A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

A citizens guide to the report of the united states government 

The federal government’s financial health 
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

OVERVIEW

Fiscal Year (FY) 2008 was a year of unprecedented change in the financial position and condition of the U.S. 

Government, with potentially more changes in the near future. The Government’s net operating cost and budget 

deficit both more than doubled during FY 2008. Chart 1 shows that the net operating cost increased from 

$276 billion in FY 2007 to just over $1 trillion in FY 2008, and the budget deficit jumped to $455 billion, 

compared with a deficit of $163 billion in FY 2007. These increases were due in part to the developing weakness 

in the economy throughout 2008 and to the Administration’s response to that weakness. Due to the weakening 

economy, corporate tax revenues declined by $68 billion. Net operating cost increased, mainly due to large 

increases in revaluations of long-term employee and veteran benefits payable. See ‘Where We Are Now’, p.3.

 

The unprecedented volatility in the Nation’s mortgage and credit markets in 2008 has led to extraordinary actions 

by the Government intended to limit the extent of this turmoil. Congress passed and the President signed the 

Housing and Economic Recovery Act (HERA) and the Emergency Economic Stabilization Act of 2008 (EESA) in 

an effort to stabilize the financial sector and protect the economy. Other actions with large financial consequences 

have been taken by the Federal Reserve, the central bank of the United States. So far, the largest financial effects 

of these actions have not yet appeared in the financial statements or the budget, but they will show up in FY 2009, 

and they will likely result in continued historically high budget deficit and net operating cost levels. See 

‘The Government Acts to Address the Financial Crisis’, p. 5.

Chart 1

U.S. Budget Deficit & Net Operating Cost

2004-2008

$760.3

$275.5

$1,009.1

$449.5

$615.6

$454.8

$162.8

$247.7

$318.6

$412.3

$100.0

$ 00.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

$1,000.0

$1,100.0

2004 2005 2006 2007 2008

Dollars in Billions

Net Operating Cost

Budget Deficit

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

The Government’s immediate challenge is to deal with the current financial crisis and the resulting economic 

recession. Net operating costs and budget deficits are likely to remain elevated for some time as the Government 

works to restore market stability. If the Government is to retain the ability to manage a financial crisis such as the 

one today, it must eventually address the long-term fiscal imbalance resulting from Social Security, Medicare, and 

Medicaid. The Government’s fiscal policies for these programs as currently structured are not sustainable. Without 

changes, spending for Social Security, Medicare, and Medicaid would permanently and dramatically increase the 

Government’s budget deficit and debt, leading eventually to renewed financial and economic instability. See ‘Where 

We Are Headed’ p. 7.

This Citizen’s Guide (Guide) highlights important information contained in the 2008 Financial Report of the 

United States Government. The Secretary of the Treasury, Director of the Office of Management and Budget 

(OMB), and Acting Comptroller General of the United States believe that the information discussed in this Guide 

is important to all Americans. 

Chart 2

Debt held by the Public

(as a percent of GDP)

0

100

200

300

400

500

600

700

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Percent of GDP

World War II 

 109% of GDP

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

WHERE WE ARE NOW 

The Economy and the Deficit 

The economy fell into recession in FY 2008. The ongoing slump in the residential homebuilding sector and the 

effects of record high energy prices and turmoil in financial markets dampened both consumer spending and private 

business investment. Employment declined steadily beginning in January 2008 with a loss of about 1 million jobs 

through the final quarter of FY 2008. Overall inflation accelerated through much of the year because of significant 

increases in energy and food prices, but the core inflation rate (which excludes food and energy) was more stable. 

Partly as a result of higher inflation, real wages fell through FY 2008. Corporate profits, outside the energy sector, 

weakened or declined. Federal tax receipts remained relatively constant, and spending growth accelerated. As a 

result, the 2008 budget deficit increased to $455 billion – more than double the 2007 deficit of $163 billion.

