New CBO numbers of aging versus health care cost growth

The CBO released new numbers dealing with the respective contributions to rising entitlement spending of population aging and rising per capita health care spending. As I noted previously, the analysis in CBO's new Long Term Budget Outlook support my previous arguments that over the next several decades, aging – not health care excess cost growth – will be the "real deficit threat."

These new data break out aging and ECG-related costs in different ways. The key issues here is that the effects of aging and ECG are multiplicative, not additive. In English, this means that the total cost increase for entitlements will be larger when the two are put together than the sum of when either is viewed separately. The interactions between aging and ECG were a key issue in my original critique of CBO's November 2007 article, in which interactions were attributed entirely to ECG.

I argued that the best way to present the interactions is to divide them proportionately between the two factors. This is the approach CBO took in their Long Term Budget Outlook. However, an equally valid approach is to two the interactions separately; that's what the new CBO numbers do.

In either case, the conclusions are the same: according to CBO's projections, aging will be the largest driver of entitlement costs – and thus of overall budget deficits – until 2055. After that, excess health care cost growth will be the main entitlement cost driver. Given the time frame, and given that we'll be broke due to aging-related cost increases long before 2055, I think focusing exclusively on ECG in the near term doesn't make that much sense.