care, as described in their 1996 report (which is more recent than the 1995 report used by CBO), for both Medicare and Medicaid.¹⁸

Although the federal deficit is currently not very large relative to gross domestic product and is likely to be further reduced by the year 2002, long-term projections reveal that serious imbalances will emerge due to rising health care costs and to the aging of the population, ushered in by the retirement of the baby-boom generations between 2010 and 2030. Current federal taxes and benefits, even if adjusted to meet deficit-reduction targets over the next few years, will not be sustainable in the longer run, and far more substantial adjustments will be required to taxes, benefits, or both. For example, a recent report by the Congressional Budget Office concluded: "CBO projects that, if spending and revenue policies are not changed, deficits and debt will soar to unprecedented levels in the following 20 years. . . . Because the deficits and debt that would result if there are no changes in policy are not sustainable, such changes are inevitable" (p. xxv).

Figure 7.1 illustrated just how unsustainable current fiscal policies are by plotting out the ratio of debt to GDP under our federal budget projections if no changes are made. These projections indicate that if our age-specific profiles of taxes and benefits shift upward at 1 percent per year, the assumed rate of productivity growth (except for Medicare and Medicaid costs as noted), then the debt as a percentage of GDP will rise from its current level of about 60 percent to 100 percent in 2014, 200 percent in 2029, 300 percent in 2039 and 700 percent by 2071. In our baseline scenario, we assume that, starting in 2016, the debt/GDP ratio is frozen by a 50-50 combination of benefit cuts and tax increases.¹⁹ Between now and then, the debt changes according to the CBO budget projections. The implied adjustments shape our results in an important way. At the state and local level, we assume a constant ratio of aggregate state and local debt to GDP, starting in 1994.²⁰ We assume that the real interest rate paid by all levels of