare: 8.54. 

2046:	
Social Security: 6.23; 
Medicaid: 3.8; 
Medicare: 8.64. 

2047:	
Social Security: 6.22; 
Medicaid: 3.8; 
Medicare: 8.737. 

2048:	
Social Security: 6.21; 
Medicaid: 3.9; 
Medicare: 8.829. 

2049:	
Social Security: 6.2; 
Medicaid: 3.9; 
Medicare: 8.916. 

2050:	
Social Security: 6.2; 
Medicaid: 4; 
Medicare: 9.002. 

2051:	
Social Security: 6.19; 
Medicaid: 4.063; 
Medicare: 9.008. 

2052:	
Social Security: 6.19; 
Medicaid: 4.127; 
Medicare: 9.172. 

2053:	
Social Security: 6.19; 
Medicaid: 4.192; 
Medicare: 9.256. 

2054:	
Social Security: 6.2; 
Medicaid: 4.258; 
Medicare: 9.344. 

2055:	
Social Security: 6.2; 
Medicaid: 4.325; 
Medicare: 9.439. 

2056:	
Social Security: 6.21; 
Medicaid: 4.393; 
Medicare: 9.538. 

2057:	
Social Security: 6.21; 
Medicaid: 4.462; 
Medicare: 9.634. 

2058:	
Social Security: 6.22; 
Medicaid: 4.533; 
Medicare: 9.728. 

2059:	
Social Security: 6.23; 
Medicaid: 4.604; 
Medicare: 9.82. 

2060:	
Social Security: 6.23; 
Medicaid: 4.676; 
Medicare: 9.91. 

2061:	
Social Security: 6.24; 
Medicaid: 4.75; 
Medicare: 10. 

2062:	
Social Security: 6.24; 
Medicaid: 4.825; 
Medicare: 10.087. 

2063:	
Social Security: 6.24; 
Medicaid: 4.901; 
Medicare: 10.175. 

2064:	
Social Security: 6.25; 
Medicaid: 4.978; 
Medicare: 10.262. 

2065:	
Social Security: 6.25; 
Medicaid: 5.056; 
Medicare: 10.349. 

2066:	
Social Security: 6.25; 
Medicaid: 5.136; 
Medicare: 10.429. 

2067:	
Social Security: 6.25; 
Medicaid: 5.217; 
Medicare: 10.502. 

2068:	
Social Security: 6.26; 
Medicaid: 5.299; 
Medicare: 10.574. 

2069:	
Social Security: 6.26; 
Medicaid: 5.383; 
Medicare: 10.648. 

2070:	
Social Security: 6.26; 
Medicaid: 5.467; 
Medicare: 10.718. 

2071:	
Social Security: 6.27; 
Medicaid: 5.553; 
Medicare: 10.784. 

2072:	
Social Security: 6.27; 
Medicaid: 5.641; 
Medicare: 10.845. 

2073:	
Social Security: 6.27; 
Medicaid: 5.73; 
Medicare: 10.906. 

2074:	
Social Security: 6.27; 
Medicaid: 5.82; 
Medicare: 10.964. 

2075:	
Social Security: 6.27; 
Medicaid: 5.912; 
Medicare: 11.022. 

2076:	
Social Security: 6.27; 
Medicaid: 6.005; 
Medicare: 11.079. 

2077:	
Social Security: 6.27; 
Medicaid: 6.099; 
Medicare: 11.134. 

2078:	
Social Security: 6.28; 
Medicaid: 6.195; 
Medicare: 11.187. 

2079:	
Social Security: 6.28; 
Medicaid: 6.293; 
Medicare: 11.239. 

2080:	
Social Security: 6.28; 
Medicaid: 6.392; 
Medicare: 11.29. 

Source: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration, Office of the Actuary, Centers 
for Medicare and Medicaid Services, and the Congressional Budget 
Office. 

Notes: Social Security and Medicare projections based on the 
intermediate assumptions of the 2007 Trustees’ Reports. Medicaid 
projections based on CBO’s August 2007 short-term Medicaid estimates 
and CBO’s December 2005 long-term Medicaid projections under mid-range 
assumptions. 

