Page 346 - Krugmans Economics for AP Text Book_Neat

figure 30.6

Future Demands on Spending
(percent Medicare and Medicaid
the Federal Budget
of GDP) Social Security
This figure shows Congres-
sional Budget Office projec- 30%
Actual data CBO projection
tions of spending on social
insurance programs as a share
of GDP. Partly as a result of an 20
aging population, but mainly
because of rising health care
costs, these programs are ex-
pected to become much more 10
expensive over time, posing
problems for the federal
budget.
Source: Congressional Budget Office. 1962 1980 2000 2008 2020 2040 2060 2083
Year

the system. By 2030, according to the Social Security Administration, that number will
rise to 46; by 2050, it will rise to 48; and by 2080 that number will be 51. This will raise
benefit payments relative to the size of the economy.
The aging of the baby boomers, by itself, poses only a moderately sized long - run fis-
cal problem. The projected rise in Medicare and Medicaid spending is a much more se-
rious concern. The main story behind projections of higher Medicare and Medicaid
spending is the long -run tendency of health care spending to rise faster than overall
spending, both for government - funded and for private-funded health care.
To some extent, the implicit liabilities of the U.S. government are already reflected
in debt statistics. We mentioned earlier that the government had a total debt of $12
trillion at the end of fiscal 2009, but that only $7.6 trillion of that total was owed to the
public. The main explanation for that discrepancy is that both Social Security and part
of Medicare (the hospital insurance program) are supported by dedicated taxes: their ex-
penses are paid out of special taxes on wages. At times, these dedicated taxes yield more
revenue than is needed to pay current benefits. In particular, since the mid -1980s the
Social Security system has been taking in more revenue than it currently needs in order
to prepare for the retirement of the baby boomers. This surplus in the Social Security
system has been used to accumulate a Social Security trust fund, which was $2.5 trillion at
the end of fiscal 2009.
The money in the trust fund is held in the form of U.S. government bonds, which
are included in the $12 trillion in total debt. You could say that there’s something
funny about counting bonds in the Social Security trust fund as part of government
debt. After all, these bonds are owed by one part of the government (the government
outside the Social Security system) to another part of the government (the Social Secu-
rity system itself). But the debt corresponds to a real, if implicit, liability: promises by
the government to pay future retirement benefits. So many economists argue that the
gross debt of $12 trillion, the sum of public debt and government debt held by Social
Security and other trust funds, is a more accurate indication of the government’s fiscal
health than the smaller amount owed to the public alone.

304 section 6 Inflation, Unemployment, and Stabilization Policies