Congressional Budget Office
Director's Blog

Yesterday I gave a talk over lunch to the National Economists Club.  If I’d known when I was invited how much legislative activity would be occurring this week, I wouldn’t have agreed—but I enjoyed the chance to talk with the group.

My topic was CBO’s outlook for the federal budget and the economy, drawing on our August report The Budget and Economic Outlook: An Update and our June report The Long-Term Budget Outlook.  You can read the slides from my remarks.

CBO estimates that, if current laws remained in place, the federal deficit would shrink significantly—from about 11 percent of GDP this fiscal year to around 3 percent of GDP between 2013 and 2019.  The country has experienced persistent large deficits before; for example, deficits averaged about 4 percent of GDP during the economic expansion of the 1980s. However, the budget challenge facing policymakers during the coming decade will be more acute than the challenge they faced during the 1980s in three important respects:

• First, federal debt held by the public will exceed 50 percent of GDP at the end of this fiscal year, compared with roughly 30 percent when the expansion of the 1980s began.  As a result, further large deficits and increases in the debt will raise more serious economic risks.  Under current law, CBO projects that debt held by the public will reach 68 percent of GDP by 2019, the highest level since 1950, and will be continuing on an upward trajectory.

• Second, the difference between current law (which underlies CBO’s baseline projections) and current policy as perceived by many people (in particular, the personal income tax rates now in effect) is especially large now.  For example, most of the tax cuts enacted in 2001 and 2003 are scheduled to expire at the end of December 2010, and the exemption amount for the alternative minimum tax (AMT) is scheduled to fall back sharply; those provisions of current law are reflected in CBO’s baseline projections, adding to projected revenues.  If, instead, the tax cuts were extended and the AMT exemption was indexed for inflation after 2009, the revenue loss and the resulting increase in interest payments on the federal debt would widen the deficit to more than 6 percent of GDP by 2019.

• Third, the aging of the U.S. population and rising costs for health care are making federal spending on Social Security, Medicare, and Medicaid a much larger burden relative to GDP.  During the expansion of the 1980s, federal spending on those three programs stayed close to 7 percent of GDP; in the 2013 to 2019 period, CBO projects that spending on those programs will rise from just over 10 percent of GDP to a little below 12 percent.  Beyond the 10-year budget window, CBO expects that this share would continue to rise rapidly under current law.

This sobering outlook for the federal budget is likely to weigh on policy decisions for some time.  High deficits in the near term may be an inevitable consequence of the severe economic downturn and the turmoil in the financial markets.  However, continued large deficits and increases in federal debt over time would adversely affect the nation’s economic growth by lowering saving and investment.

Yesterday CBO released a letter responding to a request by the Ranking Member of the Senate Committee on Finance for additional information about health insurance coverage among nonelderly unauthorized immigrants under current law and under proposals being considered in the Senate and the House.

Current Law

Estimates of the unauthorized immigrant population residing in the United States are derived from survey data that identify foreign-born individuals but do not specify their legal status. As a result, CBO and the staff of the Joint Committee on Taxation (JCT) must use statistical methods to impute legal status when modeling the effects of proposals affecting health insurance coverage. Although the best available information is used in that process, the data have substantial limitations, and the estimates described in CBO’s letter are subject to a significant amount of uncertainty.

Under current law, CBO projects that the nonelderly unauthorized immigrant population will total about 14 million in 2019. Of those individuals, nearly 60 percent (about 8 million) will be uninsured. A further 25 percent (about 4 million) will have employment-based coverage, and about 7 percent (1 million) will have some alternative form of insurance (other than Medicaid). The remaining 10 percent (about 1 million) will make use of some Medicaid coverage, reflecting the current law that allows unauthorized immigrants—who are not eligible for full Medicaid benefits—to receive limited Medicaid coverage for emergency care if they would be eligible for the program apart from their unauthorized status. The number using Medicaid may also include some unauthorized immigrants who manage to obtain full Medicaid coverage even though they do not qualify for it; however, we believe that state agencies administering the Medicaid program successfully screen out most ineligible individuals.

