June 2011

CBO's Elmendorf to Testify Before House Budget Committee at 10am Today

At 10am today, CBO director Doug Elmendorf will testify before the House Budget Committee on CBO's latest Long-Term Budget Outlook, released yesterday. Click here to see the live webcast of the Committee hearing (webcast should be live soon), and look here to see Elmendorf's prepared testimony and charts. Yesterday, CRFB released its preliminary analysis of the report. Keep an eye on our blog as we continue to post further analysis.

The Differences Between the Two Baselines

With the release of CBO's Long-Term Outlook, we thought it would be useful to break down the assumptions that the Extended-Baseline and the Alternative Fiscal Scenario make. Considering the huge divergence in the debt paths of these two scenarios, it is important to understand what they do.

First, we'll go through the paths of both of them. The Extended Baseline has debt as a percent of GDP rising to 87 percent by the 2040s, but it declines after that to 75 percent of GDP by 2085. CBO only provided debt data for the Alternative Fiscal Scenario through 2036, when debt exceeded 200 percent of GDP, but our extrapolation of the data has debt rising exponentially to 880 percent by 2085.

 

 

The difference in assumptions between the two baselines are detailed in the table below.

Description of Differences in the Baselines
Area Description Extended Baseline Alternative Fiscal Scenario
Doc Fix Current law calls for a 30 percent cut to physician payments in 2012, but Congress has always overriden scheduled cuts in the past. Assumes the 30 percent cut takes place and the SGR continues to take effect Continues doc fixes through 2021 at nominal 2011 levels; CBO estimated this would cost $300 billion over ten years
Health Care Reform The health care reform law has a number of provisions that could affect health care spending, but there are questions about their sustainability. Assumes that provider payments are reduced by economy-wide producitivity, IPAB cuts take effect, and exchange subsidy growth slows as scheduled. Also assumes slow down in cost growth of health programs Assumes that none of these provisions are in effect after 2021 and assumes prior (higher) cost growth
Tax Cuts There is great uncertainty about what will happen with the 2001/2003/2010 tax cuts when they expire. Assumes the expiration of the tax cuts in 2012 and no patching of the AMT Assumes extension of all tax cuts, estate tax at 2011/2012 parameters, and patching of the AMT
Long Term Revenue CBO uses different assumptions for how revenue grows past this decade. Uses current law to project revenue; bracket creep and health insurance excise tax push revenue up to 30% of GDP Holds revenue constant as a percent of GDP at 2021 levels (18.4%)
Other Spending Other mandatory spending and discretionary spending are projected differently under each baseline Grows as scheduled under current law baseline until 2021, remains constant as a percent of GDP after that Grows mandatory spending as scheduled, grows discretionary spending with GDP through 2021; total category remains constant as a percent of GDP after that

 

So which baseline is more realistic? Well, they both have their flaws. The Extended Baseline is very unrealistic in terms of policies and long-term revenue levels. However, the Alternative Fiscal Scenario may be too pessimistic on the tax cuts and ACA's ability (and Congress's willingness) to control health care spending, and their assumption on long-term revenue being 18.4 percent of GDP might not pan out. Nonetheless, it's easy to say that the Alternative Fiscal Scenario is probably a lot closer to where we are going, even if it has some flaws.    

But, CRFB will be updating its Realistic Baseline, which we feel is the best representation of a long term baseline. Last year, our baseline basically split the difference between the two CBO baselines over the long term. We'll see how it turns out this year.

The CBO Long Term Outlook Is Here

Update: Our paper on CBO's Long Term Outlook has been released.

CBO has just released its 2011 Long Term Outlook, detailing spending, revenue, and debt levels over the next 75 years. The report shows a similar trend in both the Extended Baseline and Alternative Fiscal Scenarios: worsening in the short term, improvement in the long term compared to last year.

Below is a graph of debt under both baseline scenarios. However, since CBO only provides data for the  Alternative Fiscal Scenario through 2036, the graph only goes up until that year.

 

 

CRFB will release a more detailed analysis very shortly, and will dive further into the findings in the report here on The Bottom Line through the rest of this week. So continue to check back.

