Corporate Income Taxes -- -- $1 $1 $10 $21 $33 $65 $94 $207 $304 $138 $191
% of Revenue -- -- 31% 14% 26% 23% 17% 12% 9% 10% 12% 7% 9%
Other* $0.7 $6 $3 $3 $10 $16 $24 $51 $92 $161 $174 $161 $208
% of Revenue 100% 84% 72% 45% 25% 17% 13% 10% 9% 8% 7% 8% 10%
Expense ($B) $0.7 $6 $3 $9 $43 $92 $196 $591 $1,253 $1,789 $2,983 $3,518 $3,456
% of GDP 2% 7% 4% 9% 16% 18% 19% 22% 22% 18% 21% 25% 24%
Defense $0.3 $2 $1 $2 $14 $48 $82 $134 $299 $294 $616 $661 $694
% of Expense 45% 37% 25% 20% 32% 52% 42% 23% 24% 16% 21% 19% 20%
Interest on the Debt $0 $1 $1 $1 $5 $7 $14 $53 $184 $223 $253 $187 $196
% of Expense 3% 16% 20% 11% 11% 8% 7% 9% 15% 12% 8% 5% 6%
Social Security -- -- -- $0 $1 $12 $30 $119 $249 $409 $617 $683 $707
% of Expense -- -- -- 0% 2% 13% 15% 20% 20% 23% 21% 19% 20%
Healthcare -- -- -- $0 $0 $1 $12 $55 $156 $352 $671 $764 $821
% of Expense -- -- -- 1% 1% 1% 6% 9% 12% 20% 23% 22% 24%
Other** $0 $3 $2 $6 $23 $25 $57 $231 $365 $511 $825 $1,222 $1,039
% of Expense 52% 47% 55% 68% 54% 27% 29% 39% 29% 29% 28% 35% 30%
Surplus / Deficit ($B) -$0 $0 $1 -$2 -$2 $0 -$3 -$74 -$221 $236 -$459 -$1,413 -$1,293
% of GDP 0% 0% 1% -2% -1% 0% 0% -3% -4% 2% -3% -10% -9%
Note: Data are not adjusted for inflation. *Other revenue includes customs and excise / estate taxes. **Other expenses include spending on law enforcement /
education / public infrastructure / energy, etc. Source: 1910 – 1930 per Census Bureau, 1940-2010 per White House OMB.
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USA Inc. | Income Statement Drilldown
60
Conclusions: 100-Year Review of USA Inc. Income Statement
• America’s government has grown dramatically - USA Inc.’s revenue as percent of
GDP has risen from 2% to 15%. Individual / social insurance (Social Security +
Medicare) taxes have risen dramatically while customs / excise / estate taxes
have declined in relative importance. In addition, USA Inc.’s spending as percent
of GDP has risen to 24% in 2010, up from 3% average between 1790 and 1930.
• USA Inc.’s average operating income was at or near breakeven for most of the
periods from 1910 to 1970.
• In the 1970s, as healthcare expenses (related to Medicare and Medicaid) began
to surge, USA Inc. reported more frequent – and bigger – losses. Since 1970,
USA Inc. showed a profit just 4 times (F1998-F2001, when economic growth was
especially robust and defense spending was relatively low).
• General expense trends since 1970: non-defense discretionary spending has
been flattish (except in recessions with material one-time charges), healthcare
spending (largely Medicare + Medicaid) has risen materially, Social Security
spending has been flattish, defense spending has been down to flattish, and
interest payments varied with interest rates.
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USA Inc. | Income Statement Drilldown
61
Operations of USA Inc. Are Solid,
Excluding Medicare / Medicaid and One-Time Charges
� Revenues of USA Inc. (largely from individual and corporate income and
payroll taxes) can fund most expenses (largely spending on defense,
Social Security, unemployment insurance, education, law enforcement,
transportation, energy, infrastructure, federal employee & veteran
benefits, and interest payments).
In fact, for USA Inc.'s operations besides Medicare / Medicaid and
one-time expenses, there’s ample scope to increase spending for
defense, education, law enforcement, transportation, infrastructure
and energy by ~4%* in aggregate and still remain break-even.
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Note: *Excluding Medicare / Medicaid revenue & expenses, USA Inc.’s expenses are, on average, 4% below revenue levels
from F1996 to F2010 based on our calculation of White House OMB data.
USA Inc. | Income Statement Drilldown
62
Defense Spending Is The Second-Largest Expense Item After
Entitlements, But Below Long-Term Trend as Share of GDP
• With budget deficits rising, some advocate cutting back on defense spending, the
second-largest expense item after entitlements.
• Defense spending has risen substantially in recent years, due to the wars in
Afghanistan and Iraq, and other costs related to the Global War on Terror. As a
percentage of GDP, however, defense spending in the U.S. remains below its 60-
year trend.
• On an inflation-adjusted basis, U.S. defense spending is at its highest level since
World War II. With overhead ~40% of all spending, the Defense Business Board
found DoD consistently pays “more for less” and fails to attack overhead as the
private sector would. 1
• The Esquire Commission to Balance the Federal Budget, a group of four former
Republican and Democratic senators, found over $300 billion 2 in defense
restructuring opportunities, and other analysts proposed gradual cuts to reduce
the defense budget by 14% by 2018. 3
Notes: 1) The Defense Business Board , “Reducing Overhead and Improving Business Operations, “July 2010, http://dbb.defense.gov; 2) see Esquire
Commission to Balance the Federal Budget, http://www.esquire.com/blogs/politics/federal-budget-statistics-1110.; 3) Gordon Adams and Matthew
Leatherman, “A Leaner and Meaner National Defense,” Foreign Affairs, Jan/Feb 2011)
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USA Inc. | Income Statement Drilldown
63
Defense Spending Has Risen,
Driven by Wars in Afghanistan + Iraq…
USA Inc. Inflation-Adjusted* Defense Spending by Type, F1948 - F2010
$800B
U.S. Inflation-Adjusted Defense Spending ($B)
$600B
$400B
$200B
Korean War
Vietnam War
Cold War
Gulf War
Afghanistan
/ Iraq
Other
RDT&E**
Procurement
Operations &
Maintenance
Personnel
$B
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
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Note: *Adjusted for inflation using GDP price index. **RDT&E is Research, Development, Test & Evaluation.
Source: White House OMB.
USA Inc. | Income Statement Drilldown
64
…While Defense Spending Rose to 5% of GDP in F2010 &
Is Up from All-Time Historical Low of 3% in F1999
But It Is Still Well Below Post-World War II (1948-2000) Average of 7%
20%
USA Inc. Defense Spending as % of GDP, F1948 - F2010
U.S. Defense Spending as % of GDP
15%
10%
5%
1948-2000 Average = 7%
5%
0%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Source: White House OMB.
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USA Inc. | Income Statement Drilldown
65
$950 Billion = Cumulative Cost of Iraq, Afghanistan &
Global War on Terror Operations Since 9/11/01 Attacks
Cumulative Cost of Iraq, Afghanistan & Global War on Terror
Operations of $950 Billion, as Percent of F2001-F2009 Spending:
4% of Total F2001-F2009 Federal Spending
� 22% of Total F2001-F2009 Defense Spending
� 28% of Total F2001-F2009 Federal Budget Deficit
Cumulative Cost of:
$685 Billion = War in Iraq
$231 Billion = War in Afghanistan
$34 Billion = Other Related Operations
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Source: White House OMB, Congressional Research Service, “The Cost of Iraq, Afghanistan, and Other Global War on Terror
Operations Since 9/11,” 9/2/2010.
USA Inc. | Income Statement Drilldown 66
While USA Inc. Ranks # 1 in Defense Spending…
$700
Top 25 Countries by 2009 Defense Spending, 2009
$600
$500
$400
$300
$200
$100
$-
Singapore
Iran
Taiwan
Colombia
Poland
Netherlands
UAE
Greece
Israel
Turkey
Spain
Australia
Canada
Brazil
South Korea
India
Italy
Saudi Arabia
Japan
Germany
Russia
France
UK
China
Defense Spending ($B)
USA
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Note: Data for North Korea unavailable.
Source: Stockholm International Peace Research Institute.
USA Inc. | Income Statement Drilldown
67
…USA Inc. Ranks # 6 in Defense Spending as Percent of GDP
10%
Top 25 Countries* by Defense Spending as Percent of GDP, 2009
Defense Spending as % of GDP
8%
6%
4%
2%
0%
China
Taiwan
Turkey
Egypt
France
UK
Pakistan
India
Ukraine
Iran
South Korea
Algeria
Kuwait
Morocco
Chile
Russia
Greece
Colombia
Singapore
USA
Iraq
UAE
Israel
Oman
Saudi Arabia
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Note: *Ranking among countries with 2009 defense spending of $3 billion or higher; data for North Korea unavailable.
Source: Stockholm International Peace Research Institute.
USA Inc. | Income Statement Drilldown
68
While USA Inc. Ranks # 2 in Number of Troops…
2,500
Top 20 Countries by Active Number of Troops, 2008
2,000
Active Troops (000)
1,500
1,000
500
0
Saudi Arabia
France
Japan
Germany
Colombia
Syria
Indonesia
Thailand
Brazil
Egypt
Vietnam
Turkey
Iran
Pakistan
South Korea
Russia
North Korea
India
USA
China
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Source: Stockholm International Peace Research Institute; Center for Strategic and International Studies, Business Monitor International.
USA Inc. | Income Statement Drilldown
69
…USA Inc. Ranks # 21 in Number of Troops Per Capita
50
Top 25 Countries by Active Number of Troops per 1000 Citizen, 2008
Active Troops per 1000 Citizen
40
30
20
10
0
France
Pakistan
Malaysia
Croatia
USA
Kuwait
Thailand
Belarus
Russia
Vietnam
Colombia
Egypt
Iraq
Iran
Turkey
Saudi Arabia
United Arab Emirates
Libya
South Korea
Greece
Syria
Singapore
Jordan
Israel
North Korea
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Source: Stockholm International Peace Research Institute; Center for Strategic and International Studies, Business Monitor International.
USA Inc. | Income Statement Drilldown
70
Drill Down on USA Inc.
Entitlement + Interest + One-Time Expenses for F2010
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss excludes Trust
Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA is American Recovery &
Reinvestment Act programs.
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USA Inc. | Income Statement Drilldown
71
1
Drill Down on USA Inc.
Entitlement Spending for F2010
2
3
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
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USA Inc. | Income Statement Drilldown
72
Entitlement Spending: Lacks Sufficient Dedicated Funding
� Entitlement programs were created with the best of intentions by
the Government. They serve many of the nation’s poorest, whose
struggles have been made worse by the financial crisis.
�
However, with the exception of Social Security (which was developed
with a pay-as-you-go funding plan and constructed to be legally flexible if
conditions change) and unemployment insurance (which was designed
to be flexible at State level), other entitlement plans (including Medicaid
and Medicare) were developed without sufficient dedicated funding.