What Came In and What Went Out 

What came in? In FY 2008, Government revenue totaled $2.7 trillion. Chart 3 shows that total Government 

revenue remained relatively constant, compared to FY 2007, increasing slightly by $34 billion or just over 1 

percent. Individual income tax revenue increased by $79 billion or almost 4 percent, but corporate income tax 

revenue substantially decreased by $68 billion or 18.4 percent in FY 2008. The corporate revenue decrease is 

attributable largely to changing economic conditions as the economy entered a recession in December 2007. Social 

Security tax revenue of $671 billion and Medicare tax revenue of $197 billion accounted for approximately onethird of total revenues in FY 2008.

Chart 3

Revenues of the U.S. Government 

FY 2004-2008

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008

Dollars in Trillions

Total Revenue

Other Individual tax

revenue

Social Security and Medicare 

Tax Revenue

Corporate income tax revenue 

0.0

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

What went out? The Government’s net cost totaled $3.6 trillion, an increase of $731 billion or more than 25 

percent over FY 2007. The Government’s “bottom line” net operating cost—the difference between revenue and 

net cost—exceeded $1 trillion for the first time—more than triple the FY 2007 net operating cost of $276 billion. 

Chart 4 shows that the largest contributors to the Government’s net cost include the Departments of Health and 

Human Services (HHS) and Defense (DoD), the Social Security Administration, and the interest paid on debt held 

by the public. In FY 2008, the Department of Veterans Affairs’ (VA) contribution to net cost increased from just 

over 2 percent or $59.4 billion in 2007 to nearly 12 percent or $430.4 billion, as shown in Chart 4 in FY 2008. 

This $371 billion increase (in net cost) stems almost entirely from a $339 billion increase in VA’s estimated actuarial 

liabilities for veterans’ benefits. This net cost increase was the largest by far at VA in recent years and accounted 

for more than half of the increase in total net cost across the Government. The substantial reestimation of VA’s 

actuarial liabilities was driven largely by changes in the discount rates used and in revised estimates of the number 

of veterans that became eligible for and applied to receive benefits. The Financial Report contains additional 

information about these and other changes. 

Cost vs. Deficit: What’s the Difference? 

In FY 2008, the Government’s budget deficit 

of $454.8 billion (budget basis reporting) was 

$554.3 billion less than its net operating cost 

(from the Financial Report) of just over $1 

trillion. Table 1 shows that almost the entire 

difference between the Government’s budget 

deficit and net operating costs in FY 2008 can 

be attributed to a $550 billion increase in net 

accrued but unpaid Federal employee and veteran 

benefits. This amount is not included in the 

Budget, but is recognized as a cost and liability in 

the financial statements, because it is cost that has 

not yet been paid.

Chart 4

Net Cost of the U.S. Government: 2008

Department 

of Defense

20.3% All Other

23.5%

Interest on 

Debt Held by

the Public

6.6%

Department 

of Veterans 

Affairs

11.8%

Social 

Security

Admin

18.2%

Department 

of Health and 

Human 

Services

19.6%

Table 1: Budget Deficit vs. Net Operating Cost

Dollars in billions 2008 2007

Budget Deficit $454.8 $162.8

 Change in:

 Federal Employee and Veteran

 Benefits Payable $549.8 $90.1

 Environmental & Disposal Liabilities $0.8 $36.8

 Capitalized Fixed Assets, Net ($46.6) ($2.6)

 Other $50.3 ($11.6)

Net Operating Cost $1,009.1 $275.5

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

The President’s Budget (Budget) is the Government’s primary financial planning and control tool. It describes how 

the Government spent and plans to spend its money, comparing receipts, or cash paid to the Government, to primarily 

cash-based outlays, or payments to individuals, businesses or other parties. The Financial Report of the United States 

Government (Report) reports on the accrual-based cost of operations, the sources used to finance the Government’s 

costs, how much the Government owns and owes, and the outlook for fiscal sustainability. It compares the Government’s 

revenues, or amounts that the Government has collected and expects to collect, but has not necessarily received, to its costs

to derive net operating cost. Together, the Budget and the Report present a complementary perspective on the Nation’s 

financial health and provide a valuable management tool for the country’s leaders.

