dramatic demographic change is certain to place enormous demands on our nation ’ s resources - demands we almost surely will be unable to meet unless action is taken. for a variety of reasons, that action is better taken as soon as possible. the budget scenarios considered by the cbo in its december assessment of the long - term budget outlook offer a vivid - and sobering - illustration of the challenges we face as we prepare for the retirement of the baby - boom generation. these scenarios suggest that, under a range of reasonably plausible assumptions about spending and taxes, we could be in a situation in the decades ahead in which rapid increases in the unified budget deficit set in motion a dynamic in which large deficits result in ever - growing interest payments that augment deficits in future years. the resulting rise in the federal debt could drain funds away from private capital formation and thus over time slow the growth of living standards. favorable productivity developments, of course, can help to alleviate the impending budgetary strains, but no one should expect productivity growth to be sufficient to bail us out. indeed, productivity would have to grow at a rate far above its historical average to fully resolve the long - term financing problems of social security and medicare. higher productivity, of course, buoys expected revenues to the system, but it also raises social security obligations. 1 moreover, although productivity has no direct link to medicare spending, historical experience suggests that the demand for medical services increases with real income, which over time rises in line with productivity. today, federal outlays under social security and medicare amount to less than 7 percent of gdp. in december, the cbo projected that these outlays would increase to 12 percent of gdp by 2030 under current law, using assumptions about the growth of health - care costs similar to the intermediate assumptions of the medicare trustees ; when spending on medicaid is added in, the rise in the ratio is even steeper. to be sure, the rise in these outlays relative to gdp could be financed by tax increases, but the cbo results suggest that, even if other non - interest spending is constrained fairly tightly, ensuring fiscal stability would require an overall federal tax burden well above its long - term average. most experts believe that the best baseline for planning purposes is to assume that the demographic shift associated with the retirement of the baby - boom generation will be permanent - that is, it will not reverse when that cohort passes away. indeed, so long as longevity continues to increase -

security and many other nondefense discretionary programs. tax reductions - some of which were intended specifically to provide stimulus to the economy - also contributed to the deterioration of the fiscal balance. for a time, the fiscal stimulus associated with the larger deficits was helpful in shoring up a weak economy. during the next few years, these deficits will tend to narrow somewhat as the economic expansion proceeds and rising incomes generate increases in revenues. moreover, the current ramp - up in defense spending will not continue indefinitely. merely maintaining a given military commitment, rather than adding to it, will remove an important factor driving the deficit higher. but the ratio of federal debt held by the public to gdp has already stopped falling and has even edged up in the past couple of years - implying a worsening of the starting point from which policymakers will have to address the adverse budgetary implications of an aging population and rising health care costs. for about a decade, the rules laid out in the budget enforcement act of 1990, and the later modifications and extensions of the act, provided a procedural framework that helped the congress make the difficult decisions that were required to forge a better fiscal balance. however, the brief emergence of surpluses eroded the will to adhere to those rules, and many of the provisions that helped to restrain budgetary decisionmaking in the 1990s - in particular, the limits on discretionary spending and the paygo requirements - were violated more and more frequently and eventually allowed to expire. in recent years, budget debates have turned to choices offered by those advocating tax cuts and those advocating increased spending. to date, actions that would lower forthcoming deficits have received only narrow support, and many analysts are becoming increasingly concerned that, without a restoration of the budget enforcement mechanisms and the fundamental political will they signal, the inbuilt political bias in favor of red ink will once again become entrenched. in 2008 - just four years from now - the first cohort of the baby - boom generation will reach 62, the earliest age at which social security retirement benefits may be claimed and the age at which about half of prospective beneficiaries choose to retire ; in 2011, these individuals will reach 65 and will thus be eligible for medicare. at that time, under the intermediate assumptions of the oasdi trustees, there will still be more than three covered workers for each oasdi beneficiary ; by 2025, this ratio is projected to be down to 2 - 1 / 4. this