citizens guide 2007

8/3/2019 Citizens Guide 2007

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The Federal

GovernmentsFinancial Health

A Citizens Guide to the

2007 Financial Report of the UnitedStates Government


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The Government Is On An Unsustainable Fiscal Path

Chart 1: The Government Is On An Unsustainable Fiscal Path

20

30

10

0

40

50

60

Percent of GDP

Revenue

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

Cost

Projecteddeficitswithoutreform1

2007

2007Key dates

Medicare Part A benefit payments began to exceed the programs tax revenue.

2080 Total government cost will be more than three times revenue.

2041 Social Security Trust Funds assets will not be enough to pay full benefits. Under current law, benefitsfor all retirees would be reduced to 75 percent of scheduled benefits in 2041, declining to 70 percent by

2081.

2040 Federal debt held by the public will exceed the historical high of 109 percent of GDP.

2019 Medicare Part A Trust Fund assets will not be enough to pay full benefits. Under current law, benefitswould be reduced to 79 percent of scheduled benefits in 2019, declining to 29 percent by 2081.

2017 Social Security benefit payments will begin to exceed the programs tax revenue.

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Notes:

1. Projected defcits represent projected cost in excess o revenue, where revenue as a percent o gross domestic product (GDP) isset equal to its historical average and projected cost is based on scheduled Social Security and Medicare benefts and current costtrends. While the precise amounts o the governments fnancial responsibilities are ar rom certainthey are based on manycomplex calculations and assumptions, including lie expectancies and health care costtheir magnitude and the need to controlthem are evident.

2. The dates and events presented above are taken rom the 2007 Annual Reports o the Social Security and Medicare Boards oTrustees and the2007 Financial Report of the United States Government.


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A Citizens Guide to the2007 Financial Report of the U.S. Government

Overview

This Citizens Guide (guide) highlights important inormation in the2007 Financial Report of theUnited States Government. The Secretary o the Treasury, Director o the Oce o Management andBudget (OMB), and Comptroller General o the United States believe that the inormation discussedin this guide is important to all Americans.

While attention has been recently ocused on addressing emerging challenges in todays economy, thelast 3 years show economic growth and improvement. Revenue went up, decits went down, and coststayed airly constant. But as you can see in chart , the government aces a huge scal challenge inthe years ahead. This year, 2008, is the year in which the rst o the approximately 80 million baby

boomersthose born between 946 and 964become eligible to draw Social Security benets.Scheduled Social Security and Medicare benets together with other ederal programs projected

long-term cost are much greater than the resources (revenue and borrowings) available to pay orthem.2 Unless action is taken to bring program cost in line with available resources, the coming surgeo entitlement spending will end in a scal train wreck that will have an adverse eect on the U.S.economy and on virtually every American.

Where We Are Now

Strong growth in individual incomes and corporate prots contributed to 4 consecutive years otax revenue growthrevenue was up by 46 percent since 2003 to $2.6 trillion in 2007.3 SocialSecurity and Medicare tax withholdings accounted or almost a third o total revenue in 2007.

Social Security Trust Funds revenue exceeded what the government paid out in benets by$86 billion in 2007. This surplus was credited to the Trust Funds.

The governments total operating cost remained relatively constant$2.9 trillion in 2006 and in2007.

Revenue increases and relative cost stability resulted in a drop in the governments net operating

costto $276 billionand a decline in the unied budget decit (budget decit)to $63 billionin 2007.

To und cumulative budget decits, the government has borrowed a total o $5 trillion rom thepublic as o the end o scal year 2007. The government has also borrowed excess annual cashfows rom the Social Security and Medicare Trust Funds and similar unds to nance othergovernment cost. Including interest, the government owes $4 trillion to these unds, which is

backed by the ull aith and credit o the government, resulting in total ederal debt o $9 trillion.

Where We Are Headed

As baby boomers retire and health care cost continue to rapidly rise, the cost o the SocialSecurity, Medicare, and Medicaid programs will account or a growing portion o government

cost.

The administration annually issues two complementary reports on the governments nances. The Financial Report of the United States Government(Financial Report), issued by the Department o the Treasury, analyzes how revenue was spent in the scal year on programs and services and discusses thegovernments resulting nancial position. Cost is reported at the time an obligation to pay arises rather than when payments are made. ThePresidents Budgetis the governments primary tool or nancial planning and control. It ocuses on taxpayers dollars the government collects, how it uses them to supportprograms and services, and whether this use results in a surplus or decit.

2This calculation assumes uture government revenue as a percent o GDP is at its average historical rate o about 8 percent, and uses current spendingtrends to project the cost o ederal programs other than Social Security and Medicare.

3The governments scal year begins October and ends September 30.


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Absent reorms, the Social Security Trust Funds will be exhausted in 204 and the Medicare PartA Trust Fund will be exhausted in 209. Revenue dedicated to these entitlement programs undercurrent law will not be enough to pay or scheduled Social Security and Medicare Part A benets.

