Will Our Entitlement Programs Drive us to Financial Ruin?
NEW YORK ( MainStreet) The 2013 Long-Term Budget Outlook released by the Congressional Budget Office (CBO) September 17 does not bode well for those who want to see decreasing deficits. The CBO projects spending for federal healthcare programs will "rise substantially" in relation to the Gross Domestic Product (GDP)."
The CBO predicts that budget deficits will decline during the next few years. After this initial decline, though, the CBO calculates there will be an increase because of greater interest expense and more spending for entitlement programs. The CBO says Social Security, Medicare, Medicaid, the Children's Health Insurance Program (CHIP) and the health insurance exchanges subsidies beginning in 2014 will drive the additional spending.
Specifically, the CBO predicts that publicly held federal debt would decline to 68% of GDP by 2018. This is because of economic policies enacted during the Great Recession that have caused the deficit to be the "smallest size since 2008," which is roughly 4% of GDP. Debt-to-GDP ratio peaked in 2009 at 10%.
If these policies remain in effect the deficit is predicted to shrink to 2% of GDP by 2015. . This would lead to a decline in the federal debt, held by the public to 68% of GDP by 2018. But then the deficits would rebound, presuming current law remains the same, because interest costs will increase as interest rates rise, and there will be growing spending because of Medicare populations growing, healthcare costs rising and subsidies for health insurance under the Affordable Care Act.
By 2023, CBO says, "the budget deficit would grow to almost 3.5% of GDP under current law, and federal debt held by the public would equal 71% of GDP and would be on an upward trajectory." The CBO further state that the "gap between federal spending and revenues would widen steadily after 2015 under the assumptions of the extended baseline. By 2038, the deficit would be 6.5% of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 100% of GDP, more than in any year except 1945 and 1946. With such large deficits, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable."
This would have a cascading effect in the economy. Investors would become apprehensive about the federal government's creditworthiness. They would wonder if the government would be unable or even unwilling to repay its debt.
Those in the financial industry and those who advise policymakers see the CBO report as a harbinger. The consensus is there is financial trouble on the horizon.
Joe Daverso, a financial advisor in Mount Laurel, NJ believes the CBO estimates are a stark reminder that the federal government needs to address entitlement reform very soon. He thinks that with the growth in entitlement spending and the potential for rising interest payments on the debt, there will not be much left in discretionary spending for Democrats or Republicans in future budgets.