Here we drill down on the funding trends for entitlement plans …
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USA Inc. | Income Statement Drilldown
73
Entitlement Spending: Expenses Up 2x Over 15 Years
Annual Entitlement Spending Per Household = $16,600 per Year
USA Inc. Annual Entitlement Programs’ Total & Per-Household Expenses, F1995 – F2010
$2,400
$20,000
Entitlement Programs Annual Expenses ($B)
USA Inc. Entitlement Total Expenses ($B)
$2,000
$1,600
$1,200
$800
$400
Entitlement Expenses per Household ($)
$16,000
$12,000
$8,000
$4,000
Entitlement Expenses per Household ($)
$0
F1995 F1997 F1999 F2001 F2003 F2005 F2007 F2009
$0
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Note: Data are not adjusted for inflation. Entitlement programs include Social Security, Medicare, Medicaid,
unemployment benefits, food & nutrition assistance, housing assistance and other. USA federal fiscal year ends in
September; Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown 74
Entitlement Spending: Expenses Up 169%
Over Past 15 Years, While Dedicated Funding Up Only 70%**
…
…
F1995 F2000 F2005 F2006 F2007 F2008 F2009 F2010
Entitlement Revenue ($B) $484 $653 $794 $838 $870 $900 $891 $865
Y/Y Growth -- 7% 8% 6% 4% 4% -1% -3%
Social Security $351 $481 $577 $608 $635 $658 $654 $632
% of Revenue 72% 74% 73% 73% 73% 73% 73% 73%
Medicare $96 $136 $166 $177 $185 $194 $191 $180
% of Revenue 20% 21% 21% 21% 21% 22% 21% 21%
Medicaid $0 $0 $0 $0 $0 $0 $0 $0
Unemployment Insurance $29 $28 $42 $43 $41 $40 $38 $45
% of Revenue 6% 4% 5% 5% 5% 4% 4% 5%
Other* $8 $9 $9 $9 $9 $9 $8 $8
% of Revenue 2% 1% 1% 1% 1% 1% 1% 1%
Entitlement Expense ($B) $788 $937 $1,295 $1,357 $1,462 $1,582 $1,834 $1,984
Y/Y Growth -- 5% 6% 5% 8% 8% 16% 8%
Social Security $336 $409 $523 $549 $586 $617 $683 $707
% of Expense 43% 44% 40% 40% 40% 39% 37% 36%
Medicare $160 $197 $299 $330 $375 $391 $430 $452
% of Expense 20% 21% 23% 24% 26% 25% 23% 23%
Medicaid $108 $118 $182 $181 $191 $201 $251 $273
% of Expense 14% 13% 14% 13% 13% 13% 14% 14%
Unemployment Benefits $24 $23 $35 $34 $35 $45 $123 $160
% of Expense 3% 2% 3% 2% 2% 3% 7% 8%
Other* $161 $189 $256 $264 $275 $328 $347 $392
% of Expense 20% 20% 20% 19% 19% 21% 19% 20%
Entitlement Surplus / Deficit ($B) -$304 -$284 -$501 -$519 -$592 -$682 -$943 -$1,119
Net Margin (%) -63% -43% -63% -62% -68% -76% -106% -129%
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Note: USA federal fiscal year ends in September; Medicaid is jointly funded by federal and state governments, and as a social welfare program (unlike a
social insurance program like Medicare), there is no dedicated trust fund. *Other expenses include family & other support assistance, earned income tax
credit, child tax credit and payments to states for foster care / adoption assistance. **We exclude Social Security & Medicare Part A trust funds interest
income as they are accounting gains rather than real revenue. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
75
Entitlement Spending: Observation About Social Security & Medicare
Part A Trust Fund – More Like Accounting Values Than Real Dollars
�
�
�
�
Social Security Trust Fund balance (accumulated annual surpluses + interest income) = $2.5 trillion as of
2009; Medicare Part A Trust Fund balance = $304 billion as of 2009. These surpluses were invested in a
special (non-marketable) series of U.S. Treasury securities, which were then used to finance budget deficits
in other parts of USA Inc. like Medicaid & Nutrition Assistance.
As a result, many observers have argued that Social Security and Medicare Part A Trust Funds’ balances
are no more than accounting gains on paper owing to: 1) no ‘real’ assets (such as tradable stocks / real
estates…) in these Trust Funds as the special U.S. Treasury securities are non-marketable and 2) the
Treasury Department needs to raise taxes / cut other programs’ spending / borrow more money in the future
to meet any withdrawal requests.
We think that for Social Security and Medicare Part A programs, their Trust Funds’ balances have legal
value as USA Inc. is legally obliged to repay the principal and interest on the Treasury securities held in
respective Trust Funds.
However, we think that these Trust Fund balances have NO economic value as these cumulative surpluses
have been spent by USA Inc. to reduce the borrowing need in the past. When Social Security & Medicare
begin net withdrawal from their Trust Funds (likely in 2017E), USA Inc.’s debt levels + interest payments
growth could accelerate, owing to the double whammy of: 1) loss of revenue source (previous surpluses)
and 2) additional Treasury redemption costs related to Trust Funds’ withdrawal requests.
�
Consequently, we exclude Social Security and Medicare Trust Funds’ balances and interest income
from our financial models and calculate their liabilities on a net basis.
Data source: Social Security Administration, Dept. of Health & Human Services, CBO. Note: the economic value of Social Security Trust Fund is subject
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to debate, for a different perspective, refer to Peter Dimond and Peter Orszag, “Saving Social Security: A Balanced Approach,” p51 Box 3-5.
USA Inc. | Income Statement Drilldown
76
Entitlement Spending: Non-Partisan CBO Advises Excluding Social Security /
Medicare Trust Funds’ Balances + Interest Income in Fiscal Analysis
� Trust funds can be useful mechanisms for monitoring the balance between
earmarked receipts and a program's spending, but they are basically an
accounting device, and their balances, even if "invested" in Treasury securities,
provide no resources to the government for meeting future funding commitments.
When those payments come due, the government must finance them in the
same way that it finances other commitments -- through taxes or borrowing from
the public. Thus, assessing the state of the federal government's future finances
requires measuring such commitments independently of their trust fund status or
the balance recorded in the funds.
� -- Congressional Budget Office (CBO)
� “Measures of the U.S. Government’s Fiscal Position Under Current Law,” 8/04
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USA Inc. | Income Statement Drilldown
77
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Entitlement Spending: Funding Patterns of Some
Entitlement Programs Work Better than Others
Have Worked Relatively Well Financially:
• Social Security – Has operated at close to break-even - so far - thanks to sufficient payroll
tax income from a relatively large working-age population. In fact, Social Security has
worked so well, that its surplus net income has been used to finance other government
activities such as Medicaid.
• Unemployment Insurance – Has operated at close to break-even thanks to accumulated
net incomes during ‘good years’ (though expenses spiked to $123 billion / $160 billion in
2009 / 2010 from $45 billion in 2008 owing to recession).
Have Worked Relatively Poorly Financially:
• Medicaid – Has operated at an average annual loss of $160 billion with, in effect, an
average net margin of -100% over past 15 years; the annual dollar loss has risen from $108
billion to $273 billion because of rising healthcare costs and expanded enrollment.
• Medicare – Has operated at an average annual loss of $123 billion with, in effect, an
average net margin of -83% over past 15 years; the margin has fallen from -66% to -154%
(or -$64 billion in annual loss to -$272 billion) because of rising healthcare costs +
expanding coverage (added Part D prescription drug benefits through legislation in 2003,
rolled out in 2006).
Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
78
Entitlement Spending: What The Programs Are and
How They Have Evolved
Social Security Act signed into law by
President Roosevelt. Created during the
height of the Great Depression, the Act
provides monetary support to retired
people from payroll taxes paid by current
workers and employers.
Medicare Part D signed
into law to provide
federal subsidies to
prescription drugs for
Medicare beneficiaries.
Medicare cash
flow (incl. Trust
Fund interest)
turned negative
(-$5 billion).
Social Security Trust Fund
cash flow = $766 million.
Social Security Trust Fund
balance started to decline.
1935 1937 1965 1975 1983 2003 2008 2010E
Unemployment Insurance
signed into law as part of
the Social Security Act,
setting up a joint federalstate
program (funded via
taxing employers) to
provide temporary
monetary support to laidoff
workers.
Medicare & Medicaid
created to provide
hospital & medical
insurance to elderly
& disabled.
Amendments to
Social Security Act
raising taxes to
shore up funding
for the Social
Security Trust
Fund.
Social Security
cash flow (ex.
Trust Fund
interest)
projected to
turn negative by
Congressional
Budget Office.
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Source: Social Security Administration, Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
79
Entitlement Spending: 76% Is Directed to Social Security +
Medicare + Medicaid
Dedicated Entitlement Revenue
Breakdown, F2010
Total = $0.87T
Entitlement Spending Breakdown,
F2010
Total = $1.98T
Unemployment
Insurance
5%
Medicare
21%
Other
Social
Security
$632B
73% of
Total
Housing Assistance
Food & Nutrition
Assistance
Unemployment
Benefits
8%
Medicaid
14%
Other
Medicare
23%
Social
Security
$707B
36% of
Total
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Note: USA federal fiscal year ends in September; Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
80
Entitlement Spending: Observations from Previous Slide
� Entitlement revenue was $0.87 trillion, yet entitlement
spending was $1.98 trillion in F2010.
� Entitlement spending exceeded entitlement revenue by
129% in F2010.
� Social Security (ex. Trust Fund interest income) accounted
for 73% of dedicated entitlement revenue yet only 36% of
entitlement spending in F2010 while Medicare accounted for
21% of revenue and 23% of spending and Medicaid
accounted for 0% of revenue and 14% of spending.
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USA Inc. | Income Statement Drilldown
81
Entitlement Spending: Clarification On
‘Unfunded’ / ‘Net Responsibilities’…
� There is debate about the semantics of using words like unfunded / net
responsibilities to describe the financial status of entitlement programs like Social
Security, Medicare and Medicaid.
� ‘Unfunded’ – We define ‘unfunded’ liabilities for Social Security and Medicare as
the present value of future expenditures in excess of dedicated future revenue.
We call Social Security and Medicare ‘partially unfunded’ entitlement programs
as their future expenditures are projected to exceed dedicated future revenue.
� ‘Net Responsibilities’ – USA Inc. does not record these ‘unfunded’ financial
commitments as explicit liabilities on balance sheet, owing to Federal accounting
standards. 1
� USA Inc.’s Dept. of Treasury calls these commitments ‘net responsibilities’
or ‘net expenditures’ in its annual Financial Report of the U.S. Government.
� Medicaid – We view Medicaid as an ‘unfunded’ liability as there is no dedicated
revenue source to match expected expenses in our financial analysis. Medicaid
is jointly funded on a pay-as-you go basis by Federal and State general tax
revenue.
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Note: 1) per Dept. of Treasury, “2004 Financial Report of the United States Government.”
USA Inc. | Income Statement Drilldown
82
…Entitlement Spending: Clarification On
‘Unfunded’ / ‘Net Responsibilities’
� Unless they are reduced, USA Inc.’s financial liabilities -- whether they are actual
debt or the present value of future promises, whether called ‘unfunded’ liabilities or
‘net responsibilities’ and whether funded by dedicated taxes or general revenue –
represent significant claims on USA Inc.’s future economic resources.
� To be sure, the projected unfunded liabilities are not the same as debt, because
Congress can change the laws that are behind those future promises. With a few
exceptions, however, over the past 60 years, lawmakers have acted to boost rather
than reduce them.
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USA Inc. | Income Statement Drilldown
83
Entitlement Spending: Social Security Funding Has Worked, So Far While
Medicare/Medicaid Are Underfunded by $5.6 Trillion Since Inception in 1965
Annual Net Income of Social Security / Medicare / Medicaid ($B)
$150
$100
$50
$0
-$50
-$100
-$150
-$200
-$250
Annual Real Net Income of Social Security / Medicare / Medicaid, 1940 – 2009
Social Security
Medicare (Part A / B / D)
Medicaid
Social Security Reform of 1983
Raised taxes by 2.3%
Reduced benefits by 5%
2003
Medicare Part D
(Prescription Drug
Benefits) Signed
into Law
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Note: Real net income are inflation-adjusted using White House OMB’s GDP price index (based on BEA’s data); calculated as total revenue (tax receipts,
excluding trust fund interest revenue) minus total expenditures; Medicare Part B / D and Medicaid do not have dedicated funding source. Source: Social
Security Administration, White House Office of Management and Budget.
