rise occurs chiefly because of two factors—“real bracket creep” (because rising real incomes push taxpayers into higher brackets) and growing taxable distributions from retirement accounts as baby boomers retire. Those two factors are just big enough to outweigh other sources that are flat or gently declining.
The baseline projection of deficits and debt is derived arithmetically from the above projections, except for 2009-2019. In this period, the estimates of changes and debt depend partly on the issuance and repayment of certain debt associated with the Troubled Asset Relief Program (TARP), assistance to Fannie Mae and Freddie Mac, and other financial interventions associated with the 2008-2009 financial crisis and economic downturn. The study baseline retains CBO’s estimate of outlays for TARP and some elements of the assistance to Fannie Mae and Freddie Mac: it records their costs as outlays in the year of intervention based on the discounted present value of projected cash flows resulting from each action.
Projections over periods much shorter than 75 years are highly unreliable if viewed as forecasts. CBO and many others view Medicare and Medicaid as the key source of uncertainty in the long-run projections. Over the last few decades, annual “excess cost growth” in the two programs (growth in excess of GDP, adjusted for changes in the eligible populations) averaged 2.3 and 1.9 percent in Medicare and Medicaid, respectively. CBO assumes a slowdown in excess cost growth (to an annual average rate of 1.5 percent and 0.6 percent, respectively, for Medicare and Medicaid, over the 2019-2083 period). Furthermore, excess cost growth in the rest of the health care sector—which historically has moved in tandem with Medicare and Medicare—is projected to diverge, falling to an average of 0.5 percent (Congressional Budget Office, 2009c:28). Even with those assumptions, health care from all sources would consume an estimated 46 percent of GDP in 2080 (Congressional Budget Office, 2009c:30). If excess cost growth continued instead at about 2.5 percent annually, health care spending would account for an estimated 99 percent of GDP in 2082 (Congressional Budget Office 2007a:27).