159 NOTES TO THE FINANCIAL STATEMENTS

Note 26. Long-Term Fiscal Projections

The SLTFP is prepared pursuant to SFFAS No. 36, Comprehensive Long-Term Projections for the U.S. Government. The

financial statements, Note 26, and unaudited RSI provide information to aid readers of the Financial Report in assessing

whether current policies for federal spending and taxation can be sustained and the extent to which the cost of public services

received by current taxpayers will be shifted to future taxpayers. This assessment requires prospective information about

receipts and spending, the resulting debt, and how these amounts relate to the size of the economy. A sustainable policy is

defined as one where the ratio of federal debt held by the public to GDP (the debt-to-GDP ratio) is ultimately stable or

declining. The Financial Report does not address the sustainability of state and local government fiscal policy.

The projections and analysis presented here are extrapolations based on an array of assumptions described in detail

below. A fundamental assumption is that current federal policy will not change. This assumption is made so as to inform the

question of whether current fiscal policy is sustainable and, if it is not sustainable, the magnitude of needed reforms to make

fiscal policy sustainable. The projections are therefore neither forecasts nor predictions. If policy changes are implemented,

perhaps in response to projections like those presented here, then actual financial outcomes will be different than those

projected. The methods and assumptions underlying the projections are subject to continuing refinement.

The projections focus on future cash flows, and do not reflect either the accrual basis or the modified-cash basis of

accounting. These cash-based projections reflect receipts or spending at the time cash is received or when a payment is made

by the government. In contrast, accrual-based projections would reflect amounts in the time period in which income is earned

or when an expense or obligation is incurred. The cash basis accounting underlying the long-term fiscal projections is

consistent with methods used to prepare the SOSI and the generally cash-based federal budget.

The SLTFP displays the PV of 75-year projections for various categories of the federal government’s receipts and noninterest spending.9 The projections for FYs 2021 and 2020 are expressed in PV dollars and as a percent of the PV of GDP10 as

of September 30, 2021 and September 30, 2020, respectively. The PV of a future amount, for example $1.0 billion in October

2096, is the amount of money that if invested on September 30, 2021 in an account earning the government borrowing rate

would have a value of $1.0 billion in October 2096.

11

The PV of a receipt or spending category over 75 years is the sum of the annual PV amounts. When expressing a receipt

or spending category over 75 years as a percent of GDP, the PV dollar amount is divided by the PV of GDP over 75 years.

Measuring receipts and spending as a percent of GDP is a useful indicator of the economy’s capacity to sustain federal

government programs.

Fiscal Projections

Receipt categories in the long-term fiscal projections include individual and corporation income taxes, Social Security

and Medicare payroll taxes, and a residual remaining category of “other receipts.” Non-interest spending categories include

discretionary spending that is funded through annual appropriations, such as spending for national security; and mandatory

(entitlement) spending that is generally funded with permanent or multi-year appropriations, such as spending for Social

Security and Medicare. This year’s projections for Social Security and Medicare are based on the same economic and

demographic assumptions that underlie the 2021 Social Security and Medicare Trustees’ Reports and the 2021 SOSI, which

include the estimated effects of the COVID-19 pandemic and ensuing recession, while comparative information presented

from last year’s report is based on the 2020 Social Security and Medicare Trustees’ Reports and the 2020 SOSI.12 Projections

for the other categories of receipts and spending are consistent with the economic and demographic assumptions in the

Trustees’ Reports and include updates for actual budget results for FY 2021 or budgetary estimates from the President’s FY

2022 Budget. Where possible, those budget totals are adjusted before spending is projected to remove outlays for programs or

activities that are judged to be temporary, such as spending related to the COVID-19 pandemic and economic recovery.

Where not possible, budget totals were not adjusted, resulting in higher projections of future spending, increasing the

uncertainty surrounding this year’s projections.

9 For the purposes of this analysis, spending is defined in terms of outlays. In the context of federal budgeting, spending can either refer to budget authority –

the authority to commit the government to make a payment; to obligations – binding agreements that will result in payments, either immediately or in the

future; or to outlays – actual payments made.