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USA Inc. | Income Statement Drilldown
84
Entitlement Spending: Medicare & Medicaid Payments per Beneficiary
Have Risen Faster than Social Security Payments
Owing to Rising Healthcare Costs + Expanded Coverage
% Change from 1966
2500%
2000%
1500%
1000%
500%
0%
Percent Change in Real* Annual Social Security / Medicare / Medicaid
Payments per Beneficiary From 1966
Medicaid
Social Security
Medicare
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
1966-2009
CAGR
Medicare
+8%
Medicaid
+3%
Social Security
+2%
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Note: Data are inflation adjusted using White House OMB’s GDP price index (based on BEA’s data).
Source: Social Security Administration, Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
85
Entitlement Spending: Program Beneficiaries (Now 29%* of Population vs.
13%* in 1966) Have Grown Faster than Population
Owing to Aging Population + Expanded Eligibility
Social Security / Medicare / Medicaid Enrollment & as % of Total Population, 1966 - 2009
160
140
120
Social Security
Medicare
Medicaid
% of Total Population*
40%
30%
Total Enrollment (MM)
100
80
60
40
20%
10%
As % of Population
20
0
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
0%
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Note: *Excludes our estimated dual / triple enrollees in Social Security / Medicare / Medicaid. Source: Social Security
Administration, Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
86
Entitlement Spending: While Beneficiaries From Aging Population
Rose 2x From 1966 to 2009, Beneficiaries From Expanded Eligibility
(Low-Income / Disabled) Rose 10x
Combined Social Security + Medicare + Medicaid Enrollment
by Old Age Group vs. Expanded Eligibility Group, 1966 - 2009
Total Enrollment (MM)
160
140
120
100
80
60
40
Expanded Eligibility (Low Income / Disabled)
Old Age
% of Total Population
40%
30%
20%
10%
As % of Population
20
0
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
0%
www.kpcb.com
Note: *Excludes our estimated dual / triple enrollees in Social Security / Medicare / Medicaid. Source: Social Security
Administration, Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
87
Entitlement Spending: Entitlement Program + Government Employee
Beneficiaries Are Now 36%* of Population vs. 20%* in 1966
200
Social Security / Medicare / Medicaid Enrollment + Government Employees
& as % of Total Population, 1966 - 2009
40%
Number of People in Entitlement
Programs + on Governemnt Payroll (MM)
160
120
80
40
35%
30%
25%
20%
15%
10%
5%
As % of Population
0
0%
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Medicaid
Medicare
Social Security
Federal Government (ex. Military)
Military
State & Local Government
% of Total Population*
Note: *Excludes our estimated dual / triple enrollees in Social Security / Medicare / Medicaid. Source: Social Security
Administration, Dept. of Health & Human Services, Bureau of Economic Analysis.
www.kpcb.com
USA Inc. | Income Statement Drilldown
88
Entitlement Spending per Beneficiary: Inflation-Adjusted Average Pre-Tax
Income from Entitlement Programs Has Gone Up 3x Since 1966
to $12K in 2008, or 15% of Average Pre-Tax Income
Inflation-Adjusted Pre-Tax Income from Entitlement Programs 1 per Beneficiary
& As % of Average Pre-Tax Income, 1966 - 2008
Annual Pre-Tax Income from Entitlement
Programs per Beneficiary ($ / year)
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
16%
14%
12%
10%
8%
6%
4%
2%
0%
Entitlement Income as % of Average Pre-Tax
Income
Average Pre-Tax Income from Entitlement Programs
As % of Total Pre-Tax Income
www.kpcb.com
Note: 1) Entitlement Income calculated as Government Social Benefits to persons less Veterans benefits.
Source: Social Security Administration, Dept. of Health & Human Services, Bureau of Economic Analysis.
USA Inc. | Income Statement Drilldown
89
Entitlement Spending: Rising Entitlement Income Is
Highly Correlated (82%) with Falling Personal Savings
24%
Personal Savings vs. Entitlement 1 Income
as % of Average Disposable Income, 1970 - 2010
Savings as % of Average Disposable Income
Entitlement Income / Personal Savings
as % of Disposable Income
20%
16%
12%
8%
4%
Entitlement / Welfare Income as % of Average Disposable Income
1970 - 2010
Correlation: -82%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010
www.kpcb.com
Note: 1) Entitlement Income calculated as Government social benefits to persons in the NIPA
series Table 2.1. Savings rate is the amount of money saved divided by income after taxes.
Sources: BEA
USA Inc. | Income Statement Drilldown 90
Entitlement Spending: Observation from Previous Slide
� Clearly, lower interest rates have allowed Americans to
borrow more and save less. But given the high correlation
between rising entitlement income for beneficiaries and
declining savings rates, one might also wonder if Americans
feel less compelled to save money as they feel that they can
depend on the government to give them money.
Note: Savings rate is the amount of money saved divided by income after taxes.
www.kpcb.com
USA Inc. | Income Statement Drilldown
91
Entitlement Spending: Social Security Now Provides
37% of an Average Retiree’s Income, Up From 31% in 1962
Sources of Retirement Income for Average Americans, 1962 - 2008
50%
40%
Personal
Earnings*
% Total Pension
30%
20%
10%
Social
Security
Pensions +
IRAs +
401(k)s**
0%
1962 1968 1974 1980 1986 1992 1998 2004
www.kpcb.com
Note: *Personal earnings include income from investment & assets + salaries; ** occupational pensions include regular payments from private
pensions, government employee pensions, IRAs, 401(k)s. Source: Social Security Administration Office of Retirement and Disability Policy
USA Inc. | Income Statement Drilldown
92
Next, We Drill Down on Entitlement Programs…
• We begin with the programs with the least sound
financials (Medicaid and Medicare) and end with the
programs with the most sound financials
(Unemployment Insurance and Social Security), as of
today.
• We then move to a drilldown of rising healthcare costs
after the Medicaid and Medicare drilldowns.
www.kpcb.com
USA Inc. | Income Statement Drilldown
93
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown
94
Medicaid: Facing Accelerating Cash Flow Deficits
� Social Welfare Program – Created in 1965 to provide health insurance to low-income
population (2% of Americans under coverage then and 16% now*).
� No Dedicated Funding – Federal funding comes from general revenue (all forms of tax
receipts).
� Ever-Growing Expenses – $273 billion in F2010, up 2x from 10 years ago.
� Rising Healthcare Costs – Owing to aging population + unhealthy life styles +
technology advances.
�
�
Growing Beneficiary + Benefits – Covered beneficiaries expanded beyond lowincome
group in 1980s to include additional groups (like individuals who have high
medical expenses and have spent down their assets, and some of those who lost
their employer-sponsored healthcare insurance coverage in recession), while
covered benefits expanded to include prescription drugs / dental services. Total
expenditures on these new groups and benefits represented ~60% of Medicaid
program’s spending in 2001, per Kaiser Family Foundation estimates. See
slide 319-322 for more details.
Moral Hazard – As a “free good,” Medicaid reduced demand for private long-term
insurance 1 while regulation loopholes + need-based benefit policies created
incentives to abuse the Medicaid reimbursement system.
Note: 1) for more information, please see Jeffrey Brown and Amy Finkelstein, “The Interaction of Public and Private Insurance: Medicaid and the Long-Term
Care Insurance Market,” 2006. *Medicaid enrollment was 4MM (population 196MM) in 1966 and 50MM (population 305MM) in 2009. Source: National Center
for Health Statistics, Kaiser Family Foundation, World Bank, Social Security Administration.
www.kpcb.com
USA Inc. | Income Statement Drilldown 95
Medicaid: Underfunded by $3.7 Trillion Over 45 Years,
With No Dedicated Funding
$0
USA Federal Real Medicaid Expenses & NPV of Liabilities, F1966 – F2010
$0
USA Inc. Medicaid Net Income ($B)
-$50
-$100
-$150
-$200
-$250
Real Medicaid Expenses
Net Present Value of Medicaid Liabilities
-$5
-$10
-$15
-$20
-$25
-$30
-$35
Net Present Value of Medicaid Liabilities ($T)
-$300
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Note: USA federal fiscal year ends in September; Data are inflation adjusted. Calculation of net present value of liability based on 75-year Medicaid spending
projections from CBO, assuming a 3% discount rate (long-run average of real 10-yr treasury yields). Source: White House Office of Management and Budget,
Congressional Budget Office.
www.kpcb.com
USA Inc. | Income Statement Drilldown 96
-$40
Medicaid: Enrollment Is Up 12x to 49 Million While Annual Payments per
Beneficiary Are Up 4x to $5K From 1966 to 2009
Real Annual Medicaid Payments per Beneficiary & Enrollment, 1966 - 2009
$5,000
50
$4,500
Enrollment
Payments per Beneficiary ($/year)
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
Annual Benefits per Enrollee
40
30
20
10
Enrollment (MM)
$500
$0
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
0
www.kpcb.com
Note: Data are inflation adjusted. Source: Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
97
Medicaid: Observations
� 49 million (26MM low-income children / 12MM low-income adults / 7MM
disabled / 4MM elderly) Americans (16% of population) received an
average of $4,684 in tax-payer funded payments from the federal
government for healthcare in 2009. For context, $6,872 in healthcare
benefits is 13% of average annual per-capita income for Americans.
� When Medicaid was created in 1965 to provide health insurance to lowincome
Americans, 1 in 50 Americans received Medicaid, now 1 in 6
Americans receives Medicaid.
� That said, Medicaid is an important benefit for recipients as it provides
access to healthcare for low-income adults and their children. In recent
years, Medicaid beneficiaries and benefit payments have risen faster than
population and per-capita income growth owing to expanded coverage,
economic difficulties and associated sluggish wage growth for low- and
lower-middle-income families, and continued healthcare cost inflation.
www.kpcb.com
Note: Data are inflation adjusted. Source: Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
98
Medicaid: While We Focus on Federal Government Dynamics, It’s Notable
that State Government Medicaid Funding Also Faces Significant Challenges
�
�
Medicaid = Major and Growing Expense Line Item for State Governments
�
�
�
Medicaid funding responsibility is shared between federal & state governments. States with higher
per-capita income (like New York) pay ~50% of total Medicaid cost while states with lower per-capita
income (like Mississippi) pay ~22%.
On average, Medicaid accounted for 21% of total state spending in F2009 (ranging from Missouri at
35% to Alaska at 8%). Enrollment growth has been accelerating, in part, owing to more people losing
employer-sponsored health insurance in the recession, and thus overall Medicaid costs jumped ~11%
Y/Y from October, 2009 to June, 2010.
State governments (which unlike the federal government must balance their annual budgets) cannot
pay for such elevated levels of Medicaid and maintain normal spending levels for other services (like
education and public safety).
Enter the Federal Government
�
ARRA (2009 economic stimulus) provided ~$100 billion in support for the states to pay for elevated
levels of Medicaid costs and to avoid large budget cuts in education and public safety. This went a
long way toward holding down the states’ contribution, but it is a one-time unsustainable fix.
� Federal Support May Be Expiring by June, 2011
�
If no action is taken, the Medicaid-related cost burden on the states will rise dramatically in coming
years. As a result, many states are on the verge of implementing Medicaid cost containment plans
that include cuts in doctor payments, benefit limitations, higher patient co-payments, etc. Moreover,
many states are fearful that the recently enacted healthcare reform will lead to additional Medicaidrelated
costs when it goes into full effect in 2014.
www.kpcb.com
Data Source: National Conference of State Legislatures, “State Budget Update: July 2009.”