[End of graph] 

Federal Tax Expenditures Exceeded Discretionary Spending for Half of 
the Last Decade: 

[See PDF for image] 

This is a line graph with three lines (Mandatory spending; Sum of tax 
expenditure revenue loss estimates; and Discretionary spending). The 
vertical axis represents Dollars in billions (in real 2005 dollars) and 
the horizontal axis represents fiscal years 1982 through 2005. The 
following data is depicted: 

Fiscal year: 1982;	
Mandatory spending excluding net interest: 623.4;	
Sum of tax expenditure revenue loss estimates: 480;
Discretionary Spending: 607. 

Fiscal year: 1983;
Mandatory spending excluding net interest: 651.2;	
Sum of tax expenditure revenue loss estimates: 517.6;	
Discretionary Spending: 630. 

Fiscal year: 1984; 
Mandatory spending excluding net interest: 621.3;	
Sum of tax expenditure revenue loss estimates: 548.8;
Discretionary Spending: 652.5. 

Fiscal year: 1985; 
Mandatory spending excluding net interest: 668.1;	
Sum of tax expenditure revenue loss estimates: 589.3; 
Discretionary Spending: 692.6. 

Fiscal year: 1986; 
Mandatory spending excluding net interest: 677;	
Sum of tax expenditure revenue loss estimates: 641.2; 
Discretionary Spending: 713.8. 

Fiscal year: 1987; 
Mandatory spending excluding net interest: 668.3;	
Sum of tax expenditure revenue loss estimates: 598; 
Discretionary Spending: 704.7. 

Fiscal year: 1988; 
Mandatory spending excluding net interest: 689.3;	
Sum of tax expenditure revenue loss estimates: 464.3; 
Discretionary Spending: 714.2. 

Fiscal year: 1989; 
Mandatory spending excluding net interest: 719.5;	
Sum of tax expenditure revenue loss estimates: 491.7; 
Discretionary Spending: 723.7. 

Fiscal year: 1990; 
Mandatory spending excluding net interest: 811.1;	
Sum of tax expenditure revenue loss estimates: 497.5; 
Discretionary Spending: 714.6. 

Fiscal year: 1991; 
Mandatory spending excluding net interest: 820.8;	
Sum of tax expenditure revenue loss estimates: 489.1;	 
Discretionary Spending: 733.7. 

Fiscal year: 1992; 
Mandatory spending excluding net interest: 870.3;	
Sum of tax expenditure revenue loss estimates: 505.8; 
Discretionary Spending: 716.4. 

Fiscal year: 1993; 
Mandatory spending excluding net interest: 881.1;	
Sum of tax expenditure revenue loss estimates: 512.8; 
Discretionary Spending: 707.8. 

Fiscal year: 1994; 
Mandatory spending excluding net interest: 921.9;	
Sum of tax expenditure revenue loss estimates: 539; 
Discretionary Spending: 695.5. 

Fiscal year: 1995; 
Mandatory spending excluding net interest: 929.7;	
Sum of tax expenditure revenue loss estimates: 558.3;
Discretionary Spending: 685.6. 

Fiscal year: 1996; 
Mandatory spending excluding net interest: 971.3;	
Sum of tax expenditure revenue loss estimates: 561.3; 
Discretionary Spending: 657.6. 

Fiscal year: 1997; 
Mandatory spending excluding net interest: 982.9;	
Sum of tax expenditure revenue loss estimates: 586.2;
Discretionary Spending: 663.9. 

Fiscal year: 1998; 
Mandatory spending excluding net interest: 1030.3;	
Sum of tax expenditure revenue loss estimates: 663.2;
Discretionary Spending: 661.8. 

Fiscal year: 1999; 
Mandatory spending excluding net interest: 1065.3;	
Sum of tax expenditure revenue loss estimates: 713.6; 
Discretionary Spending: 676.8. 

Fiscal year: 2000; 
Mandatory spending excluding net interest: 1103.4;	
Sum of tax expenditure revenue loss estimates: 746.2; 
Discretionary Spending: 713. 