10 GDP is a standard measure of the overall size of the economy and represents the total market value of all final goods and services produced domestically

during a given period of time. The components of GDP are: private sector consumption and investment, government consumption and investment, and net

exports (exports less imports). Equivalently, GDP is a measure of the gross income generated from domestic production over the same time period.

11 PVs recognize that a dollar paid or collected in the future is worth less than a dollar today because a dollar today could be invested and earn interest. To

calculate a PV, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are summed.

12 Social Security and Medicare Trustees’ Reports can be found at https://www.ssa.gov/OACT/TR/.
NOTES TO THE FINANCIAL STATEMENTS 160

The projections assume the continuance of current policy which, builds off current law, but can be different than current

law in cases where lawmakers have in the past periodically changed the law in a consistent way. The specific assumptions

that depart from current law and are used for the current policy basis of these projections are explained below.

The projections shown in the SLTFP are made over a 75-year time frame, consistent with the time frame featured in the

Social Security and Medicare Trustees’ Reports. However, these projections are for fiscal years starting on October 1,

whereas the Trustees’ Reports feature calendar-year projections. Using fiscal years allows the projections to start from the

actual budget results from FYs 2021 and 2020.

The Infrastructure Investment and Jobs Act (P.L. 117-58) was signed into law on November 15, 2021, and is therefore

not reflected in the projections shown in the Statements of Long-Term Fiscal Projections or this note and cannot be

reasonably estimated. See Note 31—Subsequent Events for additional information.

This year’s estimate of the 75-year PV imbalance of receipts less non-interest spending is 5.7 percent of the current 75-

year PV of GDP, compared to 4.8 percent as was projected in last year’s Financial Report.

13 The above table reports the

effects of various factors on the updated projections.

• The largest factor affecting the projections—increasing the imbalance as a share of the 75-year PV of GDP by 0.4

percentage points ($6.8 trillion)—is attributable to actual budget results for FY 2021 and the budgetary estimates

published in the FY 2022 President’s Budget. Actual budget results for FY 2021 lead to higher 75-year PV of

spending for mandatory programs other than Social Security, Medicare, and Medicaid. Budgetary estimates result in

higher 75-year PVs for individual income tax receipts and outlays for non-defense discretionary programs. See

discussion below regarding assumptions used for receipts and spending projections.

• The second largest factor was the update of economic and demographic assumptions which increases the imbalance

as a share of the 75-year PV of GDP by 0.2 percentage points ($6.3 trillion). The long-term fiscal projections are

based on the same economic and demographic assumptions that underlie the Trustees’ Reports, and the effects of the

COVID-19 pandemic were first reflected in the assumptions for the 2021 Trustees’ Reports. Higher wage

projections increase the 75-year PV of individual income tax and social insurance receipts and outlays for Social

Security. Higher near-term growth in GDP had the effect of increasing the 75-year PV of discretionary spending and

spending for mandatory programs other than Social Security, Medicare, and Medicaid.

13 The fiscal imbalances reported in the long-term fiscal projections do not include the initial level of publicly held debt, which was $22.3 trillion in 2021 and

$21.0 trillion in 2020, and, therefore, they do not by themselves answer the question of how large fiscal reforms must be to make fiscal policy sustainable.

See “Sustainability and the Fiscal Gap” and footnote 17 for additional discussion. More information on the projections in last year’s Financial Report can be

found in Note 24 to the financial statements here: https://fiscal.treasury.gov/reports-statements/#.
161 NOTES TO THE FINANCIAL STATEMENTS

• The third largest factor is the effect of new Social Security, Medicare, and Medicaid program-specific actuarial

assumptions, which increase this imbalance as a share of the 75-year PV of GDP by 0.2 percentage points ($3.6

trillion).

14

• The last factor in the table, the change in reporting period – the effect of shifting calculations from 2021 through

2095 to 2022 through 2096 – increases the imbalance of the 75-year PV of receipts less non-interest spending by

$1.4 trillion.

The net effect of the changes in the table above, equal to the penultimate row in the SLTFP, shows that this year’s

estimate of the overall 75-year PV of receipts less non-interest spending is negative 5.7 percent of the 75-year PV of GDP

(negative $97.6 trillion, as compared to a GDP of $1,724.4 trillion). This imbalance can be broken down by funding source.

