The Economic and Fiscal Effects of Financing Medicare's Unfunded Liabilities

Social Security's looming financial crisis has received much attention over the past few months. However, Medicare, the other major program intended to ensure the well-being of older Americans, represents an equal if not greater threat to the long-term fiscal health of the federal government.

The numbers speak for themselves. Providing promised Medicare benefits is projected to require over $2.7 trillion (in nominal dollars) in new tax revenues over just the next 10 years and a mind-boggling $29.9 trillion (in 2005 dollars) over the next 75 years. Providing promised Social Security benefits is projected to cost much less. Combined annual Old-Age, Survivor, and Disability Insurance (OASDI) benefits are not expected to exceed OASDI income from payroll taxes and other sources until 2017, and unfunded OASDI obligations to America's seniors are expected to total roughly $5.7 trillion (in 2005 dollars) over the next 75 years.[1]

In other words, Medicare's financing problems will arise sooner and ultimately surpass Social Security's financing problems. They will also require difficult choices about both the size of public health-care spending for the elderly and the burden borne by future workers in paying for that care. For these reasons, Thomas R. Saving, a public trustee for the Medicare program and a senior fellow at the National Center for Policy Analysis, has argued that "the single biggest reason for Congress to reform Social Security is the existence of Medicare."[2]

This report focuses on the economic and budgetary effects of using higher taxes to finance promised Medicare benefits. It first looks at the effects of raising personal income and payroll tax rates to fund promised Medicare benefits through 2015. It then considers the effects of raising only payroll tax rates to finance promised Medicare benefits through 2079.

These policy changes were analyzed using Global Insight's short-term U.S. Macroeconomic Model.[3] The results show that the economic costs of raising taxes to finance Medicare through even 2015 could be prohibitive. Assuming that new tax revenues are used to fund Medicare and not to offset higher spending elsewhere in the federal budget, between 2006 and 2015, total job losses could average almost 816,000 annually, and real (inflation-adjusted) gross domestic product (GDP) could be, on average, nearly $87 billion lower per year.

Annual employment and output losses would be much greater if payroll taxes were raised sufficiently to finance all of the health-care benefits promised to Americans through 2079. Total job losses could average almost 2.7 million, and the drop in real GDP could approach an average of $248 billion per year over the first 10 years that higher payroll tax rates are in place.

Medicare's Unfunded Liabilities

The federal government faces huge unfunded liabilities because of the promised health-care benefits now available to current and future generations of older Americans. Those liabilities are a product of the Medicare program, which consists of two separate components: Hospital Insurance and Supplementary Medical Insurance (including the new prescription drug benefit).

Medicare's Hospital Insurance (HI) component, also known as Part A, helps to pay for the hospital, home health, nursing home, and hospice care of the elderly and disabled. HI benefits are financed primarily through a 2.9 percent payroll tax on the earnings of all covered workers.[4] Unlike contributions to Social Security's retirement program, the Medicare payroll tax has been applied to total covered wages, salaries, and self-employment income since 1994. In addition, taxes on the Social Security benefits of high-income individuals and interest income from the investment of past HI trust fund surpluses play a small role in funding HI benefits.[5]

The income flows from payroll tax and other revenues have exceeded Part A benefit payments in all but a handful of the past 40 years. As a result, the HI trust fund had accumulated surpluses totaling $269.3 billion by the end of 2004.[6] This amount is earmarked to fund the Part A benefits of future retirees.

However, there is little reason to be sanguine about the future of Medicare's HI trust fund. Today, the HI trust fund (aside from small cash balances) consists almost entirely of special public-debt obligations purchased using trust fund surplus dollars. Those special obligations are credited to the trust fund by the federal government and represent a claim on future tax revenues. In 2004, they totaled roughly the accumulated positive differences between payroll tax (and other) receipts and trust fund spending since the HI trust fund's inception in 1965.

Theoretically, payroll tax revenues in excess of current program needs could be used to reduce budget deficits. The subsequent decline in government borrowing would increase national saving and help to reduce the tax burden on future workers.[7] Historically, however, rising payroll tax revenues and trust fund surpluses have not been accompanied by declining federal deficits.

