March 25, 2014
Letter to the Honorable Paul Ryan.
Federal spending for each of the government’s major mandatory spending programs and tax credits that are primarily means-tested (that is, spending programs and tax credits that provide cash payments or assistance in obtaining health care, food, or education to people with relatively low income or few assets). Table 1 shows CBO’s baseline projections for the 2014–2024 period; Table 2 shows historical spending data from 2004 through 2013, along with CBO’s estimates for 2014.
The tables include total spending for mandatory programs that are primarily not means-tested, but they do not include separate entries for individual programs in that group that have means-tested components (for example, student loans and some portions of Medicare, other than low-income subsidies for Part D). They also do not include means-tested programs that are discretionary (for example, the Section 8 housing assistance programs and the Low Income Home Energy Assistance Program). However, the tables show discretionary spending for the Pell Grant program as a memorandum item because that program has both discretionary and mandatory spending components and the amount of the mandatory Pell grant component is partially dependent on the annual amount of discretionary funding.
In CBO’s latest baseline projections, published in The Budget and Economic Outlook: 2014 to 2024 (February 2014), mandatory outlays for both means-tested and non-means-tested programs are projected to grow over the next decade at an average annual rate of 5.4 percent (see Table 1).
Overall, the growth rates projected for total mandatory spending over the coming decade are slower than those experienced in the past 10 years—by about one-half percentage point per year, on average. Over the 2005–2014 period, CBO estimates that total mandatory outlays will have increased at an average annual rate of 6.0 percent—means-tested programs by an average of 6.8 percent per year and non-means-tested programs by 5.7 percent per year (see Table 2).
A number of programs shown in Tables 1 and 2 have been or are scheduled to be significantly affected by changes in law, the recent recession, and the continuing recovery. As a result, important aspects of the programs in the future may differ significantly from historical experience, and those differences may be the source of some of the variation between the growth rates in the past 10 years and those in the coming decade. For example, spending for Medicaid, the Children’s Health Insurance Program (CHIP), health insurance subsidies, the Supplemental Nutrition Assistance Program (SNAP), and the refundable portions of the earned income and child tax credits has been or will be significantly affected by program changes that unfold over time:
- The difference in growth rates for Medicaid in the two periods stems in part from policy changes that, on net, reduced those rates for the past decade (when they averaged 5.4 percent) but will increase them in the coming decade (when they are projected to average 6.8 percent). For example, in 2006, Medicaid spending contracted when spending for prescription drugs for certain people was shifted to the new Medicare Part D program. By contrast, projected rates of growth in Medicaid spending over the coming decade are elevated by the expansion of Medicaid coverage under the Affordable Care Act. CBO expects growth in such spending to average about 10 percent per year over the 2014–2017 period, as the expansion is phased in, and then to level off at a steady-state rate of roughly 5.5 percent per year in the final years of the projection period.
- The difference in growth rates between the two periods for CHIP (11.8 percent in the 2005–2014 period vs. -8.6 percent in the 2015-2024 period) reflects the sunset of CHIP’s existing authority at the end of fiscal year 2015. Consistent with statutory guidelines, CBO assumes in its baseline spending projections that funding for the program after 2015 will continue at $5.7 billion, which is a significant reduction from the amount available at the start of the 2015–2024 period.
- Payments of health insurance subsidies under the Affordable Care Act began in January 2014, and the high rates of growth projected for the next several years reflect a startup period for the new program. In the current projection, the number of people gaining coverage through the exchanges rises from 6 million in 2014 to 22 million in 2016. CBO projects that, after the initial startup, annual growth will average about 6 percent over the 2018–2024 period.
- SNAP spending increased markedly during the recent recession—particularly in 2009 and 2010—as more people became eligible for those benefits. CBO expects that SNAP caseloads will fall in each year of the projection period as the economy continues to improve. In addition, provisions in the American Recovery and Reinvestment Act of 2009 (ARRA) raised the maximum benefit under that program; those provisions expired in October 2013.
- The outlay portions of the earned income and child tax credits are expected to dip after 2018 because provisions expanding the refundability of those credits (which were originally enacted in ARRA and were subsequently extended) are scheduled to expire on December 31, 2017.
Finally, because of the unique budgetary treatment of the Pell Grant program—which has both mandatory and discretionary components—the growth rates for the mandatory portions of that program give incomplete information. The bulk of the funding for Pell grants is discretionary and is provided annually in appropriation acts. In recent years, spending for Pell grants also has included two mandatory components that have allowed the discretionary budget authority provided by the regular appropriation acts to remain well below the full cost of the program.
In keeping with procedures that govern CBO’s baseline projections, the projection for the discretionary portion of the Pell Grant program is based on the budget authority appropriated for fiscal year 2014, adjusted for inflation. (Discretionary spending for the program is shown as a memorandum item in both tables.) Thus, the baseline projection for both discretionary and mandatory spending for Pell grants does not represent an estimate of the expected future costs of the program; such a projection also would take into account such factors as changes in eligibility and enrollment.