Congressional Budget Office
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The finances of the two Social Security trust funds—one for Old Age and Survivors Insurance (OASI) and the other for Disability Insurance (DI) —worsened over the past year. The recession caused a drop in revenues from payroll taxes and may have encouraged some people to apply for benefits sooner than they otherwise would have. Further, as expected, more and more members of the baby boom generation have begun to collect benefits. As a result, CBO projects that revenues from payroll taxes credited to the trust funds will be $12 billion lower in 2010 than in 2009, while benefit payments will be $37 billion higher. This year, for the first time since the Social Security reforms of the early 1980s, benefit payments from the trust funds will exceed the trust funds’ receipts from the public (which consist mostly of revenues from payroll taxes and exclude interest on Treasury securities held by the trust funds).

In the next decade, Social Security’s benefit payments will exceed its receipts from the public in most years, according to CBO’s estimates. For 2010, the shortfall of such receipts relative to benefit payments—called a “primary deficit” because it excludes interest—will be $29 billion. The financial health of the trust funds will then improve temporarily as the economy recovers; the primary deficit will shrink every year through 2013, and small primary surpluses will re-emerge in 2014 and 2015. However, a longer-term decline in the trust funds’ financial condition is inevitable under current law, because the retirement of the baby-boom generation will cause benefit payments to increase more than revenues. CBO anticipates that a primary deficit will return in 2016 and that deficit will reach $77 billion in 2020. The OASI trust fund will begin to generate primary deficits in 2018, while the DI trust fund will experience primary deficits throughout the coming decade.

When the trust funds show a primary surplus (that is, their receipts from the public exceed their disbursements), that excess represents cash that is available to finance other government activities without requiring new government borrowing from the public. Similarly, when the trust funds record a primary deficit (that is, receipts from the public are less than their disbursements), that difference is a draw on the government’s cash in that year. Such a shortfall has to be made up by running a surplus in the rest of the federal budget or by additional government borrowing in that year.

Counting interest that will be credited on their accumulated balances of Treasury securities, the two trust funds combined will still show an annual surplus this year, and for a number of years into the future. (Those interest payments are intragovernmental transactions; they do not represent income to the government and thus do not affect the unified budget deficit.) CBO projects that the combined annual surpluses of the two trust funds will rise from $91 billion in 2010, peak at $137 billion in 2015, and then fall to $102 billion by 2020. The OASI trust fund will show surpluses in every year while the DI trust fund will realize deficits in every year of the 2010-2020 period.

The figure below shows the combined surpluses or deficits projected for the trust funds over the coming decade. The top (blue) line shows the surpluses counting interest credited to the funds; the bottom (red) line shows the deficits or surpluses not counting interest.

Total Surplus or Deficit of the Social Security Trust Funds (in billions)

The projected balance in the OASI trust fund continues to grow throughout the 10-year period, while the DI trust fund balance declines each year. CBO now anticipates that the DI trust fund will be exhausted in 2018, with available funds falling $15 billion below projected expenditures in that year. Once balances are exhausted, the DI program would be unable to meet its obligations fully without a change in law. (For the purposes of the budget projections in CBO’s Budget and Economic Outlook, DI benefit payments are projected presuming those benefits are paid in full and on time throughout the 2010-2020 period.) The OASI trust fund had a balance of $2.3 trillion at the end of fiscal year 2009; CBO estimates that the OASI trust fund will continue to maintain a positive balance for more than 30 years.

The balances credited to the trust funds are a measure of the government’s legal authority to pay Social Security benefits, but the resources to redeem government bonds in the trust funds and thereby pay for benefits in some future year will have to be generated from taxes, other government income, or government borrowing in that year.

As awareness of global climate change has expanded over past decades, Congresses and Administrations have committed several billion dollars annually to studying climate change and reducing emissions of greenhouse gases, most notably carbon dioxide. Most of that spending is done by the Department of Energy (DOE) and by the National Aeronautics and Space Administration, although a dozen other federal agencies also participate. The effort has included funding science and technology, creating tax preferences, and assisting other countries in their attempts to curtail greenhouse-gas emissions. In a study released this afternoon, CBO examines the government’s commitment of resources to those purposes. The study presents information on current spending and analyzes recent patterns and trends in spending.