Fiscal year: 2001; 
Mandatory spending excluding net interest: 1141.8;	
Sum of tax expenditure revenue loss estimates: 809.2;
Discretionary Spending: 735.7.	 

Fiscal year: 2002; 
Mandatory spending excluding net interest: 1229.5;	
Sum of tax expenditure revenue loss estimates: 838.1;
Discretionary Spending: 816.4. 

Fiscal year: 2003; 
Mandatory spending excluding net interest: 1287.6;	
Sum of tax expenditure revenue loss estimates: 803.6;
Discretionary Spending: 899.5. 

Fiscal year: 2004; 
Mandatory spending excluding net interest: 1314.4;	
Sum of tax expenditure revenue loss estimates: 773.5;
Discretionary Spending: 951.3. 

Fiscal year: 2005; 
Mandatory spending excluding net interest: 1360.5; 
Sum of tax expenditure revenue loss estimates: 799.6;
Discretionary Spending: 998.4. 

Fiscal year: 2006; 
Mandatory spending excluding net interest: 1412.1; 
Sum of tax expenditure revenue loss estimates: 846.7;
Discretionary Spending: 1016.7. 

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal 
years 1976-2008. 

Note: Summing tax expenditure estimates does not take into account 
interactions between individual provisions. Outlays associated with 
refundable tax credits are included in mandatory spending. 

[End of graph] 

Revenue Loss Estimates for the Largest Tax Expenditures Reported for 
Fiscal Year 2006: 

[See PDF for image] 

This is a bar graph with the vertical axis representing Revenue loss 
estimates (dollars in billions) and the horizontal axis depicting bars 
indicating the amount of expenditures in six categories. 

Revenue loss estimate, Exclusion of employer contributions for medical 
insurance premiums and medical care: 187.5 (Treasury estimated income 
tax revenue losses: 125; Approximate payroll tax revenue losses: 
62.5[A]; 

Revenue loss estimate, Net exclusion of pension contributions and 
earnings: defined benefit plans: 89.8[A]; 

Revenue loss estimate, Deductability of mortgage interest on owner-
occupied homes: 68.3; 

Revenue loss estimate, Capital gains except agriculture, timber, iron 
ore, and coal): 48.6; 

Revenue loss estimate, Deductability of nonbusiness states and local 
taxes other than on owner-occupied homes: 43.1. 

Source: GAO analysis of OMB, Analytical Perspectives, Budget of the 
United States Government, Fiscal Year 2008. 

[A] The value of employer-provided health insurance is excluded from 
Medicare and Social Security payroll taxes. Some researchers have 
estimated that payroll tax revenue losses amounted to more than half of 
the income tax revenue losses in 2004, and we use this estimate for 
2006. The research we are aware of dealt only with health care, 
therefore the 50 percent figure may not apply to other items that are 
excluded from otherwise applicable income and payroll taxes. 

[End of graph] 

State and Local Governments Face Increasing Fiscal Challenges: 

[See PDF for image] 

This is a line graph with two lines (Operating Surplus/Deficit Measure 
and Net-lending/Net-borrowing). The vertical axis represents Percent of 
GDP from -6 to +2 and the horizontal axis represents fiscal years 1980 
through 2050. The following data is depicted: 

1980: 
Operating Surplus/Deficit Measure: 0.35873454; 
Net-lending/Net-borrowing: -0.236601541. 

1981: 
Operating Surplus/Deficit Measure: 0.34624089; 
Net-lending/Net-borrowing: -0.169415676. 
 
1982: 
Operating Surplus/Deficit Measure: 0.363124424; 
Net-lending/Net-borrowing: -0.387096774. 

1983: 
Operating Surplus/Deficit Measure: 0.774990811; 
Net-lending/Net-borrowing: -0.138547233. 

1984: 
Operating Surplus/Deficit Measure: 0.8152395; 
Net-lending/Net-borrowing: 0.223736398. 

1985: 
Operating Surplus/Deficit Measure: 0.810172263; 
Net-lending/Net-borrowing: 0.035542497. 

