March 2011

It's Time to Reform Social Security

There have been a number of pieces lately that have offered perspectives on how to view the recent debate surrounding the Social Security program. Is it part of the budget or not? What happened to the money in the Trust Fund? Does Social Security add to the deficit? Different authors frame the debate in different ways, but many have come to the same conclusion: Social Security needs to be reformed -- and quickly.

Our recent paper attempted to shed light on two differing views of Social Security: one being that it is a stand-alone program with a trust fund, the other being that it is part of the overall federal budget and adds to the deficit. We concluded that either view is valid, depending on your perspective, but that they both should lead to the same conclusion: it's time to reform Social Security. If you look at Social Security as a stand alone program, for example, it faces a substantial actuarial shortfall and is 25 years from insolvency. If you look at it as part of the budget, it is adding considerably to the overall deficit.

  View 1: Off-Budget Approach View 2: Unified Budget Approach
Federal Debt

$13.5 trillion
93% of GDP
(gross debt)

$9.0 trillion
62% of GDP
(debt held by public)

Budget Deficit

$1.4 trillion
9.4% of GDP
(on-budget deficit)

$1.3 trillion
8.9% of GDP
(unified deficit)

Social Security Balance

$82 billion surplus
(surplus including interest)

$37 billion deficit
(primary deficit)

1st Year of Social Security Deficits

2025
(deficit including interest)

2010
(primary deficit)

Insolvency Date 2037 N/A


In a recent piece, CRFB board member Gene Steuerle came to a similar conclusion, arguing that the trust fund has basically no effect on the generational and economic impacts of the program. As Steuerle writes:

"Those who say we can wait 20 years to address Social Security's solvency even though the system will soon be spending over 30 percent more than it collects in taxes have turned a blind eye to current and growing deficits. They seem to think that (1) we can count on income tax payers to raise more taxes, or we can cut other spending, or we can borrow more and pay interest to the trust funds as they move toward decline; or that (2) we can draw down assets (say, by borrowing more from China to pay off bonds in the Social Security trust fund) without consequences. This is the mindset of a household that has saved $50,000 for retirement but has $300,000 in credit card debt and keeps charging more every year without paying down the balance."

From another perspective, Social Security Trustee Charles Blahous wrote a Washington Post op-ed arguing that those who view Social Security as a stand-alone program do it a great disservice by delaying reform -- and may ironically cause the program to be seen as merely another part of the budget. Blahous shows that if we wait until 2031 to reform the program, the long-term problem would be twice as large as in 1983 and the short-term problem more than three times as large. Blahous argues that politicians will not be able to make changes that large, saying:

Faced with a choice between wrenching benefit cuts and/or payroll tax increases vs. tearing down the wall between Social Security and the rest of the budget, legislators will tear it down. And that would be the end of Social Security as we know it. No more separate trust fund. No more special parliamentary protections. No longer would benefit payments be shielded from the chopping block by the rationale that they were funded by separate payroll tax contributions. Social Security would be financed from the general revenue pool, and its benefits would thereafter have to compete with every other federal spending priority. 

We also can't help but noting that, even as a legal matter, the program does not actually have until 2037 -- 2037 is the projected insolvency date if we were to combine the Old Age and Disability trust funds. Barring legislative action to allow interfund borrowing, CBO now projects that Social Security's Disability trust fund will be exhausted by 2017. Current law, therefore, calls for a 19 percent benefit cut for all disabled workers in only 6 years; that is not an acceptable outcome.


There are different ways to look at Social Security, but no matter how you do the program must be reformed. Acting now will allow tax and spending changes to be made gradually and give beneficiaries more time to plan and adjust. Those who insist that any Social Security reform is an attempt to "balance the budget on the backs of America's seniors" or just another excuse to "slash benefits" aren't doing the program any favors, and the sooner everyone realizes this the better. Rather than fighting over the best way to view Social Security, lawmakers should start coming up with actual reforms to fix it.

