Wednesday, February 22, 2012

Healthcare expenses will overwhelm the US federal budget

If one had to point to a single factor that will end up being the most devastating to the US budget deficit, it would be the cost of healthcare in the US. The private cost of US healthcare is staggering, far exceeding anything seen elsewhere in the developed world.

Cost of healthcare as % of the GDP (source: Capital Economics)

But  if it's private, how would it impact the federal budget? The answer has to do with the aging US population as more baby boomers will be retiring over the next couple of decades:

US age demographics (Source: Credit Suisse)

With more retirees, that private healthcare spending in the first chart will be flowing into the public bucket,

as Medicaid and Medicare (including Affordable Care Act or whatever other forms that the US healthcare entitlements take) will be replacing private insurance for the aging population. That is why the CBO is forecasting the healthcare related expenditures ultimately dominating and overwhelming the US federal budget.

US federal spending as % of GDP (source: Capital Economics)