The Debt

Historically, the Government has incurred debt: (1) when it borrows from the public to fund budget deficits, and (2) 

when Government funds invest excess receipts in government securities. However, in FY 2008, this relationship has 

changed, with Treasury borrowing $300 billion to increase cash balances at the Federal Reserve (Fed) to support the 

Fed’s market stabilization efforts (discussed later in this Guide). The implementations of both HERA and EESA have 

the potential to increase future borrowings by more than $1 trillion. Substantial borrowings in FY 2009 and beyond are 

expected to fund equity and other asset purchases in financial institutions and from the markets.

Of the Government’s total debt of about $10 trillion at the end of FY 2008, approximately $5.8 trillion was debt held 

by the public in the form of Treasury securities, such as bills, notes, and bonds. The ‘public’ consists of individuals, 

corporations, state and local governments, Federal Reserve Banks, and foreign governments. The balance—more than 

$4.2 trillion—was intragovernmental debt, which arises when one part of the Government borrows from another. It 

represents debt held by Government funds, including the Social Security ($2.4 trillion) and Medicare ($378 billion) trust 

funds. These Government funds are typically required to invest any excess annual receipts in Federal securities. When the 

Government borrows these excess receipts, it still has an obligation to repay them to the Government funds with interest. 

Gross Federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit), which has been 

recently raised to $11.3 trillion. 

If budget deficits continue, the Government will have to borrow more from the public in order to make benefit 

payments and to pay for other programs. This Guide examines these and other indicators of the challenges the 

Government will face in maintaining long-term fiscal sustainability.

The Government Acts to Address the Financial Crisis 

Falling asset values in the mortgage and credit markets sparked extraordinary events and actions involving many 

financial institutions in the United States in 2008. Much of the recent market instability can be attributed to the 

decline in the housing market aggravated by the recession that began in December 2007. Declines in the value of 

mortgage-backed securities (MBS) and sub-prime credit market debt precipitated significant portfolio losses across 

many financial and credit institutions that had invested heavily in these instruments in recent years. These losses led to 

financial market instability, forced mergers, and bankruptcies. A sharp reduction in credit availability resulted as banks 

and financial institutions struggled to maintain solvency in the face of these widespread losses. The large Government 

Sponsored Enterprises (GSEs)1

 Fannie Mae and Freddie Mac, which create and guarantee MBS, were placed into 

conservatorship. Other financial institutions required large infusions of Federal funds to remain in business. 

Exhibit 1 on the following page summarizes significant actions taken by the Federal Government to respond to 

these events. Further information is reported in the 2008 Financial Report.

1. GSEs are chartered by the Federal Government and pursue a Federally-mandated mission (e.g., Fannie Mae and Freddie 

Mac were created to provide stability and liquidity in the secondary mortgage market). However, Fannie Mae and Freddie 

Mac were both distinctly established as corporate entities – owned by shareholders of stock traded on the New York Stock 

Exchange. Their debt is not guaranteed by the Federal Government.

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

Exhibit 1 - The Fiscal Crisis at a Glance

The Federal Government is taking unprecedented actions, some of which are summarized below, to stabilize the 

economy. The impact of these actions will largely be reflected in the FY 2009 financial statements and beyond. 

Housing and Economic Recovery Act (HERA) (July 2008) – HERA established a new regulatory agency, the 

Federal Housing Finance Agency (FHFA), with enhanced regulatory authority over the housing GSEs. HERA 

also authorized the Treasury Department to provide financial support for the housing GSEs. Treasury, in 

conjunction with the FHFA’s decision to place Fannie Mae and Freddie Mac into conservatorship, has agreed 

to: (1) provide capital of up to $200 billion to Fannie Mae and Freddie Mac should it be needed; and 

(2) purchase GSE-guaranteed MBS. As of September 30, 2008, the Federal Government’s financial statements 

recognized a liability for $13.8 billion of capital to be paid to Freddie Mac, investments of $3.3 billion for 

purchased MBS, and $7 billion for preferred stock and stock warrants received from the GSEs. Additionally, 

Treasury established a facility to lend money to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, 

if requested. Also, the HOPE for Homeowners Program was established under HERA to help borrowers faced 

with foreclosure refinance through the Federal Housing Administration (FHA).