Spotlight on the States: Minnesota

In this installment of our Spotlight on the States blog series, focused on Minnesota, we take a slightly different look at the state's fiscal situation. In the past this series has given brief looks at states' fiscal problems and the different ways they've gone about solving them--mostly through examining their respective budgets and new budget proposals. We thought that this recent development in Minnesota, however, deserved its own unique blog in our series.

Last month, Minnesota's Department of Revenue released a comprehensive analysis of the state’s tax expenditures. The report, titled Tax Expenditure Review Report: Bringing Tax Expenditures into the Budget Process, was done in compliance with state legislation enacted in 2010 to suggest a process for reviewing tax expenditures and improving their oversight. The report makes several recommendations to the state legislature and offers interesting insight into the purpose, benefit, and efficiency of tax expenditures.

While reading about a tax expenditure review process doesn't sound like fun, the issue is so important for responsible budgeting and Minnesota has provided a great model--so bear with us! The evaluation followed three guiding principles of tax policy: efficiency, equality, and simplicity. The information used to evaluate each tax expenditure was its purpose (many do not have a stated purpose or do not effectively meet their purpose), its impact (direct, indirect, and on the budget), and consideration of alternatives (whether another method could achieve similar results more efficiently). The report recommends an eight-year cycle of evaluations in which the highest priority tax expenditures are evaluated first. Some of the tax expenditures recommended for early review were:

  • The mortgage interest deduction
  • Charitable deductions
  • Child and dependent care (credit and exclusion)
  • Sales tax expenditures for clothing, food, and drugs and medical expenses
  • All property tax expenditures
  • All but one of the nine corporate tax expenditures that cost more than $10 million

Factors in designating a tax expenditure as high-priority included if it's difficult to administer, if it has a large annual revenue impact, if it could be easily replaced with a direct expenditure, and if it's been the subject of recent legislative proposals for modification or repeal. The report also stated that while Minnesota has a better budgeting process for tax expenditures than most states, their overall assessment of them “remains weak” and that:

"A tax system based on these three principles [efficiency, equality, and simplicity] would have far fewer tax expenditures than currently exist. Efficiency and equal treatment of equals both favor broad tax bases with low rates. Justified tax expenditures would include only tax provisions that offset a market failure or externality or that decrease the cost of tax administration by enough to offset lost efficiency or equity."

This report provides an excellent framework for evaluating tax expenditures, something that absolutely needs to be done and that we've recommended, along with many others. A recently published GAO report recommended implementing regular review of all federal tax expenditures, and the final report of the President's Fiscal Commission recommended reforming tax expenditures as well. And the Peterson-Pew Commission on Budget Reform recommended a new focus on tax expenditures in the federal budget in Getting Back in the Black.

Minnesota's fiscal responsibility in conducting this comprehensive review of tax expenditures--which cost the federal government over $1 trillion each year--should serve as a model to other states, as well as Washington. Effective tax reform that results in a fairer, more efficient, and simpler tax code is possible, and it starts with becoming as informed as possible. By examing all aspects of tax expenditures--their purpose, effectiveness, social and budgetary impacts, administrative and compliance burdens, etc--Minnesota has taken a great first step. Hopefully the federal government can show the same leadership and diligence before it's too late.

"Meet the Generations": Generation X

Meet Kate, a fictitious 41 year old Generation X member. How will our leaders’ fiscal choices affect her life? In our fifth and final installment of our “Meet the Generations” series, we look at Kate’s fiscal future, based on the two alternative futures scenarios from our recent paper “America’s Fiscal Choices at a Crossroad: the Human Side of the Fiscal Crisis”. {See also the related event and winners of the video contest “Voices of America”.)

Turning 41 this year, Gen-X member Kate is entering her most productive years. Among the most critical fiscal issues for her are those affecting family and career. Retirement issues will be more important down the line (including the retirement situation faced by her parents, who will be living longer than previous generations). As she ages, the well being of her children and grandchildren and her legacy to them will become an even higher priority. Looking back from the year 2050, when she is 80, how will Kate see the choices our leaders are making now?