Yes, Fix the SGR, But Pay for It Too

The Sustainable Growth Rate (SGR), the formula which sets provider payments for physcians under Medicare and which was originally enacted in 1997, calls for an unrealistic 30 percent cut in provider payments in 2012 if Congress does not act. Of course, it has acted frequently in the past decade to override the payment cuts that SGR has mandated. POLITICO has an article today talking about the difficult but necessary task of "weaning" Congress off of the SGR formula for Medicare. The article discusses the numerous problems with SGR and why it is hard to reform.

As the article explains, the SGR sets expenditure targets for Medicare. If Medicare spending exceeds the target, physician payments are updated by the change in the Medicare Economic Index (MEI) minus seven percent. If Medicare spending is below the target, payments are updated by the MEI plus three percent. In the first few years, spending did actually come in under the targets, so physicians were able to get payment increases in those years. However, beginning about a decade ago, Medicare spending has exceeded its targets, leading to scheduled cuts in provider payments and Congressional action ("doc fixes") to prevent that from happening. However, doc fixes from 2003-2006 were designed to recoup the costs of the temporary fixes in later years, which only added to the size of the cuts mandated in later years. Starting in 2007, temporary fixes have simply had "cliffs" with huge cuts scheduled after the expiration of the doc fix.

The article points to the most recent MedPAC report to highlight the many flaws of SGR. First of all, the budgetary issues are enormous. Congressional doc fixes have been temporary, which hides the true cost of a permanent solution. The temporary nature of these fixes has led to considerable uncertainty among physicians; for example, there were five doc fixes enacted in 2010 alone. In addition, as the MedPAC report notes, the SGR does nothing to incentivize more efficient use of health care and, in fact, promotes greater use of services (arguably, some overuse). 

However, the article points out a budgetary issue with these payment system reforms: while an SGR fix would cost significant money, the savings from a payment system reform will not score and would take a long time to come about even if it restrains health care cost growth. CBO has produced a very helpful report on the SGR that has a number of options for fixing it that all cost a significant amount of money. A few of these options are presented in the table below. They also include an SGR reset at 2010 levels (wiping out all the past accumulated cuts) and the Fiscal Commission plan, which would have a freeze through 2013, a one percent cut in 2014, and a reinstatement of the SGR in 2015 with a reset at 2014 levels.

Cost of Various SGR Replacements (billions)
Option 2012-2021 Cost
0% Annual Update (Pay Freeze) $298
1% Annual Update $342
Update with Medicare Economic Index $358
2% Annual Update $389
Fiscal Commission Plan Update $262
SGR Reset at 2010 Spending Levels $195

 

To us, the solution to this budgetary conundrum is still to pay for any future changes to the SGR. We have said that doc fixes should be paid for, and the same should go for payment system reforms that include an elimination of the SGR. If the reform helps to hold down cost growth, then that would be bonus deficit reduction on top of the offset SGR. We have a number of ideas to pay for the doc fix/SGR reform, and the Fiscal Commission also had some proposals, like increasing Part D drug rebates and reforming Medicare cost-sharing rules. Reforms to the SGR are important for the overall physician payment system and health care system, but they should be deficit-neutral. 

Leon Panetta Confirmed By the Senate

Today, the Senate confirmed former CIA Director (and former CRFB Co-Chair!) Leon Panetta by a unanimous vote to become our new Secretary of Defense.

As Mr. Panetta steps up to face some tough decisions about policy in the Middle East, Afghanistan, Iraq, and Libya, he will also be faced with some tough fiscal policy decisions as the nation looks for ways to trim the federal budget, including defense spending. Mr. Panetta will strike the right balance to handle both our security and fiscal threats. And as the current Chairman of the Joint Chiefs of Staff Admiral Mike Mullen has said, “[t]he most significant threat to our national security is our debt.”