Emergency Economic Stabilization Act (EESA) (October 2008)– Under EESA, Treasury established the 

Troubled Asset Relief Program (TARP), which was authorized by the Act to purchase or insure up to $700 billion 

of “troubled assets” to stabilize financial markets and support financial institutions. As of December 9, 2008, 

Treasury has used over $200 billion in FY 2009 to purchase financial assets of qualifying entities. As FY 2009 

unfolds, the disposition of the balance will be determined. Amounts expended have been and are expected to 

continue to be treated as either investments or loans. The Government expects a recovery of at least some of these 

funds and possibly even to earn a positive return on amounts spent as economic conditions improve. In the short 

term, Treasury will need to increase borrowings. As these borrowings take place, Treasury’s ability to borrow for 

other purposes may become more challenging. In addition, the Federal Deposit Insurance Corporation (FDIC) 

deposit insurance was temporarily increased from $100,000 to $250,000 per depositor.

Also, the FDIC implemented a temporary liquidity guarantee program for participating institutions to 

guarantee newly issued senior unsecured debt and to provide full coverage of non-interest bearing deposit 

transaction accounts, regardless of dollar amount. Further, through the Supplementary Financing Program, 

Treasury increased its deposit balances with the Federal Reserve (Fed) to support the Fed’s market stabilization 

actions, which resulted in an increase in cash and debt held by the public. As of September 30, 2008, the 

deposit balance was $300 billion.

In addition to these actions, the Fed has been directly involved in addressing this financial crisis. They (1) 

have taken actions to support several prominent financial institutions, including Bear Stearns, American 

International Group (AIG), and Citigroup; (2) have developed a program to support the commercial paper 

market; and (3) are formulating plans to lend support for new car, student, and small-business loans. The vast 

majority of Fed actions and transactions will not directly impact the Government’s financial statements since 

the Fed is an independent organization and not considered a part of the Federal reporting entity. As such, their 

financial results are not consolidated into the Government’s financial statements. However, there is a potential 

that reduced Fed earnings will be available in the future for transfer to the Government.

Exhibit 1 - The Fiscal Crisis at a Glance

Information on these and the Government’s other market stabilization efforts under EESA

may be found at http://www.treas.gov/initiatives/eesa/

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

Where We Are Headed

As the first quarter of FY 2009 draws to a close, the Government is exploring a number of recovery strategies. Actions 

under HERA, EESA, and other initiatives are expected to restore confidence to lenders and consumers, and provide 

stability to the nation’s economy. Regardless, the dramatic measures that the Government has already taken and may 

take in the future could in the long term significantly impact fiscal sustainability. Despite the urgency with which the 

Government must act in the short term to restore market stability and emerge from the current recession, it must not lose 

sight of other key issues such as the entitlement programs that continue to pose a challenge to future fiscal sustainability. 

An Unsustainable Fiscal Path 

The projected growth in entitlement spending under current law – chiefly for Social Security, Medicare, and 

Medicaid – will ultimately affect every citizen in the nation. Continued growth in health care costs is expected 

to cause government spending for its major health programs to grow faster than both the economy and Federal 

revenues over the next 75 years2

 . Similarly, population aging is expected to cause the Government’s Social Security 

and health program costs and expenditures to increase as a share of GDP over that period. Consequently, total 

Government expenditures are projected to exceed total assumed revenue throughout the projection period, with the 

fiscal imbalance – between spending and revenue – growing larger each year into the future.

Chart 5 shows Government revenue and spending, expressed as a percentage of GDP, from 1970 through 20803

. 

For most of the past several decades, revenue as a share of GDP has averaged around 18 percent, with little 

variation4

. For this reason, revenue is assumed to be about 18 percent of GDP throughout the projection period. 

