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Key Drivers of the Debt

Many factors contribute to the long-term outlook for the U.S. economy and budget, but there are two major drivers of spending: America’s demographics and rising healthcare costs.

Demographics

Over the next 25 years, the most significant driver of rising long-term federal spending is the aging of America’s population, as the number of people 65 and older increases much faster than the working-age population. This stems from both the aging of the large baby boom generation (those born in the post-World War II period of 1946 to 1964) as well as from increases in life expectancy.

Baby boomers: The first wave of baby boomers turned 65 in 2011, and the number of people aged 65 and older will climb by nearly 35 million over the next 30 years. Over the same time period, the working age population will increase by only 28 million, according to Social Security’s trustees.

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Increasing Longevity: Not only will the overall number of older Americans increase, but they are also expected to live longer in retirement. Overall life expectancy among Americans who live to 65 has risen from 79 in 1940 to 85 in 2016. Over the next 30 years, the number of people age 85 and older will almost triple. Looking forward, Americans are projected to live even longer and improvements in life expectancy are expected to continue.

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It is great news that Americans are living much longer, and the retirement of the Baby Boom generation comes as no surprise. However, these trends mean that the government will spend more for programs that serve this growing population of older Americans, including Social Security, Medicare and Medicaid. In fact, spending on Social Security and the major health programs accounts for 100% of the increase in federal non-interest spending over the long term.

These predictable demographic trends will put pressure on the federal budget, and threaten the sustainability of these vital programs, especially for those who need them most.

Healthcare costs

The second major driver of America’s long-term fiscal challenges is our inefficient healthcare system. America has one of the most wasteful healthcare systems among advanced nations. Combined with the demographic realities of rapidly growing elderly population, America’s healthcare system leaves us with an unsustainable fiscal future. Not only will more Americans qualify for federal healthcare programs like Medicare and Medicaid, in coming years, but older people, on average, need more healthcare. Consequently, without reform, the federal budget will bear rapidly growing healthcare bills. The combination of an inefficient healthcare system with our aging population creates significant challenges for the U.S. economy, threatens our long-term fiscal outlook and ill-serves the American people.

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At a total spend of approximately $3.4 trillion, or approximately 18% of the national economy, the United States healthcare system is the most expensive among advanced nations. Yet, America’s health outcomes are generally no better than those of our peers, and in some cases are worse, including in areas like asthma, diabetes, infant mortality, and life expectancy.

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Put simply, we are paying more than other countries, but we aren’t seeing better results. Healthcare experts have estimated that 30% of our total healthcare spending goes to unnecessary, ineffective, inefficient, overpriced and wasteful services. And they are projected to keep rising — faster than inflation, wages, or the overall economy. Not only does the system result in health outcomes that are generally no better for patients, but its inefficiency also creates enormous cost challenges for the U.S. economy and federal government.

The primary reason why our healthcare system underperforms is that the typical factors that fuel improvement and innovation in other industries lie dormant in healthcare:

Consumers historically have not been cost sensitive because their employers and health plans often cover a large share of their costs, and because they lack the information required to assess quality and cost.

Employers and insurers often assume a passive role, accepting annual cost increases, and eventually passing these costs on to customers and employees.

Providers generally operate under a perverse fee-for-service model, in which they are compensated based on the volume of their services, rather than the value of the care they provide.

Under this system, the demands and rewards for quality, efficiency, and price sensitivity are sharply reduced.

The growth in healthcare costs per person has moderated in the last few years, but it is uncertain how long this welcome trend will continue. Despite the slowdown, CMS projects that total spending for healthcare will climb to 20% of GDP in 2025. According to CBO, spending on the major federal healthcare programs will rise from 5.5% of GDP in 2017 to 6.9% of GDP in 2027 — and then continue climbing to 9.3% of GDP in 2047 — an increase of almost 70% between 2017 and 2047. That’s faster than the growth of any other major category of the budget except net interest on the growing debt.