Scenario One: Fiscal Gridlock. If our policymakers do not change our fiscal path, Kate and her family will be worse off from the effects of higher than normal interest rates related to national debt pressures, probably quite visible by the end of the decade. (As the economy matures, large and rising levels of national debt will increasingly compete with private investment for financial resources. Interest rates will rise more than normal as the business cycle advances and private investment will be crowded out.) Higher interest rates will hurt her job prospects and income. Her home ownership dreams will disappear as affordability declines with higher mortgage interest rates. Credit card financing will be more expensive. Education finance will be more problematic. And, over time, her standard of living will be lower than otherwise as a consequence. And then as Kate and her fellow Gen-Xers age, national fiscal pressures get worse. When she and her cohorts reach retirement age, they will no longer have full health and Social Security benefits because the trust funds will be exhausted. Her children (who she was counting on for some income support after she retired) may be hit with large taxes to fund Social Security and Medicare, as well.

Furthermore, in a world of fiscal gridlock, Kate will experience a fiscal crisis sometime in her lifetime. The fallout from a fiscal crisis will devastate her, whether she is in mid or late career. It often takes years for jobs and income to recover from these types of crises – if they ever do. Kate will forgo considerable amounts of income and savings.

Scenario Two: A Fiscal Recovery Plan. Initially, fiscal consolidation could be tough on Kate and her family, but, if done sensibly, there will increasingly be a big payoff for them. If our leaders fix our problems through a gradual, but credible fiscal recovery program, Kate will have better job opportunities and greater income gains when interest rates are lower because debt-related pressures have diminished. Her standard of living will be better over time if private investment is not displaced by massive government borrowing (and if public investment is better targeted at policies that can boost basic growth – such as education, research and development, and infrastructure, according to research). For Kate’s retirement, making changes soon to put Medicare and Social Security on unquestionably solid footing will allow her to adjust her savings plans well in advance of retirement and will eliminate the fear and uncertainty she would otherwise have about how the burden of fixing trust fund financing problems would be managed in the end.

Preventing a fiscal crisis through more gradual fiscal downsizing will mean that Kate can more easily manage and adjust to the fiscal changes needed to put our borrowing on a sustainable path. If the economy is not disrupted by a debt-related crisis, Kate’s career will not be derailed by hefty negative effects from our debt build-up (with earnings power lower and human capital lost as a result). Kate and her family will be better off.

MARKETWATCH: March 21-24, 2011

Safe haven worries that had dominated trading last week have eased so far this week – and investor appetite for greater risk rose a little. The yield on the benchmark 10 year Treasury bond rose from just above 3.25 percent on Monday to over 3.40 percent by close of business Thursday. A greater appetite for risk was indicated by record sales of corporate debt, including high yield debt (sometimes known as "junk bonds").

Still, plenty of concerns linger in the background: to what extent Treasury holdings will need to be liquidated to cover losses and reconstruction costs from Japan’s nuclear crisis (Japanese insurance companies have been the focus); what spillover there will be from the nuclear crisis to the U.S. and global economies; if oil prices will continue to rise as a result of Middle East turmoil, with the most recent focus on Libya; and if there will be effects on the U.S. from a possible new phase of the Eurozone debt crisis, with the Portuguese government falling over its austerity program and Moody’s downgrading many smaller Spanish banks.

The strength and direction of the U.S. economy has taken a back seat to these headline global risk issues, but recent data so far suggests that 1st quarter U.S. growth will be pretty solid, but not stellar. At the same time, some data and global developments have raised concerns about the inflation outlook, although price pressures are expected to be dampened by considerable excess operating capacity in the U.S. economy. The Fed has launched a new round of reverse repurchase operations (known as "reverse repos"), which is a key Fed tool for draining liquidity from the system and is seen as advanced preparation for monetary policy tightening – at some point.