USA Inc. | Income Statement Drilldown
99
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 100
Medicare: Complex Social Insurance Program
With Insufficient Funding
� Social Insurance Program – Created in 1965 to provide health insurance to the elderly (65+).
� Four Parts – A) Hospital Insurance (to cover inpatient expenses, introduced in 1965); B)
Medical Insurance (optional outpatient expenses, 1965); C) Medicare Advantage Plans
(private alternative to A&B, 1997) and D) Prescription Drug Coverage (enacted 2003).
� Funding Mechanism Varies
� Part A has dedicated funding via payroll taxes (2.9% of total payroll), though has been
running at an annual deficit since 2008 as related payments exceed taxes; Trust Fund is
expected to be depleted by 2017E, per Social Security Administration.
� Part B & D has no dedicated funding (75% of funding came from government allocation /
25% came from enrollees’ premium payments).
� Part C funding came Part A & Part B.
� Ever-Growing Expenses – $452 billion expenses in F2010, up 2x from 10 years ago
� Rising Healthcare Costs – Owing to aging population + unhealthy life styles + technology
advances.
� Moral Hazard – As a “free good,” Medicare reduced demand for private long-term
insurance 1 while loopholes in the regulations + need-based benefit policies created
incentives to abuse the system.
Note: 1) for more information, please see Jeffrey Brown and Amy Finkelstein, “The Interaction of Public and Private Insurance: Medicaid and the Long-Term
Care Insurance Market,” 2006. Source: National Center for Health Statistics, Kaiser Family Foundation, World Bank, Social Security Administration.
www.kpcb.com
USA Inc. | Income Statement Drilldown 101
Medicare: Underfunded by $1.9 Trillion Over 45 Years
USA Inc. Real Annual Medicare Revenue & Expenses, 1966 – 2009
$300
$200
Medicare Revenue / Expenses ($B)
$100
$0
-$100
-$200
-$300
-$400
Medicare Part B / D Expenditure
Medicare Part A Expenditure
Medicare Part A Tax Receipts
Total Medicare Net Income
-$500
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Note: Medicare Part A (hospital insurance) has dedicated trust fund while Part B (medical insurance) and Part D (prescription
drug benefits) do not have dedicated funding. Data are inflation adjusted. Source: Dept. of Health & Human Services..
www.kpcb.com
USA Inc. | Income Statement Drilldown 102
Medicare: Enrollment Up 2x to 46 Million While Annual Payments per
Beneficiary Up 26x to $8,325 From 1966 to 2009
Real Annual Medicare Payments per Beneficiary & Enrollment, 1966 – 2009
$10,000
50
Medicare Payments per Beneficiary ($/year)
$8,000
$6,000
$4,000
$2,000
Enrollment
Annual Per Cap Benefits (in 2005 dollars)
40
30
20
10
Enrollment (MM)
$0
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
0
www.kpcb.com
Note: Data are inflation adjusted using BEA’s GDP price index. Source: Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
103
Medicare: Observations
� 46 million elderly Americans (15% of population) received an average
of $8,325 in tax-payer funded payments for healthcare in 2009 ($5,079
for hospital care; $3,246 for medical insurance & prescription drugs).
� On the surface, $8,325 in free healthcare benefits every year certainly
seems like a high number – 23% of annual per-capita income –
(although working Medicare recipients do pay Medicare taxes).
� As with employer-sponsored health insurance plans, if people, in effect, get
a free benefit (with little personal financial commitment), they may not be
especially diligent and frugal about how they ‘spend’ it. The same concept
extends beyond healthcare recipients to the healthcare providers.*
� When Medicare was created in 1965 to provide health insurance to elderly
Americans, 1 in 10 Americans received Medicare, now 1 in 7 Americans receives
Medicare…above the initial ‘plan.’
www.kpcb.com
Note: *The issue that people overuse services for which they do not have personal financial commitment applies to most
private insurance as well. For a more detailed discussion, see slide 293. Data are inflation adjusted using BEA’s GDP price
index. Source: Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown 104
Total Government* Healthcare Spending Increases are Staggering –
Up 7x as % of GDP Over Five Decades vs. Education Spending, Only Up 0.6x
8%
USA Total Government Healthcare vs. Education Spending as % of GDP, 1960 – 2009
8.2%
Spending as % of GDP
6%
4%
2%
1.2%
Total Government (Federal + State + Local) Spending on Healthcare
Total Government (Federal + State + Local) Spending on Education
0%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
www.kpcb.com
Note: *Total government spending on healthcare includes Medicare, Medicaid and other programs such as federal
employee and veteran health benefits; total government spending on education includes spending on pre-primary through
tertiary education programs. Source: Dept. of Education, Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
105
Since Their Creation in 1965, Medicare + Medicaid Have Grown
to 35% of Total USA, Inc. Healthcare Spending in 2008 from 0%
USA Total Healthcare Spending by Funding Source, 1960 vs. 2009
Other Private Funds
Consumer
Out-of-pocket
Payments
1960
Total Healthcare
Spending = $187B*
47%
7%
Other Government
Funds**
25%
21%
Private Health
Insurance
Consumer
Out-of-pocket
Payments
Private Health
Insurance
Other Private Funds
2009
Total Healthcare
Spending = $2.5T*
12%
32%
8%
20%
13%
Medicare
15%
Medicaid
(Federal
+ State +
Local)
Other Government
Funds**
Note: *Adjusted for inflation, in 2005 dollars. ** Other government funds include those from Dept. of Defense, Veterans’ Administration and federal funding
for healthcare research and public health activities. Source: U.S. Department of Health & Human Services.
www.kpcb.com
USA Inc. | Income Statement Drilldown 106
Think About That…
� Total government spending on healthcare (including Medicare, Medicaid and
other programs) has risen 7x from 1.2% of GDP in 1960 to 8.2% in 2009 while
total government spending on education has risen only 0.6x from 4% of GDP in
1960 to 6% in 2009.
� Medicare and Medicaid, which did not exist in 1960, rose to 35% of total healthcare
spending in 2009, while out-of-pocket spending declined to 12% of total healthcare
spending in 2009 (or $894 per person per year*), down from 47% in 1960 (or $478
per person*).
� Lifetime healthcare costs for the average American are $631,000, of which the
government pays for an estimated 48% while private insurers (like UnitedHealth and
Blue Cross Blue Shield) pay 32% and consumers pay just 12%.
� When citizens don’t need to pay directly for something (like healthcare) and are given
an expensive good / service for free (or well below cost), they tend to consume more
of it – it’s basic supply and demand economics.
� This approach faces increasing challenges as USA, Inc. has gone deeper and
deeper in debt to pay for it…
www.kpcb.com
Note: *Adjusted for inflation, in 2005 dollars. Nominal amount would be $972 out-of-pocket healthcare spending per person in
2008 and $70 per person in 1960. Source: U.S. Department of Health & Human Services.
USA Inc. | Income Statement Drilldown 107
USA Healthcare Spending Is Higher Than All Other OECD Countries Combined
(with 35% of Other OECD Countries’ Combined Population)
Total Health Spending ($B)
$2,000
$1,500
$1,000
$500
$0
Total Expenditure* on Health Among OECD Countries, 2007
Public Private
USA Spending on Healthcare in 2007 = $2.2T
All Other OECD Countries’ Combined Spending = $2.2T
Iceland
Luxembourg
Slovak Republic
New Zealand
Ireland
Finland
Hungary
Czech Republic
Denmark
Norway
Portugal
Greece
Sweden
Austria
Switzerland
Belgium
Poland
Turkey
Netherlands
Australia
Korea
Mexico
OECD average
Spain
Canada
Italy
UK
France
Germany
Japan
USA
Note: OECD data adjusted for Purchasing Power Parity. *Total expenditure on health measures the final consumption of health goods and services (i.e., current
health expenditure) plus capital investment in healthcare infrastructure. This includes spending by both public and private sources (including households) on medical
services and goods, public health and prevention programs, and administration. Excluded are health-related expenditures such as training, research, and
environmental health. Source: OECD, Organization for Economic Co-operation and Development is an international organization of 31 developed and emerging
countries with a shared commitment to democracy and the market economy.
www.kpcb.com
USA Inc. | Income Statement Drilldown 108

USA Per Capita Spending on Healthcare =
3x OECD Average
Annual Per Capita Health Spending ($)
$8,000
$6,000
$4,000
$2,000
$0
Annual Per Capita Expenditure* on Health Among OECD Countries, 2007
Public
Private
Turkey
Mexico
Poland
Hungary
Slovak Republic
Korea
Czech Republic
Portugal
New Zealand
Japan
Greece
Spain
Italy
OECD average
Finland
UK
Ireland
Belgium
Iceland
Sweden
Australia
Denmark
Netherlands
Germany
France
Austria
Canada
Switzerland
Norway
Luxembourg
USA
Note: OECD data adjusted for Purchasing Power Parity. *Total expenditure on health measures the final consumption of health goods and services (i.e.,
current health expenditure) plus capital investment in healthcare infrastructure. This includes spending by both public and private sources (including
households) on medical services and goods, public health and prevention programs, and administration. Excluded are health-related expenditures such as
training, research, and environmental health. Source: OECD.
www.kpcb.com
USA Inc. | Income Statement Drilldown 109
USA Spending on Healthcare as % of GDP =
2x OECD Average
Total Health Spending as % of GDP
16%
12%
8%
4%
0%
Total Healthcare Spending as % of GDP Health Among OECD Countries, 2007
Public
Private
Turkey
Mexico
Korea
Poland
Czech
Luxembourg
Hungary
Ireland
Slovak
Japan
Finland
UK
Spain
Italy
OECD
Australia
Norway
Netherlands
New
Sweden
Iceland
Greece
Denmark
Belgium
Portugal
Canada
Austria
Germany
Switzerland
France
USA
Note: OECD data adjusted for Purchasing Power Parity. *Total expenditure on health measures the final consumption of health goods and services (i.e., current
health expenditure) plus capital investment in healthcare infrastructure. This includes spending by both public and private sources (including households) on
medical services and goods, public health and prevention programs, and administration. Excluded are health-related expenditures such as training, research, and
environmental health. Source: OECD.
www.kpcb.com
USA Inc. | Income Statement Drilldown 110

USA Spending on Healthcare IS NOT Performance-Based
and IS NOT Correlated to Longer Life Expectancy
85
Healthcare Spending per capita vs. Average Life Expectancy Among OECD Countries, 2007
Average Life Expectancy at Birth (Years)
80
75
Mexico
S. Korea
Hungary
Japan
UK
Linear Trend line (ex. USA)
�
USA
70
0 1000 2000 3000 4000 5000 6000 7000
Total Expenditure on Health per capita, $US (PPP Adj.)
www.kpcb.com
Source: OECD.
USA Inc. | Income Statement Drilldown
111
In Addition to Life Expectancy, USA Falls Behind
OECD Averages in Many Other Health Indicators
2007 Health Indicators
USA
OECD
Median
USA Ranking
(1 = Best, 30 = Worst)
RED = Below Average
Obesity (% of total population) 34 15 30
Infant Mortality (per 1,000 live births) 7 4 27
Medical Resources Available (per 1,000 population)
Total Hospital Beds 3 6 25
Practicing Physicians 2 3 22
Doctors’ Consultations per Year 4 6 19
MRI Machines* (per million population) 26 9 1
Cause of Death (per 100,000 population)
Heart Attack 216 178 22
Respiratory Diseases 60 45 21
Diabetes 20 12 20
Cancer 158 159 14
Stroke 33 45 8
www.kpcb.com
Note: *MRI is Magnetic Resonance Imaging. Source: OECD.