Proposed Legislation

Under the proposal put forth by Senator Baucus-the Chairman’s mark for proposed health care legislation released by the Committee on Finance on September 16 (the America’s Healthy Future Act of 2009)- unauthorized immigrants would not be eligible to participate in the new insurance exchanges or receive refundable tax credits for health insurance coverage; that proposal indicates that the verification process might be similar to what is required under current law for Medicaid. The effect of those provisions would depend on the legislative language that is drafted to reflect those specifications and the rules that are ultimately developed to enforce them. More stringent enforcement procedures would increase the likelihood that unauthorized immigrants could not obtain insurance or subsidies through the exchanges, but they could also discourage eligible individuals from seeking coverage. More rigorous methods would thus reduce subsidy costs; they would also increase administrative costs to some extent. For the people who would not obtain insurance under more stringent rules, the amount of medical care they would receive and the source of financing for that care are difficult to predict.

CBO and JCT have completed a preliminary analysis of specifications for the Chairman’s mark that were provided by committee staff, rather than the Chairman’s mark itself. Moreover, we have not reviewed legislative language that would specify the policies involved and their enforcement provisions. In the absence of such language, we assumed that enforcement mechanisms would be in place that would be highly effective at keeping ineligible individuals from receiving tax credits. However, we have also assumed that there would be some noncompliance—resulting from misreporting of income, family circumstances, or other qualifying conditions to obtain more generous subsidies. Illegal participation by unauthorized immigrants would fall into this category. We have no basis for quantifying those factors separately for this or other proposals.

The same conclusion applies to H.R. 3200, the America’s Affordable Health Choices Act of 2009, as it was introduced in the House in July 2009.  That bill also indicated that unauthorized immigrants would not be eligible to receive premium and cost-sharing credits for health insurance coverage. As was the case with Senator Baucus’s proposal, our preliminary analysis of H.R. 3200 took into account a variety of factors that would affect compliance with its requirements, but again, CBO cannot provide a specific figure for coverage of unauthorized immigrants under that proposal.

Yesterday CBO released a letter responding to questions from the Chairman of the Senate Finance Committee about the subsidies offered through the insurance exchanges and enrollees’ payments for that coverage under the specifications for the Chairman’s mark for proposed health care legislation that were provided by the staff of the Finance Committee on September 15, 2009. It also discusses the factors that affect a comparison of those figures to the amounts that individuals and families would pay, on average, for employment-based coverage or individually purchased policies under current law. CBO has not completed a review of the document entitled “Chairman’s Mark, America’s Healthy Future Act,” which CBO understands has been subsequently modified.

Subsidies and Payments Under the Proposal

CBO analyzed the subsidies that enrollees would receive for premiums and cost sharing—and the amounts they would have to pay, on average—if they purchased coverage in the new insurance exchanges that would be established under the Chairman’s proposal. Those subsidies and payments would vary depending on an individual’s or family’s income relative to the federal poverty level (FPL). The table accompanying that letter illustrates average subsidies and payments for single individuals and families of four at different income levels in 2016, based on the estimates that CBO and the staff of the Joint Committee on Taxation (JCT) have developed for that proposal.

The analysis focuses on enrollees who purchase one of the low-cost “silver” plans offered in the exchanges because federal subsidies would be tied to the premiums of those plans. Such a plan would have an actuarial value of 70 percent, which represents the average share of costs for covered benefits that would be paid by the plan. Under the proposal, premiums would vary by geographic area to reflect differences in average spending for health care and would also vary by age, but the table shows the approximate national average of premiums—about $4,700 for single policies and about $14,400 for family policies in 2016. Enrollees could purchase more extensive coverage or a more expensive plan for an additional premium.