Spending projections exceeded receipts by 4.0 percent of GDP (about $68.6 trillion) among programs funded by the

government’s general revenues, and there is an imbalance of 1.7 percent of GDP (about $29.0 trillion)15 for the combination

of Social Security (OASDI) and Medicare Part A, which under current law are funded with payroll taxes and not in any

material respect with general revenues.16, 17 By comparison, the FY 2020 projections showed that programs funded by the

government’s general revenues had an excess of spending over receipts of 3.3 percent of GDP ($53.9 trillion) while the

payroll tax-funded programs had an imbalance of spending over receipts of 1.6 percent of GDP ($25.6 trillion).

Sustainability and the Fiscal Gap

This report presents data, including debt, as a percent of GDP to help readers assess whether current fiscal policy is

sustainable. The debt-to-GDP ratio was approximately 100 percent at the end of FY 2021. As discussed further in the

unaudited RSI, the projections based on this report’s assumptions indicate that current policy is not sustainable. If current

policy is left unchanged, the projections show the debt-to-GDP ratio will rise to 200 percent by 2041 and reach 701 percent in

2096. Moreover, if the trends that underlie the 75-year projections were to continue, the debt-to-GDP ratio would continue to

rise beyond the 75-year window.

The fiscal gap measures how much the primary surplus (receipts less non-interest spending) must increase in order for

fiscal policy to achieve a target debt-to-GDP ratio in a particular future year. In these projections, the fiscal gap is estimated

over a 75-year period, from 2022 to 2096, and the target debt-to-GDP ratio is equal to the ratio at the beginning of the

projection period, in this case the estimated debt-to-GDP ratio at the end of FY 2021. The target year is the last year of the

75-year period (2096).

The 75-year fiscal gap under current policy is estimated at 6.2 percent of GDP, which is 32.4 percent of the 75-year PV

of projected receipts and 25.0 percent of the 75-year PV of non-interest spending. This estimate of the fiscal gap is 0.8

percentage points larger than was estimated in 2020 (5.4 percent of GDP).

The projections show that projected primary deficits average 5.7 percent of GDP over the next 75 years under current

policy. If policies were put in place that would result in a zero fiscal gap, the average primary surplus over the next 75 years

would be 0.6 percent of GDP, 6.2 percentage points higher than the projected PV of receipts less non-interest spending

shown in the SLTFP. In these projections, closing the fiscal gap requires running a substantially positive level of primary

surplus, rather than simply eliminating the primary deficit. The primary reason is that the projections assume future interest

rates will exceed the growth rate of GDP. Achieving primary balance (that is, running a primary surplus of zero) implies that

14 For more information on Social Security and Medicare actuarial estimates, refer to Note 25, “Social Insurance.”

15 The 75-year PV imbalance for Social Security and Medicare Part A of $29.0 trillion is comprised of several line items from the SLTFP – Social Security

outlays net of Social Security payroll taxes ($30.0 trillion) and Medicare Part A outlays net of Medicare payroll taxes ($10.4 trillion) – as well as

subcomponents of these programs not presented separately in the statement. These subcomponents include Social Security and Medicare Part A

administrative costs that are classified as non-defense discretionary spending ($0.6 trillion) and Social Security and Medicare Part A income other than

payroll taxes: taxation of benefits (-$5.4 trillion), federal employer share (-$1.5 trillion), and other income (-$5.0 trillion).

16 Social Security and Medicare Part A expenditures can exceed payroll tax revenues in any given year to the extent that there are sufficient balances in the

respective trust funds; these balances derive from past excesses of payroll tax revenues over expenditures and interest earned on those balances and represent

the amount the General Fund owes the respective trust fund programs. When spending does exceed payroll tax revenues, as has occurred each year since

2008 for Medicare Part A and 2010 for Social Security, the excess spending is financed first with interest due from the General Fund and secondly with a

drawdown of the trust fund balance; in either case, the spending is ultimately supported by general revenues or borrowing. Under current law, benefits for

Social Security and Medicare Part A can be paid only to the extent that there are sufficient balances in the respective trust funds. In order for the long-term

fiscal projections to reflect the full size of these program’s commitments to pay future benefits, the projections assume that all scheduled benefits will be

financed with borrowing to the extent necessary after the trust funds are depleted.