1986: 
Operating Surplus/Deficit Measure: 0.820186878; 
Net-lending/Net-borrowing: -0.103074303. 

1987: 
Operating Surplus/Deficit Measure: 0.348462918; 
Net-lending/Net-borrowing: -0.346028062. 

1988: 
Operating Surplus/Deficit Measure: 0.415329754; 
Net-lending/Net-borrowing: -0.289980015. 

1989: 
Operating Surplus/Deficit Measure: 0.461047699; 
Net-lending/Net-borrowing: -0.302676683. 
	
1990: 
Operating Surplus/Deficit Measure: 0.12076304; 
Net-lending/Net-borrowing: -0.649652772. 

1991: 
Operating Surplus/Deficit Measure: -0.002324922; 
Net-lending/Net-borrowing: -0.823896329. 

1992: 
Operating Surplus/Deficit Measure: 0.105991132; 
Net-lending/Net-borrowing: -0.675323856. 	
	
1993: 
Operating Surplus/Deficit Measure: 0.17518701; 
Net-lending/Net-borrowing: -0.573797579. 

1994: 
Operating Surplus/Deficit Measure: 0.15154266; 
Net-lending/Net-borrowing: -0.429852097. 

1995: 
Operating Surplus/Deficit Measure: 0.226784; 
Net-lending/Net-borrowing: -0.446084594. 
	
1996: 
Operating Surplus/Deficit Measure: 0.382430375; 
Net-lending/Net-borrowing: -0.292955008. 

1997: 
Operating Surplus/Deficit Measure: 0.540310442; 
Net-lending/Net-borrowing: -0.225184543. 

1998: 
Operating Surplus/Deficit Measure: 0.711478221; 
Net-lending/Net-borrowing: -0.113181662. 

1999: 
Operating Surplus/Deficit Measure: 0.528375987; 
Net-lending/Net-borrowing: -0.240602477. 

2000: 
Operating Surplus/Deficit Measure: 0.51757156; 
Net-lending/Net-borrowing: -0.309666904. 

2001: 
Operating Surplus/Deficit Measure: 0.213052923; 
Net-lending/Net-borrowing: -0.800750395. 

2002: 
Operating Surplus/Deficit Measure: -0.212758845; 
Net-lending/Net-borrowing: -1.20443952. 

2003: 
Operating Surplus/Deficit Measure: -0.034231078; 
Net-lending/Net-borrowing: -1.04098241. 

2004: 
Operating Surplus/Deficit Measure: 0.03822412; 
Net-lending/Net-borrowing: -0.899039488. 

2005: 
Operating Surplus/Deficit Measure: 0.262769152; 
Net-lending/Net-borrowing: -0.762696896. 

2006: 
Operating Surplus/Deficit Measure: 0.21944499; 
Net-lending/Net-borrowing: -0.788126765. 

2007: 
Operating Surplus/Deficit Measure: 0.412715768; 
Net-lending/Net-borrowing: -0.638191188. 

2008: 
Operating Surplus/Deficit Measure: 0.345168264; 
Net-lending/Net-borrowing: -0.630180116. 

2009: 
Operating Surplus/Deficit Measure: 0.333020741; 
Net-lending/Net-borrowing: -0.603351831. 

2010: 
Operating Surplus/Deficit Measure: 0.302656141; 
Net-lending/Net-borrowing: -0.605141837. 

2011: 
Operating Surplus/Deficit Measure: 0.257109542; 
Net-lending/Net-borrowing: -0.630946404. 

2012: 
Operating Surplus/Deficit Measure: 0.206218592; 
Net-lending/Net-borrowing: -0.658720463. 

2013: 
Operating Surplus/Deficit Measure: 0.16406332; 
Net-lending/Net-borrowing: -0.681176041. 

2014: 
Operating Surplus/Deficit Measure: 0.119677687; 
Net-lending/Net-borrowing: -0.707576964. 

2015: 
Operating Surplus/Deficit Measure: 0.076206951; 
Net-lending/Net-borrowing: -0.734940534. 

