reduce the size of the labor force) contribute to imbalances in the Social Security program.

Figure 9-1 presents 2011 estimates from the Social Security Administration on the future of the program. Under the intermediate estimates, the retirement of the baby boom generation raises costs by about 25 percent, from almost 5 percent of GDP in 2010 to about 6 percent of GDP by 2030, while program revenues rise a little, on net, over this period.3

The traditional method used by the Social Security actuaries to portray the uncertainty in their analyses is to provide three alternative sets of assumptions: (1) the intermediate, baseline assumption; (2) a low-cost assumption, which assumes that life expectancy and unemployment are lower and fertility and productivity are higher than in the baseline case; and (3) a high-cost assumption, which makes the opposite assumptions. The actual outcome for future costs is very unlikely to be as extreme as either of the last two outcomes. According to the Social Security Trustees, these high-and low-cost projections correspond very closely to a 95 percent probability interval, meaning that there is only a 5 percent chance that the actual experience will be more extreme than represented by these two projections. Yet, even under these assumptions, the range of uncertainty is not that large over the next 20 years. For example, under the low-cost scenario, by 2030, Social Security expenditures will have increased only a little, to about 5.5 percent of GDP, while under the high-cost scenario, expenditures are closer to 7 percent of GDP. Revenues are fairly stable over this time period for both these scenarios.

Medicare

The Medicare program provides health insurance to Americans aged 65 and over, as well as to certain disabled Americans younger than 65. The Medicare program shares some features with Social Security. In particular, it finances a large share of elderly consumption, its benefits accrue predominantly to the elderly, and much of the financing comes from taxes on current workers.4 However, the effect of aging on Medicare expenditures and revenues is more complicated than its effect on Social Security. Because Medicare provides health services rather than cash, the expenditures depend

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3This chapter utilizes projections of spending from the Social Security and Medicare Trustees and from the Congressional Budget Office. These projections are based on different demographic assumptions than those presented in Chapter 3.

4According to the Congressional Budget Office (2011), in 2010 about 35 percent of Medicare spending was financed by the payroll tax, about 12 percent by beneficiaries’ premiums, almost 40 percent through general revenues, and the remainder through various other sources, including income taxes on high-earning Social Security beneficiaries.



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