With forecasts of our nation’s fiscal trajectory worsening with each passing year, it has become increasingly important for a comprehensive fiscal plan that addresses all elements of the budget. Mr. Panetta’s experience as former chairman of the House Budget Committee and both former director of the Office and Management and Budget and former White House Chief of Staff under President Clinton -- where he played a significant role in the balanced budget negotiations of the 1990s -- proves that Mr. Panetta will be more than capable of tackling the tough decisions that will have to be made in the coming years.

At his Senate confirmation hearing today, Mr. Panetta already endorsed a review of the military pay and benefits structure as well as a plan to reduce the costs of some weapons programs. He has also expressed support for Secretary Gates’ plan to begin identifying $400 billion in defense savings, as called for in the President’s Budget Framework.

In a town where consensus is a rarity, the unanimous vote for Mr. Panetta's confirmation shows that policymakers agree with CRFB's sentiment -- that Mr. Panetta will be invaluable in the Obama administration with regard to the defense budget. As one example, Sen. Jeanne Shaheen (D-NH) said in a statement, “[w]hether it is balancing budgets or fighting foreign insurgency abroad, Mr. Panetta has consistently proved himself as a strong and pragmatic leader.”

CRFB applauds Mr. Panetta’s confirmation as a step in the right direction toward getting the enactment of a comprehensive fiscal plan, and we wish Mr. Panetta the best of luck at his new position!

CRFB Outlines Dos and Don'ts for Budget Negotiations

This afternoon, CRFB released a paper that lays out the dos and don'ts for the Biden group negotiations. We provide a list of goals to accomplish and a number of steps to avoid.

The things we need to see are:

  • An increase in the debt ceiling as soon as possible
  • A debt deal that calls for $4 to $5 trillion of deficit reduction
  • A deal that has a down payment that includes steps to reforming entitlement programs
  • A deal that includes a process for making the necessary further changes to entitlements and taxes

The things we need to avoid:

  • Breaching the debt limit
  • Failing to address the debt before raising the debt limit
  • Using budget gimmicks to inflate the amount of savings
  • Deferring decisions until after the 2012 elections

In addition, we included a few helpful appendices that outline some of the common-ground policies, options to reduce health care costs, and options to make Social Security solvent.

The major point to take from this paper is that while not raising the debt ceiling would be catastrophic, not using this opportunity to address our debt would also be a poor outcome. We need to get a large fiscal plan that addresses the drivers of our long-term debt and doesn't use any phony accounting.

Click here to read the full paper.

Elmendorf to NY Fed: 'We Can't Repeat the Past'

Recently, CBO Director Doug Elmendorf spoke to the Federal Reserve Bank of New York about current policies and how they affect the nation's fiscal future. Elmendorf’s presentation, titled Federal Budget Math: We Can’t Repeat the Past, highlighted key aspects of federal budget policy in the last forty years and of CBO’s projections for 2021.

Elmendorf's key argument is that we cannot continue to do everything we'd like to -- the math just doesn't add up. In particularly, we cannot do all three of the following:

  • Keep federal revenues at the average share of GDP seen during the past 40 years.
  • Provide the same sorts of benefits for older Americans that we have provided in the past 40 years.
  • Operate the rest of the federal government in line with its role in the economy and society during the past 40 years.

As Elmendorf explains, "The question is not whether to change current policies, but when and in what ways." He continues, "Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; instead, changes will need to significantly affect popular programs, people’s tax payments, or both."

Click here to view Elmendorf's Powerpoint presentation and here to read his blog.

‘Line’ Items: Golf Edition

Time ‘Fore’ Action – Golf, that favorite pastime of power players, was even more popular than usual in Washington last week. Not only did the U.S. Open bring the best professional golfers in the world to the D.C. area, but a powerful foursome also hit the links, perhaps linking fiscal policy matters to their conversation as they played their round. Yet, while the Congressional Country Club in Bethesda, Maryland saw a dominating U.S. Open performance by Rory McIlroy and a record score, the congressional club on Capitol Hill is well over par when it comes to addressing the nation’s fiscal challenges. Unlike golf, where the goal is to get the ball in the hole, legislators must get out of the fiscal hole we are in. Its time that lawmakers picked up their legislative game and lowered the federal budget deficit score.