From 1998 through 2009, appropriations for agencies’ work related to climate change totaled about $99 billion (in 2009 dollars); more than a third of that sum—$35.7 billion by CBO’s estimation—was provided in the American Recovery and Reinvestment Act of 2009 (see the figure below). During that period, the nation’s commitment to climate-related technology development increased significantly, as has the forgone revenue attributable to tax preferences. Funding for climate science and international assistance, by contrast, stayed roughly constant.

Federal Climate Change Funding, by Category

(Budget authority in billions of 2009 dollars)

Growth in reported funding for climate programs occurred in three ways over the past decade. First, funding increased for some programs whose basic mission was maintained throughout the period. Second, as different Administrations reconsidered what constituted a climate change program, some programs, most notably those in DOE for the development of nuclear power, were included in the tabulation without a change in mission. Third, the focus of some programs has shifted to emphasize climate change. DOE’s program for research and development (R&D) on energy supplied from fossil fuels, for example, evolved from research on converting coal into liquid fuels to finding ways to cut emissions from coal-fired power plants.

There are several rationales for these federal activities. A leading argument in favor of federal support for climate science and technology R&D holds that because private developers of scientific and technical innovations do not capture all of the benefits from their discoveries and inventions, private investment is lower than would be justified by the magnitude of its benefit to society. A different rationale arises from the fact that the prices for fossil fuels and for carbon emission do not fully reflect environmental and social costs. Some activities in the climate change budget can be viewed as compensating for the lower energy prices. Although some or all of the conceptual justifications could apply to many types of policies, they do not indicate that any particular federal program should be undertaken.

CBO assessed the effect of technology programs for R&D, technology demonstration, energy efficiency, infrastructure investment, and tax preferences—areas in which there has been a significant recent commitment of resources. Previous analyses have shown that some programs in the climate change budget, although not all, have provided economic benefits to society that exceed the federal government’s investment.

This study was prepared by Philip Webre of CBO’s Microeconomic Studies Division.

The federal government helps students finance higher education through two major loan programs—one that guarantees loans made by private lenders, and one that makes loans directly to borrowers. Between 2000 and 2009, the volume of outstanding federal student loans more than quadrupled, from about $149 billion to about $630 billion.

Although both programs offer similar types of loans on similar terms to borrowers, they differ significantly in how they are funded and administered. In the guaranteed loan program, loans are made and administered by financial institutions—such as Sallie Mae, commercial banks, and nonprofit agencies. The government bears almost all of the risk of borrowers defaulting and makes certain payments to the lenders. Those lenders usually raise the money to make loans in the private capital markets. By contrast, in the direct loan program, the Department of Education and its contractors bear all of the risks and manage most administrative functions; those loans are funded through the Treasury. Those differences cause the guaranteed loan program to be more costly to the federal government per dollar of lending than the direct loan program.

Today CBO released a study—prepared at the request of the Ranking Member of the Senate Budget Committee—examining the costs of the federal student loan programs, calculated two different ways. One estimate follows the methodology delineated by the Federal Credit Reform Act of 1990, which governs the treatment of credit programs (including student loans) in the federal budget. The other estimate was done on a so-called “fair-value basis,” which provides a more comprehensive measure of cost by including administrative costs and the cost of market risk (the risk that losses from defaults will be higher during periods of market stress, when resources are scarce and hence most valuable). A fair-value estimate represents what a private entity would need to be paid to assume the costs and risks to the government of providing the loans or guarantees.

CBO’s calculations indicate that:

• For both programs, subsidies calculated on a fair-value basis show substantially higher costs than those based on the standard budgetary treatment.
• Regardless of which methodology is used, for a given set of borrowers and loan types, the guaranteed loans cost the government more than those it makes directly.

For example, on a fair-value basis, a mix of representative guaranteed loans would typically cost the government about 20 percent of the principal amount of the loans. Those same loans, made directly by the government to the same people, would typically cost about 12 percent of the principal amount.