Markets were surprised by the Treasury Department’s announcement that it would start selling its portfolio of agency-guaranteed (i.e. guaranteed by Fannie Mae and Freddie Mac) mortgage-backed securities. Treasury purchased these securities to stabilize the mortgage market at the height of the financial crisis and the value of the portfolio is estimated at around $142 billion. Treasury stated that it would sell around $10 billion a month over the next year, depending on actual market conditions. While there could be effects on the intermediate government securities market from an increase in supply, many expect that the impact will be small.

"Meet the Generations": Baby Boomers

Meet John, a 56-year-old fictional Baby Boomer "profiled" in the fourth installment of our "Meet the Generations" blog series, inspired by our latest paper "America's Fiscal Choices at a Crossroad: The Human Side of the Fiscal Crisis.

Because he will continue to work longer, John’s life will still be shaped by issues related to his job and income prospects. The older he gets, however, the more important macro-fiscal issues relating to his savings, pension, and health care will become. As he approaches retirement, he will increasingly struggle to maintain his standard of living while trying to build his savings. (John didn’t save enough earlier.) He is also supporting his elderly parents. (They did not save enough either.) With all of these financial pressures, John will have to work much longer than he thought in order to build the kind of future he had envisioned.

How will our leaders' fiscal choices affect John?

Fiscal Gridlock (Scenario One). If our political leaders do not change course, John will suffer through a fiscal crisis or a crisis with fiscal dimensions sometime in his life. While the timing or tipping point cannot be predicted with certainty, experts agree that at some point our creditors will refuse to finance national borrowing that is growing a lot faster than our national income. It is very possible that the crisis will occur at a time when John is quite vulnerable – when he is approaching retirement but has not quite saved enough to retire. (Experts think that the risk of a crisis has already risen.) John may be laid off suddenly as businesses go bankrupt or try to survive by shedding highly paid senior employees like him to reduce costs. This probably means he will have to draw on public safety nets more than he expected and will not be able to save what he needs to support himself and his parents in retirement.

Even if a full-blown crisis does not occur, pressures from our massive borrowing on interest rates as the economy strengthens will slow growth and investment. John’s income and savings attempts will be hurt in a weaker job market with lower growth. John’s living standards – and those of his parents - will be sharply reduced. Rising poverty for John and other Boomers as they become senior citizens will be a serious concern.

Fiscal Recovery Plan (Scenario Two). John will have higher living standards if our policymakers take sensible fiscal action sooner rather than later. Importantly, putting a fiscal recovery plan in place soon will mean that John and other Baby Boomers will likely avoid the sharp disruption and immediate economic devastation to jobs and income that usually accompany a fiscal crisis.

But, more basically, John will also be better off over time as policymakers reduce national borrowing pressures on the economy. Once initial belt-tightening effects from a fiscal recovery plan recede (probably tough on some of the oldest non-retiree Boomers), improved fundamental economic conditions will increase John’s well-being (and his family’s). If our fiscal house is put in order, interest rates will be lower than otherwise, which will mean faster growth, stronger employment and greater income prospects for John and his fellow Baby Boomers. Then, as he looks to retire, he will be able to plan more effectively if adjustments to programs like Social Security and Medicare have been made before he is in his 70s or early 80s.

John and his family (and everyone else) will also benefit from increased fiscal space, one of the key by-products of fiscal adjustment: if U.S. fiscal imbalances are reduced enough, we will have the fiscal flexibility to respond to emergencies (including natural disasters, and economic, financial or national security shocks from elsewhere) without increasing creditor risk from having too much debt.  

So Does Social Security Add to the Deficit?

In light of the recent debates over Social Security, CRFB's latest paper attempts to clarify how the program relates to the federal budget and budget deficits. Some say that Social Security is a completely independent program and contributes nothing to the budget deficit, while others argue that it is in fact the largest government program and adds to overall deficits since it spends more than it takes in. So who's correct?

