Budget Issues: Long-Term Fiscal Challenges
Published: 2002-02-27T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Combating terrorism and ensuring homeland security have created urgent claims on the nation's attention and on the federal budget. Although an economic recovery seems to be underway, the recession that began last spring has had real consequences for the budget. At the same time, the fiscal pressures created by the retirement of the baby boomers and rising health care costs continue unchanged. However, the surpluses also put the nation in a stronger position to respond to the events of September 11 and to the economic slowdown. The nation's commitment to surpluses will be tested. A return to surplus will require sustained discipline and difficult choices. Because the longer-term outlook is driven in large part by known demographic trends, the outlook 20 years from now is surer than the forecast for the next few years. The message of GAO's updated simulations remains the same as last year: absent structural changes in entitlement programs for the elderly, persistent deficits and escalating debt will overwhelm the budget in the long term. Both longer-term and new commitments undertaken after September 11 sharpen the need for competing claims and new priorities. A fundamental review of existing programs and activities is necessary both to increase fiscal flexibility and to make government fit the modern world. Stated differently, there is a need to consider the proper role of the federal government in the 21st century and how government should do business. The fiscal benchmarks and rules that moved the country from deficit to surplus expire this fiscal year. Any successor system should include a debate about reprioritization today and a better understanding of the long-term implications of different policy choices. Many things that the nation may be able to afford today may not be sustainable in the future.

section_title: Letter
paragraphs: I am pleased to return this year to present GAO’s perspective on the long- range fiscal policy challenges facing this Congress and our nation. We  meet today in a situation that seems very different from that of last  February. Today the challenges of combating terrorism and ensuring our  homeland security have come to the fore as urgent claims on our attention  and on the federal budget. While there are indications that an economic  recovery is underway, the recession that began last spring has had real  consequences for the budget. These are important changes in the last year.  At the same time, the known fiscal pressures created by the retirement of  the baby boom generation and rising health care costs remain the same.  Absent substantive reform of the entitlement programs, a rapid escalation  of federal spending for Social Security, Medicare, and Medicaid beginning  less than 10 years from now is virtually certain to overwhelm the rest of  the federal budget. Indeed, the slowing economy and tax and spending  decisions, including the increased spending levels necessary to respond to  new security challenges, have increased pressures on the budget.  Correspondingly, the ultimate task of addressing these needs without  unduly exacerbating the long-range fiscal challenge has become much  more difficult.
In my testimony today I make the following points:
The surpluses that many worked hard to achieve—with help from the  economy—not only strengthened the economy for the longer term but also  put us in a stronger position to respond to the events of September 11 and  to the economic slowdown than would otherwise have been the case.
Going forward, the nation’s commitment to surpluses will be tested: a  return to surplus will require sustained discipline and difficult choices.
Because the longer-term outlook is driven in large part by known  demographic trends, in some ways we can be surer about the outlook 20  years from now than the forecast for the next few years.
The message of GAO’s updated simulations remains the same as last year:  absent structural changes in entitlement programs for the elderly, in the  long term persistent deficits and escalating debt will overwhelm the  budget.
Both longer-term pressures and the new commitments undertaken after  September 11 sharpen the need to look at competing claims and new  priorities. A fundamental review of existing programs and activities is  necessary both to increase fiscal flexibility and to make government fit the  modern world. Stated differently, there is a need to consider what is the  proper role of the federal government in the 21st century and how should  the government do business in the future.
The fiscal benchmarks and rules that moved us from deficit to surplus  expire this fiscal year. Any successor system should facilitate both a  debate about reprioritization today and a better understanding of the long- term implications of different policy choices. Simply stated, there are  many things that we may be able to afford to do today but we may not be  able to sustain in the future.
subsections: section_title: The Fiscal Backdrop for Today’s Choices
paragraphs: Today it is evident that recent surpluses were the result not only of hard  choices made earlier in the 1990s, but also of fortuitous economic,  demographic, and policy trends that are no longer working for us as we  enter the 21st century. In retrospect, the nation emerged from deficits of  nearly three decades only to find itself in what has been called “the eye of  the storm.” The passage to surpluses was aided by a tailwind consisting of  (1) extraordinarily strong economic growth, (2) a slowing of health care  cost growth, (3) a demographic holiday stemming from low birth rates  during the Depression and World War II paired with a large workforce  resulting from the post-war baby boom—which together gave rise to a  stable worker-to-beneficiary ratio in Social Security, and (4) the fall of the  Soviet Union permitting a decline in defense spending as a share of the  economy.