Chart 5 also shows that by 2080, costs related to the currently scheduled benefits for the three major entitlement 

programs are projected to be about equal to total Government revenue. By 2060, total Government expenditures 

are projected to be 45 percent of GDP – levels unseen since World War II, when Government expenditures reached 

44 percent of GDP. By 2080, expenditures could exceed 60 percent of GDP, more than three times the assumed 

Chart 5

Current Trends Are Not Sustainable

10.0

0.0

20.0

30.0

40.0

50.0

60.0

70.0

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

Net Interest

Other

Government

Medicaid

Medicare

Social Security

Total Revenues

Percent of GDP

2. The FY 2008 Statement of Social Insurance may be found in the 2008 Financial Report. 

3. Projected spending is based on scheduled Social Security and Medicare benefits and current spending trends.

4. GDP is one way of measuring the size of a nation’s economy and is defined as the total market value of all final goods and 

services that the nation produces in a given period. The projection that the government’s revenue as a percentage of GDP 

will remain relatively constant is based on historical data and trends that are not expected to change.

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

revenues. These large and growing deficits could increase Government debt levels as a percentage of GDP to 

unprecedented and unsustainable heights – from 170 percent by 2040 to over 600 percent by 2080 – far exceeding 

the historical high of 109 percent that occurred immediately following WWII and far exceeding the Government’s 

ability to fund program expenditures. It is important to note that precise expenditure projections change with 

different forecasting assumptions (e.g., life expectancy increases and health care cost growth), but even under a 

wide range of reasonable assumptions, budget deficits and debt are projected to increase dramatically5

. Should such 

dramatic increases occur, interest costs would increase, making the Federal Government’s fiscal path even more 

unsustainable, and the Government’s ability to borrow from the public could be affected. 

Preparing for the Future

With respect to entitlement spending, the nation must change course before the deficit and debt reach 

unprecedented heights. The Government must act to bring social insurance expenses and resources in balance. 

Delays will increase the magnitude of the reforms needed and will place more of the burden on future generations. 

There is no simple fix to the projected imbalance between social insurance expenditures and revenues. The precise 

amount of the Government’s future financial responsibilities is far from certain, as they are based on many complex 

calculations and assumptions. Nevertheless, the magnitude of these responsibilities and the pressing need to control 

their continued growth are evident.

The Government has made and is expected to continue to make a vast commitment of financial resources to 

establish and maintain stability in the credit markets. The Government expects that at least some of the financial 

assets acquired by the Government in its market stabilization efforts may eventually return full value to the taxpayer 

and possibly even earn a positive return on amounts spent as economic conditions improve. The Government 

has been able to take these stabilization actions because of the deep, liquid market for Treasury securities. The 

unsustainable growth in Social Security, Medicare, and Medicaid remains a long-term fiscal challenge to be 

addressed once the current credit crisis has passed and overall economic conditions have improved.

5. Chart 5 includes projections of scheduled benefits for Medicare and Social Security. The Medicare Trustees’ Report shows 

that, under current law, the Hospital Insurance Trust Fund will not have sufficient funds to pay scheduled benefits beginning 

in 2019. At that point, trust fund income would cover only 78 percent of scheduled benefits, falling to about 30 percent 

in 2082. The Social Security Trust Fund could encounter a similar problem. Under current law, trust fund income would 

cover only 78 percent of scheduled benefits in 2041 and only 75 percent by 2082.

KEY SUSTAINABILITY DATES

2008 Medicare Hospital Insurance benefits begin to

exceed program tax revenues.

2017 Social Security benefits begin to exceed program

tax revenues.

2040 Federal Debt held by the Public surpasses historic

high of 109% of GDP.

2080 Total Government cost is more than

3 times revenue.*

* Revenue is assumed to be the historical average of about 18 percent of GDP.

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

Looking Ahead

The 2008 Financial Report of the United States Government, issued by the U.S. Department of the Treasury, is a 

comprehensive financial report that provides a backdrop for both the Government’s current financial position and 

prospects for moving forward. It discusses the steps the Federal Government has taken to restore stability in the 

U.S. financial system. The issues discussed in the Citizen’s Guide and the Financial Report affect, and should be 

of interest to, every citizen. The Financial Report’s comprehensive reporting is intended to inform and support the 

decision-making needs of lawmakers and the public and to help keep the United States on solid financial ground. 