17 The fiscal imbalances reported in the long-term fiscal projections are limited to future outlays and receipts. They do not include the initial level of

publicly-held debt, $22.3 trillion in 2021 and $21.0 trillion in 2020, and therefore they do not by themselves answer the question of how large fiscal reforms

must be to make fiscal policy sustainable, or how those reforms divide between reforms to Social Security and Medicare Part A and to other programs. Other

things equal, past cash flows (primarily surpluses) for Social Security and Medicare Part A reduced federal debt at the end of 2021 by $2.9 trillion (the trust

fund balances at that time); the contribution of other programs to federal debt at the end of 2021 was therefore $25.1 trillion. Similarly, because the $29.0

trillion imbalance between outlays and receipts over the next 75 years for Social Security and Medicare Part A does not take account of the Social Security

and Medicare Part A trust fund balances, it overstates the magnitude of reforms necessary to make Social Security and Medicare Part A solvent over 75

years by $2.9 trillion. The $2.9 trillion combined Social Security and Medicare Part A trust fund balance represents a claim on future general revenues.
NOTES TO THE FINANCIAL STATEMENTS 162

the debt held by the public grows each year by the amount of interest spending, which under these assumptions would result

in debt growing faster than GDP.

Assumptions Used and Relationship to Other Financial Statements

A fundamental assumption underlying the projections is that current federal policy (defined below) does not change.

The projections are therefore neither forecasts nor predictions, and do not consider large infrequent events such as natural

disasters, military engagements, or economic crises. By definition, they do not build in future changes to policy. If policy

changes are enacted, perhaps in response to projections like those presented here, then actual fiscal outcomes will be different

than those projected.

Even if policy does not change, actual spending and receipts could differ materially from those projected here. Longrange projections are inherently uncertain and are necessarily based on simplifying assumptions. For example, one key

simplifying assumption is that interest rates paid on debt held by the public remain unchanged, regardless of the amount of

debt outstanding. To the contrary, it is likely that future interest rates would increase if the debt-to-GDP ratio rises as shown

in these projections. To help illustrate this uncertainty, projections that assume higher and lower interest rates are presented in

the “Alternative Scenarios” discussion in the unaudited RSI section of this Financial Report.

As is true for prior long-term fiscal projections for the Financial Report, the assumptions for GDP, interest rates, and

other economic and demographic variables underlying this year’s projections are the same assumptions that underlie the most

recent Social Security and Medicare Trustees’ Report projections, adjusted for historical revisions that occur annually. These

assumptions differ from those in the President’s Budget because they extend for 75 years, rather than 25 years. Additionally,

they assume extension of current policy whereas the economic assumptions in the President’s Budget assume full

implementation of policies reflected in the Budget.18 The use of discount factors consistent with the Social Security Trustees’

rate allows for consistent PV calculations over 75 years between the SLTFP and the SOSI.

The following bullets summarize the key assumptions used for the categories of receipts and spending presented in the

SLTFP and the disclosures:

• Social Security: Projected Social Security (OASDI) spending excludes administrative expenses, which are

classified as discretionary spending, and is based on the projected spending in the 2021 Social Security Trustees’

Report for benefits and for the Railroad Retirement interchange. The projections of Social Security payroll taxes and

Social Security spending are based on future spending and payroll taxes projected in the 2021 Social Security

Trustees’ Report, adjusted for presentational differences and converted to a fiscal year basis. More information

about the assumptions for Social Security cost growth can be found in Note 25 and the unaudited RSI discussion of

Social Insurance.

• Medicare: Projected Medicare spending also excludes administrative expenses, which are classified as discretionary

spending, and is based on projected spending from the 2021 Medicare Trustees’ Report. The projections here make

some adjustments to the Trustees’ Report projections. Medicare Part B and D premiums, as well as state

contributions to Part D, are subtracted from gross spending in measuring Part B and Part D spending, just as they are

subtracted from gross cost to yield net cost in the financial statements.19 Here, as in the federal budget, premiums are

treated as “negative spending” rather than receipts since they represent payment for a service rather than payments

obtained through the government’s sovereign power to tax. This is similar to the financial statement treatment of

premiums as “earned” revenue as distinct from all other sources of revenue, such as taxes. The projections are based

on Medicare spending in the Medicare Trustees’ Report, adjusted for presentational differences and converted to a

fiscal year basis. Medicare Part A payroll taxes are projected similarly. More information about the assumptions for

Medicare cost growth can be found in Note 25 and the unaudited RSI discussion of Social Insurance. As discussed

in Note 25, there is uncertainty about whether the reductions in health care cost growth assumed in the Medicare

Trustees’ Report will be fully achieved. Note 25 illustrates this uncertainty by considering Medicare cost growth

assumptions under varying policy assumptions.