The fiscal winds have now shifted—many of these fortunate trends have  now reversed course and are making the choices harder. Although it  appears the economy may have turned the corner, forecasters are not  showing a return to the extremely rapid growth the nation enjoyed during  the last half of the nineties. Health care costs have once again resumed  growing at double-digit rates. Reductions in defense spending can no  longer be used as a means to help fund other claims on the budget; indeed,  spending on defense and homeland security will grow as we seek to defeat  terrorism worldwide. Finally—and I know this is one of the reasons you  invited me here today—the nation’s demographic holiday is ending. In  2008—only 6 years from now—demographic storm clouds will begin to  shadow the baseline as the first wave of baby boomers become eligible to  claim Social Security.
However one allocates credit across the events and decisions that led to  years of surpluses, we benefited from that achievement. These large  surpluses not only helped in the short term by reducing debt and interest  costs but also strengthened the budget and the economy for the longer  term. The budgetary surpluses of recent years put us in a stronger position  to respond both to the events of September 11 and to the economic  slowdown than would otherwise have been the case.
However, going forward, the nation’s commitment to surpluses will truly  be tested. For the last few years surpluses were built in to the baseline so  that given a lack of policy action, there would be a surplus. Last year, the  Congressional Budget Office (CBO) baseline not only projected unified  surpluses for at least the 10-year window but also substantial surpluses in  the non-Social Security portion of the budget. Saving the Social Security  surplus became an achievable and compelling fiscal policy goal for the  nation in this context. This is no longer true. At least for the next several  years the baseline does not turn to unified surplus. A surplus in the non- Social Security portion of the budget is not projected under the baseline to  emerge until 2010. As a result, explicit policy actions on spending and/or  revenue will be necessary to return to and maintain surpluses over the  next 10 years.
section_title: The Known Demographic Challenge
paragraphs: Although in important ways you begin the task of crafting a budget this  year in a very different place than you did last year, in other ways the  responsibilities remain the same. We still have a stewardship obligation to  future generations. By stewardship obligation I mean that in making  budget decisions today, it is important to be mindful of their impact on the  future. This means that in responding to the legitimate needs of today, we  should take into account the longer-term fiscal pressures we face. The  message of GAO’s long-term simulations, updated using CBO’s new budget  estimates, is consistent with previous simulations: absent change,  spending for federal health and retirement programs eventually  overwhelms all other federal spending.
As we look ahead we face an unprecedented demographic challenge. A  nation that has prided itself on its youth will become older. Between now  and 2035, the number of people who are 65 or over will double. As the  share of the population over 65 climbs, federal spending on the elderly will  absorb larger and ultimately unsustainable shares of the federal budget.  Federal health and retirement spending are expected to surge as people  live longer and spend more time in retirement. In addition, advances in  medical technology are likely to keep pushing up the cost of providing  health care. Moreover, the baby boomers will have left behind fewer  workers to support them in retirement, prompting a slower rate of  economic growth from which to finance these higher costs. Absent  substantive change in related entitlement programs, large deficits return,  requiring a combination of unprecedented spending cuts in other areas,  and/or unprecedented tax increases, and/or substantially increased  borrowing from the public (or correspondingly less debt reduction than  would otherwise have been the case). These trends have widespread  implications for our society, our culture, our economy, and—of most  relevance here—our budget.
Ultimately, as this Committee and its counterpart in the House  recommended on October 4, the federal government should attempt to  return to a position of surplus as the economy returns to a higher growth  path. Returning to surpluses will take place against the backdrop of  greater competition of claims within the budget. Although budget balance  may have been the desired fiscal position in the past decade, surpluses  would promote the level of savings and investment necessary to help  future generations better afford the commitments of an aging society.