We argue that both of these perspectives are correct, depending on how you view the program. Viewed as a stand alone program, dedicated revenues and trust fund assets will keep the program solvent for another 25 years, but will increase the borrowing needs going forward since Social Security essentially lent its holdings to the rest of the federal government. Viewed as part of the overall budget, Social Security can be seen as already adding to deficits today since yearly benefits already exceed dedicated revenues.

As we find in our analysis:

"No matter how you look at it, Social Security is in dire need of reform. The program’s trustees continue to warn us that changes need to be implemented as soon as possible. By acting now, we can implement changes in thoughtful ways and protect those who depend on the program the most. We can also institute tax and benefit changes gradually, giving current workers plenty of time to adjust their retirement planning decisions. Whether for the health of the budget or for its own sake, it’s time to reform Social Security."

Click here to read the full paper.

Below, CRFB President Maya MacGuineas explains the two different perspectives on the Nightly Business Report:

 

Watch the full episode. See more Nightly Business Report.

Ten Former CEA Chairs Call for "Intense Negotiations" on Long-Term Deficits

A bipartisan group of ten former chairs of the President's Council of Economic Advisors (CEA) published an op-ed in Politico today stating that the federal budget deficit "is a severe threat that calls for serious and prompt attention". In what should serve as a wake-up call to some in Washington about the seriousness of our nation's fiscal problems, the former chairs argue that continued inaction would be "irresponsible", urging lawmakers to look beyond the debate over the 2011 budget to the far bigger problem of long-run budget deficits.

The former chairs--including Martin Baily (Clinton), Martin Feldstein (Reagan), R. Glenn Hubbard (George W. Bush), Edward Lazear (George W. Bush), N. Gregory Mankiw (George W. Bush), Christina Romer (Obama), Harvey Rosen (George W. Bush), Charles Schultze (Carter), Laura Tyson (Clinton), and Murray Weidenbaum (Reagan)--call for the final report of the President's Fiscal Commission to serve as the framework for a bipartisan effort to reduce the deficit, citing the bipartisan majority of 11 out of 18 possible votes the final report received and stating:

"As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties."

"There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention."

Without action soon to address long-term deficits, population aging and health care costs will push deficits to unsustainable heights. They argue that:

"These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008."

With a letter last week from 64 Senators calling on the President to address comprehensive deficit reduction and now an op-ed from some of the most well known and respected economists in the country, momentum and pressure are certainly growing for lawmakers to start talking about our long-term fiscal challenges. We said it last week in a release praising the 64 Senators and we'll say it again, "something big is happening, and those who don't confront our fiscal situation head-on are going to be left behind."

We commend these former CEA chairs for coming together to call attention to the urgency of this issue and hope that Washington will heed their excellent advice. Congress and the Administration can no longer ignore the critical need for a comprehensive deficit-reduction plan that addresses all areas of our budget.

Click here to read the full op-ed.

 

MY VIEW: Gene Steuerle

Once again, policy-watchers and policymakers are fired up over whether Social Security needs to be fixed anytime soon. Some resort to pretty arcane debates over the trust fund to make their point. Won't it take years to exhaust the trust fund? Are the bonds in the trust fund real? Is the trust fund a fiction? Was the trust fund raided? You know, it scarcely matters. All these debates are over a tiny sliver of the Social Security System—not over where the real action is.

What does matter is that Social Security expenses are expected to rise by about 50 percent—from about 4.3 to 6.3 percentage points of GDP—from 2008 to 2030, and taxes aren't. As the baby boomers retire, higher expenses and less tax revenue mean that the national deficit will rise year after year.

Let's take a quick look at the history of Social Security expenses and income. As the figure readily shows, Social Security has always been roughly a pay-as-you-go system. There was a tiny buildup of the trust funds at the beginning when people paid into the system but beneficiaries had not become eligible. In most years, the trust fund's purpose was simply to cover potential cash flow problems if a recession or other major economic event hit. Then, in the mid-1980s, there was a slight buildup again as the large cohort of baby boomers swelled the ranks of the working population. But never have these trust funds held enough money to cover more than a tiny fraction of Social Security's obligations.

