June 2011

Senator Lieberman Proposes Medicare Reform

Update: Estimates updated

Today, Senator Joseph Lieberman (I-CT) proposed a plan to reform Medicare, but to do so working within the current system rather than through more fundamental reforms, such as a move to "premium support". As Sen. Lieberman argued, "Medicare is hurtling toward its demise... [w]e can and must work together to fix Medicare now. Doing so would send a powerful and necessary signal to financial markets that we are addressing our long-term fiscal challenges." (With this statement, the Senator joins the Announcement Effect Club)

Sen. Lieberman's plan relies on five major changes:

  • Raising the Medicare Retirement age by two months every year, starting in 2014 until it reaches 67 in 2025.
  • Replacing Medicare's complicated cost-sharing rules with a unified dedutible, co-pay, and catastrophic cap.
  • Increasing premiums for all new enrollees, beginning in 2014, from 25% of costs to 35%.
  • Reforming 'Medigap' rules to reduce overutilization.
  • Raising the payroll tax by 1% on income above $250,000.

Sen. Lieberman claims that these changes will save "at least $200 billion in Medicare spending over the next 10 years" and extend Medicare’s solvency "by approximately 20 years." Though we don't have enough details to know for sure, we estimate that his plan could save significantly more -- perhaps close to $370 billion over ten years ($430 billion with interest). According to our estimates, in 2021 the plan would save $75 billion ($90 billion including interest), and those savings would continue to grow as the Medicare age reached 67, more new retirees were subject to the higher premiums, and the cost-sharing changes put some downward pressure on cost growth.

  2012-2016 (Billions) 2012-2021 (Billions)
Raise Retirement Age  $20 $125
Reform Cost-Sharing Rules  $15 $35
Premium Increase $10 $50
Restrict Medigap $20 $60
Payroll Tax Increase  $30 $100
Total  $100 $370
Total With Interest  $110 $430

Note: Numbers are rounded to the nearest five and are CRFB estimates. For the Medicare age change, we rely on CBO's Budget options. For Medigap and cost-sharing, we assume the parameters in CBO's Budget options and distribute the interaction proportionally. For premium increases, we begin with the CBO's Budget option but adjust it substantially downward to account for the fact his proposal only applies to new retirees. The payroll tax estimates are very rough, and assume the increase starts in 2014 and is no applied to investment income.

This plan doesn't go nearly far enough to solve our Medicare problems, but it does make a substantial downpayment and does so in a way that would help address both health care cost growth and population aging, while also recognizing that rising health care costs will require the public to contribute more. Sen. Lieberman should be praised for offering this approach and for taking Medicare's problems seriously. As he explains:

I offer these ideas as a starting point for discussion to show we can extend the solvency of Medicare and reduce our national deficit and debt. The truth is that we cannot save Medicare as we know it. We can save Medicare only if we change it. I realize that each of the reforms is bound to make some people unhappy and that supporting such legislation entails political risk. But unless members of Congress are willing to take risks together, the big losers will be our great country and the people who elected us to lead it.

 

Biden Group Talks Taxes and Triggers

The bicameral, bipartisan debt limit and deficit reduction negotiations chaired by Vice President Biden resumed today with the group’s fifth meeting since it first convened last month. The pace of the talks is expected to pick up next week with as many as three meetings.

Revenues and budget process reforms were on the agenda for today’s meeting. Revenues is often where a significant divide exits. Democrats want revenue increases to be part of a deal, while Republicans want increases in taxes off the table. CRFB has recommended eliminating/reducing tax expenditures, the various tax breaks that are essentially spending by another name, as a ripe area for compromise (see also here and here) and we have said that it is likely that some additional revenue is going to have to be part of a fiscal plan.

While there is general agreement on the need for budget process changes to promote deficit reduction, there is a partisan divergence in opinion over which tool to use. A new resource from the Peterson-Pew Commission on Budget Reform succinctly explains the various options and compares them. Republicans prefer a cap on federal spending while the White House wants a trigger based on the size of the debt in relation to the economy. The Peterson-Pew Commission has also provided recommendations for making a debt trigger work.

The group still has a long ways to go towards reaching an agreement by July. The members are still searching for specific spending cuts that they can agree on. CRFB recently identified over $1 trillion in common-ground savings based on recent fiscal plans from each party.

Panetta Puts Everything on the Table for Defense Savings

In his Senate confirmation hearing this morning to become the next Secretary of Defense, CIA Director Leon Panetta (and former CRFB chairman!) said that every element of the defense budget needs to be on the table when we discuss ways to get control of our mounting federal debt.

In his statement and in response to questions from the Senate Armed Services Committee, Mr. Panetta noted that we have to consider a whole host of specific areas where we can save, saying that "it may be appropriate to conduct a comprehensive review of the military pay and benefits structure to determine where costs can be contained" while also singling out some weapons programs. He endorsed Secretary Gates's approach to begin indentifying where an additional $400 billion in defense savings, as called for in the President's Framework, could come from, and ultimately agreed that difficult choices must be made based on their impact on national security.