USA Inc. | Income Statement Drilldown 112
Think About That…
� USA per capita healthcare spending is 3x OECD average, yet the
average life expectancy and a variety of health indicators in the US
fall below average.
� But if you spend way more than everyone else, shouldn’t your
results (a.k.a. ‘performance’) be better than everyone else’s, or at
least near the top?
� Should you examine sources of waste/inefficiency given lower
output despite greater input?
� Definition of ‘Performance’ = Amount of useful work accomplished
given certain amount of time and resources.
� Definition of ‘Efficient’ = Obtains maximum benefit from a given
level of input of cost, time, or effort.
www.kpcb.com
Note: OECD data adjusted for Purchasing Power Parity. * Lifetime healthcare costs = life expectancy (years) x per capita
healthcare spending ($ per year, 2006). Source: OECD, US Dept. of Health & Human Services.
USA Inc. | Income Statement Drilldown
113
Patient Protection and Affordable Care Act (PPACA)
PPACA – America’s new healthcare reform legislation, signed into law on
3/23/10 – creates some reason for concern that it could become an
unfunded entitlement.
www.kpcb.com
USA Inc. | Income Statement Drilldown 114
PPACA: A Detailed Drilldown into Costs of Recent Healthcare Reform Is Key
as it May Increase Budget Deficit…
� Congressional Budget Office expects Reform to lower the deficit by $143
billion during 2010-19
�
Gross cost of $938 billion for expanded coverage, per CBO.
� Less: $511 billion in spending cuts from lower Medicare reimbursement rate + $420
billion in tax revenues (excl. excise tax) from higher payroll tax rates on high-income
families and indoor tanning services + $149 billion in penalty payments by
employers/individuals and excise tax on “Cadillac” insurance plans with annual cost
exceeding $10,000 for individual / $28,000 for families.
Source: CBO.
www.kpcb.com
USA Inc. | Income Statement Drilldown
115
� Issues With Official Cost Estimates to Consider
�
�
�
�
Deficit neutral status somewhat reliant on future lawmakers’ willingness to implement Medicare
savings/reimbursement reductions:
� Reductions in payment rates for many types of Healthcare providers relative to the rates that
would have been paid under prior law (always a politically difficult decision).
� However the good news is that recommendations from the Independent Payment Advisory
Board focused on reducing growth in per capita Medicare spending if it exceeds target
automatically become the law without congressional intervention if Congress allows IPAB to
operate as planned.
CBO estimates the effects of proposals as written: CBO acknowledges that it is unclear whether
reform can actually reduce the annual growth rate in Medicare spending from 4% (historical
average) to 2% for the next two decades, as PPACA estimates assume.
Relies on excise taxes on sectors of the healthcare industry that could be passed through to
consumers via price increases.
Starting in 2018, assumes taxation of high premium employment-based health insurance plans.
� Opportunities For Cost Savings to Consider
�
�
Increased access to preventative care could potentially slow down overall healthcare cost growth.
Such potential effect is not captured in CBO scoring.
Investments in information technology and new provider & consumer incentives can drive better
and more efficient care.
www.kpcb.com
PPACA –
Verdict Is Still Out on Eventual Costs / Deficit Impact
Source: Morgan Stanley Healthcare Research.
USA Inc. | Income Statement Drilldown 116
PPACA –
There Is Potential for ‘Unintended’ Consequences
� The new law changes some system incentives, which may lead to new behavior
patterns, many of which are complex and hard to predict.
� The market may adapt to new MLR (Medical Loss Ratio) rules that incentivize
and reward a very specific (but ultimately arbitrary) cost structure.
� The cost/benefit analysis for employers and consumers may change, and
some may opt to re-evaluate their current employer-sponsored coverage
offerings.
� Health plans that are no longer economically viable may exit markets, potentially
adding to the uninsured problem prior to 2014.
� Likely acceleration in consolidation of payers as well as providers.
www.kpcb.com
Source: Doug Simpson, Morgan Stanley Healthcare Research.
USA Inc. | Income Statement Drilldown
117
Historical Anecdote – “An Accurate Economic Forecast Might Have
Sunk Medicare & Medicaid [in 1965]”
• In 1965, the official estimate of Medicare’s costs was $500 million per year,
roughly $3 billion in 2005 dollars.*
• The actual cost of Medicare has turned out to be 10x that estimate.
• Medicare’s actual net loss (tax receipts + trust fund interest – expenditures)
has exceeded $3 billion (adjusted for inflation) every year since 1976 and
was $146 billion in 2008 alone. In other words, had the original estimate been
accurate, the cumulative 43-year cost since Medicare was created would
have been $129 billion, adjusted for inflation.
• In fact, the actual cumulative spending has been $1.4 trillion** (adjusted for
inflation)...in effect, 10x over budget.
• While calculations have been flawed from the beginning for some of USA Inc.’s
entitlement programs, little has been done to correct the problems.
� An accurate economic forecast might have sunk Medicare.
David Blumenthal and James Morone
“The Lessons of Success – Revisiting the Medicare Story”, November 2008
www.kpcb.com
Sources: * Lyndon B. Johnson Library & Museum. Medicare spending data per White House OMB.
**Dept. of Health & Human Services, CMS, data adjusted for inflation based on BEA’s GDP price index.
USA Inc. | Income Statement Drilldown 118
If History is a Guide, There is Potential for Estimates to Understate
Eventual Costs – Medicare Is 10x Higher Than Spending Forecast
120
Actual vs. Estimated Spending on Medicare
In reality, total
spending
increased 61.1x
Annual Medicare Spending ($MM adjusted for
inflation)
100
80
60
40
20
In the first year of
Medicare, total
spending was
$1.8bn
In 1967, the House
Ways & Means
Committee estimated
spending would
increase 6.7x by 1990
$12B
$110B
0
www.kpcb.com
$2B
1966A 1990E (in 1967) 1990A
Source: Senate Joint Economic Committee Report, 7/31/09
USA Inc. | Income Statement Drilldown
119
However, More Recent Healthcare Entitlement Such as Medicare
part D Has Cost Less Than Expected
� Medicare Part D (the 2006 outpatient drug benefit for seniors) was projected to
cost $111 billion annually.
� In 2009, Medicare Part D’s actual cost = $61 billion, 45% below projection.
� The government originally projected 43 million beneficiaries in 2009, but only 33
million seniors (23% below projection) elected to participate in 2009.
� Medicare Part D was outsourced to the private sector, and seniors elected to
enroll in plans operated primarily by managed care organizations, which utilize a
variety of techniques to reduce costs and improve the quality of care.
� The Washington Times stated on August 16 th 2010 – "The lower cost - a result of
slowing demand for prescription drugs, higher use of generic drugs and fewer
people signing up - has surprised even some of the law's most pessimistic
critics."
� The Part D experience has given some observers hope that PPACA will not cost
more than anticipated.
www.kpcb.com
Source: Morgan Stanley Healthcare Research.
USA Inc. | Income Statement Drilldown 120
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 121
Unemployment Benefits: Long-Term Break-Even,
Though Prone to Cyclicality
� Social Insurance Program – Created in 1935 as part of the Social Security Act
to provide temporary financial assistance to eligible workers who are
unemployed through no fault of their own (via layoffs or natural disasters).
� Funded via Taxing Employers – Employers pay federal government 0.8% of
payroll (in addition to various levels of state unemployment insurance taxes) to
fund the Federal Unemployment Insurance Trust Fund.
� Funding = Pro-Cyclical – Rising employment increases revenue and reduces
benefit payments, generally leading to surpluses, while falling employment
reduces revenue and increases benefits payments, leading to periodically large
deficits during recessions.
� Flexible at the State Level by Design – State governments set policies on
unemployment benefit eligibility / duration / tax levels, while federal government
provide financial and legal oversight.
� Generally Break-Even – In 29 of the past 49 years, Federal unemployment
insurance programs have had surpluses. Excluding the 2009 / 2010 loss,
unemployment insurance had a cumulative surplus of $53 billion from 1962 to
2008.
www.kpcb.com
Source: White House OMB.
USA Inc. | Income Statement Drilldown 122
Unemployment Benefits: Solid, Though Cyclical, Funding
But Underfunded by $150B Over 49 Years Owing to -$115B* Deficits in 2010
USA Inc. Real Annual Unemployment Insurance Revenue & Expenses, F1962 – F2010
$70
Unemployment Insurance Revenue / Expenses ($B)
$20
-$30
-$80
-$130
Unemployment Insurance Expenses
Unemployment Insurance Revenue
Unemployment Insurance Net Income
-$180
1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Note: USA federal fiscal year ends in September; *all data inflation-adjusted, based on 2005 dollars.
Source: White House Office of Management and Budget.
www.kpcb.com
USA Inc. | Income Statement Drilldown
123
Unemployment Benefits: In the Past, Benefits Paid
Have High (70%) Correlation to Unemployment Rate
Real Unemployment Benefits ($B)
180
160
140
120
100
80
60
40
20
Real Unemployment Benefits & Unemployment Rates, 1962 – 2010
Real Unemployment Benefits
Unemployment Rate
12%
10%
8%
6%
4%
2%
Unemployment Rates (%)
0
1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
0%
www.kpcb.com
Note: Fiscal year ends in September. Source: White House Office of Management & Budget, Bureau of Labor Statistics.
USA Inc. | Income Statement Drilldown 124
Unemployment Benefits: Good News—Unemployment Change In the Past
Has Strong (71%) Inverse Correlation with Real GDP Change, so Economic
Growth Should Reduce Unemployment
Q/Q Unemployment Rate Change & Real GDP Change, CQ1:48 – CQ4:10
-20%
200%
Quarterly Unemployment Change
-15%
-10%
-5%
0%
5%
10%
15%
Quarterly Unemployment Rate Change
Quarterly Real GDP Change (Inverse Scale)
20%
1Q48 1Q53 1Q58 1Q63 1Q68 1Q73 1Q78 1Q83 1Q88 1Q93 1Q98 1Q03 1Q08
150%
100%
50%
0%
-50%
-100%
-150%
Quarterly Real GDP Change (Inverse Scale)
www.kpcb.com
Source: Bureau of Economic Analysis, Bureau of Labor Statistics.
USA Inc. | Income Statement Drilldown
125
Unemployment Benefits: Bad News—Newly Extended Unemployment Benefits
Could Cost USA Inc. $34 Billion in Next Two Years
Net Cost of Extended Unemployment Benefits to Federal Government, F2010-2011E
$30,000
Cost of Extended Unemployment Benefits ($MM)
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$9B
F2010E
$25B
F2011E
www.kpcb.com
Note: Net cost of the Unemployment Compensation Extension Act of 2010 is expected to decline substantially in F2012E
because the deadline to file for extended unemployment benefits expires in November 2010 and federal extended
unemployment insurance provides benefits for up to 99 weeks (less than two years). Source: Congressional Budget Office, 7/10.
USA Inc. | Income Statement Drilldown 126
Unemployment Benefits: Bad News—Structural Problems in Labor Force
Could Lead to Prolonged Duration/Increased Rate of Unemployment
� Structural Problems in USA Labor Force
� Healthcare costs may be a barrier to hiring for employers
� Healthcare benefits = 8% of average total employee compensation; grew at
6.9% CAGR from 1998 to 2008 compared with 4.5% CAGR in salaries.