Early action is important. We all recognize that we have urgent matters to  address as a nation and our history shows we have been willing to run  deficits during wars and recessions. However, it remains important that to  get on with the task of addressing the long-term pressures sooner rather  than later. Some will suggest that early action may not be necessary—for  example, that faster economic growth may enable a smaller pool of  workers to more easily finance the baby boom retirement. While this might  happen, the best estimates of the actuaries suggest it is unlikely. CBO has  also said that the nation’s long-term fiscal outlook will largely be  determined by federal spending for retirees, especially for health..
Although long-term projections are inherently more uncertain than short- term forecasts, in some ways we can be surer about the outlook 20 years  from now since it is driven by known demographics. The swing in 1-, 5-,  and 10-year projections over the last 12 months has served to emphasize  the extent to which short-term projections are subject to uncertainty. And  CBO notes that this year the near-term projections are subject to unusual  uncertainties as the nation wages war on terrorism and recovers from a  recession. CBO pointed out that it is considered more difficult to forecast  the economy when it is entering or exiting a recession. This year there are  additional uncertainties in the near-term budget outlook. CBO’s reference  case—the baseline—from which you begin your deliberations (and which  in the first 10 years is the underpinning for our long-term model) is a  representation of current laws and policies. Thus, by definition it does not  account for the effects of future legislation, including likely increases in  spending for defense and homeland security to which both parties have  agreed in principle. Nor, as CBO noted, does it make assumptions about a  number of issues, e.g., the extension of agriculture programs, Medicare  prescription drug coverage, changes in the Alternative Minimum Tax, or  the extension of various expiring tax provisions.
Given this extreme uncertainty around the next 1 to 5 years, why look out  20 or 30 years? Absent some draconian or unexpected dramatic event, the  long-term budget outlook is driven by factors already in motion—most  notably the aging of the population. In previous testimonies before you, I  have talked about a demographic tidal wave. Beginning about 2010, the  share of the population that is age 65 or older will begin to climb,  surpassing 20 percent by 2035. (See fig. 1.)
section_title: GAO’s Model Simulations Illustrate Long-Term Budget Challenges
paragraphs: Because of the coming demographic shift, the message from our  simulations remains the same as last year, indeed as since we first  published results from our long-term model in 1992: Absent policy change,  in the long term, persistent deficits and escalating debt driven by  entitlement spending will overwhelm the budget. This year we ran three  different policy paths to illustrate the implications of a range of budgetary  choices. I’d like to emphasize again that these simulations are not intended  to endorse a particular policy but rather to illustrate the long-term  implications of different scenarios.
All three scenarios begin with CBO’s baseline estimates. The first starts  with the baseline where for the first 10 years tax and entitlement laws are  unchanged—including sunset provisions—and discretionary spending  grows with inflation. After the first 10 years, we hold discretionary  spending and revenues constant as a share of gross domestic product  (GDP) and allow Social Security and Medicare to grow based on the  actuaries’ intermediate estimates. In this path, the unified surpluses that  emerge in 2004 are saved. Nevertheless, deficits return in 2036. At the  other end is an alternative policy path in which discretionary spending  grows with the economy in the first 10 years and in which last year’s tax  cuts are extended. This yields a smaller period of surpluses with deficits  returning in 2011. In both of these paths taxes remain constant as a share  of GDP after 2012; this is, of course, a policy decision. To illustrate  something in between these two paths, we simulated a third that tracks  the CBO baseline until 2010. After 2010 we assume that the full Social  Security surplus is saved through 2024—this requires some combination  of tax and spending policy actions. In this simulation deficits reemerge in  2025. (See fig. 2.)
In all three paths, surpluses eventually give way to large and persistent  deficits. These simulations show that there is a benefit to fiscal  discipline—it delays the return to deficits—but that even the most  demanding path we simulated—a path that does not provide for funding  Presidential or many Congressional initiatives—is structurally imbalanced  over the long term. Although savings from higher surpluses are important,  they must be coupled with action to slow the long-term drivers of  projected deficits, i.e. Social Security and health programs. Surpluses can  help—they could, for example, facilitate the needed reforms by providing  resources to ease transition costs—but, by themselves, surpluses will not  be sufficient.