The study also looks at several proposals for modifying the student loan programs. For example, the President’s 2011 budget calls for ending the guarantee program’s authority to make new loans on July 1, 2010, and switching entirely to the direct lending program to realize the savings from that program’s lower costs. (CBO recently provided a cost estimate for that particular proposal in a letter to Senator Gregg on March 15 and in our Analysis of the President’s Budget released yesterday.) The House of Representatives and the Senate have both passed legislation (H.R. 4872, the Health Care and Education Affordability Reconciliation Act of 2010) to carry out a similar change.

Other policy options, some of which would reduce costs to the government and others that would increase those costs, include:

• Reducing the cost of the guarantee program by cutting government payments to lenders, reducing the guarantee percentage on loans, or auctioning off the right to lend under the program;
• Indexing interest rates to market rates, allowing federal costs to be more predictable;
• Improving the affordability of student loans by lowering interest rates; and
• Lessening the hardships that borrowers face in repaying loans by making repayment of loans contingent on income, for example.

This study was prepared by Deborah Lucas, CBO’s Associate Director for Financial Analysis, and Damien Moore of CBO’s Macroeconomic Analysis Division.

This afternoon CBO released a report presenting its analysis of the budgetary proposals contained in the President’s budget request for fiscal year 2011.  This report provides more detail than the preliminary analysis that CBO released on March 5, which was discussed in a blog entry that same day. Our latest report differs slightly from the earlier one because it incorporates the impact of some legislation that has recently been enacted. It reflects the revenue and spending estimates that the President included in his budget for major health care legislation, but it does not incorporate the specific effects of the health care bill that was signed into law yesterday. It also includes an analysis of the potential effects on the economy of the President’s budgetary proposals and the impact of those economic effects on the federal budget.

As a reminder, this analysis presents CBO’s assessment of the budgetary outlook for the 2010-2020 period assuming enactment of the President’s policy proposals and reflecting CBO’s economic forecast and technical estimating procedures. The analysis compares that outlook with CBO’s baseline projections, which—unlike the President’s budget—assume that current laws and policies that affect federal spending and revenues remain unchanged

CBO’s analysis indicates that if the President’s proposals were enacted:

• The federal government would record deficits of $1.5 trillion in 2010 and $1.3 trillion in 2011. Those deficits would amount to 10.3 percent and 8.9 percent of gross domestic product (GDP), respectively. (The deficit in 2009 totaled 9.9 percent of GDP.) Compared with CBO’s current-law baseline projections, deficits under the President’s proposals would be about 2 percentage points of GDP higher in fiscal years 2011 and 2012, 1.3 percentage points greater in 2013, and above baseline levels by growing amounts thereafter. By 2020, the deficit would reach 5.6 percent of GDP, compared with 3.0 percent under CBO’s baseline projections.
• Under the President’s budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020, about $5 trillion more than under the assumptions underlying the baseline. Net interest would more than quadruple from 1.4 percent of GDP in 2010 to 4.1 percent in 2020 in nominal dollars (without an adjustment for inflation).
• Revenues under the President’s proposals would be $1.4 trillion (or 4 percent) below CBO’s baseline projections from 2011 to 2020, largely because of the President’s proposals to index the thresholds for the alternative minimum tax for inflation starting at their 2009 levels and to extend many of the tax reductions enacted in 2001 and 2003 that are scheduled to expire at the end of 2010. Other proposals in the President’s budget—including those associated with significant changes in the nation’s health insurance system—would, on net, increase revenues.
• Mandatory outlays under the President’s proposals would be above CBO’s baseline projections by $1.9 trillion (or 8 percent) over the 2011–2020 period, about one-third of which would stem from net additional spending related to proposed changes to the health insurance system and health care programs. Discretionary spending under the President’s budget would be about $0.3 trillion (or 2 percent) lower than the cumulative amount between 2011 and 2020 in CBO’s baseline, reflecting reduced funding for the wars in Iraq and Afghanistan.

The President’s budgetary proposals would have effects on the economy, which would in turn influence the budget through changes in such factors as taxable income (which affects the amount of revenues collected), employment (which determines outlays for programs like unemployment compensation), and interest rates (which affect the government’s borrowing costs). Estimates of economic effects depend on many specific assumptions, and there are several approaches to estimating those effects, so CBO used a number of different models to project the impact on the economy of enacting the President’s proposals. There is, however, a high degree of uncertainty about the economic effects of government policies, so the ranges of possible budget effects are quite wide.