Of Golf and Gulfs – The much anticipated ‘Golf Summit’ between President Obama and House Speaker Boehner occurred Saturday. They paired up to beat Vice President Biden and Ohio Governor John Kasich, a former House Budget Committee chairman. While it was no Ryder Cup, a lot is riding on the ability of Obama and Boehner to work together in brokering a deal that increases the statutory debt limit and achieves significant deficit reduction. Time is running out to bridge the wide gulf between the two parties on how to reduce the national debt. While it is not clear how much time was spent on the golf course discussing how to get our fiscal situation back on course, perhaps the victory by Obama and Boehner that netted each two bucks is a good sign that the two will team up for a victory in a contest with a lot more money on the line.

Bernanke Tees Off on Debt – Federal Reserve Chairman Ben Bernanke offered his strongest remarks yet on U.S. fiscal policy at the CRFB Annual Conference on Tuesday (read highlights of his speech here). He warned that mounting national debt threatens the economy and that the current trajectory cannot be maintained. While he cautioned that the debt limit should be raised quickly and not used to force deficit reduction, he also made clear that a long-term, comprehensive fiscal plan should be devised now, and that putting a credible plan in place would benefit the economy in the shorter term as well as the long run. He also gave some guidance on what an effective plan would look like – possibly including triggers (see the recommendations from the Peterson-Pew Commission for making a debt trigger work here); stabilizing the debt at a certain ratio of GDP in the shorter term and reducing it further in the longer term (Peterson-Pew recommended a goal of a 60 percent debt/GDP ratio by the end of the decade); and simultaneously finding specific savings over 10 years while addressing the long-term sustainability of entitlement programs (see CRFB’s ideas for reforming Social Security and health care programs).

CRFB Unveils Tool to Compare Plans – Just like choosing the right club is a crucial part of golf, choosing the right plan will be imperative to making sure U.S. budget policy makes the cut in meeting our fiscal challenges. On the heels of Chairman Bernanke’s remarks on the need for a comprehensive fiscal plan and what an effective one could look like, CRFB unveiled a new interactive online tool that makes it easier to compare the plans that are out there and see how they stack up. The Deficit Reduction Plan Comparison Tool allows the user to easily compare the 30 plans that have been offered so far and will be updated as more plans emerge. Many plans share common elements but also diverge in important aspects. The new tool lets the user compare specific plans side-by-side to easily flesh out similarities and differences. It joins our “Stabilize the Debt” budget simulator as a useful educational resource.

Biden Group Drives Hard – The bipartisan, bicameral group of lawmakers negotiating a deal to raise the debt limit and reduce the deficit is playing through as it seeks a speedy resolution. The group met three times last week. The Tuesday meeting focused on discretionary spending. The group then discussed budget process mechanisms on Wednesday; Democrats wants a debt trigger while Republicans prefer a spending cap. The new Fiscal Toolbox from CRFB summarizes and compares the various budget tools available to help reduce the debt and the Peterson-Pew Commission recently provided recommendations for making a debt trigger work. At the meeting, Rep. Chris Van Hollen (D-MD) also provided a list of corporate tax subsidies to reduce or eliminate in order to achieve budget savings. CRFB has also provided tax expenditure reform ideas to reduce the deficit. The Thursday meeting looked at areas such as military compensation and farm subsidies. The group will meet at least three times this week, possibly more, and have longer meetings in an attempt to have a deal by July 1. CRFB has identified over $1 trillion in common-ground savings that the group could agree on as a down payment towards achieving the goal of $4 trillion in deficit reduction over the next decade.

Working on the Long Game – Some fear that the Biden group will not reach the $4 trillion target and instead settle for a shorter-term measure with less savings. In that case, there will be alternatives that go the distance. The Gang of Six, now five, says it is close to agreement on a plan that would reduce the deficit by around $4.5 trillion with a ration of spending cuts (including lower interest payments on the debt) to revenue increases of 3:1. Meanwhile, Senator Kent Conrad (D-ND), chairman of the Senate Budget Committee and a member of the Gang of Six, says he is close to a budget resolution that could pass his committee with Democratic votes that generates about $4 trillion in deficit savings through an even mix of spending reductions (including lower interest payments on the debt) and increased revenue. Both plans would rely on reducing or eliminating tax expenditures to raise revenue.