In the long term, under all three paths federal budgetary flexibility  becomes increasingly constrained and eventually disappears. To move into  the future with no changes in federal health and retirement programs is to  envision a very different role for the federal government. Assuming, for  example, that last year’s tax reductions are made permanent and  discretionary spending keeps pace with the economy, spending for net  interest, Social Security, Medicare, and Medicaid consumes nearly three- quarters of federal revenue by 2030, leaving little room for other federal  priorities including defense and education. By 2050, total federal revenue  is insufficient to fund entitlement spending and interest payments—and  deficits are escalating out of control. (See fig. 3.)
Reducing the relative future burdens of Social Security and federal health  programs is critical to promoting a sustainable budget policy for the longer  term. Absent reform, the impact of federal health and retirement programs  on budget choices will be felt as the baby boom generation begins to  retire. While much of the public debate concerning the Social Security and  Medicare programs focuses on trust fund balances—that is on the  programs’ solvency—the larger issue concerns sustainability.
The 2001 Trustees Reports estimate that the Old-Age Survivors Insurance  and Disability Insurance (OASDI) Trust Funds will remain solvent through  2038 and the Hospital Insurance (HI) Trust Fund through 2029.
Furthermore, because of the nature of federal trust funds, HI and OASDI  Trust Fund balances do not provide meaningful information about  program sustainability—that is, the government’s fiscal capacity to pay  benefits when the program’s cash income falls below benefit expenses.  From this perspective, the net cash impact of the trust funds on the  government as a whole—not trust fund solvency—is the important  measure. Under the trustees’ intermediate assumptions, the OASDI Trust  Funds are projected to have a cash deficit beginning in 2016 and the HI  Trust Fund a deficit also beginning in 2016. (See fig. 4.) At that point, the  programs become net claimants on the Treasury. In addition, as we have  noted in other testimony, a focus on HI solvency presents an incomplete  picture of the Medicare program’s expected future fiscal claims. The  Supplementary Medical Insurance (SMI) portion of Medicare, which is not  reflected in the HI solvency measure, is projected to grow even faster than  HI in the near future. According to the best estimates of the Medicare  trustees, Medicare HI and SMI together will double as a share of GDP  between 2000 and 2030 (from 2.2 percent to 4.5 percent) and reach 8.5  percent of GDP in 2075. Under the trustees’ best estimates, Social Security  spending will grow as a share of GDP from 4.2 to 6.5 percent between 2000  and 2030, reaching 6.7 percent in 2075.
Medicare HI  Medicare HI  cash deficit  cash deficit  To finance these cash deficits, Social Security and the Hospital Insurance  portion of Medicare will need to draw on their special issue Treasury  securities acquired during the years when these programs generated cash  surpluses. This negative cash flow will placed increased pressure on the  federal budget to raise the resources necessary to meet the program’s  ongoing costs. In essence, for OASDI or HI to “redeem” their securities,  the government will need to obtain cash through increased taxes, and/or  spending cuts, and/or increased borrowing from the public (or  correspondingly less debt reduction than would have been the case had  cash flow remained positive).
Our long-term simulations illustrate the magnitude of the fiscal challenges  associated with an aging society and the significance of the related  challenges the government will be called upon to address. As we have  stated elsewhere, early action to change these programs would yield the  highest fiscal dividends for the federal budget and would provide a longer  period for prospective beneficiaries to make adjustments in their own  planning. Waiting to build economic resources and reform future claims  entails risks. First, we lose an important window where today’s relatively  large workforce can increase saving and enhance productivity, two  elements critical to growing the future economy. We lose the opportunity  to reduce the burden of interest in the federal budget, thereby creating a  legacy of higher debt as well as elderly entitlement spending for the  relatively smaller workforce of the future. Most critically, we risk losing  the opportunity to phase in changes gradually so that all can make the  adjustments needed in private and public plans to accommodate this  historic shift. Unfortunately, the long-range challenge has become more  difficult, and the window of opportunity to address the entitlement  challenge is narrowing. It remains more important than ever to return to  these issues over the next several years. Ultimately, the critical question is  not how much a trust fund has in assets, but whether the government as a  whole can afford the promised benefits now and in the future and at what  cost to other claims on scarce resources.
section_title: The Need to Reexamine Government Activities and Programs
paragraphs: One of the reasons to address these longer-term pressures is their  potential to crowd out the capacity to support other important priorities  throughout the rest of the budget. The tragedy of September 11 made us all  realize the benefits fiscal flexibility provides to our nation’s capacity to  respond to urgent and newly emergent needs. Obviously we will allocate  whatever resources are necessary to protect the nation. However, these  new commitments will compete with and increase the pressure on other  priorities within the budget. Financing these compelling new claims within  an overall fiscal framework that eventually returns the budget to surplus is  a tall order indeed.