The projected cost o all ederal programs will exceed available resources. Unless the governmentbrings program cost in line with available resources, resulting budget decits will be so large thatthe government will not be able to borrow enough to und them.

Our children and grandchildren will bear a greater burden o the cost i we delay in implementingundamental reorms.


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Where We Are Now

What Came In and What Went Out

What came in? In 2007, government revenue totaled $2.6 trillion. What went out? The governmentsoperating cost totaled $2.9 trillion. The bottom line net operating costthe dierence betweenrevenue and costwas $276 billiona $74 billion decrease rom 2006. It is also more than$00 billion greater than the unied budget decit, as it includes approximately $90 billion inaccrued, but as o yet unpaid, post-employment benets to the millions o people who are part o thegovernments current and retired civilian and military workorce. The budget decit is the amount

by which the governments spending exceeds its revenue, and thus, is a measure o how much thegovernment has to borrow rom the public. The budget decit decreased $85 billion to $63 billion in2007.

In 2007, a growing U.S. economy led to record revenue o $2.6 trillion. Chart 2 shows thatgovernment revenue increased steadily rom 2003 through 2007, largely because o taxes onincreasing individual incomes and corporate prots. Social Security tax revenue o $648 billion

and Medicare tax revenue o $200 billion accounted or almost a third o total revenue. The recentslowing o U.S. economic growth will have an eect on 2008 revenue.

Chart 2: Government Revenue 2003-2007

Total revenue

Social Security and Medicare tax revenuea

Individual income tax revenuea

Corporate income tax revenue

2003 2004 2005 2006 2007

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dollars in trillions

aIn theFinancial Report, Social Security and Medicare tax revenue are combined with individual income tax revenue.


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The governments net cost in 2007 was relatively constant compared to 2006. Chart 3 shows thatin 2007, the Department o Health and Human Services (HHS), Department o Deense, and SocialSecurity Administration, plus interest on debt held by the public, accounted or approximatelythree-ourths o the governments total net cost. Medicare cost o $368 billion and Medicaid cost o$88 billion accounted or more than 80 percent o HHS total net cost in 2007. 4

Chart 3: Government Net Cost 2007

Departmentof Defense$665 billion

OtherHHS$111 billion

SocialSecurityAdministration$626 billion

Interest on debtheld by the public$239 billion

All otherentities$713 billion

HHS -Medicare andMedicaid$556 billion

22.8%

8.2%

24.6%21.5%

19.1%

3.8%

The Debt

The government incurs debt when it borrows rom the public to und its budget decits.The government also incurs debt when government unds invest their excess receipts in

government securities. O the governments total debt o about $9 trillion at the end o 2007,approximately $5 trillion was debt held by the public in the orm o Treasury securities, such as bills,notes, and bonds. The public includes individuals, corporations, state and local governments, FederalReserve Banks, and oreign governments.

The balance o the debtnearly $4 trillionwas intragovernmental debt. This represents debt heldby government unds, including the Social Security ($2.2 trillion) and Medicare ($359 billion) TrustFunds. These government unds are typically required to invest any excess annual receipts in ederalsecurities. When the government borrows these excess receipts, it still has an obligation to repay themto the government unds with interest. I expected budget decits continue, as the government undsredeem the ederal securities to pay or benets or other program cost, then additional borrowingrom the public will likely be required.

4Medicare cost is net o related premium revenue.


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Where We Are Headed

An Unsustainable Fiscal Path

The projected growth in spending or Social Security and Medicare benets aects every citizenin the nation.5 Scheduled benets under these programs are expected to exceed dedicated revenue(e.g., payroll taxes and premiums) by more than $40 trillion (present value) over the next 75 years,under current laws and policy.6 The scal imbalance is even larger looking beyond 75 years.7Moreover, without reorm

In 2007, Medicare Part A benet payments began to exceed the programs tax revenue.

In 2011, the Medicare Part A Trust Fund begins to decline as benets exceed payroll taxes andtrust und interest.

In 2017, Social Security benet payments will begin to exceed the programs tax revenue.

In 2019, Medicare Part A Trust Fund assets will not be enough to pay ull benets. Undercurrent law, benets would be reduced to 79 percent o scheduled benets in 209, declining to29 percent by 208.

In 2027, Social Security Trust Funds begin to decline as benets exceed tax revenue and trustund interest.

In 2040, ederal debt held by the public will exceed the historical high o 09 percent o GDP.

In 2041, Social Security Trust Funds assets will not be enough to pay ull benets. Undercurrent law, benets or all retirees would be reduced to 75 percent o scheduled benets in 204,declining to 70 percent by 208.

In 2080, total government cost will be more than three times revenue.

5The dates and events described in this section are taken rom the 2007 Annual Reports o the Social Security and Medicare Boards o Trustees and the 2007Financial Report.

6This estimate, included in the scal year 2007 Statement o Social Insurance, may be ound in the 2007 Financial Report.