• Medicaid: The Medicaid spending projections start with the projections from the 2018 Medicaid Actuarial Report

prepared by CMS’s Office of the Actuary, which is the most recent report available.

20 These projections are based on

recent trends in Medicaid spending; the demographic, economic, and health cost growth assumptions in the 2018

Medicare Trustees’ Report; and projections of the effect of the PPACA on Medicaid enrollment. The projections in

the Medicaid Actuarial Report, which end in 2027, are adjusted to accord with the actual Medicaid spending in FY

2021. Actual Medicaid spending includes temporary spending increases due to changes in enrollment and other

18 See the FY 2022 President’s Budget, Analytical Perspectives Volume, Chapter 3 “Long-Term Budget Outlook.”

19 Medicare Part B and D premiums and state contributions to Part D are subtracted from the Part B and D spending displayed in the SLTFP. The total 75-

year PV of these subtractions is $19.9 trillion, or 1.2 percent of GDP.

20 Christopher J. Truffer, Kathryn E. Rennie, Lindsey Wilson, and Eric T. Eckstein II, 2018 Actuarial Report on the Financial Outlook for Medicaid, Office

of the Actuary, Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services.
163 NOTES TO THE FINANCIAL STATEMENTS

temporary measures related to the pandemic. The amounts related to these temporary spending increases cannot be

identified, which adds uncertainty to the projections. After 2027, the projections assume no further change in State

Medicaid coverage under the PPACA, and the numbers of aged beneficiaries (65-plus years) and non-aged

beneficiaries (less than 65 years) are expected to grow at the same rates as the aged and non-aged populations,

respectively. Medicaid costs per beneficiary are assumed to grow at the same rate as Medicare benefits per

beneficiary, as is generally consistent with the experience since 1987. Between 1987 and 2017, the average annual

growth rates of spending per beneficiary for Medicaid and Medicare were within 0.3 percentage point of each other.

Projections of Medicaid spending are subject to added uncertainty related to: 1) assumed reductions in health care

cost growth discussed above in the context of Medicare; 2) the projected size of the Medicaid enrolled population,

which depends on a variety of factors, including future state actions regarding the PPACA Medicaid expansion; and

3) certain limitations relating to the data used to generate the projected per enrollee spending in the 2018 Medicaid

actuarial report.

• Other Mandatory Spending: Other mandatory spending includes federal employee retirement, veterans’ disability

benefits, and means-tested entitlements other than Medicaid. Current mandatory spending components that are

judged permanent under current policy are assumed to increase by the rate of growth in nominal GDP starting in

2022, implying that such spending will remain constant as a percent of GDP.21,22 Projected spending for insurance

exchange subsidies starting in 2022 grows with growth in the non-elderly population and with the NHE projected

per enrollee cost growth for other private health insurance for the NHE projection period (through 2028 for the FY

2021 projections), and with growth in per enrollee health care costs as projected for the Medicare program after that

period. As discussed in Note 25, there is uncertainty about whether the reductions in health care cost growth

projected in the Medicare Trustees’ Report will be fully achieved. Projected exchange subsidy spending as a percent

of GDP remains below the failsafe provision in the PPACA that limits the federal share of spending to 0.504 percent

of GDP.

• Defense and Non-defense Discretionary Spending: These projections assume discretionary spending in 2022

equals the baseline estimate from the President’s Budget then grows at the same rate as nominal GDP. Separate

funding levels for overseas contingency operations are assumed to end after 2021, similar to the presentation in the

President’s FY 2022 Budget. The President’s Budget includes spending related to the pandemic and economic

recovery that is considered temporary. The amounts related to these temporary spending increases cannot be

identified, which adds uncertainty to the projections. To illustrate sensitivity to different assumptions, PV

calculations under alternative discretionary growth scenarios are presented in the unaudited “Alternative Scenarios”

RSI section.