Find Out More

You will find more detail on these matters in the Financial Report. You are encouraged to explore the information 

it contains and to ask questions about how the Government manages taxpayers’ money. The 2008 Financial Report 

of the United States Government and other information about the nation’s finances are available at:

• U.S. Department of the Treasury’s Financial Management Service, 

http://www.fms.treas.gov/fr/index.html;

• OMB’s Office of Federal Financial Management, 

http://www.whitehouse.gov/omb/financial/index.html; and

• GAO, 

http://www.gao.gov/financial/fy2008financialreport.html.

This Citizens’ Guide highlights information in the 2008 Financial Report. The Government Accountability 

Office’s (GAO) complete audit report on the U.S. Government’s consolidated financial statements can be 

found beginning on page 165 of the Financial Report. For FY 2008 and FY 2007, GAO issued an unqualified 

or ‘clean’ opinion on the 2008 and 2007 Statements of Social Insurance. However, certain material financial 

reporting control weaknesses and other limitations on the scope of its work prevented GAO from expressing an

opinion on the remaining financial statements.

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

The Government’s Financial Position and Condition

The Financial Report of the U.S. Government (Report) provides the President, Congress, and the 

American people a comprehensive view of how the Federal Government is managing taxpayer dollars. It discusses the Government’s financial position and condition, its revenues and costs, assets and 

liabilities, and other responsibilities and commitments, as well as important financial issues that affect 

the Nation and its citizens both now and in the future.

The following table presents several key indicators of the Government’s financial health, which are 

discussed in greater detail in the Report.

billions of dollars 2008 2007 2006

stsoC ssorG $ )6.198,3( $ (3,157.3) $ (3,127.7)

seuneveR denraE $ 9.052 247.8$ $ 226.4

tsoC teN $ )7.046,3( $ (2,909.5) $ (2,901.3)

Total Taxes and Other Revenues $ 2,661.4 2,627.3$ $ 2,440.8

Other $ (29.8) 6.7$ $ 11.0

 tsoC gnitarepO teN $ )1.900,1( $ (275.5) $ (449.5)

stessA $ 7.479,1 1,581.1$ $ 1,496.5

Less: Liabilities, comprised of:

cilbuP eht yB dleH tbeD $ )2.638,5( $ (5,077.7) $ (4,867.5)

Federal Employee & Veteran Benefits $ (5,318.9) $ (4,769.1) $ (4,679.0)

seitilibaiL rehtO $ )1.320,1( $ (940.1) $ (866.4)

Total Liabilities $ (12,178.2) $ (10,786.9) $ (10,412.9)

Net Position (Assets Minus Liabilities) (1 $ 0,203.5) $ (9,205.8) $ (8,916.4)

Statement of Social Insurance: 

1

Closed Group (current participants) 2 $ (49,135) $ (45,062) $ (44,145)

Open Group (current + future participants) 3 $ (42,970) $ (40,948) $ (38,851)

 ticifeD tegduB deifinU $ )8.454( $ (162.8) $ (247.7)

A Snapshot of 

The Government's Financial Position & Condition

1 Present value of projected revenues and expenditures for scheduled benefits over the next 75 years of certain benefit programs that are referred to as 

Social Insurance (e.g., Social Security, Medicare). Not considered liabilites on the balance sheet. 

2 Includes current participants (i.e., receiving and/or are eligible to receive benefits) for the Social Security and Medicare programs ages 15 and over at

the start of the 75-year projection period, except for the 2007 Medicare programs for which current participants are assumed to be at least 18 years of 

age at the start of the 75-year projection period.

3 Includes all current and future projected participants over the 75-year projection period.

Budget Results

Sustainability Measures: 

The Statement of Social Insurance provides certain fiscal sustainability information concerning Social 

Security, Medicare, and other social insurance programs. 

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government