May 2011

The Trustees Report Is Here

With the release of the 2011 OASDI Trustees Report, there are a lot of numbers to digest, not to mention a few hundred pages to read (if you actually want to go through the whole thing). Fortunately, for our readers, CRFB has released its analysis of the report, which breaks down the important points.

The financial outlook of Social Security has worsened since last year's report. The 75-year actuarial imbalance stands at 0.8 percent of GDP (2.22 percent of taxable payroll), a notable drop-off compared to the 0.7 percent of GDP (1.92 percent of taxable payroll) shortfall projected last year (read our analysis for an explanation of why shortfalls are now projected to be larger). In addition, cash flow deficits from 2012-2021 for the program are now about $490 billion, a $110 billion increase from last year. Not only that, but the few years of surpluses that were projected last year from 2012-2014 have been wiped out; thus, unless the Trustees' economic and demographic assumptions don't pan out roughly as expected, we are in permanent deficit territory.

The date of OASDI trust fund exhaustion has been moved up one year to 2036, at which time benefits would have to be cut 23 percent to match revenue. Spending and revenue paths over the long-term have not changed much from previous years.

Spending currently sits at 4.9 percent of GDP, but it will increase to 6.2 percent by 2035. After that, spending will decline slightly and stabilize around 6 percent for the rest of the 75-year outlook. Revenue is projected to be 4.6 percent of GDP this year and it will peak at 4.9 percent around 2020. After that, it will decline slightly to 4.6 percent by the end of the 75-year window. Of course, the takeaway from this report is that delaying action on Social Security will only make the problem harder to solve.

The longer we put off making changes to the program, the larger these actuarial shortfalls will look and the larger the changes will need to be. It's time to fix Social Security now.

Click here to read the full paper.

Rep. Quigley Gets Really Specific

Building on a report he made last year on budget process reform, Rep. Mike Quigley (D-IL) has taken the next step in his crusade to fix the budget. The sequel is a report with a comprehensive list of 60 recommendations on how to help put our budget on a more sustainable path. These recommendations run the gamut of options, covering most areas of the budget. He also provides additional options that he does not specifically endorse but that could be used to reduce the deficit.

The full list, if implemented, would save a total of about $1.7 trillion over ten years (as estimated by his office), with about 40 percent coming from reducing tax expenditures and 60 percent coming from defense and health care spending cuts. Social Security is also made solvent over 75 years but those savings are not included in the total, and domestic discretionary spending reform is mentioned but no specific reforms were embraced.

The table below presents some of the highlights of Rep. Quigley's plan.

Select Recommendations from Rep. Mike Quigley
  Ten-Year Savings (Billions)
Health Care
Set Minimum Rebate for Medicare Part D $112*
Strengthen IPAB $50
Enroll Dual Eligibles in Medicaid Managed Care $12
Other $53
Subtotal, Health Care $277
Reduce Troops in Afghanistan and Iraq $147
Reduce Military Overhead (Gates Plan) $100
Reduce R&D Costs $80
Other $301
Subtotal, Defense $628
Non-Defense Discretionary
Reforms to Domestic Discretionary Spending, in Particular by Reducing Waste, Fraud, and Abuse N/A
Tax Expenditures
Limit Itemized Deductions to 28 Percent $321
Implement President's International Tax Reforms $129
Eliminate Ethanol Subsidies $62
Other $225
Subtotal, Tax Expenditures $737
Farm Subsidy Changes $94
Total, Excluding Social Security $1,736

*Estimate based on CBO Budget Options report.

Rep. Quigley's Social Security plan represents a balanced approach that is very similar to the plan presented by the Fiscal Commission. He raises the amount of wages subject to the payroll tax to 90 percent, raises the retirement age to 68, switches to the chained CPI, and makes the benefit formula more progressive. Looking at numbers from the Social Security Administration, it looks very likely that these changes would at least ensure 75-year solvency.

In addition, Rep. Quigley also details some reductions to farm subsidies that would save roughly $100 billion over ten years. Furthermore, he proposes having a debt-to-GDP budget cap, but he does not specify at what level or over what timeframe it would occur. Presumably, whatever the difference is between the combined impact of these recommendations and the debt target would be made up in domestic spending, since the cap was offered up in the section on non-defense discretionary spending.