7The 75-year horizon includes the revenue rom people working in the latter part o the 75-year period but not the associated benets that will be paid whenthese same people retire ater the end o the 75 years.


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Fundamental Reforms Are Needed Now

Chart 4 shows government revenue and spending as a percent o GDP rom 970 through 2080.8Since World War II, ederal revenue as a share o GDP has been roughly constant at around8 percent.9 Whenever taxes rose, policy actions tended to pull them back.

Chart 4: Government Revenue and Cost 1970-2080

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

Revenue

Net interest

Medicaid

Medicare

Social Security

Other government programs

0

10

20

30

40

50

60

Percent of GDP

I revenue is held constant at about 8 percent o GDP (the historical average level), governmentspending will eventually exceed the governments ability to pay. By 2070, total government cost isprojected to be 50 percent o GDP mainly because o mounting interest cost. Cost-to-GDP ratios havenot been this high since World War II, when cost briefy reached 44 percent o GDP. By 2080, costreaches nearly 60 percent o GDP, more than three times the average historical level o revenue as apercent o GDP. The dates and numbers would change with dierent orecasting assumptions, butunder a wide range o reasonable projections, the increases in budget decits will be dramatic.

8Projected spending is based on scheduled Social Security and Medicare benets and current spending trends. Revenue as a percent o GDP rom 200 to 2080is assumed to equal its historical average.

9GDP is one way o measuring the size o a nations economy and is dened as the total market value o all nal goods and services the nation produces in agiven period. The projection that the governments revenue as a percent o GDP will remain relatively constant is based on historical data and trends that arenot expected to change.


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Chart 5 shows the extreme eect on the debt o projected budget decits indicated in chart 4. Thesecombined trends will cause government debt levels to more than triple by 2040 and to more thandouble again by 2060. The nations debt could approach 600 percent o GDP by 2080. This arexceeds the historical high o 09 percent o GDP that occurred during World War II.

Chart 5: Federal Debt Held by the Public 1940-2080

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 IIhistorical high

109%

Past Future

2007

The nation must change course beore the decit and debt reach unprecedented heights. Thegovernment must bring program cost in line with available resources. Delays in taking this action will

increase the magnitude o the reorms needed and will place more o the burden on our children andgrandchildren.

While the precise amounts o the governments nancial responsibilities are ar rom certaintheyare based on many complex calculations and assumptions, including lie expectancies and health carecosttheir magnitude and the need to control them are evident.


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Looking Ahead

In the2007 Financial Report, the Secretary o the Treasury indicates that the nation must look to theuture, particularly the spending demands o Social Security and Medicare, and squarely ace the needor undamental reorm i these programs are to be sustained. The government must strive to make alldisclosures transparent, provide all points o view with relevant data, and expand nancial and scalreporting in order to explain why estimates o uture Social Security and Medicare costs increase yearater year.

The issues discussed in this guide aect, and should be o interest to, every citizen. TheFinancialReports comprehensive reporting is intended to inorm and support the decision-making needs olawmakers and the public and to help keep the United States on solid nancial ground.

Finding Out More

You will nd more detail on these matters in the Financial Report. You are encouraged to explore theinormation it contains and to ask questions about how the government manages taxpayers money.The2007 Financial Report of the United States Governmentand other inormation about the nationsnances are available at:

U.S. Department o the Treasurys Financial Management Service,http://www.ms.treas.gov/r/index.html;

OMBs Oce o Federal Financial Management,http://www.whitehouse.gov/omb/nancial/index.html; and

GAO,http://www.gao.gov/nancial/y2007nancialreport.html.

This guide can be obtained on-line at the above Web sites.

This Citizens Guide highlights inormation in the2007 Financial Report. The GovernmentAccountability Oces (GAO) complete audit report on the U.S. governments consolidatednancial statements can be ound beginning on page 59 o theFinancial Report. For 2007, orthe rst time, GAO issued an unqualied or clean opinion on the Statement o Social Insurance.However, certain material nancial reporting control weaknesses and other limitations onthe scope o its work prevented GAO rom expressing an opinion on the remaining nancialstatements.
http://www.fms.treas.gov/fr/index.htmlhttp://www.whitehouse.gov/omb/financial/index.htmlhttp://www.gao.gov/financial/fy2007financialreport.htmlhttp://www.gao.gov/financial/fy2007financialreport.htmlhttp://www.whitehouse.gov/omb/financial/index.htmlhttp://www.fms.treas.gov/fr/index.html


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Image Sources

Cover ................................ PhotoDisc (US banknotes)Page 1 ............................... PhotoDisc (stack of twenty dollar bills)Page 2 ............................... PhotoDisc (detail of one hundred dollar bills)Page 4 ............................... PhotoDisc (pile of dollar bills)Page 6 ............................... Digital Vision (one hundred dollar bills)Page 8 ............................... Digital Vision (assorted US paper currency)Inside back cover ............. BrandXPictures (maze of money)


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citizens guide 2007

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