� Healthcare benefits are fixed costs as they are paid on an annual per-worker
basis and do not vary with hours worked.
� As employers try to lower fixed costs to right-size to their reduced revenue
levels, layoffs are the only way to reduce fixed healthcare costs.
� Skills mismatch may be a barrier to hiring for employers
� A large portion of the long-term unemployed may lack requisite skills.
� 14% of firms reported difficulty filling positions due to the lack of suitable talent,
per 5/10 Manpower Research survey.
� Labor immobility resulting from the housing bust may be a barrier to hiring
� One in four homeowners are “trapped” because they owe more than their
houses are worth, so they cannot move to take another job – until they sell or
walk away.
www.kpcb.com
Source: Richard Berner, “Why is US Employment So Weak” (7/23/10), Morgan Stanley Research.
USA Inc. | Income Statement Drilldown
127
Unemployment Benefits: Bad News
Although economists have shown that extended availability of UI
[unemployment insurance] benefits will increase unemployment duration, the
effect in the latest downturn appears quite small compared with other
determinants of the unemployment rate. Our analyses suggest that extended
UI benefits account for about 0.4 percentage point of the nearly 6 percentage
point increase in the national unemployment rate over the past few years. It is
not surprising that the disincentive effects of UI would loom small in the midst
of the most severe labor market downturn since the Great Depression.
Despite the relatively minor influence of extended UI, it is important to note that
the 0.4 percentage point increase in the unemployment rate represents about
600,000 potential workers who could become virtually unemployable if their
reliance on UI benefits were to continue indefinitely.
Rob Valletta and Katherine Kuang, Federal Reserve Board of San Francisco
“Extended Unemployment and UI Benefits,” April 19, 2010.
www.kpcb.com
USA Inc. | Income Statement Drilldown 128
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 129
Social Security: In Good Shape Now, Yet Challenged in Future
by Aging Population
� Social Insurance Program Created in 1935 – During height of the Great
Depression to help elderly (65+*) and disabled people avoid poverty.
� Pay-as-You-Go Funding – Social Security taxes deducted from current payrolls
to pay out to current eligible recipients of Social Security.
� For Most of its 8 Decades (1935-1970; 1985 - 2009), Annual Social Security
Payments Have Been Funded by Annual Social Security Taxes – However,
based on estimates from Congressional Budget Office (CBO), beginning in 2016
(or earlier), Social Security will begin running an annual deficit as payments
exceed taxes (at unchanged flat tax rate of 12.4% 1 of annual gross wages) – this
is a problem!
� Social Security Has Been Struck by Annual Deficit Crisis Before – From
1975 to 1981, Social Security expenses exceeded revenue every year, which
caused a 45% reduction in the Social Security Trust Fund balance. Legislation
recommended by the Greenspan Commission in 1983 reduced average benefits
by ~5% 2 and raised social insurance tax rates for individuals by ~2.3%. 3 But the
Greenspan Commission fix will run out soon as Social Security turns to operating
loss in 2016.
Note: *Early retirees (62+) could receive partial benefits between 62 and 65. 1) 6.2% taxes paid by employees and matched by employers on gross wages up to
but not exceeding the Social Security wage base of ~$100K; 2) total benefit cuts included $27B savings from benefit taxation for the wealthy and $66B savings
from delay in cost of living adjustments over 1984-1989; 3) average increase in entitlement payroll tax rates between 1982 and 1988, includes Medicare payroll
www.kpcb.com
taxes, per estimates from CBO. Source: Social Security Administration.
USA Inc. | Income Statement Drilldown 130
Social Security: Financially Sound – So Far – Owing to
Increased Revenue / Reduced Spending Post 1983 Reform,
But ‘Operating Loss’ Resumed in 2009
150
Real Social Security Operating Income, 1957 – 2010
Real Net Income of Social Security Program ($B)
100
50
0
-50
Operating Income (Tax Receipts - Expenditures)
-100
1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
www.kpcb.com
Note: *Data is adjusted for inflation using White House OMB’s GDP price index (based on BEA’s data).
USA federal fiscal year ends in September; Source: Social Security Administration.
USA Inc. | Income Statement Drilldown
131
Social Security: Enrollment Up 5x to 52 Million While Inflation-Adjusted
Annual Payments per Beneficiary Up 2x to $12K From 1957 to 2009
Real Annual Social Security Payments per Beneficiary & Enrollment, 1957 – 2009
$14,000
Enrollment
60
Annual Payments per Beneficiary ($/year)
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
Annual Per Cap Benefits (in 2005 dollars)
50
40
30
20
10
Enrollment (MM)
$0
1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
0
www.kpcb.com
Note: Data are inflation adjusted using BEA’s GDP price index. Source: Social Security Administration.
USA Inc. | Income Statement Drilldown 132
Social Security: Observations
� 52 million retired Americans (17% of population) received an
average of $11,826 (in 2005 dollars) in Social Security payments
(32% of USA per-capita income) in 2009.
� By comparison, 10 million retired Americans (6% of population)
received an average of $5,447 (in 2005 dollars) in Social Security
payments (51% of per-capita income) in 1957.
� When Social Security was created in early 20 th century to provide
retirement income to elderly Americans, 1 in 127 Americans 1 (<1% of
population) received Social Security payments. Now 1 in 6 Americans
(17%) receive Social Security payments…well above the initial ‘plan.’
www.kpcb.com
Note: 1) Social Security was created in 1935, full data on enrollees not available until 1945.
Source: Social Security Administration.
USA Inc. | Income Statement Drilldown
133
Social Security: America is Aging, and USA, Inc. Workers Are Required to
Support 5x More Beneficiaries (and Rising) than They Did in 1950!
1950 2010
6
33
Social Security
Beneficiaries
Supported by
100 Workers
Social Security
Beneficiaries
Supported by
100 Workers
www.kpcb.com
Source: Social Security Administration.
USA Inc. | Income Statement Drilldown 134
Social Security: Each Retiree Was Supported by
42 Workers in 1945 & Just 3 Workers in 2009
Supporting Workers per Social Security Beneficiary, 1945 – 2030E
45
40
Forecast
Supporting Workers per Beneficiary
35
30
25
20
15
10
5
0
1945 1955 1965 1975 1985 1995 2005 2015E 2025E
www.kpcb.com
Source: Social Security Administration.
USA Inc. | Income Statement Drilldown
135
Think About That…
If you are a worker in USA, Inc.
(as 81 million tax-paying
Americans are), in effect, you have
5 times more ‘dependents*’ than
your parents had and 15 times
more than your grandparents.
www.kpcb.com
Note: * ‘Dependents’ = retirees who receive Social Security benefits primarily funded via payroll taxes on current working population.
USA Inc. | Income Statement Drilldown 136
Analysts Often Think of Things as Math Problems…
So, how about
this one…
www.kpcb.com
USA Inc. | Income Statement Drilldown
137
Americans Are Living 26% Longer, But Social Security ‘Retirement Age’ Has
Increased Only 3% Since Social Security Was Created in 1935…
USA Life Expectancy at Birth, 1935 & 2009 USA Full Retirement Age, 1935 & 2009
USA Life Expectancy at Birth (Years)
90
80
70
60
50
40
30
20
62
+26%
78
USA Full Retirement Age (Years)
90
80
70
60
50
40
30
20
65
+3%
67
10
10
0
1935 2009
0
1935 2009
Note: Full retirement age is 65 for people born in 1930; 67 for people born in 2009; Social Security Amendments of 1961 allowed early retirement to start at
62+ with reduced benefits. Source: National Center for Health Statistics, World Bank, Social Security Administration.
www.kpcb.com
USA Inc. | Income Statement Drilldown 138
That’s a Math Problem…
� If an expense rises by 26% and the ability to pay rises by only 3%,
the math doesn’t work. A computer in a science fiction movie might
blurt out, ‘does not compute…does not compute…’
� ‘’Something’s Gotta Give…’ as the 2003 film put it.
� A mathematician or economist would say, ‘the expense must go down or
the ability to pay must rise to match the expense.’
� Simple math implies that the age for collecting full benefits should rise
from 67 to 72, so that expenses more closely match workers’ ability to
pay. Under this scenario, while Americans are living 30% longer, the
‘retirement’ age would rise just 7%, still well below the increase in life
expectancy since Social Security was created.
www.kpcb.com
USA Inc. | Income Statement Drilldown
139
Social Security: Unless The Program Is Restructured, Cash Flow
Will Turn Negative by 2015E Owing to Aging Population
Real Social Security Annual Operating Income, 1982 – 2036E
Annual Social Security Net Cash Flow ($B)
$200
$100
$0
-$100
-$200
-$300
2015+
Permanent
Negative Cash Flow
Projection
-$400
1982 1987 1992 1997 2002 2007 2012E 2017E 2022E 2027E 2032E
www.kpcb.com
Note: Data adjusted for inflation in real 2009 dollars. Includes Disability Insurance. Projection by Social Security Administration
in 8/10. Source: Social Security Administration.
USA Inc. | Income Statement Drilldown 140
In Sum…
Heretofore, Social Security and Unemployment Insurance
have been effectively funded, but two significant entitlement
programs (Medicaid and Medicare) were created without
effective funding plans / programs. Only one of these
(Medicaid) is means-tested (indicating that one is eligible for
Medicaid only if he / she does not sufficient financial means).
Left unchanged, Unemployment Insurance funding should
improve as economic growth resumes, but Social Security will no
longer be self-funded within 5-10 years, and the underfunding of
Medicaid and Medicare will simply go from bad to worse.
www.kpcb.com
USA Inc. | Income Statement Drilldown
141
Drill Down on USA Inc.
Rising Debt Level and Interest Payments
1
2
3
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
www.kpcb.com
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social
Security net loss excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is
Troubled Asset Relief Program; ARRA is American Recovery & Reinvestment Act programs.
USA Inc. | Income Statement Drilldown 142
Interest Payments:
3 Determinants = Debt Level + Interest Rates + Maturity
Interest
Payments
Debt
Level
Effective
Interest
Rates
Debt Level
• 62% of GDP in 2010, up 2x over 30 years
• Projected to rise to ~146% of GDP by 2030E
owing to diminishing surpluses from Social
Security and rising expenses from Medicaid and
other entitlement spending
Effective Interest Rates
• At historic low of 2.2% in 2010, vs. 30-year
average of 6.4%
• Will rise with federal funds target rate & long-term
Treasury yield as economy recovers
Maturity
• Shorter debt maturities imply less leverage to
Maturity reduce future interest payments via inflation
• Long-term debt (10+ year) only 10% of total in
2010, down from 15% in 1985
• Short-term debt (0-1 year) especially large in 2009
Source: Historical debt level / effective interest rates data per White House OMB; Debt projection per CBO; Maturity and composition per Dept. of Treasury.
www.kpcb.com
USA Inc. | Income Statement Drilldown
143
Drill Down on Debt Levels & Related Expenses
We begin with a simple study of current and historical debt
levels and key drivers of why debt has risen so much, then
we look at interest rates (which are low by historical
standards) and the impact they have on interest expense,
then we look at the short-term vs. long-term composition of
USA Inc.’s debt.
www.kpcb.com
USA Inc. | Income Statement Drilldown 144
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 145
Debt Level: Highest (as % of GDP) Since World War II
and Rising Rapidly
USA Federal Debt Held by the Public 1 as % of GDP, 1940 – 2010
120%
100%
World War II
Public Debt As % of GDP
80%
60%
40%
2010 Public Debt = 62% of GDP
20%
0%
1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006
www.kpcb.com
Note: 1) For a more-detailed discussion about net debt (Federal debt held by the public) vs. gross debt, see slide 455 to 463
in Appendix. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown 146
Why Has Debt
Risen So Much?