Rep. Quigley has done a great job of going into great detail with this list of recommendations. While it doesn't look like the identified savings would stabilize the debt this decade, it's a big step in the right direction. By looking for additional savings from remaining areas of the budget, including domestic discretionary spending and other mandatory spending, this proposal could join the ranks of other major fiscal plans that would put the budget on a sustainable path.


Frank Wolf op-ed in WaPo

Congressman Frank Wolf (R-VA) has an op-ed in the Washington Post today in which he writes about just how serious our nation's fiscal problems are and the kind of leadership necessary to bring us back from the brink, while praising the Fiscal Commission for achieving bipartisan support for its outline to reduce the debt and applauding the efforts of the "Gang of Six" in the Senate for trying to tackle the politics and the policy head on.

Congressman Wolf writes:

"I applaud the “Gang of Six” — Sens. Saxby Chambliss, my Virginia colleague Mark Warner, Tom Coburn, Dick Durbin, Mike Crapo and Conrad, chairman of the Budget Committee — for taking up the mantle to put the Bowles-Simpson concept into a legislative plan. They recognize that addressing the debt and the deficit isn’t a simple exercise in rooting out waste, fraud and abuse; eliminating earmarks; and reining in discretionary spending. To be sure, those are important reforms, but alone they won’t come close to solving the crisis. The senators agree that, like the SAFE process envisioned, and as painful as it may be, everything — including what I call tax earmarks for companies and other special interests — must be on the table.

It is disappointing that some have attacked these senators for daring to engage in a discussion that has tax reform as an option. Americans for Tax Reform, led by Grover Norquist, has engaged in bullying tactics designed specifically to stop Coburn’s call for eliminating the ethanol subsidy. The tax code will never be overhauled if any attempt to eliminate a tax expenditure — spending through the tax code — is equated with a tax increase.

Look, too, at the $14.2 billion in profits posted by General Electric, of which $5.1 billion came from operations within the United States. Not only did GE pay no federal taxes, it also claimed a tax benefit of $3.2 billion, initially designed as short-term tax breaks to spur economic growth. Once a tax cut is enacted, it is nearly impossible to eliminate (see the ethanol subsidy). If these are not examples of why everything must be included in our budget discussions, I don’t know what is.

This discussion also demands presidential leadership. Before his speech at George Washington University last month, the president barely acknowledged the work of his own deficit commission. I was disappointed that he failed to offer specific solutions and seemed more interested in staking out political positions than finding common ground. He cannot continue to bob and weave as the financial storm closes in.

This is an American issue, not a Republican or Democratic one. We have been warned. There is never an easy time to make hard decisions, but the economic reality is that the financial markets could soon dictate drastic options if we don’t have the fortitude to look at everything and agree on a plan to ensure a prosperous future for our children and grandchildren."

Click here to read Congressman Wolf's full piece.

There's a New Cap in Town

Yesterday, Rep. Connie Mack (R-FL) introduced deficit reduction legislation -- the One Percent Spending Reduction Act -- that is based on the "One Cent Solution." The proposal is a simple one: cut non-interest spending by one percent each year for six years starting in 2012. After that time period, spending would be capped at 18 percent of GDP (it would be 18.3 percent of GDP in 2017). Basically, one could think of it as an amped-up version of the Corker-McCaskill spending cap (which calls for capping all spending at 20.6 percent of GDP by the end of the decade), except that this proposal would provide a glide path down to 18 percent.

It should be noted that the One Cent Solution would cut nominal non-interest spending levels, not spending as a percent of GDP. Thus, from 2011 through 2017, non-interest spending would fall from $3.38 trillion to $3.18 trillion. Overall spending inches up from $3.59 trillion to $3.67 trillion, although this could vary based on the baseline revenue used, which affects spending on interest. If all of the 2001/2003 tax cuts were extended, spending would rise to $3.74 trillion by 2017.

Assuming that spending is exactly 18 percent of GDP from 2018-2021, the spending cuts from the proposal (even with all the tax cuts extended, which increases interest costs relative to current law) would be substantial: $7.5 trillion according to the One Cent Solution's website and $7.6 trillion relative to current law, according to our calculations. Mack also claims that the plan would balance the budget by 2019, which our estimates also seem to confirm.

The graph below shows what primary (non-interest) spending would be under the plan and what total spending would be if the tax cuts were extended. These numbers are compared with CBO's March 2011 current law numbers.