Taking Aim at Defense Spending – While Defense spending has usually received a mulligan in past budget cutting episodes, many are taking whacks at it now. Although the FY 2012 Defense appropriations bill passed by the House Appropriations Committee last week and due for House floor consideration this week includes a spending increase over last year, even the Pentagon is preparing for significant cuts. Outgoing Defense Secretary Robert Gates and Joint Chiefs of Staff Chairman Adm. Mike Mullen testified before the Senate Appropriations Committee on Wednesday on DoD’s 2012 budget and both discussed the new fiscal reality. Mullen reiterated his view that public debt is the greatest threat to national security. "If we as a country do not address our fiscal imbalances in the near-term, our national power will erode. Our ability to respond to crises and to maintain and sustain our influence around the world will diminish." He admitted that the military in the past was not "disciplined" in its fiscal choices, but now "cost will be a critical element of nearly every decision we face." Secretary Gates discussed his efforts "to replace a culture of endless money with one of savings and restraint" and listed some of the cost-cutting and efficiency measures he has instituted. Gates will be stepping down at the end of the month. His designated successor, CIA Director Leon Panetta, was approved last week by the Senate Armed Services Committee and is on track for confirmation by the full Senate this week. Panetta, who is a former OMB director, House Budget Committee chairman, and CRFB co-chair, will be tasked with meeting President Obama’s goal of finding $400 billion in savings in the Pentagon budget.

Entitlements in the Spotlight – Policymakers usually avoid entitlements like sand traps on the golf course. Yet, there has been recent movement on the entitlement reform front. Sen. Joseph Lieberman (ID-CT) recently wrote an op-ed calling for a balanced approach to making Medicare more fiscally sustainable that involves both revenue increases and changes to benefits, including gradually raising the eligibility age to 67. He says he is drafting legislation to that effect. A new report from the Medicare Payment Advisory Commission (MedPAC), an independent agency tasked with advising Congress on Medicare issues, echoes some of the ideas Lieberman mentioned, such as capping out-of-pocket expenses, requiring fixed-dollar copayments for services, and changes to supplemental coverage to reduce costs. The report also warns about the sustainability of the program. In addition, most Senate Republicans wrote to President Obama asking him to put forward a plan to reform Medicare in light of the recent Medicare trustees report detailing its long-term financial issues (see here for some ideas on health care reform, including Medicare). Meanwhile, Sen. Kay Bailey Hutchison (R-TX) introduced legislation to reform Social Security that includes raising the Normal Retirement Age over time to 69 and the Early Eligibility Age to 64 and reducing the annual cost-of-living adjustment (COLA) by one percent. A recent news report says that the powerful seniors lobby, AARP, is softening its opposition to Social Security benefits changes (which CRFB praised). The group's former CEO, Bill Novelli, urged action now to strengthen the program’s finances for future generations through a mix of revenue increases and benefit changes, and stated that increasing the retirement age should be on the table. CRFB offered ideas for reforming Social Security here, and explained why raising the retirement age is a good idea in blog posts here and here.

Clearing the Way for More Transparency – Initiatives to enhance transparency in the budget process and cut waste are becoming more prevalent than birdies at this year’s U.S. Open. Last week the White House announced a new ‘Campaign to Cut Waste’ that will target inefficiency in the government. Vice President Biden will chair a new oversight and accountability board to improve transparency by publicly tracking where federal dollars go. A first priority will be consolidating the nearly 2,000 government websites to make it easier to follow spending. Rep. Darrell Issa (R-CA), chairman of the House Oversight and Government Reform Committee, has gone even further, introducing legislation creating a statutory commission similar to the group that Biden will chair and creating a single online platform to track all government spending. The idea has bipartisan support; Sen. Mark Warner (D-VA) sponsored the Senate version of the bill, the Digital Transparency and Accountability Act (DATA). Rep. Issa held a hearing on the topic in his committee on Tuesday. The Peterson-Pew Commission on Budget Reform provided recommendations to improve the budget process to promote transparency and accountability in the report Getting Back in the Black. On a related note, the Advisory Committee on Transparency convened a forum examining tax expenditures, which account for about a quarter of the federal budget (just over $1 trillion) but are subject to little scrutiny and are difficult to trace. The event explored ways to make them more a more visible part of the budget process. Getting Back in the Black also offered proposals for integrating tax expenditures into the budget process. Finally, our New America Foundation colleagues at the Federal Education Budget Project launched an improved website last week that tracks K-12 and higher education funding as well as data on educational outcomes.