The budget process is the one place where we as a nation can conduct a  healthy debate about competing claims and new priorities. However, such  a debate will be needlessly constrained if only new proposals and  activities are on the table. A fundamental review of existing programs and  operations can create much-needed fiscal flexibility to address emerging  needs by weeding out programs that have proven to be outdated, poorly  targeted, or inefficient in their design and management. It is always easier  to subject proposals for new activities or programs to greater scrutiny  than that given to existing ones. It is easy to treat existing activities as  “given” and force new proposals to compete only with each other. Such an  approach would move us further, rather than nearer, to budgetary  surpluses.
Moreover, it is healthy for the nation periodically to review and update its  programs, activities and priorities. As we have discussed previously, many  programs were designed years ago to respond to earlier challenges. In the  early years of a new century, we have been reminded how much things  have changed. For perspective, students who started college this past fall  were 9 years old when the Soviet Union broke apart and have no memory  of the Cold War; their lifetimes have always known microcomputers and  AIDS. In previous testimony, both before this Committee and elsewhere, I  noted that it should be the norm to reconsider the relevance or “fit” of any  federal program or activity in today’s world and for the future. Such a  review might weed out programs that have proven to be outdated or  persistently ineffective, or alternatively could prompt us to update and  modernize activities through such actions as improving program targeting  and efficiency, consolidation, or reengineering of processes and  operations. Ultimately, we should strive to hand to the next generations  the legacy of a government that is effective and relevant to a changing  society—a government that is as free as possible of outmoded  commitments and operations that can inappropriately encumber the  future. We need to think about what government should do in the 21st  century and how it should do business.
The events of last fall have provided an impetus for some agencies to  rethink approaches to long-standing problems and concerns. In particular,  agencies will need to reassess their strategic goals and priorities to enable  them to better target available resources to address urgent national  preparedness needs. For instance, the threat to air travel has already  prompted attention to chronic problems with airport security that we and  others have been pointing to for years. Moreover, the crisis might prompt a  healthy reassessment of the broader transportation policy framework with  an eye to improving the integration of air, rail, and highway systems to  better move people and goods.
Other long-standing problems also take on increased relevance in today’s  world. Take, for example, food safety. Problems such as overlapping and  duplicative inspections across many federal agencies, poor coordination,  and inefficient allocations of resources are not new and have hampered  productivity and safety for years. However, they take on new meaning and  urgency given the potential threat from bioterrorism. We have argued for a  consolidated food safety initiative merging the separate programs of the  multiple federal agencies involved. Such a consolidated approach can  facilitate a concerted and effective response to the new threats.
The federal role in law enforcement is another area that is ripe for  reexamination following the events of September 11. In the past 20 years,  the federal government has taken on a larger role in financing criminal  justice activities that have traditionally been viewed as the province of the  state and local sector. This is reflected in the growth of the federal share  of financing—from 12 percent in 1982 to nearly 20 percent in 1999.
Given the new daunting new law enforcement responsibilities in the wake  of September 11 and limited budgetary resources at all levels, the question  is whether these additional responsibilities should prompt us to rethink  the priorities and roles of federal, state, and local levels of government in  the criminal justice area and ultimately whether some activities are  affordable in this new setting. The Federal Bureau of Investigation has  already begun thinking about reprioritization and how its investigative  resources will shift, given the new challenges posed by the terrorism  threat.
With the Coast Guard’s focus on homeland security, it has de-emphasized  some of its other critical missions in the short term, most notably fisheries  enforcement and drug and migrant interdiction. The Coast Guard is  currently developing a longer-term mission strategy, although it has no  plans at present to revise the schedule or asset mix for its Deepwater  Project (which will be awarded mid-2002).