A number of researchers have attributed the buildup of public-debt obligations in the federal trust funds to the switch to a unified budget in 1970.[8] Under unified budget accounting, trust fund income is combined with federal personal income taxes, corporate income taxes, and other federal receipts to arrive at unified federal revenues. Similarly, trust fund spending is lumped together with all other federal spending to arrive at unified federal expenditures.

The budget debate revolves around the unified budget balance. Until recently, payroll tax revenues (and other income) in excess of benefits have generated trust fund surpluses. Those surpluses have helped to offset increased federal spending by the rest of the government and the resulting on-budget and federal-funds deficits.[9] In the late 1990s and early 2000s, they contributed greatly to unified budget surpluses.

However, according to the Medicare trustees' report, promised HI benefits began to outstrip current payroll tax collections and other trust fund income (excluding interest income) beginning in 2004. Actuarial imbalances in the HI trust fund are expected to expand in every year thereafter as a result of the retirement of the baby-boom generation and the inflation of health-care costs, among other factors. To help fund current benefits, Medicare will begin to redeem the special public-debt obligations held in the HI trust fund. The 2005 Medicare trustees' report projects that Medicare will deplete those special obligations by 2020. However, the exact date matters little in one important sense. Both before and after 2020, ever larger transfers of federal corporate and personal income tax collections and other federal receipts will be needed to fund the gap between current HI income and promised benefits.

Such general revenue transfers already constitute the bulk of Supplementary Medical Insurance (SMI) trust fund financing. Medicare's SMI program consists of two separate components. Part B covers physician, outpatient, home health, and other services for the elderly and disabled who are enrolled. Part D, a product of the Medicare Modernization Act of 2003, initially provides a prescription drug discount card to low-income Medicare beneficiaries. Beginning in 2006, the discount card will be replaced by subsidized drug insurance coverage that is available to all enrolled beneficiaries. Premium and cost-sharing subsidies will be available to all enrollees, with substantially larger subsidies for those with low incomes.

Part B and Part D benefits are funded out of two separate accounts within the SMI trust fund. Under law, each account is automatically in balance because benefits are financed using a combination of premiums paid by recipients and authorized general revenue transfers set to cover the next year's estimated fund expenditures. In fiscal year 2004, premiums accounted for roughly 25 percent of Part B trust fund income, and general revenue transfers from the Treasury accounted for the remaining 75 percent. Total funding for basic drug insurance coverage under Part D is calculated to follow a similar formula beginning in 2006.

The only revenues earmarked for financing the HI and SMI trust funds are those raised by the existing payroll tax, the tax on Social Security benefits, and premiums. Any gap between those earmarked revenues and expected benefit payments must be filled with transfers of federal personal and corporate income tax collections and other federal receipts. Assuming that the benefits promised to current and future retirees will be provided, that gap constitutes a staggering unfunded liability. (See Charts 1 and 2.)

Under the trustees' intermediate economic and demographic assumptions,[10] the HI trust fund's actuarial imbalance is projected to exceed $8.8 trillion (in 2005 dollars) over the next 75 years (2005-2079).[11] Over the same period, general revenue transfers to SMI Parts B and D are projected to total $12.4 trillion and $8.7 trillion, respectively.[12] To put those totals in perspective, fully funding the benefits promised to present and future beneficiaries through 2079 would require permanently and immediately increasing the Medicare payroll tax rate to roughly 13.4 percent of all wages, salaries, and self-employment income. (See Appendix A for the methodological details.)

Even funding the benefits promised to retirees over the next 10 years implies steep tax hikes. Closing HI trust fund imbalances through 2015 could require general revenue transfers totaling an estimated $134 billion (in nominal dollars).[13] More ominously, funding benefits promised under SMI Parts B and D over the same period could easily require total general revenue transfers approaching $2.6 trillion.[14] SMI Part D will likely account for nearly 40 percent of that $2.6 trillion unfunded liability.[15]

Funding Medicare's Unfunded Liabilities

Of course, estimating the economic and budgetary effects of putting Medicare on a firmer financial footing is difficult because of the high degree of uncertainty surrounding long-term trends in life expectancy, birth rates, productivity, and wage growth. Trends in life expectancy and birth rates will determine the number of elderly and the pool of available workers to support them. Trends in productivity and wage growth will determine workers' ability to pay the taxes needed to fund promised benefits.