Also, we compare spending in Mack's plan (assuming the tax cuts are extended) to the President's budget as a percent of GDP.

In addition, the One Cent Solution would come with a trigger that would make across-the-board spending cuts if the one percent reduction was not met. Thus, not only would spending be capped at 18 percent of GDP in 2018 and beyond, but the one percent reductions would also serve as overall spending caps. There are no more specifics provided about the sequestration, so the exact mechanics are not clear.

The critical challenge facing lawmakers is to agree to a bipartisan fiscal plan with broad support. Spending caps can be an essential element to controlling future deficits and in attracting bipartisan support (see the Fiscal Commission's plan) and will likely play a part in any final consensus between lawmakers. While Rep. Mack's proposal would certainly reduce deficits and debt, it's unclear if it would be able to garner bipartisan support.

Deputy Defense Secretary Says Defense Savings Must Be Balanced, Gradual

As part of a larger deficit-reduction effort, last month President Obama proposed cutting $400 billion from projected defense spending by 2023. Speaking at a conference in New York yesterday, Deputy Defense Secretary William Lynn said that the Department of Defense (DoD) must now find ways to cut spending without affecting overall defense capability and effectiveness.

Calling attention to the urgency of our fiscal challenges, Deputy Secretary Lynn stated:

"This is in fact a matter of national security.  Our security begins with a strong economy.  Our ability to exert global influence and protect our interests abroad will be threatened if we do not reduce the deficit and keep federal debt within sustainable bounds.  No great power can project military force in a sustained manner without the underpinnings of a sound economy.  Our economy is truly the wellspring of our military might.  And it is reeling from an overall imbalance between revenues and expenditures and the expenses of a decade of conflict.  With deficits approaching 10% of the economy, austerity measures are now required to ensure its long-term health."

He went on to reference previous military drawdowns--including the periods after World War II, the conflicts in Korea and Vietnam, and the end of the Cold War--and said that US military capability had "suffered a disproportionate loss" as a result of each of those transitions in defense spending. Learning from these experiences, he said, could help DoD avoid making the same mistakes. Specifically, Deputy Secretary Lynn offered four lessons to be gained from studying these historical examples:

  1. The hardest decisions have to be made early
  2. It will be impossible to generate the necessary savings from efficiencies alone
  3. Spending reductions should be balanced and not focused on a single area
  4. Spending cuts should not be made too quickly, especially in core mission areas.

We applaud Deputy Secretary Lynn for laying out such a balanced and thoughtful approach to generating savings within DoD, and for accepting that the defense budget will have to be part of the solution in order to meaningfully improve our nation's fiscal outlook. As he said:

“The defense budget alone cannot solve our deficit crisis. But it’s hard to envision an overall solution -- either economically or politically -- that does not include some contribution from the 20 percent of government spending that goes toward defense.”


Click here for the full text of Lynn’s remarks.

Raising the Retirement Age Still Is a Good Idea

Update: Chuck Blahous joined the debate today in a piece over at e21, setting the facts straight on longevity increases, the retirement age, and how exactly the Fiscal Commission's plan would affect retirement benefits.

Several months ago, CRFB responded to a growing chorus of voices who were arguing against raising the retirement age. Well, it seems like we’re back at it again in support of raising the retirement age (click here to read the original post from September).

The blogosphere is alive with another round of attacks on CRFB board member and Fiscal Commission co-chair Alan Simpson for speaking out about the need for Social Security reform regarding changes in life expectancy. The current line of criticism is based on statements he has made regarding changes in life expectancy since Social Security was created, with some critics going so far as to suggest that his use of statistics they don’t like should disqualify him from being part of the discussion regarding Social Security reform.

In his comments, Simpson stated that average life expectancy was when 63 in 1940 and has increased to over 77 now. None of his critics actually dispute that statement, because they are factually accurate. Rather, he is being attacked because he is not using the measure of life expectancy that his critics prefer. They argue that instead of looking at average life expectancy at birth, which is affected by children who die in infancy, the appropriate measure is to look at life expectancy at age 65. But that measure has drawbacks when discussing Social Security as well since it does not account for the many adults who did not make it to retirement.

