An Economic Model for Long-Run Budget Simulations
Abstract
The federal budget will face Intense pressure in coming decades as health care costs mount and members of the baby-boom generation retire. Costs for Medicare and Medicaid are expected to grow much faster than federal revenues through at least 2020. And between now and 2030, the elderly population will more than double, while the number of workers will grow by only one-quarter. That demographic transition will expand the ratio of retirees to workers by more than half and drive up federal spending for Social Security and health care. Under those conditions, federal deficits could mushroom. Such demographic and budgetary events would retard the growth of economic output by slowing the growth of two of its main determinants: labor and capital. With aging workers headed for retirement and projected fertility rates at near-record lows, the growth of the workforce will slow to a crawl. Furthermore, government deficits crowd out private investment, so persistent deficits would lead to less capital and lower output and hence to less revenue and even higher deficits. The interaction between the budget and the economy could start a cycle of ever-higher deficits and ever-slower growth. Of course, that outcome is not foreordained. Much depends on uncertain economic and demographic events many years in the future. More important, the Congress can choose a policy to avoid a high-deficit/slow-growth cycle.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jul 01, 1997
- Accession Number
- ADA399537
Entities
Organizations
- Congressional Budget Office