Those projected premium amounts include the effect of the fees that would be imposed under the proposal on manufacturers and importers of brand name drugs and medical devices, on health insurance providers, and on clinical laboratories. Those fees would increase costs for the affected firms, which would be passed on to purchasers and would ultimately raise insurance premiums by a corresponding amount. According to JCT’s estimate, those fees would   add about 1 percent to the affected premiums. The projected premium amounts for exchange plans do not include the effect of the excise tax on insurance plans with relatively high premiums, because individually purchased plans would not be subject to that excise tax.

Under the proposal, the maximum share of income that enrollees would have to pay for a low-cost “silver” plan in 2013 would range from 3 percent for those with income equal to the FPL to 13 percent for those with income equal to 300 percent of the FPL. Those with income between 300 percent and 400 percent of the FPL would have the same 13 percent cap. After 2013, those income caps would all be indexed so that the share of the premiums that enrollees paid (in each income band) would be maintained over time. As a result, the income caps would gradually become higher over time; they are estimated to range from 3.2 percent to 13.9 percent in 2016. A family of four, for example, would have to pay premiums of about $1,400 if its income was $30,000 (about 125 percent of the projected FPL in 2016), or $8,300 if its income was $66,000 (or 275 percent of the FPL).

The magnitude of the premium subsidy that enrollees received would depend on how the premiums compared to those income caps. According to the estimate by CBO and JCT, the average premiums for a low-cost “silver” plan for an individual in 2016 would be less than the 13.9 percent cap on premiums as a share of income that would apply in that year for single people with income above roughly 300 percent of the FPL—so no subsidy would be projected for those with income higher than that amount. Our analysis also indicates that families with income equal to 400 percent of the FPL would probably receive some subsidy because the expected family premiums in 2016 would exceed 13.9 percent of their income (about $96,000 in 2016).

Under the proposal, enrollees with income below 200 percent of the FPL would also be given cost-sharing subsidies to raise the actuarial value of their coverage to either 90 percent (for those with income between 100 percent and 150 percent of the FPL) or 80 percent (for those between with income between 150 percent and 200 percent of the FPL).

CBO also estimated the sum of enrollee premiums and average cost-sharing amounts for the middle of each income band and the average share of income that such spending would represent. For single enrollees, premiums plus cost-sharing payments would range from about $1,200 for those with income of about $14,700, to $6,300 for those with income above $34,000. For families, premiums plus cost-sharing payments would range from about $2,900 for those with income of $30,000, to nearly $20,000 for those with income above $96,000.

Comparisons with Arrangements Under Current Law

To put those figures in perspective, the amounts of premiums and cost sharing in the proposed insurance exchanges can be compared with the amounts people would pay in that same year under current law, either for employment-based coverage or for individually purchased (nongroup) coverage.  Under current law, average premiums for employment-based coverage, the primary source of health insurance for the non-elderly population, are expected to be about $7,500 for a single policy and about $19,000 for a family policy in 2016; average premiums for non-group coverage in 2016 are projected to be about $6,000 for individuals and about $11,000 for family coverage.

Making appropriate comparisons is difficult, however, because insurance premiums can vary under current law—and thus can differ from premiums under a proposal—for many reasons—some of which would tend to make exchange premiums higher than current-law premiums and some of which would tend to make them lower. Differences could be affected by the extent of the coverage that is provided; the rates and methods used to pay providers of health care; the quantity and intensity of services provided; the insurers’ administrative costs; state regulations; the employment status of those insured and employers’ decisions about offering coverage; and the underlying health of the enrollee pool. The differences in premiums would partly reflect differences in the actuarial value of insurance plans, so there would be differences in cost-sharing requirements that would have the opposite effects on household budgets (other factors held equal). Further, the characteristics of people enrolled in the proposed exchanges would differ from the characteristics of people enrolled in employment-based coverage or the individual market under current law, so differences in average premiums would not equal the differences in premiums faced by a given group of enrollees across those different settings. In light of those complexities, quantifying the net effects of the Chairman’s proposal on the amounts paid by individuals and families to obtain health care is very difficult. CBO has not modeled all of those factors and cannot quantify them or calculate the net effects at this time.