In sum, CBO’s analysis of the interactions between the budget and the economy indicates the following:

• For 2011 to 2015, CBO estimates that the President’s proposals would raise real (inflation-adjusted) output relative to that under the assumptions in CBO’s baseline by between 0.9 percent and 1.2 percent, on average. Those estimates incorporate both supply-side effects (influences on the economy’s potential output) and demand-side effects (temporary movements of actual output relative to potential output).
• For 2016 to 2020, CBO estimates that the President’s proposals would lower real output relative to CBO’s baseline assumptions by between 0.4 percent and 1.4 percent, on average. Those estimates incorporate only supply-side effects because the magnitude of demand-side effects depends on the state of the economy, which is difficult to predict over longer horizons. In addition, the Federal Reserve might offset the effect of policies that are foreseen well in advance in order to maintain economic stability.
• CBO estimates that the economic feedback from the President’s proposals would reduce their cumulative cost over the period from 2011 through 2015—estimated to be about $1.4 trillion excluding any aggregate economic effects—by between 2 percent and 14 percent. From 2016 to 2020, the effects of the proposals on the economy would increase their cumulative cost (estimated to be about $2.3 trillion, excluding any aggregate economic effects) by as much as 6 percent or reduce it by as much as 2 percent.

CBO has not modified its economic forecast since January, but the agency updated its baseline budget projections early in March to take into account some legislation that has been enacted since the completion of the previous baseline in January 2010 as well as new information obtained about various aspects of the budget since then. The resulting changes, relative to CBO’s January projections, are modest, adding $20 billion to the projected deficit in 2010 and reducing projected deficits over the 2011–2020 period by a total of $57 billion.

Last night CBO released a cost estimate for the reconciliation proposal that represents one component of the health care legislation being considered by the Congress. The other component is a bill, H.R. 3590, that the Senate passed in December.

CBO and the staff of the Joint Committee on Taxation (JCT) estimate that enacting both pieces of legislation—H.R. 3590 and the reconciliation proposal—would produce a net reduction in federal deficits of $143 billion over the 2010–2019 period as result of changes in direct spending and revenues. That figure comprises $124 billion in net reductions deriving from the health care and revenue provisions and $19 billion in net reductions deriving from the education provisions. CBO has not completed an estimate of the potential impact of the legislation on discretionary spending, which would be subject to future appropriation action.

On the education side, the reconciliation proposal would amend the Higher Education Act of 1965, which authorizes most federal postsecondary education programs. In particular, the proposal would eliminate the federal program that provides guarantees for student loans and replace those loans with direct loans made by the Department of Education. It would also increase direct spending for the Pell Grant program and other education grant programs.

On the health care and revenue side, the reconciliation proposal and H.R. 3590 would, among other things, establish a mandate for most 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 federal tax code, Medicare, Medicaid, and other programs.

CBO and JCT estimate that by 2019, the combined effect of enacting H.R. 3590 and the reconciliation proposal would be to reduce the number of nonelderly people who are uninsured by about 32 million, leaving about 23 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the legislation, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 94 percent.

Members have also requested information about the effect of the legislation on health insurance premiums. In November CBO released an analysis prepared by CBO and JCT of the expected impact on average premiums for health insurance in different markets of H.R. 3590 as originally proposed. Although CBO and JCT have not updated the estimates provided in that letter, the effects on premiums of the legislation as passed by the Senate and modified by the reconciliation proposal would probably be quite similar.

Although CBO does not generally provide cost estimates beyond the 10-year budget projection period, CBO (together with JCT) has developed a rough outlook for the ensuing decade. CBO estimates that the combined effect of enacting H.R. 3590 and the reconciliation proposal would be to reduce federal budget deficits during the 2020s relative to those projected under current law—with a total effect during that decade in a broad range around one-half percent of gross domestic product (GDP).