As the Social Security Administration historian has suggested “a more appropriate measure is probably life expectancy after attainment of adulthood.” Social Security was created as a social insurance program, to insure against the risk that one would outlive his or her savings. In 1940, less than 60 percent of the population survived from age 21 to age 65, meaning that even when infant mortality is removed from the equation, many adults never made it to the retirement age. Today, roughly 80 percent of the population survives from age 21 to 65. This is an important point that is missed by only looking at life expectancy at age 65.

The increase in longevity has been a great accomplishment of modern society, and is in no way the problem. The point that Simpson was making is that Social Security has not kept up with demographic changes since the program was created. Reforms to strengthen Social Security should take these demographic changes into account.

And whether you look at life expectancy at birth, after attaining adulthood, or at age sixty five, the fundamental conclusion remains the same – life expectancy has increased much faster than the normal retirement age for Social Security, resulting in a greater proportion of society receiving benefits, not to mention more people receiving benefits for a longer period of time than was the case when Social Security was created. Simpson did not suggest that this meant the creators of Social Security didn’t expect anybody to collect benefits when it was created, as some have suggested.

This point remains true even using his critics preferred approach of looking at life expectancy at age 65. The average life expectancy of a male turning 65 in 1940 was 12.7 years, while a male turning 65 today will on average live another 18.1 years (age 83.1). That is an increase of more than 40% in life expectancy at age 65 from 1940 until now. Put another way, the average man claiming benefits at the Normal Retirement Age in 1940 would receive benefits for less than 13 years, while the average man claiming benefits at the Normal Retirement Age of 66 today will receive benefits for over 17 years.

The increased number of years the average worker will receive benefits is even more pronounced when using life expectancy at age 20. Life expectancy at age 20 has increased by about 9 years for men and 10 years for women from 1940 compared to recent years. This means that even with the NRA increase under the Fiscal Commission plan, the average twenty year old a male will receive benefits for six more years than was the case in 1940 and the average twenty year old female would receive benefits for seven more years.

Life Expectancy At Birth At Age 20 At Age 65
Men Women Men Women Men Women
1940 61 66 67 71 77 78
2006 75 80 76 81 82 85
2050 (Projected) 80 84 n/a n/a 85 87


In light of continued increasing longevity, it only makes sense that individuals would work longer. As we’ve noted before, in addition to the fiscal benefits, working longer is probably the single best thing people can do for their retirement security. Staying in the workforce allows workers to save more money before retiring and go without wages for a shorter period of time.

There is a legitimate concern that some individuals may be physically unable to work longer. But that still remains an issue whether we raise the retirement age or not. We are better off providing more targeted relief rather than maintaining unaffordable benefits for 100 percent of the population in order to protect the 20 percent who can’t work longer. The Fiscal Commission provided this through a “hardship exemption”, while others have suggested using the disability program, supplemental security income (SSI), or through other means.

It is also worth noting that as life expectancy has gone up, average age of retirement has continued to fall. As Chuck Blahous, one of the Social Security Public Trustees, has noted, “the empirical evidence is clear that a physical inability to work is not the sole or even the primary determinant of workforce participation rates for those in their 60s.” In 1955, before the lower early eligibility age of 62 was established, 57 percent of American males aged 65-69 were in paid employment. By 2007 this had declined to 35 percent. Does anyone believe that American men are working in more physically demanding jobs or in worse health now than they were in 1955?



Finally, there are concerns that raising the retirement age would be regressive and unfair. Not so. When looking at the entire Social Security system, the Urban Institute actually found that raising the NRA is progressive showing that “benefit reductions from an increase in the [NRA] would increase with lifetime earnings.”

Benefit Reductions by Quintile in 2050 (percent relative to scheduled benefits)

Raising the retirement age is a broadly supported policy change which would not only improve Social Security’s finances, but also encourage economic growth and lead to higher income tax revenues. It has been endorsed by the Fiscal Commission, the Academy of Actuaries, Third Way, Speaker of the House John Boehner, Minority Whip Steny Hoyer, and a long list of other people with Social Security plans. The increase in Simpson-Bowles Fiscal Commission is, if anything, too modest, increasing the retirement age at a slower rate than life expectancy is expected to increase – lifting it only two years over the next 75.

Let’s stop fighting over semantics and start enacting policies to put our country on a sustainable path.