2016: 
Operating Surplus/Deficit Measure: 0.026942361; 
Net-lending/Net-borrowing: -0.769406462. 

2017: 
Operating Surplus/Deficit Measure: -0.032335263; 
Net-lending/Net-borrowing: -0.814653671. 

2018: 
Operating Surplus/Deficit Measure: -0.109446599; 
Net-lending/Net-borrowing: -0.878965311. 

2019: 
Operating Surplus/Deficit Measure: -0.19227354; 
Net-lending/Net-borrowing: -0.950160744. 

2020: 
Operating Surplus/Deficit Measure: -0.28349272; 
Net-lending/Net-borrowing: -1.030954125. 

2021: 
Operating Surplus/Deficit Measure: -0.386388384; 
Net-lending/Net-borrowing: -1.123450085. 

2022: 
Operating Surplus/Deficit Measure: -0.483216203; 
Net-lending/Net-borrowing: -1.211277239. 

2023: 
Operating Surplus/Deficit Measure: -0.557423995; 
Net-lending/Net-borrowing: -1.275859781. 

2024: 
Operating Surplus/Deficit Measure: -0.667104614; 
Net-lending/Net-borrowing: -1.376919803. 

2025: 
Operating Surplus/Deficit Measure: -0.781500085; 
Net-lending/Net-borrowing: -1.482014441. 

2026: 
Operating Surplus/Deficit Measure: -0.866176187; 
Net-lending/Net-borrowing: -1.558258502. 

2027: 
Operating Surplus/Deficit Measure: -0.971014018; 
Net-lending/Net-borrowing: -1.654401786. 

2028: 
Operating Surplus/Deficit Measure: -1.059403133; 
Net-lending/Net-borrowing: -1.733838263. 

2029: 
Operating Surplus/Deficit Measure: -1.167739726; 
Net-lending/Net-borrowing: -1.833479877. 

2030: 
Operating Surplus/Deficit Measure: -1.259948277; 
Net-lending/Net-borrowing: -1.916759702. 

2031: 
Operating Surplus/Deficit Measure: -1.372065386; 
Net-lending/Net-borrowing: -2.020169149. 

2032: 
Operating Surplus/Deficit Measure: -1.467520327; 
Net-lending/Net-borrowing: -2.107108096. 

2033: 
Operating Surplus/Deficit Measure: -1.596865114. 
Net-lending/Net-borrowing: -2.227702996. 

2034: 
Operating Surplus/Deficit Measure: -1.728257684; 
Net-lending/Net-borrowing: -2.350527637. 

2035: 
Operating Surplus/Deficit Measure: -1.829728717; 
Net-lending/Net-borrowing: -2.443203659. 

2036: 
Operating Surplus/Deficit Measure: -1.964429157. 
Net-lending/Net-borrowing: -2.569286091. 

2037: 
Operating Surplus/Deficit Measure: -2.100986709; 
Net-lending/Net-borrowing: -2.697381312. 

2038: 
Operating Surplus/Deficit Measure: -2.205225568; 
Net-lending/Net-borrowing: -2.7928813. 

2039: 
Operating Surplus/Deficit Measure: -2.325201615; 
Net-lending/Net-borrowing: -2.904115765. 

2040: 
Operating Surplus/Deficit Measure: -2.430489372; 
Net-lending/Net-borrowing: -3.00097328. 

2041: 
Operating Surplus/Deficit Measure: -2.569712106; 
Net-lending/Net-borrowing: -3.131648373. 

2042: 
Operating Surplus/Deficit Measure: -2.709424661; 
Net-lending/Net-borrowing: -3.262966376. 

2043: 
Operating Surplus/Deficit Measure: -2.818508477; 
Net-lending/Net-borrowing: -3.363795891. 

2044: 
Operating Surplus/Deficit Measure: -2.947568546; 
Net-lending/Net-borrowing: -3.484450067. 

2045: 
Operating Surplus/Deficit Measure: -3.058317306; 
Net-lending/Net-borrowing: -3.58693672. 