Public Debt Up 2x Over
Past 3 Decades
www.kpcb.com
Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
147
Debt Level: Why It Has Risen
Answer Part 1: Expenses (Entitlement + One-Time Items*) Grew Faster Than GDP
USA Real Federal Expenses vs. Real GDP % Change, 1965 – 2010
% Change From 1965
1200%
1000%
800%
600%
400%
200%
Total Expenses
Entitlement Programs
Non-Defense Discretionary
Defense
Net Interest Payments
Real GDP
0%
-200%
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Note: *One-time items could not be shown in chart because % change from 1965 is not available. For context, one-time items totaled $377B in 2009 and
$152B in 2010 (both in 2005 constant dollars), both of which are the 3 rd largest line item after entitlement expenses and defense spending. Data adjusted
for inflation. Source: White House Office of Management and Budget.
www.kpcb.com
USA Inc. | Income Statement Drilldown 148
Debt Level: Entitlement Spending Increased 11x (1965 to 2010),
While Real GDP Grew 3x
USA Real Federal Expenses, Entitlement Spending, Real GDP % Change, 1965 – 2010
% Change From 1965
1200%
1000%
800%
600%
400%
200%
Total Expenses
Entitlement Programs
Real GDP
Entitlement
Expenses
+10.6x
Total
Expenses
+3.3x
Real GDP
+2.7x
0%
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
www.kpcb.com
Note: Data adjusted for inflation. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
149
Debt Level: Why It Has Risen
Answer Part 2: Revenue (Esp. Corporate Taxes) Fell Below GDP Growth
USA Real Federal Revenue vs. Real GDP % Change, 1965 – 2010
% Change From 1965
600%
500%
400%
300%
200%
100%
Individual Income Taxes
Corporate Income Taxes
Social Insurance Taxes
Other Taxes & Fees
Total Revenue
Real GDP
0%
-100%
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
www.kpcb.com
Note: All data adjusted for inflation. Source: White House Office of Management and Budget, Bureau of Economic Analysis.
USA Inc. | Income Statement Drilldown 150
Debt Level: Recessions + Corporate Tax Accounting Changes
Led to Revenue Underperformance (Relative to GDP Growth)
1,200
USA Federal Receipts by Type ($B in 2005 Constant Dollars), 1965 – 2010
Individual & Corporate Income Taxes (in 2005 $B)
1,000
800
600
400
200
Individual Income Taxes
Corporate Income Taxes
Recessions
1981
Tax Cuts
1981
Accelerated Cost
Recovery System
� Lower Corporate
Taxes*
2001 / 2003
Tax Cuts
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Note: * The adoption of Accelerated Cost Recovery System allowed companies to utilize accelerated depreciation on capital investments, leading to
higher depreciation costs and lower taxable income. Source: White House Office of Management and Budget. Note that recession-related tax cuts can be
doubled edged – reducing tax revenue but enhancing GDP growth.
www.kpcb.com
USA Inc. | Income Statement Drilldown 151
Debt Level: In the Past, Social Security’s Surpluses Have Masked
USA Inc.’s True Borrowing Needs by $1.4T
� Social Security tax receipts exceeded outlays in every year between 1984 and 2008,
leading to a cumulative surplus of $1.4 trillion.
� These surpluses have been used to fund other parts of federal government operations
(including Medicaid, infrastructure and defense...) under the unified budget accounting
rules.
� Without these past Social Security surpluses, USA Inc. would have to have issued $1.4
trillion more debt (or 16% higher than current level of debt) to fund its operations.
Social Security Operating Income ($B)
$120
$80
$40
$0
-$40
-$80
Social Security Cumulative Real Operating Surpluses / Deficits, 1982-2010
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
www.kpcb.com
Note: Surpluses & deficits exclude Trust Fund interest income, adjusted for inflation.
Data source: Congressional Budget Office.
USA Inc. | Income Statement Drilldown 152
Why Will Debt Level
Continue to Rise?
Public Debt Projected
to Rise 2x Over
Next 3 Decades
www.kpcb.com
Source: Congressional Budget Office Long-Term Budget Outlook (6/10), Alternative Fiscal Scenario (assuming a continuation
of today’s underlying fiscal policy. This scenario deviates from CBO’s baseline because it incorporates some policy changes
that are widely expected to occur and that policymakers have regularly made in the past).
USA Inc. | Income Statement Drilldown 153
Debt Level: Projected to Rise 3x Over Next 2 Decades,
per USA Inc.’s Own Estimates
USA Public Federal Debt as % of GDP, 1982 – 2030
160%
Net Federal Debt As % of GDP
140%
120%
100%
80%
60%
40%
2010 Federal Debt = 62% of GDP
2030E Federal Debt =
146% of GDP
20%
0%
1982 1986 1990 1994 1998 2002 2006 2010E 2014E 2018E 2022E 2026E 2030E
Source: Congressional Budget Office Long-Term Budget Outlook (6/10), Alternative Fiscal Scenario (assuming a continuation of today’s underlying fiscal
policy. This scenario deviates from CBO’s baseline because it incorporates some policy changes that are widely expected to occur and that policymakers
have regularly made in the past).
www.kpcb.com
USA Inc. | Income Statement Drilldown 154
Debt Level: Why Will It Continue to Rise?
Answer Part 1: Notional Social Security “Trust Fund” Surpluses Likely
Turning Into Deficits Owing to Aging Population
$200
Social Security Cumulative Real Operating Surpluses / Deficits, 1982-2037E
Social Security Operating Income ($B)
$0
-$200
-$400
-$600
-$800
Cumulative Surpluses
(1982-2008) Reduced
Federal Debt by
$1.4T
Projected Cumulative
Deficits (2009-2037E)
Could Increase Federal
Debt by $11.6T
-$1,000
1982 1987 1992 1997 2002 2007 2012E 2017E 2022E 2027E 2032E 2037E
www.kpcb.com
Note: Surpluses & deficits exclude Trust Fund interest income, adjusted for inflation in 2009 dollars.
Source: Congressional Budget Office.
USA Inc. | Income Statement Drilldown
155
Debt Level: Why Will It Continue to Rise?
Answer Part 2: Notional Medicare* “Trust Fund” Surpluses Likely
Turning Into Deficits Owing to Aging Population
$100
Medicare Part A* Cumulative Real Operating Surpluses / Deficits, 1982-2037E
Medicare Part A Operating Income ($B)
$0
-$100
-$200
-$300
Cumulative Surpluses
(1982-2008) Reduced
Federal Debt by
$21B
Projected Cumulative
Deficits (2009-2037E)
Could Increase Federal
Debt by $5T
-$400
1983 1988 1993 1998 2003 2008 2013E 2018E 2023E 2028E 2033E
Note: Data are adjusted for inflation in 2009 dollars. *Only Medicare Part A (hospital insurance) has a trust fund (funded by payroll taxes), Part B (medical
insurance) and Part D (prescription drug benefits) are primarily funded by general tax revenue and premium / co-payments. Source: Medicare Trustees.
www.kpcb.com
USA Inc. | Income Statement Drilldown 156
Debt Level: Why Will It Continue to Rise?
Answer Part 3: Potential Loss on Guarantees on Fannie Mae / Freddie Mac
Originations Could Rise
$9,000
Government-Sponsored Enterprises Gross Debt Composition, 1971 – 2008
Total GSE Debt Outstanding ($B)
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1971 1976 1981 1986 1991 1996 2001 2006
Freddie Mac
RMBS*
Fannie Mae
RMBS*
Freddie Mac
Corporate Debt
Fannie Mae
Corporate Debt
Other Debt
www.kpcb.com
Note: *RMBS is residential mortgage-backed securities. Other debt includes those issued by other federal agencies such as
Federal Home Loan Banks and Student Loan Marketing Association (Sallie Mae). Source: FHFA Report to the Congress 2009.
USA Inc. | Income Statement Drilldown
157
Debt Level: GSEs’ Expansion Into ‘Non-Conventional’ Mortgage Lending
Business Has Proved to Be Costly So Far
Fannie Mae Credit Losses by Type of Mortgage Product, 1Q08 – 2Q10
$8,000
Quarterly Credit Losses ($MM)
$6,000
$4,000
$2,000
Other Non-Conventional
Subprime
Alt A
Interest Only
Conventional
Non-
Conventional
Mortgages =
30% of Fannie
Mae’s Total
Loan Guarantee
Balance, But
Causing 70-80%
of Losses
Owing to Lower
Loan Quality
$0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
www.kpcb.com
Source: Fannie Mae, Betsy Graseck, Morgan Stanley Research.
USA Inc. | Income Statement Drilldown 158
Debt Level: Fannie Mae + Freddie Mac =
Latest Estimated Ultimate Cost to Taxpayers Varies*
Base-Case
Estimated Ultimate
Net Loss**
$389 Billion
Source
Congressional
Budget Office
(CBO)
Comments / Assumptions
Net accrued loss to be borne by taxpayers, including
net cash infusions (with implied default rate of ~5-
10%) and risk premiums associated with federal
government’s implicit guarantee on GSEs’ credit.
Bulk of the net loss ($291B) occurred prior to and
during F2009.
On a cash basis, CBO’s estimate would have been in
line with White House OMB’s estimate.
$160 Billion
White House
Office of
Management and
Budget (OMB)
Net cash outlay to be borne by Treasury Dept. (and
ultimately taxpayers), including Treasury Dept.’s cash
outlays to purchase Fannie Mae & Freddie Mac
preferred stock (with implied default rate of ~5-10%),
minus cash received from dividends.
Bulk of the net cash outlay ($112B) occurred prior to
and during F2009.
www.kpcb.com
Note: *Latest estimated cost to taxpayers varies and continues to rise. **By F2019E. Source: CBO, OMB.
USA Inc. | Income Statement Drilldown
159
Debt Level: Scenario Math – What Various Default Rates Could Mean for
Taxpayer Ultimate Cash Cost of Fannie Mae & Freddie Mac
Fannie Mae / Freddie Mac
Outstanding Loan Guarantees
Default Rate
Loss Severity*
Ultimate Cash Cost
to Taxpayer
Outstanding
Loan Guarantees
Default
Rate
Loss Severity*
Ultimate Cash Cost
to Taxpayer
$5 Trillion 1
(before
government
conservatorship in
9/08)
2%
$50 Billion
5% $125 Billion
10% $250 Billion
50%
15% $375 Billion
20% $500 Billion
25% $625 Billion
$160 Billion
Current CBO /
OMB Forecasts
of Ultimate Cash
Cost of Fannie
Mae / Freddie
Mac
www.kpcb.com
Note: * Loss severity is liquidation value (foreclosure auction or other means) as a % of the loan amount adjusted for any
advances and fees. Source: 1) Fannie Mae, Freddie Mac.