Yesterday CBO released a letter responding to questions from the Ranking Member of the U.S. House of Representatives Committee on the Budget about how two policy options for health care would affect the budget deficit over the long term. One option would replace the current tax exclusion for premiums for employment-based health insurance with a tax credit that would grow over time at a rate less than that of health care inflation. The other option would convert Medicaid into a defined-contribution program with federal outlays increasing over time at a rate less than that of health care inflation. In CBO’s view, both options would reduce future budget deficits, relative to projections under current law, by amounts that increased over time. The analysis presented in the letter covers only these two general policy concepts and does not represent an analysis of any particular legislation.

Today CBO released a report that summarizes its analyses of the economic effects of proposed policy changes aimed at reducing emissions of greenhouse gases.

Global climate change poses one of the nation’s most significant long-term policy challenges. A strong consensus has developed in the expert community that, if allowed to continue unabated, the accumulation of greenhouse gases in the atmosphere will have extensive, highly uncertain, but potentially serious and costly impacts on regional climates throughout the world. Moreover, the risk of abrupt and even catastrophic changes in climate cannot be ruled out.

Those expected and possible harms may motivate policy actions to reduce the extent of climate change. However, the cost of doing so could be significant because it would entail substantial reductions in U.S. emissions and in emissions from other countries over the coming decades. Achieving such reductions in this country would probably involve some combination of three broad changes:

• Transforming the U.S. economy from one that runs on carbon-dioxide-emitting fossil fuels to one that   increasingly relies on nuclear and renewable fuels;
• Accomplishing substantial improvements in energy efficiency; and
• Implementing the large-scale capture and storage of carbon dioxide emissions.

CBO’s report makes several points regarding the economic implications of policies that might be chosen to address climate change:

• The economic impact would depend importantly on the design of the policy. Decisions about whether to reduce greenhouse gases primarily through market-based systems (such as taxes or a cap-and-trade program) or primarily through traditional regulatory approaches that specify performance or technology standards would influence the total costs of reducing emissions and the distribution of those costs. The costs would also depend on the stringency of the policy; whether other countries imposed similar policies; the amount of flexibility about when, where, and how emissions would be reduced; and the allocation of allowances if a cap-and-trade system was used.

• Reducing the risk of climate change would come at some cost to the economy. A cap-and-trade system, for example, would lead to higher prices for energy from fossil fuels and for energy-intensive goods, which would in turn provide incentives for households and businesses to use less carbon-based energy and to develop energy sources that emit smaller amounts of carbon dioxide. Changes in the relative prices for energy and energy-intensive goods would also shift income among households at different points in the income distribution and across industries and regions of the country. Policymakers could counteract some of those income losses and shifts by having the government sell emission allowances and use the revenues to compensate certain households or businesses, or by having the government give allowances away to some households or businesses. Even so, some income losses and shifts would occur.

For example, CBO concludes that the cap-and-trade provisions of H.R. 2454, the American Clean Energy and Security Act of 2009, would reduce GDP below what it would otherwise have been—by roughly ¼ to ¾ percent in 2020 and by between 1 and 3½ percent in 2050. By way of comparison, CBO projects that real (that is, inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP because consumption falls by less than GDP and because households benefit from more time spent in nonmarket activities. Moreover, these measures of potential costs do not include any benefits of averting climate change.

• Climate legislation would cause permanent shifts in production and employment away from industries that produce carbon-based energy and energy-intensive goods and services and toward industries that produce alternative energy sources and less-energy-intensive goods and services. While those shifts were occurring, total employment would probably be reduced a little compared with what it would have been without such a policy, because labor markets would most likely not adjust as quickly as would the composition of demand for different outputs.

• CBO has estimated the loss in purchasing power that would result from the primary cap-and-trade program in H.R. 2454. CBO’s measure reflects the higher prices that households would face and the compensation they would receive, primarily through the allocation of allowances or the proceeds from their sale. However, the measure omits some channels of influence on households’ well-being that cannot be readily quantified. It appears that CBO’s measure probably understates the true burden to a small degree. As estimated, the loss in purchasing power would be modest and would rise over time as the cap became more stringent, accounting for 0.2 percent of after-tax income in 2020 and 1.2 percent in 2050.