2046: 
Operating Surplus/Deficit Measure: -3.188512473; 
Net-lending/Net-borrowing: -3.709010629. 

2047: 
Operating Surplus/Deficit Measure: -3.300350183; 
Net-lending/Net-borrowing: -3.812861884. 

2048: 
Operating Surplus/Deficit Measure: -3.432143889; 
Net-lending/Net-borrowing: -3.936539309. 

2049: 
Operating Surplus/Deficit Measure: -3.545556545; 
Net-lending/Net-borrowing: -4.041974237. 

2050: 
Operating Surplus/Deficit Measure: -3.686995315; 
Net-lending/Net-borrowing: -4.175627129. 

Sources: Historical data from National Income and Product Accounts. 
Historical data from 1980–2006, GAO projections from 2007–2050 using 
many CBO projections and assumptions, particularly for next 10 years. 

[End of graph] 

Current Fiscal Policy Is Unsustainable: 

The “Status Quo”is Not an Option: 
* We face large and growing structural deficits largely due to known 
demographic trends and rising health care costs. 
* GAO’s simulations show that balancing the budget in 2040 could 
require actions as large as: 
- Cutting total federal spending by 60 percent or; 
- Raising federal taxes to 2 times today's level. 

Faster Economic Growth Can Help, but It Cannot Solve the Problem: 
* Closing the current long-term fiscal gap based on reasonable 
assumptions would require real average annual economic growth in the 
double digit range every year for the next 75 years. 
* During the 1990s, the economy grew at an average 3.2 percent per 
year. 
* As a result, we cannot simply grow our way out of this problem. Tough 
choices will be required. 

The Way Forward: A Three-Pronged Approach: 

1. Improve Financial Reporting, Public Education, and Performance 
Metrics. 
2. Strengthen Budget and Legislative Processes and Controls. 3. 
Fundamentally Reexamine & Transform for the Twenty-first Century (i.e., 
entitlement programs, other spending, and tax policy). 

Solutions Require Active Involvement from both the Executive and 
Legislative Branches. 

The Way Forward: Improve Financial Reporting, Public Education, and 
Performance Metrics: 

* Improve transparency & completeness of President’s budget proposal: 
- Return to 10-year estimates in budget both for current policies and 
programs and for policy proposals; 
- Include in the budget estimates of long-term cost of policy proposals 
& impact on total fiscal exposures; 
- Improve transparency of tax expenditures; 

* Consider requiring President’s budget to specify & explain a fiscal 
goal and a path to that goal within 10-year window—or justify an 
alternative deadline; 

* Require annual OMB report on existing fiscal exposures [liabilities, 
obligations, explicit & implied commitments]; 

* Require enhanced financial statement presentation to address fiscal 
sustainability and intergenerational equity issues; 

* Prepare and distribute a summary annual report that is both useful 
and used; 

* Increase information on long-range fiscal sustainability issues in 
Congressional Budget Resolution & Budget Process; 

* Develop key national (outcome-based) indicators (e.g. economic, 
security, social, environmental) to chart the nation’s posture, 
progress, and position relative to the other major industrial 
countries. 

The Way Forward: Strengthen Budget and Legislative Processes and 
Controls: 

* Restore discretionary spending caps & PAYGO rules on both spending 
and tax sides of the ledger; 

* Develop mandatory spending triggers [with specific defaults], and 
other action-forcing provisions (e.g., sunsets) for both direct 
spending programs and tax preferences; 

* Develop, impose & enforce modified rules for selected items (e.g., 
earmarks, emergency designations, and use of supplementals); 

* Require long-term cost estimates (e.g. present value) for any 
legislative debate on all major tax and spending bills, including 
entitlement programs. Cost estimates should usually assume no sunset; 

* Extend accrual budgeting to insurance & federal employee pensions; 
develop techniques for extending to retiree health & environmental 
liabilities; 

* Consider biennial budgeting; 

* Consider expedited line item rescissions from the President that 
would only require a majority vote to override the proposed 
rescission(s). 