USA Inc. | Income Statement Drilldown 160
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 161
Effective Interest Rates: While USA Debt Has Risen Steadily Since 1981,
Rates Have Fallen Steadily, so the Cost of Debt Has
Potentially Been Held Artificially Low
USA Net Federal Debt Outstanding & Effective Interest Rates, 1980 – 2010
$10,000
$8,000
Net Debt Outstanding
Effective Interest Rates
30-Year Avg. Effective Interest Rate
10%
8%
Net Debt Outstanding ($B)
$6,000
$4,000
6%
4%
Effective Interest Rates (%)
$2,000
2%
$0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
0%
www.kpcb.com
Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown 162
Effective Interest Rates: While USA Debt Has Risen,
Net Interest Payments Have Fallen
USA Net Federal Debt Outstanding & Net Interest Payments, 1980 – 2010
$10,000
$500
$8,000
Net Debt Outstanding
Net Interest Payments
$400
Net Debt Outstanding ($B)
$6,000
$4,000
$300
$200
Net Interest Payments ($B)
$2,000
$100
$0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
$0
www.kpcb.com
Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
163
Effective Interest Rates: Hypothetical Exercise – If USA 2009 Cost of Debt
Was Paid at 30-Year Average Interest Rate Level of 6% vs. Current 2%,
Annual Interest Cost Would Rise 3x to $566 Billion from $196 Billion
$600
USA Actual & Hypothetical Net Interest Payments*, 1980 – 2010
Net Interest Payments ($B)
$500
$400
$300
$200
Hypothetical Net Interest Payments, Assuming
30-Year Average Effective Interest Rate of 6.25%
Actual Net Interest Payments
Would have
been $370B
higher
$100
$0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
www.kpcb.com
Note: * Hypothetical net interest payments calculation assumes all other variables (such as GDP, revenue, spending, debt
levels, etc.) are held constant. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown 164
Effective Interest Rates: But Cost of Debt Unlikely to Continue to Decline
For Extended Period If Economy Improves
USA Federal Debt Weighted Average Yields, 1980 – 2010
14%
Weighted Average Treasury Yields (%)
12%
10%
8%
6%
4%
2%
30-Year Average Yield
7%
0%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
www.kpcb.com
Source: US Treasury.
USA Inc. | Income Statement Drilldown
165
Effective Interest Rates: If Debt Levels & Interest Rates Rise Dramatically
Beyond 2010, Net Interest Payments Could Soar…
USA Federal Net Debt Outstanding / Effective Interest Rates / Net Interest Payments, 2009 – 2016E
11-16E
2009 2010 2011E 2012E 2013E 2014E 2015E 2016E CAGR
Net Debt Outstanding ($B) $7,545 $9,019 $10,856 $11,881 $12,784 $13,562 $14,301 $15,064 7%
Y/Y Growth 30% 20% 20% 9% 8% 6% 5% 5%
Effective Interest Rate (%) 2.5% 2.2% 1.9% 2.0% 2.5% 3.1% 3.5% 3.7% --
Net Interest Payments ($B) $187 $196 $207 $242 $321 $418 $494 $562 22%
Y/Y Growth -26% 5% 5% 17% 33% 30% 18% 14%
% of Federal Tax Receipts 9 9 10 9 11 13 14 15
www.kpcb.com
Note: CAGR is compound annual growth rate. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown 166
Effective Interest Rates: If Debt Levels & Interest Rates Rise Dramatically
Beyond 2010, Net Interest Payments Could Soar
USA Net Federal Debt Outstanding & As Percent of Total Revenue, 1980 – 2016E
$600
30%
$500
Net Interest Payment ($B)
As % of Total Revenue
24%
Net Interest Payment ($B)
$400
$300
$200
$100
18%
12%
6%
As % of Total Revenue (%)
$
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013E 2016E
0%
www.kpcb.com
Note: CAGR is compound annual growth rate. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
167
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 168
Debt Composition: Average Debt Maturity Declining Since 2000, Combined
With Declining Interest Rate, Leading to “Artificially Low” Interest Payments
USA Inc. Debt Maturity vs. Short-Term Interest Rate, 1980 – 2010
Average Treasury Securities Maturity (Years)
7
6
5
4
Average Treasury Securities Maturity
Short-Term Interest Rate
30-Year Average
Maturity
20%
15%
10%
5%
Short-Term Interest Rate (%)
3
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
0%
www.kpcb.com
Source: Dept. of Treasury.
USA Inc. | Income Statement Drilldown
169
Debt Composition: Maturity – Temporary High Mix (32%) of
Short-Term Treasury Bills in 2009 Took Advantage of Historic Low Interest
Rates to Reduce Interest Payments
USA Inc. Outstanding Debt Breakdown by Type & Maturity, 2000 - 2010
% of Total Marketable Debt Outstanding
100%
80%
60%
40%
20%
0%
7%
6%
5%
4%
3%
2%
1%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Interest Rate (%)
TIPS
Treasury Inflation
Protected Securities
Bonds
- Long-Term (10+
Year Maturity)
Notes
- Medium-Term (2-
10 Year Maturity)
Bills
- Short-Term (0-1
Year Maturity)
Short-Term
Interest Rate (Fed
Funds Rate)
10-Year Average
Share of T-Bills
www.kpcb.com
Note: Data as of March each year; composition excludes nonmarketable securities. Source: Dept. of Treasury.
USA Inc. | Income Statement Drilldown 170
Debt Composition: Foreign Investors & Governments
Hold ~46% of USA Inc. Public Debt
1989 Total Public Debt
Outstanding
$2 Trillion
2010 Total Public Debt
Outstanding
$9 Trillion
Foreign Investors &
Government
Federal Reserve
28%
18%
10%
Mutual Funds
State & Local
Governments
3%
3%
19%
46%
6%
11%
5%
6%
17%
Private Pension Funds
Depository Institutions
6%
6%
Insurance Companies
7% 10%
Other Investors
www.kpcb.com
Note: Public debt ownership excludes Government Accounts Series (such as Social Security Trust Fund) as those holdings
are intra-government and not tradable in public. Source: Dept. of Treasury, as of CQ2:10.
USA Inc. | Income Statement Drilldown
171
Debt Composition: Foreign Investors & Governments Hold 46% of USA Inc.
Public Debt, Up From 4% in 1970 – How Much Higher Should It Go?
Foreign Ownership of US Treasury Securities, CQ1:1970 – CQ2:2010
Foreign Ownership of USA Inc's Debt (%)
50%
40%
30%
20%
10%
Top Foreign Owners, CQ2:10
China 10%
Japan 9%
UK 3%
Oil Exporters* 3%
Brazil 2%
All Other 18%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010
www.kpcb.com
Note: *Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,
Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.
Source: Dept. of Treasury, as of CQ2:10.
USA Inc. | Income Statement Drilldown 172
And – You Guessed It – Here’s the Punch Line…
By USA Inc.'s Own
Forecast…
www.kpcb.com
USA Inc. | Income Statement Drilldown
173
Entitlement Spending + Interest Payments Alone Should
Exceed USA Inc. Total Revenue by 2025E!
Entitlement Spending + Interest Payments vs. Revenue as % of GDP, 1980 – 2050E
Total Revenue & Entitlement + Net Interest
Payments as % of GDP
40%
30%
20%
10%
Revenue
Entitlement Spending + Net
Interest Payments
0%
1980 1990 2000 2010E 2020E 2030E 2040E 2050E
Source: Congressional Budget Office (CBO) Long-Term Budget Outlook (6/10). Note that entitlement spending includes federal government expenditures on Social
Security, Medicare and Medicaid. Data in our chart is based on CBO’s ‘alternative fiscal scenario’ forecast, which assumes a continuation of today’s underlying
fiscal policy. Note that CBO also maintains an ‘extended-baseline’ scenario, which adheres closely to current law. The alternative fiscal scenario deviates from
CBO’s baseline because it incorporates some policy changes that are widely expected to occur (such as extending the 2001-2003 tax cuts rather than letting them
expire as scheduled by current law and adjusting physician payment rates to be in line with the Medicare economic index rather than at lower scheduled rates) and
that policymakers have regularly made in the past.
www.kpcb.com
USA Inc. | Income Statement Drilldown 174

CBO’s Projection from 10 Years Ago (in 1999) Showed Federal Revenue
Sufficient to Support Entitlement Spending + Interest Payments Until 2060E
– 35 Years Later than Current Projection
CBO’s Projection in the ‘1999 Long-Term Budget Outlook’ on
Entitlement Spending + Interest Payments vs. Revenue as % of GDP, 1980 – 2070E
Total Revenue & Entitlement + Net Interest
Payments as % of GDP
40%
30%
20%
10%
0%
Revenue
Entitlement Spending + Net Interest Payments
1980 1990 2000 2010E 2020E 2030E 2040E 2050E 2060E 2070E
www.kpcb.com
Source: Congressional Budget Office Long-Term Budget Outlook (1999).
Note that there was no alternative fiscal scenario in CBO’s forecast back then.
USA Inc. | Income Statement Drilldown
175
If the Previous Two Slides…
aren’t a
wake-up call,
we don’t know
what is…
www.kpcb.com
USA Inc. | Income Statement Drilldown 176
Drill Down on USA Inc. Periodic Large One-Time Charges
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
www.kpcb.com
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social
Security net loss excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is
Troubled Asset Relief Program; ARRA is American Recovery & Reinvestment Act programs.
USA Inc. | Income Statement Drilldown 177
One-Time Charges: Unusually High in F2009 & F2010 with
Financial + Economic Crisis
Net One-Time Charges to USA Inc. ($B)
F2011 Net Sum of
F2008 F2009 F2010 YTD* 4 Years
Government-Sponsored Enterprises (GSEs) $14 $97 $41 -- $152
Fannie Mae -- 60 23 -- 83
Freddie Mac $14 37 18 -- 69
Troubled Asset Relief Program (TARP)* -- $261 -$26 -$23 $213
Banks -- 134 -85 -28 21
Automakers -- 78 -6 -14 58
AIG -- 49 -- 20 69
Individual Homeowners -- 0 39 -1 38
Other Financial Institutions -- -- 22 -- 22
Consumers & Small Businesses -- -- 4 -- 4
American Recovery and Reinvestment Act (ARRA)** -- $40 $137 -- $177
Education -- 21 50 -- 71
Nutrition Assistance -- 5 11 -- 16
Transportation -- 4 15 -- 19
Tax Credits -- 2 33 -- 35
Energy -- 1 5 -- 6
Other -- 7 23 -- 30
Net Total One-Time Charges ($B) $14 $398 $152 -$23 $542
Note: Federal fiscal year ends in September. *TARP one-time charges include repayments & dividends; F2011 TARP data as of 2/11, per US Treasury;
F2011 YTD GSE & ARRA data not available. **ARRA one-time charges exclude funds used by entitlement programs such as Social Security / Medicare /
Medicaid / Unemployment. Source: Congressional Budget Office, Dept of Treasury.
www.kpcb.com
USA Inc. | Income Statement Drilldown 178
One-Time Charges: What Charges from F2008-F2010
May Look Like on Net Basis Over Next 10 Years
One-Time Charges from the ‘Financial Crisis’ are Not Created Equal – While TARP Was the
Headliner, When All’s Said & Done, TARP may be Smallest Component, by a Long Shot
Current Cost
($B, as of 2/11)
Ultimate Cash Cost
($B, by F2020E) Comments
TARP $213B <$51B 1 less 1 as banks continue to pay back their loans
and automakers / AIG seek IPOs / sales to
May fall from net $213 billion to $51 billion or
realize value of USA Inc.’s equity stake.
GSE $152 ~$160 2 (or higher) 2 as Fannie Mae and Freddie Mac
losses on loan guarantees stabilize and they
May grow from net $152 billion to ~$160 billion
continue to pay dividends on USA Inc.’s shares.
ARRA $177 $417
Should rise from $177 billion to $417 billion 3
based on commitments…and a payback plan
was never factored into these payments.
Note: 1) Latest Treasury estimate as of 12/10, includes net profits from banks of $16B, net costs from AIG ($5B) / Automakers ($17B) / Consumers & Housing
programs ($-46B) and other. AIG net costs excludes potential gains from selling AIG’s common shares held by the Treasury, which could turn out to be a $22B profit