Those who say we can wait 20 years to address Social Security's solvency even though the system will soon be spending over 30 percent more than it collects in taxes have turned a blind eye to current and growing deficits. They seem to think that (1) we can count on income tax payers to raise more taxes, or we can cut other spending, or we can borrow more and pay interest to the trust funds as they move toward decline; or that (2) we can draw down assets (say, by borrowing more from China to pay off bonds in the Social Security trust fund) without consequences.

This is the mindset of a household that has saved $50,000 for retirement but has $300,000 in credit card debt and keeps charging more every year without paying down the balance. The parents in such a household plan on retiring for decades, earning less, and spending down their meager retirement savings in a few years, so they're counting on their kids to bail them out. The parents keep insisting that the assets in their "fund" were real. The kids think the retirement fund is an accounting fiction. The parents remind the kids that they'd be in a worse pickle if it weren't for the parents' retirement fund. You can see how fruitless this conversation is when the operative fact is that the household is in a big financial hole that the decline in income and increase in expenses will only deepen.

How about raiding the trust fund? Those railing against this financial sin say that the country would have been better off without running a lot of non-Social Security debt even while it was accruing a tiny pot of money temporarily in its trust fund. That's true, but then whose taxes were lower and other government benefits higher as a result? Often, the same people who cry foul that the (tiny) trust fund was raided. By that bizarre logic, the parents in our hypothetical household could claim that the kids should support them in retirement because the parents had raided their retirement fund by running up credit card debt.

So where did all the Social Security tax dollars go? Basically, to previous generations of retirees. Money in, money out. Did people get something out of their tax dollars? Yes, they did—support for their parents. Having already received that benefit, they can't really lay claim to the same money twice. They can make a case that their kids should support them, just as they supported their parents. But it's not that simple: newly retiring generations have fewer kids to support them and live many more years as retirees—21 years on average— than their parents did.

Those who would put off this debate may not have time on their side either: the Social Security problem will be fully ripe by about 2030—not 75 years from now. That's well within the lifespan of people retiring today, not to mention most workers. If only politicians could see that far ahead!

Gene Steuerle is a member of the board of directors of the Committee for a Responsible Federal Budget. He also is a senior fellow at The Urban Institute, co-director of the Urban-Brookings Tax Policy Center, and a columnist for Tax Notes Magazine.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Note: This article was originally published as a Government We Deserve column at the Urban Institute.

Debate BUILDs over Infrastructure Investment

The recent introduction of the BUILD Act to create a national infrastructure bank to help finance infrastructure improvements has started a needed debate over how to pay for such investments. Our New America Foundation colleague Jason Delisle today sheds some light on the new proposal in a commentary at e21.

The BUILD Act would create a new entity, the American Infrastructure Financing Authority (AIFA), which would issue direct loans and loan guarantees to finance projects. The purpose is to create a process that is immune from the "pork-barreling" tendencies of lawmakers and also fiscally sustainable in an era of mounting federal budget deficits and national debt. The website of Sen. John Kerry (D-MA), lead sponsor of the bill, states:

"AIFA is independent of the political process. It would fund the most important and most economically viable projects across the country, our states, and our communities. AIFA is also fiscally responsible. While AIFA will receive initial funding from the government, after that it must become self-sustaining."

Whether such an institution could truly be apolitical should be debated in another forum. The "fiscally responsible" argument is important to us and Delisle examines it in his commentary. The rationale behind the bank would be to reduce the costs of borrowing for infrastructure projects, make the loans and guarantees "self-sustaining," and leverage private money--allowing infrastructure projects to take advantage of the federal government's incredibly low interest rates. However, the bank would require all projects to compensate the government for the full cost of this subsidy from lower interest rates. As Delisle argues, this begs the question why states and municipalities would go through all this? The interest on municipal bonds is already subsidized by taxpayers since it is not subject to federal income tax.