Similarly, there is no single approach that the federal government can take to fund Medicare's promised benefits. Some argue that the government can simply raise taxes with almost no effect on the economy. Others argue that tax increases would have beneficial effects on output and employment because they would reduce the need for federal borrowing and debt accumulation after the baby-boom generation retires.

The 1993 Omnibus Budget Reconciliation Act (OBRA-93) is often used to bolster the case for higher taxes. OBRA-93, among other revenue-raising measures, put in place two new, higher marginal tax rates for individuals (36 percent and 39.6 percent) and repealed the wage cap on Medicare payroll taxes.[16] In the five years following its passage, real GDP expanded at an annual average rate of almost 3.8 percent, and private-sector employment grew at an annual average rate of over 2.9 percent. At the time, the Clinton Administration credited the deficit reduction facilitated by OBRA-93 with setting the stage for economic expansion.[17]

However, there are reasons to be skeptical of such arguments. First, the tax increases needed to put Medicare on firmer financial footing would be many orders of magnitude larger than those included in OBRA-93. In August 1993, the Joint Committee on Taxation (JCT) estimated that the revenue provisions in OBRA-93 would increase federal tax collections by almost $241 billion over five years (1994-1998).[18] As the Congressional Budget Office (CBO) noted at the time, the higher revenues were not even expected to alter "the underlying trends of deficits that, after falling from the high levels of the early 1990s, [would] rise steadily" as the decade neared its end.[19] In comparison, funding all of Medicare's unfunded obligations through just 2015 would require increasing tax collections by more than $2.7 trillion.

Moreover, economic analysis of OBRA-93 has indicated that it potentially slowed rather than facilitated a nascent economic expansion. Beach et al. used the Washington University Macro Model (WUMM) to simulate U.S. economic performance assuming that Congress had not raised taxes in 1993.[20] Their comparison of OBRA-93 to a current-law baseline forecast (see Appendix A) concluded that the tax increase slowed the pace of economic growth and job creation and cut the growth in real disposable income and saving. As a result, the economy did not perform well when compared to similar points during previous economic expansions of similar length.

In this regard, continental Europe provides a cautionary tale. Since the 1970s, continental European countries have experienced declines-often dramatic declines-in employment rates, average annual hours worked, and the growth rates of real per capita GDP. As a result, European per capita GDP in 2000 remained fixed at roughly 70 percent of U.S. per capita GDP (measured in terms of purchasing power parity), roughly its level in 1970. Over the same period, European taxes on labor income (income and payroll taxes) either have increased relative to or have remained persistently higher than the equivalent U.S. labor income taxes.[21]

Explanations for Europe's sluggish economic performance abound. Prescott and Cardia et al. recently argued that high labor taxes played a central role in driving down hours worked in Europe. Alesina et al. and Blanchard attributed the bulk of Europe's decline in hours worked to greater preferences for leisure among Europeans, but also allowed that high tax rates on labor income could explain at least part of the decline in annual average hours worked.

Looking into the future, Kotlikoff et al. estimate that U.S. payroll and income taxes would need to climb to almost 40 percent of wages to provide future retirees with promised health care and pension benefits.[22] In their calculations, lower after-tax income to workers reduces hours worked, disposable income, and therefore personal saving. Over time, the implied decline in capital formation negatively affects labor productivity and wages. The result is an estimated 25 percent drop in the U.S. standard of living by 2030.

Clearly, any policy that reduces future job opportunities and economic growth will complicate the problem of providing future generations of older Americans with health-care benefits.

The Economic and Budgetary Effects of Raising Payroll and Personal Income Taxes

This section focuses on the effects of raising taxes to finance Medicare's unfunded liabilities.[23] It first considers the economic and budgetary effects of immediately raising payroll tax rates and personal income tax rates to finance HI and SMI benefits through 2015. Payroll taxes would be increased to finance projected imbalances in the HI trust fund over only the next 10 years. Personal income taxes would be increased to cover general revenue transfers to the SMI trust fund over the same period.[24] It then looks at the economic and budgetary effects of raising payroll tax rates permanently and immediately to finance HI and SMI benefits through 2079.

Raising taxes to finance Medicare's unfunded liabilities over either the next 10 or the next 75 years would undoubtedly have economic and budgetary effects from the beginning. The size of those effects would depend largely on whether the new tax revenues are used to pay down debt or to finance higher spending elsewhere in the federal government's budget.

