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June 20, 2001
 

Honorable Jim Nussle
Chairman
Committee on the Budget
U.S. House of Representatives
Washington, DC 20515

Dear Mr. Chairman:

Section 314 of the Concurrent Resolution on the Budget for Fiscal Year 2002 (H. Con. Res. 83) expresses the sense of the Congress that the Congressional Budget Office should report "on the risk that provision of full concurrent receipt of military retired pay and disability compensation would reduce the surplus below the level of the Medicare Hospital Insurance (HI) trust fund." This letter answers that request.

CBO published its most recent baseline budget projections in An Analysis of the President's Budgetary Proposals for Fiscal Year 2002, which was issued in May 2001. Assuming that annual appropriations would increase at the rate of inflation and that laws governing revenues and mandatory spending would remain unchanged, CBO estimated that on-budget surpluses would total $3.1 trillion over the 2002-2011 period. Since that time, the Congress passed and the President signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16), which is estimated to decrease tax revenues and increase outlays, including increased debt-service costs, by a total of $1.7 trillion over the 10-year period. After incorporating the effects of the tax bill into the May 2001 baseline, CBO estimates the on-budget surplus for the 2002-2011 period will total $1.5 trillion (see Table 1). That amount includes an HI trust fund surplus estimated to total $397 billion over the 2002-2011 period. Thus, under baseline assumptions, CBO estimates the on-budget surplus excluding the HI trust fund will total $1.1 trillion over the 10-year period.

CBO recently completed its estimate of S. 170 and H.R. 303, identical bills that would allow total or partial concurrent payment of retirement annuities together with veterans' disability compensation to retirees with service-connected disabilities. The bills would apply to retirees from the military, the Coast Guard, the Public Health Service, and the National Oceanic and Atmospheric Administration. The legislation also would discontinue special compensation for certain severely disabled retirees from the uniformed services. CBO estimates that enacting this legislation would increase direct spending for retirement payments and veterans' disability compensation by about $41 billion over the 2002-2011 period (see Table 2). In addition, the Department of Defense would have to make payments of about $14 billion over the 2002-2011 period to the military retirement trust fund to cover the increase in future liabilities for current military personnel. The increased contributions to the retirement trust fund would come from appropriated funds and would represent an intragovernmental transfer to provide for future retirement benefits.

Taken by itself, in the context of CBO's baseline projections, concurrent receipt of military retirement pay and disability compensation, as specified in either S. 170 or H.R. 303, would not reduce the on-budget surplus below the level of the HI trust fund. The legislation would cost $3 billion to $5 billion a year, and the projected on-budget surpluses (excluding HI) are $26 billion or more in every year after 2001.

However, it should be recognized that future legislation could alter the paths of federal spending and revenues, thereby reducing projected on-budget surpluses. In addition, the budget is affected by many economic and technical factors that are difficult to predict. Such developments could result in on-budget deficits or in on-budget surpluses much larger than CBO currently projects.

I hope this information is helpful to you. If you wish further details on this matter, we will be pleased to provide them. The CBO staff contacts are Sarah T. Jennings for the proposal concerning military retirees and Jeffrey M. Holland for budget projections.

Sincerely,

Dan L. Crippen
Director
 

Enclosures
 
cc: Honorable John M. Spratt Jr.
Ranking Democratic Member
 
  Honorable Bob Stump
Chairman, Committee on Armed Services
 
  Honorable Ike Skelton
Ranking Member
 
  Honorable Christopher H. Smith
Chairman, Committee on Veterans' Affairs
 
  Honorable Lane Evans
Ranking Democratic Member
 
Identical letter sent to Honorable Kent Conrad

 

 
TABLE 1.
PRELIMINARY ESTIMATE OF THE EFFECT OF THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 (PUBLIC LAW 107-16) ON CBO'S BASELINE PROJECTIONS (By fiscal year, in billions of dollars)
      2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
2002-
2011
May 2001 Baseline Surplus Projections  
  On-budget 119 132 166 197 215 270 322 366 425 495 553 3,142
  Off-budget 156 172 187 202 221 238 256 275 293 311 330 2,487
 
    Total 275 304 353 400 437 508 578 641 718 806 883 5,629
 
On-Budget Surplus Excluding HI 92 95 125 155 173 225 279 324 385 459 525 2,745
 
Estimated Effect of Public Law 107-16a  
  Revenue reductions -70 -31 -84 -101 -100 -126 -142 -151 -158 -176 -117 -1,186
  Refundable tax credits (outlays) 4 6 7 7 7 10 10 9 10 11 12 89
  Debt service 2 5 8 14 21 29 38 49 61 74 87 385
 
    Total Effect on Surplus -76 -43 -99 -122 -128 -164 -190 -209 -229 -261 -217 -1,660
 
May 2001 Baseline Surplus Projections Incorporating Effect of Public Law 107-16  
  On-budget 44 90 67 76 88 107 132 157 197 234 336 1,484
  Off-budget 156 171 187 202 221 238 256 275 293 311 330 2,484
 
    Total 200 261 255 278 309 345 388 432 489 545 666 3,968
 
On-Budget Surplus Excluding HI 16 52 26 33 46 62 90 116 157 198 308 1,087
 
Memorandum:  
HI Surplus 28 38 41 43 42 45 43 42 40 36 28 397
SOURCE: Congressional Budget Office.
NOTE: HI = Hospital Insurance.
a. The Economic Growth and Tax Relief Reconciliation Act of 2001.
 
TABLE 2.
ESTIMATED OUTLAYS FROM S. 170 OR H.R. 303 COMPARED WITH ON-BUDGET SURPLUSES, EXCLUDING HI (By fiscal year, in billions of dollars)
  2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
2002-
2011
Estimated additional outlays from S. 170 or H.R. 303 0 3 3 3 4 4 4 4 5 5 5 41
Estimated on-budget surpluses (excluding HI) in the absence of such legislation 16 52 26 33 46 62 90 116 157 198 308 1,087
SOURCE: Congressional Budget Office.
NOTE: HI = Hospital Insurance.