The bank's supporters argue that even after paying for this subsidy, infrastructure projects would still be better off. Delisle questions this claim and points to federal budgeting rules that make it look like taxpayers are better off too. He explains that we really can't have it both ways--taxpayers would still bear some credit risk that they are not reimbursed for due to a loophole in federal budgeting rules.

"The Federal Credit Reform Act, which details how the federal government must calculate the costs and risks that federal loan programs impose on taxpayers (including loans made under the BUILD Act), systematically excludes a full measure of the riskiness of these loans. That is, by discounting expected loan payments at risk-free U.S. Treasury interest rates, the rules ignore the fact that loan performance is unpredictable over time and that defaults will be more frequent and costly in bad economic climates. Private lenders charge borrowers a premium to take on that kind of risk and uncertainty, called “market risk,” but government budget rules do not."

Delisle concludes, “In short, the program isn’t self-sustaining because taxpayers are bearing a risk for which they have not been compensated.” We need to have a serious debate about how to modernize our aging infrastructure in a fiscally responsible way. In having that discussion we must recognize that there will be no free lunch, and budget accordingly.

"Meet the Generations": Seniors

Meet Edna, a 75-year-old fictitious senior citizen. In the third installment of our "Meet the Generations" series, we take a look how policymakers' action (or inaction) could affect her life, as outlined in CRFB's March 10 paper "America's Fiscal Choices at a Crossroad: The Human Side of the Fiscal Crisis".

Edna is retired and relies on the fixed income from her savings and pensions. She is very vulnerable to deteriorating economic conditions (including inflation) and reductions in income. Services (especially health-related) and personal security issues have become increasingly important. The well-being of her children and grandchildren and her legacy to them are crucial to her.

How will our leaders' fiscal choices affect Edna?

Fiscal Gridlock (Scenario One). Two programs are essential to Edna’s life: Social Security and Medicare. While she will probably be able to continue drawing on their resources into the future, these programs are not fully sustainable for seniors down the road without major changes. If the difficult decisions are delayed, Edna’s children and grandchildren will be worse off as a result of the amount of adjustment required (which could include reducing benefits sharply, raising taxes on the working age population and/or shifting funds from other government programs). The burden of the adjustment that will be passed on to Edna’s family (the successor generations) only increases the longer policymakers delay putting in place a plan to gradually phase in any policy changes.

Fiscal gridlock will also have immediate costs for Edna. National debt-related pressures on the economy will reduce the value of assets she relies on for her income, particularly if they contribute to a fiscal crisis. Plus, if our policymakers are tempted to inflate their way out of our debt problems (i.e. put pressure on the Federal Reserve to accommodate higher inflation, which lowers the inflation-adjusted value of the debt we are repaying), Edna will see the value of her savings eroded. (Inflation is Enemy No. 1 for anyone on a fixed income.) In the end, any fiscal crisis - whether gradual or sudden - will probably require austerity measures which could significantly affect programs Edna relies on (including programs related to pandemics, food borne illness, crime prevention, and public transportation).

Adopt a Fiscal Recovery Plan (Scenario Two). Edna and her family will be better off with a stronger economy - which is what we’ll see when the upward pressure on interest rates from fiscal gridlock subsides. In a stronger economy, Edna’s children will not be as likely to ask her for financial help (or move her in with them), and the value of her assets will probably be higher. Another plus is that if our policymakers better manage our fiscal future, the likelihood of a fiscal crisis will be diminished. For Edna, her children and her grandchildren, it is always better to avoid a crisis and to manage change gradually. Most importantly however, fixing our fiscal problems gradually but comprehensively could help ease the massive income transfer from the younger generations to senior citizens that would otherwise take place. By putting in place a gradual and balanced plan to fix the Social Security and Medicare trust fund financing problems, Edna’s family and seniors that come after her will be able to plan for retirement well in advance and on balance will be better off. For Edna and her family, it’s a matter of living standards - and her legacy.