• The distribution of the loss in purchasing power across households depends importantly on policymakers’ decisions about how to allocate the allowances. According to CBO’s calculation, households in the lowest fifth of households when arrayed by income would see gains in purchasing power in both 2020 and 2050, because the compensation they would receive would exceed the costs they would bear. However, households in the middle fifth would see net losses in purchasing power amounting to 0.6 percent of after-tax income in 2020 and 1.1 percent in 2050.

Some legislation considered by the current and previous Congresses has proposed combining cap-and-trade programs with various regulatory standards to reduce greenhouse-gas emissions. Yesterday CBO released an issue brief that describes how regulatory standards can interact with a cap-and-trade program, using examples related to H.R. 2454, the American Clean Energy and Security Act of 2009, which passed the House of Representatives on June 26, 2009.

In some cases, regulatory standards would require producers of greenhouse gases to use specific technologies, such as renewable sources for generating electricity; in others, manufacturers would have to modify the performance of their products, such as commercial furnaces, to use energy more efficiently. Such regulatory standards have been used in the past to meet various environmental goals.

Over the past two decades, however, policymakers have established cap-and-trade and other market-based programs because such programs often provide a more efficient way to reduce pollution than is possible through the imposition of regulatory standards alone. Market-based approaches rely on the interaction between producers and consumers to determine how to meet specific targets for emissions. Because policymakers do not always have enough information to tailor national regulatory standards to local circumstances, for example, or to adjust standards rapidly as market conditions change, regulatory standards do not always ensure that the least expensive solution is brought to bear on an environmental problem. Market-based approaches, in contrast, allow flexibility in the approach to meeting an environmental goal and often can achieve the same result at a lower cost.

As a result, regulatory standards combined with market-based approaches often will increase the cost of meeting an environmental goal. In particular, if standards forced large reductions in emissions in a specific industry or for a particular product that would not result from a cap-and- trade program alone, the standards would reduce the demand for allowances and depress market prices for them. Some lower-cost strategies would then not be pursued because producers would have no incentive to adopt them. The target for emission reductions might be met, but the technology or performance standard might have substituted higher-cost for lower-cost reductions that would have occurred as a result of the cap-and-trade program without the additional standards.

Market-based approaches are effective only to the extent that markets deliver accurate and timely price information and only so long as producers and consumers respond to that information. When the price mechanism falls short and appropriate price signals are not sent or received, the imposition of regulatory standards can be a more cost-effective way than a cap-and-trade program or a tax to change behavior. For example, builders and owners of rental properties might see little need to insulate buildings or install energy-efficient appliances if utility bills are paid by tenants and if the differences in tenants’ costs are not reflected in the rent that could be charged. (Standards also might be desirable if they addressed other national priorities more effectively than market mechanisms could, even if their economic costs were higher.)

This issue brief was prepared by Rob Johansson of CBO’s Microeconomic Analysis Unit.

CBO has just issued a preliminary analysis of specifications for the Chairman’s mark of the America’s Healthy Future Act, which was released by the Senate Finance Committee earlier today. Among other things, the Chairman’s proposal would establish a mandate for most legal residents of the United States to obtain health insurance; set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage; significantly expand eligibility for Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under current law); impose an excise tax on insurance plans with relatively high premiums; and make various other changes to the Medicaid and Medicare programs and the federal tax code.