For example, raising payroll and personal income tax rates just enough to fund general revenue transfers to HI and SMI through 2015 (see Table 2 in Appendix B) could push real GDP an average of $105.5 billion below base levels between 2006 and 2010.[25] Private-sector employment over the same period would be reduced by an average of over 921,000 jobs per year, increasing the unemployment rate by an average of 0.4 percentage points over the five-year period.

Higher payroll and personal income taxes would continue to be a drag on the economy between 2011 and 2015. However, the magnitude of lost output and jobs would be moderate relative to the first five years. This is because, within any given budget year, the federal government is assumed to allocate new revenues earmarked for Medicare toward deficit reduction and not increased spending.[26]

Thus, by 2015, the federal government's projected unified budget deficit would have become a substantial unified budget surplus, and privately held federal debt as a share of GDP would have dropped over 15 percentage points to 19.4 percent.

Reduced deficit spending, along with cuts in the federal funds rate by the Federal Reserve, would in time lower interest rates and the overall cost of capital to businesses. The result would be a temporary rebound in non-residential investment and an increase in capital formation. However, personal income and consumption would remain depressed, as would private-sector employment.[27] Higher taxes on labor would in turn contribute to a gradual decline in labor-force participation. As a result, by 2015, real GDP is estimated to be over $116 billion lower than it would be without the tax increases.[28]

The economic and budgetary effects would be much larger if the government raised payroll tax rates sufficiently to fund general revenue transfers to HI and SMI through 2079. (See Table 3 in Appendix B.) Raising the Medicare payroll tax rate to the required 13.4 percent of all wages, salaries, and self-employment income would generate substantial amounts of new federal tax revenues. (See Appendix A.) Assuming that the new revenues are used to reduce deficits and pay down debt, the federal government's unified budget deficit would very quickly become a unified budget surplus, and privately held federal debt would drop below 10 percent of GDP before 2015. The ensuing lower interest rates would in time encourage higher non-residential capital spending and capital formation.

However, the unified budget surpluses would be the result of increased payroll tax revenues and lower interest payments on the federal debt. Both personal and corporate incomes, and thus personal and corporate federal income tax collections, would fall below their base levels in every year between 2006 and 2015. Consistent with lower personal income, personal consumption expenditures would decline steadily, helping to push real GDP down an average of over $204 billion per year between 2006 and 2010. Private-sector job losses would in turn average nearly 1.8 million annually over the same period.

The negative economic effects of raising payroll tax rates to fund HI and SMI through 2079 would be more pronounced if the federal government used new tax revenues to finance higher spending instead of paying down debt. (See Table 4 in Appendix B.) This is because lower personal and corporate incomes would again give way to lower personal and corporate income tax collections, but increased payroll tax revenues, instead of offsetting declining federal income tax receipts, would offset greater spending elsewhere in the federal government's budget.

As a result, privately held federal debt would expand as a share of GDP, tending to make it more difficult for businesses to finance new capital spending. Non-residential investment and, ultimately, capital formation would still rebound, but only because the Federal Reserve is assumed to lower the federal funds rate aggressively to offset rising unemployment rates. By 2015, real GDP would be over $283 billion lower than it would be without tax increases, and almost 2.8 million private-sector jobs would have been lost because of higher payroll tax rates.

Conclusion

Today, Medicare is the less costly of the two major government programs intended to ensure the well-being of older Americans. However, an aging population and other factors will make it a primary concern of policymakers in the coming years. How policymakers meet the long-term fiscal challenges of Medicare's unfunded liabilities could have profound economic and budgetary effects. Any policy that reduces future job opportunities and economic growth will compound the problem.

Simply raising taxes to finance promised Medicare benefits would likely prove counterproductive because the economic costs would be prohibitive, even assuming that policymakers are prudent and use new tax revenues to pay down deficits and debt. In the estimates presented in this report, raising payroll and personal income taxes to finance Medicare over just the next 10 years could reduce total employment by an average of nearly 816,000 jobs and depress real GDP by an average of almost $87 billion per year through 2015. (See Table 1 and Chart 3.)