The Way Forward: Fundamentally Reexamine & Transform: 

* Restructure existing entitlement programs; 

* Reexamine and restructure the base of all other spending; 

* Review & revise existing tax policy, including tax preferences and 
enforcement programs; 

* Expand scrutiny of all proposed new programs, policies, or 
activities; 

* Reengineer internal agency structures and processes, including more 
emphasis on long-term planning, integrating federal activities, and 
partnering with others both domestically and internationally; 

* Strengthen and systematize Congressional oversight processes; 

* Increase transparency associated with government contracts and other 
selected items; 

* Consider a capable, credible, bi-partisan budget, entitlement, and 
tax reform commission. 

Key National Indicators: 

* What: A portfolio of economic, social, and environmental outcome- 
based measures that could be used to help assess the nation’s and other 
governmental jurisdictions’ position and progress; 

* Who: Many countries and several states, regions, and localities have 
already undertaken related initiatives (e.g., Australia, New Zealand, 
Canada, United Kingdom, Oregon, Silicon Valley (California) and 
Boston); 

* Why: Development of such a portfolio of indicators could have a 
number of possible benefits, including; 
- Serving as a framework for related strategic planning efforts; 
- Enhancing performance and accountability reporting; 
- Informing public policy decisions, including much needed baseline 
reviews of existing government policies, programs, functions, and 
activities; 
- Facilitating public education and debate as well as an informed 
electorate; 

* Way Forward: Consortium of key players housed by the National 
Academies domestically and related efforts by the OECD and others 
internationally. 

Key National Indicators: Where the United States Ranks: 

The United States may be the only superpower, but compared to most 
other OECD countries on selected key economic, social, and 
environmental indicators, on average, the U.S. ranks 16 out of 28. 

OECD Categories for Key Indicators (2006 OECD Factbook): 

* Population/Migration;
* Energy;
* Environment;
* Labor Market;
* Education;
* Public Finance;
* Science & Tech.;
* Quality of Life;
* Macroeconomic Trends;
* Economic Globalization
* Prices. 

Source: 2006 OECD Factbook. 

Key Dates Highlight Long Term Challenges of the Social Security System: 

Event: Cash surplus begins to decline; 
Date: 2009, OASI, OASDI. 
 
Event: Annual benefit costs exceed cash revenue from taxes; 
Date: 2018, OASI; 
Date: 2005, DI; 
Date: 2017, OASDI. 

Event: Trust fund ceases to grow because even taxes plus interest fall 
short of benefits; 
Date: 2028, OASI; 
Date: 2013, DI; 
Date: 2027, OASADI. 

Event: Trust fund exhausted; 
Date: 2042, OASI; 
Date: 2026: DI; 
Date: 2041, OASDI. 

Source: Social Security Administration, The 2007 Annual Report of the 
Board of Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds(Washington, DC: April 2007). 

[End of table] 

Possible Way Forward on Social Security Reform: 

Make little or no changes to those who are near retirement or already 
retired and make a number of adjustments that would affect younger 
workers: 

* Phase-in an increase in the normal retirement age and index it to 
life expectancy; 

* Consider phasing-in an increase in the early retirement age and index 
it to life expectancy with a modified disability access provision; 

* Modify income replacement and/or indexing formulas for middle and 
upper income earners; 

* Strengthen the minimum benefit; 

* Consider a modest adjustment to the COLA formula; 

* Increase the taxable wage base, if necessary; 

* Consider supplemental individual accounts and mandatory individual 
savings 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). 

Key Dates Highlight Long Term Challenges of the Medicare Program: 

Date: 2007; 
Event: Medicare Part A outlays exceed cash income. 

Date: 2007; 
Event: Estimated trigger date for “Medicare funding warning.” 

Date: 2013; 
Event: Projected date that annual “general revenue funding” for Part B 
will exceed 45 percent of total Medicare outlays. 

Date: 2019; 
Part A trust fund exhausted, annual income sufficient to pay about 80% 
of promised Part A benefits. 

Source: 2007 Annual Report of The Boards of Trustees of The Federal 
Hospital Insurance and Federal Supplementary Medical Insurance Trust 
Funds(Washington, DC, April 2007). 