According to CBO and JCT’s assessment, enacting the Chairman’s proposal would result in a net reduction in federal budget deficits of $49 billion over the 2010–2019 period. The estimate includes a projected net cost of $500 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $774 billion in credits and subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $215 billion in revenues from the excise tax on high-premium insurance plans and $59 billion in revenues from other sources. The net cost of the coverage expansions would be more than offset by other spending changes that CBO estimates would save $409 billion over the 10 years, and by other tax provisions that JCT and CBO estimate would increase federal revenues by $139 billion over the same period. (The $139 billion figure includes $134 billion in additional revenues estimated by JCT apart from the excise tax on high-premium insurance plans and $5 billion in additional revenues from certain Medicare and Medicaid provisions estimated by CBO.)

You may notice that CBO’s letter does not contain a figure of $856 billion, which the committee has described as the gross cost of the Chairman’s proposal. As we understand it, the committee staff arrived at that number by adding up essentially all of the positive numbers in the draft tables we provided them earlier. Thus, their use of a different total figure from ours appears to reflect primarily a different method for aggregating the underlying figures rather than different underlying figures.

By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by about 29 million, leaving about 25 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the proposal, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 94 percent. Roughly 25 million people would purchase coverage through the new insurance exchanges, and there would be roughly 11 million more enrollees in Medicaid than is projected under current law. The number of people purchasing individual coverage outside the exchanges or obtaining coverage through employers would decline slightly, relative to currently projected levels.

Those estimates are all subject to substantial uncertainty. Furthermore, although we understand that the published document describing the Chairman’s mark was intended to reflect the specifications provided to us, CBO and JCT have not reviewed that document to determine whether it conforms in all respects to those specifications.

Although CBO does not generally provide cost estimates beyond the 10-year budget window, Senate rules require some information about the budgetary impact of legislation in subsequent decades, and many Members have requested CBO analyses of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. However, a detailed year-by-year projection, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great. CBO has therefore developed a rough outlook for the decade following the 10-year budget window by grouping the elements of the proposal into broad categories and assessing the rate at which the budgetary impact of each of those broad categories is likely to increase over time.

All told, the Chairman’s proposal would reduce the federal deficit by $16 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion. Consequently, CBO expects that the proposal, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law, with a total effect during that decade that is in a broad range around one-half percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates.

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented. (If those changes arose from future legislation, CBO would estimate their costs when that legislation was being considered by the Congress.) 

Today CBO released a letter responding to a number of questions from the Ranking Member of the Senate Committee on Health, Education, Labor, and Pensions (HELP) about the effects of health insurance legislation considered by the Committee this summer. CBO and the staff of the Joint Committee on Taxation (JCT) issued a preliminary and partial analysis of that legislation as it was introduced on July 1, 2009. We have not completed an assessment of the legislation as it was ultimately approved by the committee.

Expanding Medicaid Coverage. One question concerned the cost of combining the legislation with an expansion of eligibility for Medicaid for all legal residents with income below 150 percent of the federal poverty level (FPL). As CBO indicated in its letter to Senator Gregg on July 6, 2009, an expansion of Medicaid coverage of this sort would increase the federal cost of the legislation considerably—by an amount that is probably on the order of $500 billion over 10 years. Our preliminary assessment was that the provisions of the legislation pertaining to insurance coverage would increase federal deficits by $645 billion over the 2010–2019 period—so such a Medicaid expansion would probably bring the total federal cost to more than $1 trillion. Adding a Medicaid expansion to the legislation would also yield a substantially larger reduction in the number of people who are uninsured, because about half of the people projected to be uninsured under current law would have income below 150 percent of the FPL.

Effect on Workers’ Wages. Another question asked whether the costs borne by employers as a result of the proposal would be passed on to workers. Under the legislation as introduced, firms with more than 25 workers would have to offer health insurance (and contribute a specified share of the premiums) or pay a penalty. CBO believes that firms that pay the penalty would generally pass that cost on to their workers, primarily in the form of lower wages—just as firms that contribute toward health insurance today pay lower wages than they otherwise would, keeping their total compensation costs about the same. One exception would be workers earning close to the minimum wage, because their wages might not be able to adjust downward to offset the cost of the penalty; as a result, employment of those workers might be adversely affected, though that impact is likely to be small. (For more discussion, see Effects of Changes to the Health Insurance System on Labor Markets.)