• Receipts (Other than Social Security and Medicare Payroll Taxes): Individual income taxes are based on the

share of salaries and wages in the current law baseline projection in the FY 2022 President’s Budget, and the salaries

and wages projections in the Social Security 2021 Trustees’ Report. That baseline accords with the tendency of

effective tax rates to increase as growth in income per capita outpaces inflation (also known as “bracket creep”) and

the expiration dates of individual income and estate and gift tax provisions of TCJA.

23 After reaching 23 percent of

wages and salaries in 2028, individual income taxes increase gradually to 29 percent of wages and salaries in 2096

as real taxable incomes rise over time and an increasing share of total income is taxed in the higher tax brackets.

Through the first 10 years of the projections, corporation tax receipts as a percent of GDP reflect the economic and

budget assumptions used in developing the FY 2022 President’s Budget ten-year advance baseline budgetary

estimates. After this time, corporation tax receipts grow at the same rate as nominal GDP. All other receipts also

reflect FY 2022 President’s Budget levels as a share of GDP throughout the budget window and grow with GDP

outside of the budget window. Corporation tax receipts peak at 1.6 percent of GDP in 2025 before falling to 1.3

percent of GDP in 2031, where they stay for the remainder of the projection period. The ratio of all other receipts

combined, excluding corporation tax receipts, to GDP is estimated to be 1.6 percent in 2022, after which it gradually

declines to 1.2 percent by 2031 where it remains through the projection period. To illustrate uncertainty, PV

calculations under higher and lower receipts growth scenarios are presented in the “Alternative Scenarios” section.

21 Other mandatory spending in 2021 from legislation enacted in response to the COVID-19 pandemic is considered temporary and is not assumed to

increase with nominal GDP. Such spending is identified using Disaster Emergency Fund Code attributes in budget execution data for the following: the

Families First Coronavirus Response Act (P.L. 116-127); the CARES Act (P.L. 116-136); the Paycheck Protection Program and Health Care Enhancement

Act (P.L. 116-139); the CAA (P.L. 116-260, Division N); and the ARP (P.L. 117-2). Spending data for COVID-19 response legislation are available on

USAspending.gov.

22 This assumed growth rate for other mandatory programs after 2022 is slightly higher than the average growth rate in the most recent OMB and

Congressional Budget Office 10-year budget baselines.

23 The 2020 projections assumed the individual income and estate and gift tax provisions of the TCJA would continue past their legal expiration on

December 31, 2025. See the FY 2020 Financial Report.
NOTES TO THE FINANCIAL STATEMENTS 164

• Debt and Interest Spending: Interest spending is determined by projected interest rates and the level of outstanding

debt held by the public. The long-run interest rate assumptions accord with those in the 2021 Social Security

Trustees’ Report.24 The average interest rate over this year’s projection period is 4.4 percent, down slightly from the

2020 Financial Report’s 4.5 percent. These rates are also used to convert future cash flows to PVs as of the start of

FY 2022. Debt at the end of each year is projected by adding that year’s deficit and other financing requirements to

the debt at the end of the previous year.

Departures of Current Policy from Current Law

The long-term fiscal projections are made on the basis of current policy, which in some cases is assumed to be different

from current law. The notable differences between current policy that underlies the projections and current law are: 1)

projected spending, receipts, and borrowing levels assume raising or suspending the current statutory limit on federal debt; 2)

continued discretionary appropriations are assumed throughout the projection period; 3) scheduled Social Security and

Medicare Part A benefit payments are assumed to occur beyond the projected point of trust fund depletion; and 4) many

mandatory programs with expiration dates prior to the end of the 75-year projection period are assumed to be reauthorized.

As is true in the Medicare Trustees’ Report and in the SOSI, the projections incorporate programmatic changes already

scheduled in law, such as the PPACA productivity adjustment for non-physician Medicare services and the expiration of

certain physician bonus payments in 2025.

24 As indicated in the more detailed discussion of Social Insurance in Note 25 to the financial statements.