Congratulations: We Just Saved Half a Trillion Dollars

You may not have noticed it, but the Federal Government just saved half a trillion dollars over the next decade. It's one of the biggest deficit-reductions in history, and it made virtually no headlines.

Health care cost growth -- the driver of effectively all long-term budget deficits -- is coming in much lower than expected. Part of that is likely due to the economy and the recession. But there's more to it than that. Falling cost growth began before the recession and has taken place in regions that escaped the recession without much pain. As Harvard health economist David Cutler said last year: "The recession just doesn't account for the numbers we're seeing. I think there's much more going on." 

The effect this has on the federal budget is huge. Over the last 43 years, Medicare cost per beneficiary grew 2.7% faster than the broad economy. That trend has now reversed itself. Since 2009, costs per beneficiary have gown 1.3% slower than the overall economy, according to The New York Times


Add it up, and "projected Medicare spending over the 2011-2020 period has fallen by more than $500 billion since late 2010," according to the Center on Budget and Policy Priorities, which cites Congressional Budget Office Data:

The budget savings are even greater when you add in Medicaid spending. The Congressional Budget Office wrote in its latest budget outlook (emphasis mine):

In recent years, health care spending has grown much more slowly both nationally and for federal programs than historical rates would have indicated. (For example, in 2012, federal spending for Medicare and Medicaid was about 5 percent below the amount that CBO had projected in March 2010.) In response to that slowdown, over the past several years, CBO has made a series of downward technical adjustments to its projections of spending for Medicaid and Medicare. From the March 2010 baseline to the current baseline, such technical revisions have lowered estimates of federal spending for the two programs in 2020 by about $200 billion -- by $126 billion for Medicare and by $78 billion for Medicaid, or by roughly 15 percent for each program.

If this keeps up, current forecasts of runaway long-term budget deficits melt quickly. Journalist Annie Lowrey noted last year: "If the growth in Medicare were to come down to a rate of only 1 percentage point a year faster than the economy's growth, the projected long-term deficit would fall by more than one-third."

Take all of this with an appropriate grain of salt. The fact that a past budget forecast was revised is a good reminder that the current budget forecast can be revised, too. But we too often forget that revisions can be a good thing. People might overlook positive surprises because virtually every budget forecast during the last decade brought worse news, falling deeper into the red. But that isn't a law. In the early 1990s, budget forecasters were predicting deep deficits as far as the key could see. By the late 1990s, the budget was in surplus -- something virtually no one predicted a few years prior. That's an extreme example, but it emphasizes that bad forecasts don't necessarily mean never-ending bad news. Good surprises can happen -- and it looks like we're seeing one right now. 

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The article Congratulations: We Just Saved Half a Trillion Dollars originally appeared on Fool.com.

Morgan Housel doesn't own shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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