In rethinking federal missions and strategies, it is important to examine  not only spending programs but the wide range of other more indirect  tools of governance the federal government uses to address national  objectives. These tools include loans and loan guarantees, tax  expenditures, and regulations. For instance, in fiscal year 2000, the federal  health care and Medicare budget functions include $37 billion in  discretionary budget authority, $319 billion in entitlement outlays,  $5 million in loan guarantees, and $91 billion in tax expenditures.
The outcomes achieved by these various tools are in a very real sense  highly interdependent and are predicated on the response by a wide range  of third parties, such as states and localities and private employers, whose  involvement has become more critical to the implementation of these  federal initiatives. The choice and design of these tools is critical in  determining whether and how federal objectives will be addressed by  these third parties. Any review of the base of existing policy should  address this broader picture of federal involvement.
GAO has also identified a number of areas warranting reconsideration  based on program performance, targeting, and costs. Every year, we issue  a report identifying specific options, many scored by CBO, for  congressional consideration stemming from our audit and evaluation  work. This report provides opportunities for (1) reassessing objectives of  specific federal programs, (2) improved targeting of benefits, and  (3) improving the efficiency and management of federal initiatives.
Just as long-standing areas of federal involvement need re-examination, so  proposed new initiatives designed to address the new terrorism threat  need appropriate review. With the focus on counterterrorism, you will  undoubtedly face many proposals redefined as counterterrorism activities.  The Congress will need to watch for the redefinition of many claims into  counterterrorism activities. It will be especially important to seek to  distinguish among these claims.
In sorting through these proposals, we might apply investment criteria in  making choices. Well-chosen enhancements to the nation’s infrastructure  are an important part of our national preparedness strategy. Investments  in human capital for certain areas such as public health or airport security  will also be necessary as well to foster and maintain the skill sets needed  to respond to the threats facing us. A variety of governmental tools will be  proposed to address these challenges—grants, loans, tax expenditures,  and/or direct federal administration. The involvement of a wide range of  third parties—state and local governments, nonprofits, private  corporations, and even other nations—will be a vital part of the national  response as well.
In the short term, we will do whatever is necessary to get this nation back  on its feet and compassionately deal with the human tragedies left in its  wake. However, as we think about our longer-term preparedness and  develop a comprehensive homeland security strategy, we can and should  select those programs and tools that promise to provide the most cost- effective approaches to achieve our goals.
section_title: Budget Process Should Facilitate Discipline and Awareness of Long- Term Implications of Decisions
paragraphs: Today the Congress faces the challenge of sorting out these many claims  on the federal budget without the fiscal benchmarks and rules that served  as guides through the years of deficit reduction. Going forward, new rules  and goals will be important both to ensure fiscal discipline as we sort  through these new and compelling claims and to prompt policymakers to  focus on the longer-term implications of current policies and programs.  For more than a decade, budget process adaptations have been designed  to reach a zero deficit. With the advent of surpluses, a new framework was  needed—one that would permit accommodating pent-up demands but not  eliminate all controls. A broad consensus seemed to develop to use saving  the Social Security surplus or maintaining on-budget balance as a kind of  benchmark. However, the combination of the economic slowdown and the  need to respond to the events of September 11 has overtaken that  measure.
Once again, Congress faces the challenge of designing a budget control  mechanism. Last October, Mr. Chairman, you and your colleague Senator  Domenici and your House counterparts called for a return to budget  surplus as a fiscal goal. This remains an important fiscal goal, but  achieving it will not be easy. In the near term, limits on discretionary  spending may be necessary to prompt the kind of reexamination of the  base I discussed above. There are no easy choices. There will be  disagreements about the merits of a given activity—reasonable people can  disagree about federal priorities. There may also be disagreements about  the appropriate response to program failure: Should the program be  modified or terminated? Would the program work better with more money  or should funding be cut? Spending limits can be used to force choices;  they are more likely to do so, however, if they are set at levels viewed as  reasonable by those who must comply with them.