CRFB Holds Annual Conference and Dinner – On Tuesday CRFB convened its annual conference and dinner, which drew more heavy hitters than the Congressional clubhouse. In addition to Chairman Bernanke’s remarks described above, the conference also featured House Budget Committee Chairman Paul Ryan (R-WI), White House National Economic Council Director Gene Sperling, and many others. It was moderated by CNBC Correspondent Steve Liesman. The reception afterwards included remarks from OMB Director Jacob Lew and the dinner was highlighted by Fiscal Commission Co-Chairs Alan Simpson and Erskine Bowles talking to PBS NewsHour Senior Correspondent Judy Woodruff. Highlights of the event can be found here and more information is available here. Video of the conference can be viewed here and video of the dinner discussion can be viewed here.

Key Upcoming Dates

June 21

  • Joint Economic Committee of Congress hearing on "Spend Less, Owe Less, and Grow the Economy" at 2 pm.

June 22

  • CBO releases its Long-term Budget Outlook on its website at 10 am.
  • House Ways and Means Committee Health Subcommittee hearing on the Medicare Trustee’s 2011 report on Medicare’s finances at 9:30 am.

June 23

  • The House Budget Committee holds a hearing on CBO's Long Term Budget Outlook with CBO Director Douglas Elmendorf at 10 am.
  • Senate Finance Committee hearing on "Health Care Entitlements: The Road Forward" at 10 am. 
  • House Ways and Means Committee Social Security Subcommittee hearing on Social Security's finances at 1:30 pm.

 June 24

  • First quarter GDP revision from the Department of Commerce.

July 1

  • Deadline set by Biden group to come up with debt limit deal.

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.

IMF Issues Grim Warning

Highlighting the growing concern within international circles and among the various ratings agencies, the International Monetary Fund released its newest World Economic Outlook today, and the verdict is unpleasant. Aside from lowering our economic growth projections since its last iteration (2.5 percent in 2011 as opposed to April's 2.8 percent), the IMF says that the United States so far failing to address its fiscal situation and policymakers 'playing with fire' on the debt limit are posing risks to global economic recovery.

The IMF states clearly that the U.S., in order to prevent unbalanced global economic growth, should:

"[I]mplement credible and well-paced consolidation programs focused on bolstering medium-term debt sustainability. Given the tepid recoveries in these economies thus far, consolidation should ideally be gradual and sustained, so as not to undermine growth prospects. For the United States, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform."

Furthermore, the IMF says that if the U.S. delays in implementing fiscal adjustments, global economic growth -- including growth in the U.S. -- would be negatively effected. In a rather grim comparison, Jose Vinals, director of the IMF's monetary and capital markets department said, "If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States." 

Following recent gloomy outlooks on the U.S. credit rating from ratings agencies Moody's, S&P, and Fitch, this warning from the IMF is just one more shot across the bow. Policymakers in the U.S. must increase the statutory debt limit in order to avoid a default on our nation's obligations, and must put in place a significant long-term debt reduction plan that phases in savings as to protect a fragile economic recovery while setting the nation on a sound fiscal path in order to ease market fears and show we can and will get our finances in order.

Senate Votes to Cut Spending in the Tax Code

For anyone who is interested in seeing tax subsidies cleaned up, there's a bit of good news for you. The Senate voted yesterday to eliminate a $5.4 billion per year ethanol tax credit by a tally of 73-27. The vote came on an amendment to the economic development bill that is making its way through the Congress.

