It’s hard to keep repeating the same point over and over, but when other folks keep getting it wrong it’s a little hard not to. The Obama administration has long argued that rising per capita health spending—not the aging population—will be the main driver of entitlement costs and thus “the real deficit threat.” But, as shown through warnings on this site, in the popular press, and in policy papers, the math just doesn’t support the claim. Over any time period that really matters, the simple graying of the population will drive deficits and debt more than health costs. “Bend the cost curve” all you like, but you’re still facing some very tough choices on taxes and spending.
But in a speech delivered Friday at Princeton University, Council of Economic Advisors Chairwoman Christina Romer again pointed the finger at healthcare costs as the main deficit driver. “Over the long haul, in the absence of corrective action [the deficit] will grow tremendously, largely due to the effect of rising healthcare costs,” said Romer.
The chart below, drawn on Congressional Budget Office projections, shows the increase in debt relative to GDP driven by population aging and rising per capita health spending. Both are significant, but aging is clearly the bigger factor. By 2040, aging alone would increase the national-debt-to-GDP ratio by 40 percentage points. That change, by itself, means it’s game over for the federal budget—financial markets simply won’t support that level of borrowing. Over the same period, the effect of per-capita health costs is less than half as much.
That basic pattern continues through 2070, though those kinds of numbers are simply academic. If we don’t fix the entitlement spending problem in the near future, the budget and the economy will face some very difficult repercussions. A first step in fixing those rising costs is to correctly identify what’s driving them.
Andrew Biggs is a resident scholar and Adam Paul is a research assistant at the American Enterprise Institute.