WASHINGTON — Several years of budget battles and a partial government shutdown last year captured headlines but amounted to fights over the easy stuff. A new projection for the U.S. fiscal outlook over the next decade makes it clear the hard choices are still ahead as the baby boom generation retires.
In a report this week, the nonpartisan Congressional Budget Office projected a deficit of $514 billion for the fiscal year ending Sept. 30, and an even lower one the following year. But that is quickly reversed, and by the end of the 10-year projection the deficit climbs back over $1 trillion in 2024.
The CBO report projected an economy that is nearly stagnant at 2 percent growth by 2024. Federal spending is hammered by the crush of retiring boomers — born between 1946 and 1964 — and both debt and deficits are growing in leaps and bounds. The first wave of boomers hit early retirement age — 62 — in 2008. By the end of this decade, they’re expected to exit the workforce in droves.
“To me, that’s the big story,” said Robert Bixby, head of the politically neutral watchdog group Concord Coalition. “Despite all the good news, lower health care costs, caps on discretionary spending, rebounding revenues and a rebounding economy, we can still look at the deficit and say, ‘Geez, it’s going to be $1 trillion again before we know it!’”
One of the striking numbers offered by CBO Director Douglas Elmendorf on Tuesday was this fact: A decade from now, discretionary spending, the things Congress can choose to fund or not, will be at its lowest percentage relative to the overall economy since records first were kept. The CBO projects a 20 percent drop in this discretionary spending relative to the size of the economy through 2024.
It means that further belt-tightening here is like wringing water from sand. It won’t pay for the retirement demands of boomers on the budget.
“The future has arrived,” said Bixby, whose budget watchdog group has long called for serious fiscal reforms. “Everybody keeps talking about the impact of the baby boomers on the budget. Well, it’s here. It is clearly demonstrated in this report.”
The impact of the boomers isn’t limited to greater spending on Social Security and Medicare. To be sure, these so-called mandatory spending programs, or entitlements, are why the CBO projects federal spending to grow from 20.5 percent of the overall economy this year to 22.4 percent by 2024. Rising interest payments on the national debt contribute, too.
But thanks to boomers exiting the workforce in greater numbers, revenues are expected to grow at a much slower pace, equal to about 17.5 percent of the overall economy this year and 18.4 percent in 2024. Similarly, the CBO projects economic growth at 3 percent or more for the next three years, but from 2017-2024 it’ll average 2.7 percent, slowing each year further out as the effect of the boomers hits.
As boomers exit the workforce progressively over the next two decades, they not only demand more from retirement programs but also stop contributing to the nation’s output. And the Internal Revenue Service collects less in tax revenue.
“You really get this double whammy effect,” said Gene Steuerle, a senior economist at the centrist Urban Institute, a public policy think tank. “Because this is all concentrated in one generation, the impact is quite large. It compounds year after year, for about 25 years running.”
Steuerle worked in the Treasury Department under four presidents, and he describes the boomer generation as the proverbial “pig in the python.” As this group of 78 million Americans aged, they strained the public school system, later universities and in their adulthood helped fuel a decadeslong booming economy. Now they’ve figuratively made their way to the back end of the python, where the effects will be varied.
“It’s reducing everything. It’s reducing (net) personal income, reducing GDP, income tax collections,” he said. “It’s not just a Social Security issue.”
Meanwhile, the debt lurks.
The debt continues to climb. But it will fall as a share of a growing economy from current highs, dipping in 2017 to about 74 percent of the overall economy. While an improvement, it’s still more than twice the 34 percent of the total economy in 2007, before the crisis. By the end of 2024, a decade from now, debt as a percentage of the total economy is projected to spike again to 79 percent as the economy slows and the boomers keep exiting the stage.
“Over the next decade, debt held by the public will be significantly greater relative to GDP than any time since just after World War II,” the CBO report warned.
America has enjoyed more than a decade of unusually low borrowing costs, from post-9/11 interest rate cuts by the Federal Reserve to its near zero rate for the benchmark federal funds rate since December 2008. When lending rates finally go up, warned Maya MacGuineas, head of the budget watchdog Fix the Debt, it means the cost of paying for the bills already accrued will soar. That’s because new borrowing is needed to pay for those bills.
“It’s predicted to go up at quite a quick clip at the end of the decade,” she said. “If there is any emergency that comes up, we can’t go into it as we did in the Great Recession. We’re really vulnerable to future crises. We’re really vulnerable to (interest) rates going up . if we don’t put this debt on a sustainable path.”
And the CBO’s grim outlook stops at the end of a 10-year period.
“It all gets worse,” MacGuineas warned. “They don’t show the second decade, but it gets much, much worse.”