Between the ‘Line’s: Meetings, Plans, Halfsies and One Cent

No Deficit of Talk – At least there no longer is a deficit of discussion when it comes to our fiscal situation. House Speaker John Boehner (R-OH) gave a major address Monday night to the Economic Club of New York where he said that increasing the statutory debt limit should be accompanied by spending cuts greater than the amount of the debt limit increase. Also, the group of debt reduction negotiators led by Vice President Biden continued their talks Tuesday with their second meeting and scheduled a third for Thursday. And President Obama met with Democratic senators on the topic Wednesday and will meet with their Republican counterparts Thursday. Meanwhile the Gang of Six senators continues its work on a comprehensive fiscal plan and a bipartisan group of nine former members of Congress organized by the Concord Coalition issued a statement supporting their work, saying: “No other group of current lawmakers has taken it upon themselves to break the dynamic of gridlock and set the nation on a more hopeful and sustainable fiscal path.”

Ideas Proliferate – The Heritage Foundation on Tuesday unveiled a debt reduction plan that seeks to balance the budget in ten years and significantly reduce the national debt by substantially cutting spending. Entitlements and farm subsidies would see fundamental changes and reductions and defense spending would be cut as well. The tax code would be reformed without increasing revenue by eliminating most tax expenditures and switching to a flat tax. Sen. Pat Toomey also released a budget plan that seeks to balance the budget by 2020.

Mack Puts in His One Cent Worth – On Wednesday Rep. Connie Mack (R-FL) jumped into the debt reduction debate when he introduced the One Percent Spending Reduction Act, which seeks to balance the budget by 2019 with a one percent reduction in total spending (discretionary and mandatory) each year through 2017, with a cap limiting annual spending to 18 percent of GDP starting in 2018. If Congress and the White House cannot agree on spending reductions to reach the target in any given year, across-the-board cuts would be triggered. The bill is based on the One Cent Solution, a grassroots campaign that is building support across the country.

Deficit of Consensus Persists – The left (Social Security) and the right (taxes) continue to insist that major pieces of the budget remain off the table. The intensified talk and surge in plans are important, but it is time for policymakers to start making the tough decisions and negotiate with everything on the table in order to achieve an effective solution that can be adopted.

Many on Wall Street Say Spending Cuts Alone Won’t Cut It Reuters reports that many of the Wall Street fund managers and economists it surveyed said that relying on spending cuts alone to reduce the debt would not be enough, calling for a middle path that includes revenue. Any plan addressing the debt will need to be credible in the eyes of investors and markets.

Conrad Goes Halfsies with Budget – Senate Budget Committee Chair Kent Conrad (D-ND) is circulating a draft FY 2012 budget resolution among his caucus that seeks to reduce the deficit by $4 trillion over ten years by relying on an even mix of spending cuts and tax increases. One of the revenue measures reportedly is a 3 percent surtax on millionaires. The proposal contrasts sharply with the budget blueprint crafted by House Budget Committee Chair Paul Ryan (R-WI) and passed by that chamber, which does not call for any tax increases. The plan that the Gang of Six is working on, which is based on the White House Fiscal Commission proposal of a 3-to-1 ratio of spending reductions (including interest payments) and revenue increases, would land firmly in the middle of the House and Senate plans. You can compare plans that have been released so far using CRFB's chart.

House Moves Forward with Appropriations – The House is moving forward with the FY 2012 appropriations process. On Wednesday the House Appropriations Committee released its 302(b) allocations, which are the limits for each subcommittee in drafting their spending bills. The numbers are based on the total of $1.019 trillion approved by the House in its FY 2012 budget resolution. The committee also released the schedule for each subcommittee and the full committee to approve of each of the 12 spending bills, with the goal of concluding the process by early August.

Pataki Courts Budget Lackeys – Former New York Governor George Pataki (R) is leading a new group, No American Debt, that “seeks to advance the national dialogue about America’s debt crisis.” It promises a 50 state campaign to raise awareness about the long-term consequences of our national debt and promote solutions from policymakers.

Link Between Social Security and Deficit Explored – A Senate Finance Committee hearing on Tuesday examined the role of Social Security reform in addressing the federal budget deficit. Though all agreed that changes must be made to strengthen its long-term finances, the witnesses were split over whether Social Security reform should be undertaken in conjunction with deficit reduction. CRFB addressed the topic in a recent paper, essentially saying that both views of Social Security – as independent from the budget and as part of the budget – are correct. The paper goes on to argue that either way you look at it, Social Security needs reform and the sooner the better.