[End of table] 

Issues to Consider in Examining Our Health Care System: 

The public needs to be educated about the differences between wants, 
needs, affordability, and sustainability at both the individual and 
aggregate level. 

Ideally, health care reform proposals will: 

* Align Incentives for providers and consumers to make prudent 
decisions about the use of medical services; 

* Foster Transparency with respect to the value and costs of care, and; 

* Ensure Accountability from insurers and providers to meet standards 
for appropriate use and quality; 

Ultimately, we need to address four key dimensions: access, cost, 
quality,and personal responsibility. 

Selected Potential Health Care Reform Approaches: 

Reform Approach: Revise the government’s payment systems and leverage 
its purchasing authority to foster value-based purchasing for health 
care products and services; 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Consider additional flexibility for states to serve as 
models for possible health care reforms; 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Consider limiting direct advertising and allowing 
limited importation of prescription drugs; 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Foster more transparency in connection with health 
care costs and outcomes; 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Create incentives that encourage physicians to utilize 
prescription drugs and other health care products and services 
economically and efficiently. 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Foster the use of information technology to increase 
consistency, transparency, and accountability in health care; 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Encourage case management approaches for people with 
chronic and expensive conditions to improve the quality and efficiency 
of care delivered and avoid inappropriate care. 
Short-term action: [check];
Long-term action: [Empty]. 

Reform Approach: Reexamine the design and operational structure of the 
nation’s health care entitlement programs—Medicare and Medicaid, 
including exploring more income-related approaches; 
Short-term action: [check];
Long-term action: [check]. 

Reform Approach: Revise certain federal tax preferences for health care 
to encourage more efficient use of health care products and services; 
Short-term action: [check];
Long-term action: [check]. 

Reform Approach: Foster more preventative care and wellness services 
and capabilities, including fighting obesity and encouraging better 
nutrition; 
Short-term action: [check];
Long-term action: [check]. 

Reform Approach: Promote more personal responsibility in connection 
with health care; 
Short-term action: [check];
Long-term action: [check]. 

Reform Approach: Limit spending growth for government-sponsored health 
care programs (e.g., percentage of the budget and/or economy); 
Short-term action: [Empty]; 
Long-term action: [check]. 

Reform Approach: Develop a core set of basic and essential services. 
Create insurance pools for alternative levels of coverage, as 
necessary; 
Short-term action: [Empty]; 
Long-term action: [check]. 

Reform Approach: Develop a set of evidence-based national practice 
standards to help avoid unnecessary care, improve outcomes, and reduce 
litigation; 
Short-term action: [Empty]; 
Long-term action: [check]. 

Reform Approach: Pursue multinational approaches to investing in health 
care R&D; 
Short-term action: [Empty]; 
Long-term action: [check]. 

[End of table] 

Moving the Debate Forward: 

The Sooner We Get Started, the Better: 

* The miracle of compounding is currently working against us; 

* Less change would be needed, and there would be more time to make 
adjustments. 

Our demographic changes will serve to make reform more difficult over 
time. 

Need Public Education, Discussion, and Debate: 

* The role of government in the 21st Century; 

* Which programs and policies should be changed and how; 

* How government should be financed. 

Three Key Illnesses: 

* Myopia; 
* Tunnel Vision; 
* Self-Centeredness. 

Four National Deficits: 

* Budget; 
* Balance of Payments; 
* Savings; 
* Leadership. 

Key Leadership Attributes Needed for These Challenging and Changing 
Times: 

* Courage; 
* Integrity; 
* Creativity; 
* Stewardship; 
* Partnership. 

Three Key Groups That Need to Increase Their Influence and Involvement: 

* The Business and Professional Community; 
* Young Americans; 
* The Media. 

These Challenges Go Beyond Numbers and Dollars—It’s About Values and 
People. 

[End of presentation] 

On the Web: 

Web site: [hyperlink, http://www.gao.gov/cghome.htm]: 

Contact: 

Chuck Young, Managing Director, Public Affairs: 
YoungC1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: 

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