That calculation reflects an assumption that the provisions of the legislation 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 mechanism governing Medicare’s payments to physicians has frequently been modified to avoid reductions in those payments, and legislation to do so again is currently under consideration by the Congress. The current legislation would maintain and put into effect a number of policies that might be difficult to sustain over a long period of time.

Yesterday CBO and the staff of the Joint Committee on Taxation (JCT) completed a preliminary estimate of the direct spending and revenue effects of the reconciliation proposal that represents one component of the health care legislation being considered by the Congress. The other component is a bill, H.R. 3590, that the Senate passed in December.

CBO and JCT estimate that enacting the combination of the reconciliation proposal and H.R. 3590 as passed by the Senate would reduce federal budget deficits by $138 billion between 2010 and 2019. Although CBO does not generally provide cost estimates beyond the 10-year budget projection period, many Members have requested our analysis of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. Therefore, we have developed a rough outlook for the decade following the 2010-2019 period. We estimate that the combined effect of enacting those two pieces of legislation would be to reduce federal budget deficits during that following decade relative to those projected under current law—with a total effect that is in a broad range around one-half percent of gross domestic product (GDP). That calculation is very uncertain, and the imprecision of the estimate is intended to reflect that uncertainty.

Many people have raised questions about those projections of deficit reduction and similar projections that we have made regarding earlier pieces of health legislation. Their questions often focus either on the uncertainties surrounding the various technical, behavioral, and economic factors underlying the estimates, or on uncertainties as to whether the legislation would ultimately be implemented as written.

Some analysts believe that CBO is underestimating the ultimate costs of the new subsidies to buy health insurance (which could make the legislation deficit-increasing instead of deficit-reducing). Others assert that CBO is underestimating the ultimate savings from changes in the Medicare program (which could make the legislation reduce deficits by more than we have estimated). Certainly, the budgetary impact of broad changes in the nation’s health care and health insurance systems is very uncertain. However, CBO staff, in consultation with outside experts, has devoted a great deal of care and effort to this analysis, and the agency strives to develop estimates that reflect the middle of the distribution of possible outcomes. As a result, we believe that CBO’s estimates of the net savings that would result from the legislation have a roughly equal chance of turning out to be too high or too low.

Focusing on another area of concern, some observers argue that CBO’s estimates are unrealistic because the Congress will not allow the Medicare spending cuts and future tax increases in the proposals to take effect. CBO’s responsibility to the Congress is to estimate the effects of proposals as written and not to forecast future legislation. However, the agency does try to provide information about the consequences of implementing proposals. For example, our cost estimate for the bill taken up by the Senate in December and our estimate for the House bill last October noted that inflation-adjusted Medicare spending per beneficiary would slow sharply under those proposals. We estimated that growth in such spending under the Senate bill would drop from about 4 percent per year for the past two decades to roughly 2 percent per year for the next two decades; whether such a reduction could be achieved through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care is unclear. In addition, CBO’s estimates have shown that relaxing previously enacted constraints on Medicare spending can add significantly to long-run budget deficits, as we wrote in answer to a question last fall about the effects of combining the House bill with a change in the so-called Sustainable Growth Rate mechanism for Medicare’s payments to physicians.

As we reported yesterday, budget deficits would be reduced, in our estimation, if the reconciliation proposal and Senate-passed health bill are enacted and remain unchanged throughout the next two decades.  However, the legislation would maintain and put into effect a number of provisions that might be difficult to sustain over a long period of time. Whether any of its provisions—and if so, which ones—might be changed in the future is not for CBO to judge.

Today, in a letter responding to questions from Congressman Ryan, CBO described the effects on the federal budget of enacting the reconciliation proposal and the Senate-passed health bill if:

• The excise tax on insurance plans with relatively high premiums—which would take effect in 2018 and for which the thresholds would be indexed at a lower rate beginning in 2020—was never implemented;
• The annual indexing provisions for premium subsidies offered through the insurance exchanges continued in the same way after 2018 as before—in contrast with the reconciliation proposal, which would slow the growth of subsidies after 2018;
• The adjustment to physician payment rates under Medicare that was passed by the House last fall was included; and
• The Independent Payment Advisory Board—which would be required, under certain circumstances, to recommend changes to the Medicare program to limit the rate of growth in that program’s spending, and whose recommendations would go into effect automatically unless blocked by subsequent legislative action—was never implemented.