The economic costs would increase if policymakers follow historical patterns of using new tax revenues to offset new federal spending. Under such circumstances, raising taxes to finance Medicare over the next 75 years could reduce total employment by close to 2.7 million jobs and real GDP by an average of almost $248 billion over the first 10 years that higher payroll taxes are in place.

Tracy L. Foertsch, Ph.D., is a Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation, and Joseph R. Antos, Ph.D., is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

Appendix A
Methodology

A three-step procedure was followed in analyzing the economic and budgetary effects of raising taxes to finance Medicare's unfunded liabilities.

First, the static increases in payroll tax and personal income tax revenues needed to fund promised benefits were estimated. These estimates were based on data from the 2005 Annual Report of the Boards of Trustees of the Hospital Insurance and the Supplementary Medical Insurance Trust Funds and the 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

Second, version 9 of the Global Insight U.S. Macroeconomic Model was calibrated to the baseline economic and budgetary assumptions and forecasts published in the Congressional Budget Office's August 2005 The Budget and Economic Outlook: An Update.[29]

Third, once calibrated, that model and its CBO-like baseline were used to simulate how the general economy would likely respond to the implied changes in federal tax and spending policies.[30]

The Congressional Budget Office produces a current-law baseline. A current-law baseline includes projections of personal incomes, corporate profits, GDP, prices, employment, consumption, investment, etc. that are consistent with no changes in federal outlays and receipts other than those specified by laws that have already been enacted.[31] For example, the CBO's current-law baseline assumes the expiration of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. However, it excludes any new legislation that would increase federal spending, even when such legislation is likely to be enacted.

The CBO's current-law baseline treats the outlays and receipts associated with Medicare somewhat differently. CBO federal spending projections include expected outlays for Medicare Parts B and D. However, its revenue projections do not include any offsetting general revenue transfers to the SMI trust funds. These transfers are instead captured residually in CBO projections of unified federal budget surpluses/deficits. From a modeling standpoint, this means that any simulated increases in revenues earmarked for Medicare will affect deficit reduction and not spending on federal health-care benefits.

Calculating Static Revenue Estimates

Two separate sets of static revenue estimates were made. Both are consistent with the intermediate economic and demographic assumptions outlined in the 2005 Medicare and the 2005 OASDI trustees' reports.[32]

First, the additional payroll tax revenues needed from 2005 to fund HI and SMI benefits over the next 75 years were calculated using projections of taxable payroll taken from the 2005 OASDI trustees' report and estimates of payroll tax rate increases from the 2005 Medicare trustees' report. The calculated gains in payroll tax revenues were then translated into corresponding increases in the effective federal social insurance tax rate used in the Global Insight model.

• The 2005 Medicare trustees' report estimates the present value of HI's 75-year actuarial imbalance to be 3.09 percent of taxable payroll.[33] It then suggests that HI's "long-range financial imbalance could be addressed" by immediately and permanently raising the 2.9 percent payroll tax rate to 5.99 percent of all wages, salaries, and self-employment income.[34]
• The report estimates the present value of the general revenue transfers needed to fund Part B through 2079 to be 4.34 percent of taxable payroll.[35] It estimates the present value of the general revenue transfers needed to fund Part D over the same period to be 3.04 percent of taxable payroll.[36] Therefore, using payroll taxes to fund Parts B and D combined would imply an immediate and permanent jump in the Medicare payroll tax rate to roughly 10.3 percent of total wages and salaries. Combining the unfunded obligations of SMI Parts B and D with HI's actuarial imbalance would immediately push the Medicare payroll tax rate to an estimated 13.4 percent.
• Static revenue estimates were obtained by multiplying OASDI projections of taxable payroll by the difference between that 13.4 percent and the current 2.9 percent Medicare payroll tax rate. Between 2006 and 2015, in calendar years, the result would be an increase in payroll tax revenues exceeding $8.1 trillion. Obtaining the same increase in payroll tax revenues in the Global Insight model required a permanent 10.8 percentage point increase in the model's effective federal social insurance tax rate by the end of 2015.

Second, the increases in payroll tax and personal income tax revenues needed to pay promised HI and SMI benefits over just the next 10 years were calculated using data taken from the 2005 Medicare trustees' report.