Senators Duplicate Effort to Curb Government Duplication – Senators Mark Warner (D-VA) and Tom Coburn (R-OK) today introduced legislation to eliminate, consolidate or streamline duplicative federal programs. The bill is in response to a recent GAO study that indentified widespread overlap of programs in the federal government. The bill will save at least $5 billion. The Senate approved the proposal last month as an amendment to a small business bill, but because the underlying measure has been pulled from consideration, the senators are putting forth the bill as stand-alone legislation.

Apple of My CPI – A new paper from the Moment of Truth Project examines a technical change to the way inflation is measured that can reduce the deficit by some $300 billion over ten years. The paper proposes switching from the traditional consumer price index (CPI) that is used to index provisions of the budget and tax code to a chained CPI that accounts for “upper level substitution bias” and, thus, does not overstate inflation like the current index does. The paper explains it this way:

For example, if consumers respond to the price increase for Granny Smith apples by buying more Red Delicious apples instead (lower level substitution bias – changes within categories), this is accounted for in the current CPI. But if consumers respond to the price of Granny Smith apples increasing by buying less apples altogether and purchasing more oranges instead (upper level substitution bias – changes between categories), this is not accounted for.

It's Time to Measure Inflation Correctly

Today, the Moment of Truth project released a paper outlining the case for indexing federal programs to a more accurate measure of inflation, the chained CPI. Currently, many parts of the federal government -- including parts the tax code, Social Security, and many other programs -- are indexed for changes in either the CPI-U or CPI-W -- even though most economists believe these measures actually overstate inflation.

The paper describes the principal flaw of these measures in what is known as upper-level substitution bias. Because consumers often buy less of a product when it becomes more expensive and more of another as a substitute, consumers do not face the full brunt of the price changes that are recorded in the current CPIs. The chained CPI would better account for the ability of consumers to substitute goods between categories of goods, such as between apples and oranges. Making this technical fix would save roughly $300 billion over ten years (including interest) from all areas of the budget.

Budgetary Savings for Chained CPI by Category (billions)
  2012-2016 2012-2021
Social Security $27 $112
Other COLAs $8 $33
Other Spending* $3 $23
Tax Code $21 $87
Subtotal $60 $255
Interest $4 $44
Total $64 $299

*Excludes impact on Medicaid and health subsidies.

If lawmakers can't agree to a technical fix like switching to the chained CPI, there's little hope that they can agree to larger changes to our health care programs, tax system, Social Security, and military before markets force those changes on us. As the authors state in the paper:

"Addressing our fiscal challenges will require many tough choices and policy changes - but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment"

Click here to read the full paper.


Heritage Foundation Unveils New Debt-Reduction Plan

This morning, The Heritage Foundation released a comprehensive fiscal plan aimed at reducing the federal budget deficit by significantly cutting spending and reducing the overall size of government. The proposal, Saving the American Dream, balances the budget within ten years, limits spending to 18.5 percent of GDP, and reduces debt to 30 percent of GDP in 25 years. The plan would dramatically reduce federal spending, signficantly reform entitlement programs, and overhaul the existing US tax code.

See table below for highlights of the proposal.

Social Security
Raises the normal retirement age and early eligibility age to 68 and 65 respectively, then indexes both to life expectancy
Gradually transitions to one flat benefit indexed to wage growth
Gradually reduces or eliminates benefits for higher earners
Switches to chained CPI to more accurately measure inflation
Implements a special tax deduction for those who work past the normal retirement age
Implements optional private retirement savings accounts starting in 2014
Health Care
Repeals health care reform legislation
Transforms Medicare into a premium-support program (though an individual can choose to use their subsidy to purchase traditional Medicare)
Enacts a permanent "doc fix"
Caps total Medicare spending, indexed to inflation and Medicare population growth
Eliminates tax exclusion for employer-sponsored health care and replaces with a non-refundable credit
Block-grants Medicaid and caps at 2007 levels starting in 2014, adjusted for medical inflation thereafter
Tax Reform
Replaces income and corporate tax systems with a single flat tax
Eliminates tax expenditures except the mortgage interest deduction, charitable contribution deduction, and higher education expenses deduction
Returns most non-defense discretionary spending to 2008 levels
Reduces and reforms federal education and anti-poverty spending
Reduces defense spending from approximately 5 percent of GDP to 4 percent and keeps it there
Replaces farm subsidies with Farmer Savings Accounts (tax-deductible IRA style accounts)
Elimates federal spending on local job training, justice, environmental, or community and economic development programs


The proposal also implements caps on total federal spending at 18.5 percent of GDP, as well as requires Congress to publish estimates of projected 75 year costs of all policy proposals and funding levels for federal programs.