We estimated that if this set of changes was made, the legislation as modified would increase federal budget deficits during the decade beyond 2019 relative to those projected under current law—with a total effect during that decade in a broad range around one-quarter percent of GDP.

The Congress is considering the pending health care legislation in two components: One is a bill (H.R. 3590) that the Senate passed in December; the other is a “reconciliation” bill that would modify the Senate-passed bill in a number of ways. (In general, a “reconciliation” bill seeks to implement instructions in the Congressional budget resolution in order to achieve the budgetary goals set forth in that resolution; special parliamentary procedures apply to the consideration of such bills.)

CBO and the staff of the Joint Committee on Taxation (JCT) have just completed a preliminary estimate of the direct spending and revenue effects of the reconciliation proposal that was made public on March 18, 2010. (Direct spending is spending that would result from enactment of this proposal without any further legislation. The estimate does not encompass discretionary spending, which would be subject to future action in appropriation bills.)

The estimate is presented in three ways:

• An estimate of the budgetary effects of the reconciliation proposal, in combination with the effects of H.R. 3590, the Patient Protection and Affordable Care Act (PPACA), as passed by the Senate. The combination of those two pieces of legislation would reduce federal deficits by an estimated $138 billion over the 2010-2019 period.
• An estimate of the incremental effects of the reconciliation proposal, over and above the effects of enacting H.R. 3590 by itself. CBO and JCT estimate that enacting the reconciliation proposal would add about $20 billion to the deficit reductions over the 2010-2019 period, on top of the $118 billion in net savings attributable to the Senate-passed H.R. 3590.
• An estimate of the budgetary impact of the reconciliation proposal under the assumption that H.R. 3590 is not enacted (that is, an estimate of the bill’s impact relative to current law as of today). Although estimates on that basis have been completed for most of the provisions of the reconciliation proposal, CBO does not yet have such an estimate for all of the provisions. By CBO’s estimate, the provisions that have been analyzed so far would reduce deficits by $82 billion over the 2010-2019 period.

Although CBO completed a preliminary review of legislative language prior to its release, the agency has not thoroughly examined the reconciliation proposal to verify its consistency with the previous draft. This estimate is therefore preliminary, pending a review of the language of the reconciliation proposal, as well as further review and refinement of the budgetary projections.

The reconciliation proposal includes provisions related to health care and revenues, many of which would amend H.R. 3590; those provisions account for most of the budgetary impact of the proposal. It also includes amendments to the Higher Education Act of 1965, which authorizes most federal programs involving postsecondary education; the education provisions account for net outlay savings of about $19 billion over the 2010-2019 period.
 
Although CBO does not generally provide cost estimates beyond the 10-year budget projection period, certain Congressional rules require some information about the budgetary impact of legislation in subsequent decades, and many Members have requested CBO’s analyses of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. Therefore, CBO has developed a rough outlook for the decade following the 2010-2019 period. We estimate that the combined effect of enacting H.R. 3590 and the reconciliation proposal would be to 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 gross domestic product (GDP).

Today CBO released the third of its statutory reports on transactions undertaken as part of the Troubled Asset Relief Program (TARP). This report discusses CBO’s estimate of the costs of those transactions initiated as of February 17, 2010, as well as possible future transactions that could be undertaken with the available authority.

CBO currently estimates that the cost to the government of the TARP’s transactions—including investments, grants, and loans—completed, outstanding, and anticipated will amount to $109 billion. Much of that estimated cost is associated with the assistance provided to American International Group (AIG)—at a cost of about $36 billion—and the automotive industry—at a cost of about $34 billion. CBO estimates a very small net gain to the government from the capital purchase program, in which the Treasury purchased more than $200 billion in shares of preferred stock from hundreds of financial institutions.

The Office of Management and Budget (OMB) estimates that the total cost of the TARP’s transactions will amount to $127 billion. OMB’s estimate is $18 billion higher than CBO’s estimate principally because of differences in the estimated cost of assistance to AIG and in the amount expected to be disbursed by the Home Affordable Modification Program (an initiative that provides direct payments to mortgage servicers to help homeowners avoid foreclosure).