Effect on Health Insurance Provided by Employers. A further question dealt with the effects of the legislation on employment-based health insurance. CBO and JCT estimated that the version that was introduced on July 1 would not have a major effect on the number of people obtaining coverage through an employer. This outcome is the net effect of changes going in both directions: Some people would gain employment-based coverage, because the mandate to obtain health insurance would induce some employers to make an offer of such coverage that would not have been made otherwise or would induce some individuals to take advantage of an existing offer that they would not have accepted otherwise. At the same time, we estimated that some people who would have employment-based coverage under current law would not have such coverage under the proposal.

Impact of a Public Plan. Another question was whether the federally administered “public plan” that would be offered under the legislation as introduced would have a substantial effect on federal spending for health care. In the legislation, the public plan would be managed by the Department of Health and Human Services, would pay negotiated rates to providers of health care, and would have to be financially self-sufficient (albeit with the government bearing some risk, as discussed below). Given those provisions, CBO’s assessment is that premiums for the public plan would typically be comparable to the average premiums of private plans offered in the insurance exchanges—and thus the existence of such a plan would not directly affect the amount of federal subsidies for health insurance under the legislation.

Nevertheless, including a public plan would probably have two small effects on private premiums, both of which would tend to lower federal subsidy payments through the exchanges to some degree. First, a public plan as structured in the introduced bill would probably attract a substantial minority of enrollees (in part because it would include a broad network of providers and would be likely to engage in only limited management of its health care benefits). As a result, it would add a small amount of competitive pressure in many insurance markets that are currently served by a limited number of private insurers. Second, a public plan is also apt to attract enrollees who, overall, are less healthy than average (for the same reasons it would attract a substantial number of enrollees). Although the payments received by all plans in the exchanges would be adjusted to account for differences in the health of their enrollees, the methods used to make such adjustments are imperfect. As a result, the higher costs of those less healthy enrollees in the public plan would probably be offset partially but not entirely; the rest of the added costs would be reflected in the public plan’s premiums. Correspondingly, the costs and premiums of competing private plans would, on average, be slightly lower than if no public plan was available.

Effects on National Spending for Health Care. The introduced legislation would also affect national spending on health care. By itself, a substantial expansion of insurance coverage could cause national spending on health care to increase by between 2 percent and 5 percent, largely because insured people generally receive somewhat more medical care than do uninsured people—notwithstanding the fact that some newly insured people would avoid expensive treatments by getting care sooner, before their illness progressed. (For more discussion, see Key Issues in Analyzing Health Care Proposals.) However, the rise in national spending on health care would be less than the increase for the federal government because some costs that are now paid by others would be shifted to the government (via the subsidies provided by the bill).

The bill would encourage private insurers to adopt measures to improve the coordination of the care they provide, but private insurers would be inclined to adopt cost-reducing strategies even in the absence of new legislation, so the effect of those provisions on costs is not clear. The insurance market reforms included in the bill would reduce administrative costs for individually purchased policies, but the resulting savings would probably be small relative to the increase in spending brought about by the insurance expansion. On balance, the bill would probably increase national spending on health care modestly.

Today CBO released a background paper examining whether the demand for assets, such as stocks and bonds, will fall after the retirement of the baby-boomer generation—the segment of the nation’s population born between 1946 and 1964, whose oldest members turned 62 in 2008. Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance their retirement; they assert that the sell-off could cause a dramatic decline in prices. An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely.

Demand for Assets

In general, retirees sell assets to finance their retirement, whereas young and middle-aged workers buy assets to save for old age. As a population ages, the share of older, retired people selling assets increases relative to the share of younger, working people buying them. In principle, if an unusually large cohort, such as the baby boomers, were to sell its assets to finance retirement, the total demand for assets in the economy could fall substantially over several decades and the prices of those assets could decline as well.

