CBO Budget Forecast is Gloomy For Millennials

This week the Congressional Budget Office (CBO) offered a much bleaker long-term outlook for the federal budget. It is 126 pages of yuck, and it is probably optimistic yuck.

Investors Business Daily provides a more detailed view of the changes to the projections. Businessweek offers a good explanation of why the figures have changed.

Here are the major takeaways:

Millennials Will Pay More And Get A Lot Less In Return

CBO's forecast include large increases in Social Security, Medicare, and interest costs. As these expenses rise, the resources left over for things like roads, food stamps, education and the like will drop sharply. The IBD article notes, "Outside of Social Security, big health entitlements and debt service, spending on the rest of government is projected to fall to the lowest level since the 1930s."

CBO Asks Whether Our Government Is Too-Big-To-Fail

Debt is measured relative to the economy for the same reason that your credit card debt is measured relative to your income. The estimate of debt level roughly doubled over last year's estimate to levels not seen since WWII.

The report warns that investors "may become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates". First, this means that you will get even less as interest rates rise. Second, the rise in interest rates "reduces the market value of outstanding government bonds, causing losses for investors who hold them. Such a decline can precipitate a broader financial crisis." 

That is exactly what happened to Bear Stearns in 2008.

Social Security Reductions Will Hit Millennials Hard

CBO lowered its projection for the Social Security Trust Fund to 2031.

If your parents are 49 years old or younger, they can expect to retire after the Social Security Trust Fund is exhausted. If your parents are 67, they can expect to outlive the system's ability to pay scheduled benefits. That is in a good economy!

These figures mean that millennials will support their parents more than previous generations.

Everything Depends Upon Assumptions

Most of the CBO's projections are fairly optimistic about American willingness to absorb tax increases.

Last year's revenue projections were based on the expiration of the Obama tax cuts in 2012. The American Taxpayer Relief Act of 2012 sharply reduced projected long-term revenues.

This year's report assumes future tax increases. For example, CBO is planning on a large revenue boost from an excise tax on certain high-premium health insurance plans scheduled to go into effect in 2018 as part of the Affordable Care Act.