Both CBO and OMB value the TARP’s investments by discounting to the present the projected cash flows stemming from each investment, using a discount rate that captures both the time value of money and the premium that a private investor would require as compensation for the risk of the investment or commitment. The resulting “net present value” is the cost or gain projected for the investment and represents an estimate of its market value.

Currently, the Secretary of the Treasury has the authority to purchase and hold up to $699 billion in assets at one time. CBO estimates that $344 billion of that authorized amount is outstanding or will be disbursed before the program expires on October 3, 2010. (That figure includes an estimated $45 billion that is projected to be used for purposes not yet specified.) 

This report was prepared by Avi Lerner of CBO’s Budget Analysis Division.

This afternoon CBO responded to Senator Gregg’s request for estimates of the budgetary impact of the President’s proposal to eliminate the federal program that provides guarantees for student loans and to replace those loans with direct loans made by the Department of Education.
 
The Federal Family Education Loan Program (guaranteed loan program) provides federal guarantees on loans for higher education that are administered and funded by private lenders. The guarantee ensures that lenders will receive almost all of the principal and accrued interest owed to them if borrowers default. The William D. Ford Direct Loan Program offers eligible borrowers nearly identical loans that are administered by the Department of Education and funded through the U.S. Treasury. Under the President’s proposal, all federal student loans originated after July 1, 2010, would be made by the direct loan program.

CBO constructed two estimates of the budgetary impact of that proposal. One estimate follows the methodology delineated by the Federal Credit Reform Act of 1990 (FCRA), which CBO is required to use in cost estimates for most credit programs including student loans. The other estimate was done on a so-called “fair value basis” that provides a more comprehensive measure of cost by including administrative costs and the cost of market risk (the risk that losses from defaults will be higher during periods of market stress, when resources are scarce and hence most valuable). The idea of a fair value estimate is to represent what a private entity would need to be paid to assume the costs and risks to the government from providing loans or guarantees.

Taking into account administrative costs and the cost of risk increases the estimated costs of both the guaranteed and direct loan programs: Using the fair-value methodology, CBO estimates that under current law, the net budgetary costs of new direct and guaranteed student loans during the 2010-2020 period would total about $158 billion, as compared to total net receipts for the government of $25 billion using the FCRA methodology.

CBO estimates that the President’s proposal would generate significant cost savings using both the FCRA and fair value approaches, but the savings would be smaller under the fair-value approach. (Both estimates were constructed relative to CBO’s most recent set of baseline budget projections, which were issued earlier this month.) Using the FCRA methodology, CBO estimates that replacing new guarantees of student loans with direct lending would yield savings in mandatory spending of about $68 billion over the 11 years from 2010 through 2020. That figure represents the estimated savings in mandatory costs that would be shown in a CBO cost estimate for legislation under consideration by the Congress. However, adjusting for the projected increase in annual discretionary administrative costs in the direct loan program, the net reduction in federal costs from the proposal would be about $62 billion. On a fair value basis, incorporating administrative costs and the cost of risk, CBO estimates that replacing new guarantees of student loans with direct lending would yield savings of about $40 billion over the 2010-2020 period. The primary reason for that $22 billion difference is that payments from the government to lenders are risky—they terminate when a borrower defaults on or prepays a loan. Those payments are less valuable to lenders and less costly to the government when the cost of that risk is taken into account, so terminating those payments by eliminating the guaranteed loan program yields smaller savings for the government.

In its March 11, 2010, cost estimate for H.R. 3590, the Patient Protection and Affordable Care Act (PPACA), as passed by the Senate, CBO indicated that it had identified at least $50 billion in specified and estimated authorizations of discretionary spending that might be involved in implementing that legislation. Discretionary costs under PPACA would arise from the effects of the legislation on several federal agencies (especially the Internal Revenue Service and the Department of Health and Human Services) and on a number of new and existing programs. The authority to undertake such spending is not provided in H.R. 3590; it would require future action in appropriation bills. Today CBO released a memo and table providing additional information about those authorizations.