• Beginning in 2005, payroll taxes were increased by the amount of HI's projected (nominal) annual deficits. These deficits are defined as the difference between HI income, excluding interest, and HI benefits payments.[37] They sum to almost $134 billion between 2006 and 2015, implying an increase of more than 0.4 percentage point in the Global Insight model's effective federal social insurance tax rate by the end of 2015.
• Beginning in 2005, federal personal income taxes were increased by the amount of (nominal) projected general revenue contributions to SMI Parts B and D.[38] Those projected general revenue contributions sum to nearly $2.6 trillion between 2006 and 2015, implying a rise of more than 4.2 percentage points in the Global Insight model's average effective federal personal income tax rate by the end of 2015.

Simulating the Economic and Budgetary Effects of Financing Medicare's Unfunded Liabilities with Higher Taxes

Increases in payroll and personal income tax revenues were introduced into the Global Insight model by:

• Increasing the effective federal social insurance tax rate on wages and salaries and the effective federal personal income tax rate on the model's taxable personal income.
• Adjusting several of the model's labor supply variables to capture the potentially negative effects of higher payroll and personal income taxes on labor force participation and average weekly hours worked.[39] Those adjustments were relatively minor. For those 65 years old and older, a total wage elasticity between 0 and 0.3 was assumed.[40] This total wage elasticity includes a participation elasticity falling between 0.1 and 0.2 and an average-hours elasticity not exceeding 0.1. For those between 16 and 64 years old, a participation elasticity not exceeding 0.15 was assumed. The average number of hours worked was assumed to be unresponsive to changes in tax policy. A weighted average of these elasticities was used to determine the full-employment labor force's responsiveness to changes in tax rates. The weights applied equaled each age cohort's share of the total civilian labor force.[41]
• Assuming that the Federal Reserve Board follows historical behavior patterns when reacting to a change in either payroll or personal income tax rates. This assumption was implemented in the Global Insight model using an econometrically estimated reaction function that determines the effective interest rate on federal funds.
• Determining how sensitive the results are to using the new payroll tax revenues to pay down debt versus to finance higher spending.

The Global Insight model assumes that the federal government uses every additional dollar of higher payroll tax revenues to reduce debt. Increases in tax revenues negatively affect employment, income, and personal consumption. However, in the Global Insight model, reduced deficit spending pushes down interest rates and the cost of capital, causing a "crowding-in" effect for non-residential investment. The result is an increase in the stock of non-residential capital and in the economy's capital-to-labor ratio.

However, historically, payroll tax revenues collected in excess of current benefits have not been used to fund future benefits. Rather, they have been used to offset higher spending elsewhere in the federal budget. In exchange for those revenues, the HI trust fund, like the Social Security trust fund, has been given special public-debt obligations.

Medicare has already begun to redeem those obligations and is expected to continue to do so over the next 10 years as benefits increasingly outstrip income from payroll tax and other revenues. Thus, future Congresses will be forced to borrow, cut spending elsewhere in the budget, raise taxes, or enact some combination of those policies to finance the benefits promised to today's workers.

The financing situation confronting Medicare's SMI is similar. SMI is composed of two separate trust fund accounts: one for Part B and one for Part D. Both accounts largely finance current benefit payments with premium income from beneficiaries and general revenue transfers from the Treasury. In any given year, premiums finance 25 percent of SMI's Part B benefits, and general revenue transfers finance the remaining 75 percent. Part D funding is expected to follow a similar formula beginning in 2006.

Two simulations were run to test the sensitivity of the results to assumptions about how the government uses higher payroll tax revenues. Both simulations assumed a permanent and immediate increase in payroll tax rates to fund general revenue transfers to the HI trust fund and the SMI trust fund through 2079.

The first simulation assumed that the government used new payroll tax revenues to pay down debt. The result was a drop in privately held debt as a share of GDP. The second assumed that the government used new payroll tax revenues to offset increases in other spending. The higher spending was matched by an offsetting increase in the model's variable for federal debt held by other government agencies, an approximation here for the special public-debt obligations currently held in the HI trust fund.

New government spending was introduced into the Global Insight model using a variable denoting the difference between national income and product account federal outlays and unified budget federal outlays. The government spending represented by that variable has no short-run stimulative effects in the model. All other mandatory and discretionary federal spending in the model was kept at baseline levels.

Appendix B
The Effects of Raising Taxes to Fund Medicare's Unfunded Liabilities