CRFB applauds Heritage for proposing a specific plan that would stabilize and reduce our debt. We hope that more organizations from across the political spectrum will follow their example and offers substantial fiscal plans as well.

WATCH: Senate Finance Committee Hearing 'Perspectives on Deficit Reduction: Social Security'

At 10:00am today, the Senate Finance Committee will hold a hearing on Social Security reform titled "Perspectives on Deficit Reduction: Social Security." Witnesses will include James Roosevelt, Jr. from Tufts Health Plan, Chuck Blahous from the Hoover Institute, Nancy Altman of the Pension Rights Campaign and the Strengthen Social Security Campaign, and Alex Brill from the American Enterprise Institute.

Click here to watch the hearing's live webcast through the Finance Committee's website.

Boehner to Call for Deep Spending Cuts to Offset Debt Limit Increase

According to a recent article in Politico, Speaker of the House John Boehner will call for spending cuts that are "greater than the accompanying increase in debt authority the president is given" to be attached to any increase in the debt limit. According to Treasury estimates, Rep. Boehner's plan would require $2 trillion in cuts in order to raise the debt ceiling through 2012.

Rep. Boehner will reportedly lay out this approach during a speech tonight at the Economic Club in New York. As the article states:

That fact that Boehner is taking his case directly to Wall Street is significant — the Republican leader clearly wants to send a message to the markets that he’s got a strong plan for a debt limit package. But the speech to the financial industry has quickly become a political issue in Washington. Sen. Charles E. Schumer (D-N.Y.) earlier Monday said Boehner should use the appearance to give assurances that Congress will, indeed, increase the debt limit. Boehner is set to say that raising the debt ceiling “without simultaneously taking dramatic steps to reduce spending and reform the budget process” would be “more irresponsible” than allowing the nation to default on its debt.

CRFB has noted that the debt ceiling debate offers lawmakers an opportunity to discuss our unsustainable path and solutions to start fixing the problem, including deficit-reducing policies and budget process improvements (see Responsible Approaches to Increasing the Debt Limit and Biden Talks Must Move Swiftly and Produce Results). But we have also warned against waiting until the last minute to approve such an increase in the debt ceiling. As CRFB president Maya MacGuineas stated in a recent press release about the ongoing budget talks led by Vice President Biden, "The purpose of these discussions should be to agree on acceptable measures to attach to a debt limit increase in a timely manner. One of the main objectives must be to avoid an eleventh hour shutdown."

Click here to read the full Politico article.

‘Line’ Items: May Flowers Edition

What Will Bloom This Month? – In April we were showered with fiscal policy developments: namely, a last-minute FY 2011 budget deal; a deluge of budget plans from across the political spectrum (see here, here, here and here ); House passage of a FY 2012 budget resolution; a major fiscal policy speech from President Obama along with a new fiscal framework; and a steady stream of budget process ideas. What sort of May flowers will these April showers bring? A deal to raise the debt limit? A bipartisan, comprehensive fiscal plan?

Biden Hopes to Cultivate a Debt Deal – Vice President Biden on Thursday chaired the first meeting of the task force of lawmakers called by President Obama to discuss debt reduction. The first priority of the group is to reach an agreement on raising the statutory debt ceiling. While the initial meeting was devoted to each side staking out its position, this week negotiators will dig into the more difficult task of finding common ground. CRFB offered ideas for responsibly raising the debt limit in a recent paper. There is growing consensus that a deal will include some budget cuts and some sort of process to ensure further deficit savings. CQ Weekly (subscription required) examined the emergence of budget enforcement such as debt triggers as part of a deal, as well as their mixed record of success and compared recent plans. The Peterson-Pew Commission on Budget Reform recently offered some timely recommendations for making triggers effective. For further reading, so also CRFB’s statement on the need for a timely deal with, at least, debt targets and triggers and a “down payment” of specific savings.

Senate Budget Committee to Sprout Resolution? – Senate Budget Committee Chair Kent Conrad (D-ND) plans to unveil his mark of a FY 2012 budget resolution this week, with a committee mark-up possible later in the week. The plan seeks about $4 trillion in deficit savings over ten years and pays for the Medicare "doc fix."