This vote is the culmination of a four-month back-and-forth between Sen. Tom Coburn (R-OK) and Americans for Tax Reform president Grover Norquist. In February, the (at the time) three Republican members of the Gang of Six--Coburn, Sen. Mike Crapo (R-ID), and Sen. Saxby Chambliss (R-GA)--sent a letter to Grover Norquist saying that cutting spending in the tax code should not be a violation of ATR's anti-tax pledge. This was in response to a Norquist letter arguing the opposite.

Ethanol came into the picture in late March when Sen. Coburn attempted to end the tax credit for ethanol that was voted on yesterday. Once again, Grover Norquist stated that voting for this amendment would violate his tax pledge unless it was offset with other tax cuts. And once again, Sen. Coburn shot back with a letter criticizing Norquist's position, saying that "you are defending wasteful spending and a de-facto tax increase on every American."

The tension among conservatives over whether to defend tax expenditures has been great in the past few months, with observers wondering whether Republicans in Congress would support cutting them or side with Norquist and the no-new-taxes pledge. In this case, Senate Republicans have overwhelmingly sided with the former group, recognizing that tax expenditures are merely spending through the tax code. This opens the door to meaningful tax reform that could be part of a budget deal, and that is all around great news.

The Wall Street Journal's Social Security Tool

It seems that interactive tools are definitely in vogue. We'd like to say we started the trend with the Stabilize the Debt simulator, and we have continued it with the fiscal plan Comparison Tool we released yesterday. Today, The Wall Street Journal highlighted an interactive tool of its own on its website allowing users to construct their own Social Security reform plan from a menu of given options. The tool acts as an easily digestible version of the solvency provisions section of the Office of the Chief Actuary's website.

The graphic contains fifteen different options for making changes to Social Security. Among them are various changes to benefits--like increases in the retirement age, reductions to initial benefits, and switching to the chained CPI--and tax increases generally involving the payroll tax cap; in addition, there are a few of the more common benefit increase options included such as a robust minimum benefit and an age-85 benefit bump up. When you click an option, a slider at the top of the page shows how that option affects the 75-year actuarial balance of Social Security.

Try to make your own plan! Although WSJ has only included a small sampling of the options available for reform, it is good interactive tool that helps show the magnitude of the changes needed to restore 75-year solvency to the program. For more options, check out the Office of the Chief Actuary's solvency provisions here and CBO's most recent Social Security Options here.

Sen. Hutchison Unveils Social Security Plan

Sen. Kay Bailey Hutchison unveiled her Social Security reform plan today, and conveniently, it already has its own score from the Office of the Chief Actuary (OACT) at the Social Security Administration.

Her plan would use two of the "levers" of Social Security reform: the retirement age and cost-of-living-adjustments (COLAs). Her proposal would speed up the increase in the Normal Retirement Age, making it three months per year starting in 2016 until it reached 69 in 2027. In addition, she would raise the early retirement age by three months per year starting in 2016 until it reached 64 in 2023. Her other change would reduce COLAs by one percentage point, a larger cut than switching to the chained CPI would make, starting in 2012.

(As a sidenote, revenue under the proposal is slightly lower due to decreased revenue from the taxation of Social Security benefits.)

 

The combined effect of these changes would restore solvency to the program over 75 years, but it would not meet the OACT's definition of sustainable solvency. This is because despite the magnitude of these changes, Social Security would still have cash flow deficits throughout most of the 75-year window. These deficits result in a declining trust fund by the end of the 75-year window, which means that under current projections, it would become insolvent somewhere past 2085. The cash flow issue could be remedied by making the retirement ages increase very gradually beyond their specified levels. But regardless of the cash flow deficits, this plan would significantly improve Social Security's financial outlook.

It's good to see Social Security proposals still popping up, especially as changes to the program have seemed to have been left behind in the current debt talks. Although this plan focuses solely on the benefits side of the equation, another plan to prevent insolvency to this program and to help address our fiscal situation is a step in the right direction.