The scary debt projections from CBO

If you want to have a hard time going to sleep, read about the latest long-term projections for the Federal budget by the CBO. The CBO study, The Long-Term Budget Outlook, shows a deficit that is out of control and that cannot be sustained. We will be above 100% debt to GDP in approximately 10 years by following an extended-baseline scenario. If the Federal deficit does not change, interest payments will surge to 2.5% of GDP by 2020. Many are expecting that the economy will grow under 3%, so all of the growth will go to paying interest.

Breaking the budget will be three programs. Medicare, Medicaid, and Social Security. Sure we can change these programs but there is a terrible headwind that cannot be controlled, demographics. The baby boom generation will be retiring so there will be increased demand for services so the only way that this can change is if the services are curtailed or there are significant efficiencies and cost-savings. While everyone is talking about health care insurance, the real issue is still the retirement programs. The Federal government has not been able to control these costs.

Yes, we can insure more with health care but that does not change the problems with Medicare and Medicaid. These two programs represent about 5 percent of GDP but will increase to 10% in 2035 and more than 17% by 2080. These two programs will have the same share as the total current Federal budget. This is where we will have real problems and this is one reason for high long-term rates.