Spending limits alone cannot force a reexamination of existing programs  and activities. However, the recognition that for most agencies the new  responsibilities acquired since September 11 cannot merely be added to  existing duties requires that decisions be made about priorities. In the last  decade Congress and the Administration put in place a set of laws  designed to improve information about cost and performance. This  information can help inform the debate about what the federal  government should do. In addition, the budget debate can benefit from the  kind of framework I discussed above. In previous testimony before this  committee, I suggested that Congress might equip itself to engage in this  debate by developing a congressional performance resolution to target its  oversight on certain governmentwide performance issues cutting across  agencies and programs. Along with caps, this and other measures might  help ensure that Congress becomes part of the debate over reprioritization  and government performance.
The dramatic shift in budget projections since last year has prompted  discussion of shortening the budget window. This may well be a sensible  approach to reducing uncertainty. However, such a change should be  coupled with steps to provide a broader and longer-term fiscal horizon:  goals and metrics to address the longer-term implications of today’s  choices. This does not mean that we should budget for a 20- or 30-year  period. It does mean considering establishing indicators and targets that  bring a long-term perspective to budget deliberations and a process that  prompts attention to the long-term implications of today’s decisions.  Periodic simulations along the lines we and CBO have developed can and  should become a regular feature of budget debate. We would be the first to  say that the simulations are not predictions of the future or point  estimates, rather they serve as indicators—or warning lights—about the  magnitude and direction of different policy profiles. These scenarios are  particularly helpful in comparing long-term consequences of different  fiscal paths or major reforms of entitlements using the same assumptions.  As I said earlier, the demographic tidal wave that drives the long-term  budget challenge is a known element with predictable consequences.
Some kind of fiscal targets may be helpful. As a way to frame the debate,  targets can remind us that today’s decisions are not only about current  needs but also about how fiscal policy affects the choices over the longer  term. Other nations have found it useful to embrace broader targets such  as debt-to-GDP ratios, or surpluses equal to a percent of GDP over the  business cycle. To work over time targets should not be rigid—it is in the  nature of things that they will sometimes be missed. It should be possible  to make some sort of compelling argument for the target—and it should be  relatively simple to explain. Reaching a target is not a straight line but an  iterative process. The other nations we have studied have found that  targets prompted them to take advantage of windows of opportunity to  save for the future and that decisionmakers must have flexibility each year  to weigh pressing short-term needs and adjust the fiscal path without  abandoning the longer-term framework.
In re-examining what I have called the “drivers” of the long-term budget,  we need to think about new metrics. We have been locked into the  artifacts of the trust funds, which do not serve as appropriate signals for  timely action to address the growth in these programs. As I mentioned  earlier, trust fund solvency does not answer the question of whether a  program is sustainable.
Although aggregate simulations are driven by these programs, the need for  a longer-term focus is about more than Social Security and Medicare. In  recent years there has been an increased recognition of the long-term  costs of Social Security and Medicare. While these are the largest and most  important long-term commitments—and the ones that drive the long-term  outlook—they are not the only ones in the budget that affect future fiscal  flexibility. For Congress, the President, and the public to make informed  decisions about these other programs, it is important to understand their  long-term cost implications. A longer time horizon is useful not only at the  macro level but also at the micro-policy level. I am not suggesting that  detailed budget estimates could be made for all programs with long-term  cost implications. However, better information on the long-term costs of  commitments like employee pension and health benefits and  environmental cleanup could be made available. Here again, new concepts  and metrics may be useful. We have been developing the concept of “fiscal  exposures” to represent a range of federal commitments—from explicit  liabilities to implicit commitments. Exactly how such information would  be incorporated into the budget debate would need to be worked out—but  it is worth serious examination.
section_title: Conclusion
paragraphs: In one sense much has changed in the budget world since last February.  There are even more compelling needs and demands on the federal budget  than a year ago—and policymakers must deal with them absent the  surpluses that were projected then. However, the demographic trends that  drive the long-term outlook have not changed. The baby boom generation  is still getting older and closer to retirement. Because of the coming  demographic shift, the message from our simulations remains the same as  last year, indeed as since we first published results from our long-term  model in 1992: Absent changes in Social Security and health programs, in  the long term, persistent deficits and escalating debt driven by entitlement  spending will overwhelm the budget.