Toomey Too – Sen. Pat Toomey (R-PA) will plant his own fiscal seed this week, releasing a FY 2012 budget proposal on Tuesday. It reportedly will balance the budget in nine years.

House Appropriators Set to Unveil 302(b) Allocations – Where there are flowers, you can expect bees, or in this case “b”s, as in 302(b) allocations. The House Appropriations Committee plans to release the top line spending levels for each of the 12 FY 2012 spending bills this week. The budget resolution passed by the House last month caps FY 2012 discretionary spending at $1.019 trillion. The allocations will divide that amount up between the 12 appropriations subcommittees. The budget process also moves forward on another front as congressional committees continue examining 2012 budgets for the various government agencies. In an annual ironic twist, the Congressional Budget Office (CBO) defends its own budget on Wednesday before a subcommittee of the House Appropriations Committee.

Gang of Six Not Pushing Up Daisies – The Gang of Six senators continues to work on a bipartisan, comprehensive debt reduction plan. With the Biden group beginning deliberations and Sen. Conrad poised to mark up a budget resolution in his committee, some feared that the original Gang of Six would be pushed aside. However, budget watchers like Erskine Bowles are hopeful the gang will agree on a plan soon and many still believe it is the best hope for achieving a comprehensive, multiyear fiscal plan.

Business Support Springs UpOver 100 business leaders have signed on to a statement from the Committee for Economic Development (CED) demanding that lawmakers act now to reduce the debt and offer “concrete, realistic ideas.” The group promises not to penalize those who tell the truth about the painful choices necessary, but “will not look kindly on political posturing and delay in this time of crisis.” This latest group joins other prominent efforts such as the over 60 budget and economic experts who joined in a letter in March calling for everything to be on the table in devising a comprehensive fiscal plan.

Pruning Tax Breaks – Prominent economist Martin Feldstein argued in the New York Times last week that tax reform “limiting the deductions, credits and exclusions that are essentially government spending by another name” can result in increased revenue to reduce the deficit without raising tax rates. Feldstein also recently wrote a paper with CRFB President Maya MacGuineas and Daniel Feenberg detailing a plan to cap so-called tax expenditures. The White House Fiscal Commission made eliminating most tax expenditures a centerpiece of its tax reform plan–the “Zero Plan”–which Progressive Policy Institute Senior Fellow Paul Weinstein and CRFB’s Marc Goldwein expanded upon in a recent paper. CRFB identified tax expenditures as ripe for reform last year. Rep. Tim Walz (D-MN) has now set sail with a modest proposal to eliminate the mortgage interest deduction for yachts that currently qualify as second homes under the tax code. The bill is a baby step towards the fundamental tax reform that is required.

Weeding out Excess Federal Property – The White House has designated over 12,000 federal properties across the country as excess and has worked with Rep. Jeff Denham (R-CA) on legislation creating a process modeled after the Base Closure and Realignment Commission (BRAC) that closed and sold off obsolete military installations. The bill will create a Civilian Property Realignment Commission that will recommend selling or redeveloping federal properties–the recommendations of the panel will get an expedited up-or-down vote in Congress. The bill calls for a one-time appropriation of $88 million to get the process started, but OMB estimates that at least $15 billion can be saved by selling the properties.

Key Upcoming Dates

May 9

  • House Speaker John Boehner (R-OH) speaks before the Economic Club of New York.

May 10

  • Vice President Joe Biden hosts the second meeting of the congressional deficit reduction talks.
  • Senate Finance Committee hearing on the role of Social Security in deficit reduction at 10 am.
  • Senate Homeland Security and Governmental Affairs Committee Federal Financial Management Subcommittee hearing on "Roadmap for a More Efficient and Accountable Federal Government: Implementing the GPRA Modernization Act” at 2:30 pm.

May 12

  • Producer Price Index for April released.
  • House Ways and Means Committee hearing on comprehensive tax reform at 9 am.
  • House Ways and Means Committee Health Subcommittee hearing on reforming Medicare physician payments at 2 pm.

May 13

  • Consumer Price Index for April released.
  • University of Michigan consumer sentiment index for May released.

May 16

  • Treasury Secretary Tim Geithner says the statutory debt limit will be reached no later than May 16.

August 2 

  • Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then (revised).