Ruth Marcus: “A Debt Crisis That Requires Compassion”

In her recent column, Ruth Marcus, of The Washington Post declared:

“Don’t call me a deficit hawk. Call me a deficit panda.”

Seeking a cuddlier image for the mantle of fiscal responsibility, she continues:

“I would argue that it is possible to be a deficit panda: to simultaneously worry about the debt and believe in an active and compassionate role for government. In fact, I would argue that worrying about the debt is required of those who believe in such a government role."

Ruth points out that failing to address our national debt will eventually hurt everyone – but especially the most vulnerable:

"This point would seem obvious, except that too often the fiscal policy debate seems to be divided between grinch-like deficit hawks and caring big spenders. The progressive case for worrying about the debt too often goes unmade, and the players forget: Fiscal responsibility is, at bottom, moral responsibility. Fiscal crises are ultimately human crises."

But she does not forget the average American. Ruth looks at how “John”, a 56 year old Baby Boomer, and Nick, a 24 year old recent college graduate and Millennial, will be worse off if our debt problems are not fixed.

Nick and John are some of the fictitious characters we created in our recent paper, America's Fiscal Choices at a Crossroad: the Human Side of the Fiscal Crisis, to illustrate the benefits from tackling our fiscal problems for people – and the high costs for them if we do not. (For more details on Nick, John, Edna, Keisha and Kate, see our “Meet the Generation” blog series continuing through this week.)

Ruth moderated CRFB's Human Side of the Fiscal Crisis event earlier this month. The event featured conversations among top fiscal experts and people representing many of the major voices involved in our budget battles. View the event and the many presentations here.

Click here to read the full column.

 

Fiscal Power Rankings

Students at Stanford University, under the guidance of Comeback America Initiative (CAI) CEO and CRFB board member David Walker, have developed a Sovereign Fiscal Responsibility Index (SFRI) in an attempt to compare the quality of fiscal policy across different countries. The study, unsurpringly, does not contain good news for the US.

The SFRI uses three broad categories of criteria: fiscal space, fiscal path, and fiscal governance. In other words, how much room a country has to borrow, where the debt is heading, and how well the country can manage its debt. The first two criteria are relatively straightforward, but their assessment of fiscal governance includes a huge variety of measures, such as the presence of an independent forecasting body, the enforceability of fiscal rules, and the transparency of a country's budget. 

The study compares 34 countries, consisting of mostly OECD countries and the BRICs (Brazil, Russia, India, and China). On the total measure of fiscal responsibility, the U.S. comes in 28th. Ouch.

We have serious problems in all three areas. Most alarmingly, they predict that the U.S. would reach its capacity to borrow in sixteen years--in the year 2027, based on an IMF estimation of how much debt the U.S. can borrow before the markets make the debt unsustainable. Obviously, reasonable people will disagree as to exactly what this number is. Nevertheless, on all three measures, we rank in the neighborhood of some of the most fiscally troubled countries in the study--including Italy, Portugal, and Ireland.

The U.S. is almost at the "danger" line of about 50 percent fiscal space discussed in the report. They chose this line based on the fact that many countries that are below it are under the most "fiscal scrutiny." About six countries are below this point--including Japan, Belgium, Ireland, Portugal, Italy, Iceland, and Greece. This line is more an observation about where the countries in the most serious trouble are.

One interesting note they include is that if the U.S. enacts a fiscal plan as ambitious as the Fiscal Commission's proposal, the U.S. would jump to eighth in the rankings--since it would not reach its debt capacity anytime in the foreseeable future and process reforms in the proposal would significantly improve fiscal governance.

 

The SFRI is just one way to measure the quality of a country's fiscal responsibility and people may disagree on the metrics used, but it is an indication of where we are compared to other advanced and emerging countries. If we can develop a fiscal plan, our outlook would look a lot brighter.