However, empirical evidence about the behavior of earlier groups of retirees suggests that baby boomers will not sell their assets quickly after they retire. Several factors probably explain that evidence. First, retirees generally are cautious about selling assets to finance consumption because they might need those assets in the future: They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated. Second, rather than spend all of their assets, retirees might intentionally retain some to make bequests. Third, wealth in the United States is highly concentrated: One-third of the nation’s financial assets is held by the wealthiest 1 percent of the U.S. population. The wealthiest people do not spend significant portions of their assets during retirement and in most cases die leaving bequests.

The demand for assets will be reinforced if baby boomers change the timing of their retirement as a result of the recent financial turmoil. Some baby boomers who have lost or spent a significant portion of their assets may defer retirement, shortening the duration of retirement and reducing the amount of assets needing to be sold to finance consumption. The aggregate effect on asset demand might be small, however, if people delayed retiring for only a year or two.

Foreign demand is likely to help sustain the demand for U.S. assets. A rising demand for U.S. financial assets is anticipated to come from developing countries with emerging economies whose populations are younger or aging less quickly than is the U.S. population. By contrast, the demand for assets by new immigrants to the United States is unlikely to have much effect on overall demand.

Prices of Assets

Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. That prediction of a temporary decrease is based on the studies’ expectation that the retirement of baby boomers will cause the demand for assets to fall more rapidly than the stock of capital will be reduced, causing asset prices to fall while the capital stock adjusts. Empirical evidence, however, has not revealed much connection between demographic trends and the price changes observed in financial markets.

This paper was prepared by Marika Santoro of CBO’s Macroeconomic Analysis Division.

Today CBO released its estimates of federal revenues and outlays for the first 11 months of fiscal year 2009. The federal budget deficit through August was almost $1.4 trillion, CBO estimates, close to $900 billion greater than the deficit recorded through August 2008. Outlays were $518 billion (or 19 percent) higher and revenues $365 billion (or 16 percent) lower than the amounts recorded during the same period last year.

The estimated deficit reflects outlays of about $174 billion for the Troubled Asset Relief Program (TARP), recorded on a net-present-value basis adjusted for market risk, and net cash outlays of $83 billion in support of Fannie Mae and Freddie Mac. CBO believes that Fannie Mae and Freddie Mac should now be considered federal operations and that the full scope of their activities should be incorporated in the federal budget. The Monthly Treasury Statements, however, are only recording the cash infusions from the Treasury (net of receipts) as federal outlays. CBO estimates that spending increases and revenue reductions stemming from the American Recovery and Reinvestment Act of 2009 (ARRA) have totaled more than $150 billion so far this year (excluding the impact on the budget from ARRA’s effects on the economy).

CBO estimates that receipts were about $11 billion (or 7 percent) lower in August 2009 than they were in August 2008, marking the 16th consecutive month in which receipts were lower than those in the same month of the previous year. Withholding for income and payroll taxes declined by about $10 billion (or 7 percent) compared with August 2008, accounting for nearly all of the total decline. CBO estimates that more than half of that decline resulted from provisions in ARRA, primarily the Making Work Pay tax credit. For the fiscal year to date, withholding is down by about 6 percent, primarily because of the recession’s effect on wages and salaries and lower effective tax rates on that income.

Outlays were $6 billion lower in August than in the same month last year; however, spending compared to last year would be greater if adjustments were made to account for the different timing of certain benefit payments. (For example, because August 1, 2009, fell on a weekend, payments that would have been made in August were instead made at the end of July.) Without those shifts, outlays would have been about $40 billion (or 16 percent) higher than in August 2008.

CBO recently issued new estimates of the budget outlook for 2009. Counting Fannie Mae and Freddie Mac in the budget, CBO estimates that the deficit for 2009 would total about $1.6 trillion. If those GSEs are excluded from the budget and only payments to them from the Treasury and associated dividend receipts are counted (as has been the case in the Treasury statements thus far), the recorded deficit will be approximately $1.4 trillion, CBO estimates. Additional information about those estimates can be found in The Budget and Economic Outlook: An Update.