No one understands the need to simultaneously address both our security and fiscal threats better than Mr. Panetta. Projections for our growing debt become worse with each passing year, and the magnitude of the problem requries us to address it with a comprehensive fiscal plan. The many years Mr. Panetta served in the House of Representatives and as chairman of the House Budget Committee, his time in the Clinton Administration as OMB Director and Chief of Staff, and his national security experience gained while serving as CIA Director for the past two years make him the ideal candidate for Secretary of Defense where he will be in the center of all debates.

We wish Mr. Panetta a speedy confirmation process, and the best of luck when he assumes his new role. 

Fitch Follows Moody's and S&P In Issuing Warning on Debt Ceiling

Yesterday, Fitch became the latest credit rating agency, following S&P and Moody’s in recent weeks, to warn the U.S. of a credit rating downgrade if we fail to raise the debt ceiling by August 2nd.  David Riley, head of Fitch’s sovereign rating says, “Failure to raise the debt ceiling in a timely manner would imply a crisis of governance that could imperil the US’s triple-A status”.

The latest warning shows the dilemma we face in raising the debt ceiling. Being downgraded to Aa due to lawmakers inability to raise the debt ceiling by August 2nd would be a bigger blow than being downgraded to a negative outlook due to our unsustainable path. As a result, this is further proof that investors are on shaky ground when it comes to the United States' fiscal situation and how imperative it is to raise the debt limit.
 
While there are ways to responsibly use the debt limit negotiations being led by Biden as a mechanism for getting some control over our fiscal path (be it a fiscal plan, caps, triggers, targets, or a downpayment), it is very risky to be playing chicken with the debt ceiling. Click here for more ideas on responsible ways to raise the debt ceiling.
 

Also be sure to follow Treasury's use of extraordinary measures to delay a default this summer here.

Peterson-Pew's New Fiscal Toolkit

In the last few weeks there has been an incredible amount of talk about using targets, triggers, caps, and failsafes to help set us on a sustainable course. Many different approaches can be taken to solve the broken budget problem, and CRFB hopes the new Fiscal Toolbox from the Peterson-Pew Commission (PPC) will offer guidance in choosing the right approach to repair the budget. 

According to CRFB President, Maya MacGuineas, “We have lots of tools to choose from here – everything from spending limits to balanced budget rules to debt targets.” In a time of uncertainty, when no plan has emerged as the frontrunner to control debt, MacGuineas goes on to say,What we need to do is take the best parts of each plan to design the tool that will best help policymakers to bring the debt under control."

The fiscal toolbox looks at proposals put forth by the PPC, Fiscal Commission, President's Framework, Corker-McCaskill, Bipartisan Policy Center, and balanced budget amendments, comparing the overall goals and specifics of each proposal.

Be sure to check out the grid here.

Cooper and Wolf Announce Support for Gang of Six

Yesterday, according to Congressional Quarterly (subscription required), Reps. Jim Cooper (D-TN) and Frank Wolf (R-VA) sent around a “Dear Colleague” letter, pledging their support for the Gang of Six’s efforts to create a comprehensive bipartisan deficit reduction plan based on the Fiscal Commission recommendations. This letter comes in response to an op-ed from CRFB board members and Fiscal Commission co-chairs Erskine Bowles and Alan Simpson, who declared that “[m]embers of both parties and both houses must publicly support the work of the Gang of Six.”

As Cooper and Wolf write:

The Gang of Six has based their work off of the Bowles-Simpson plan, which is why it is important their discussions not only continue, but they have our bipartisan support…Never has there been a more important time in our nation’s history to come together to rein in our wasteful spending, stop playing favorites with the tax code, and put everything on the table…It is common political posturing for Democrats and Republicans to blame each other for acquiring this debt, but neither side can cast stones. Both are guilty of making new promises we can’t pay for, and tax breaks we can’t afford. It is time to stop using the deficit as a political weapon, and come together to find bipartisan solutions. The Bowles-Simpson plan is bitter medicine, and while not perfect could restore our fiscal health. There is never a convenient time to make tough decisions, but the longer we put off fixing the problem, the worse the medicine will be.

We are thrilled to see this bipartisan team in the House of Representatives coming out in support of the Gang’s efforts. And we hope more members from both parties and both houses will join them. As Bowles and Simpson write, “This is the time for heroes. The country is ready for leaders in Washington to put politics aside, pull together — not apart — put national interest ahead of political interests and put the next generation over the next election.”

We congratulate Reps. Cooper and Wolf for their leadership and courage, and encourage others to join them in providing bipartisan support for the work of the Gang of Six.

Between the ‘Line’s: Speeches, Meetings, Anniversaries, and Letters Galore

Pawlenty of Ideas – GOP presidential candidate Tim Pawlenty gave a speech in Chicago on Tuesday where he laid out his fiscal and economic policy agenda. Among his proposals are reforming the tax code by eliminating many tax breaks (see our ideas for tax expenditures) while reducing tax rates. He also called for a balanced budget amendment to the U.S. Constitution that caps federal spending at 18% of GDP. In addition, he mentioned raising the Social Security retirement age (see our ideas for Social Security reform), block granting Medicaid (see our ideas for controlling health care costs), and limiting the growth of defense spending. His plan also assumes a very optimistic 5 percent annual GDP growth rate to help reduce the deficit.

Biden Band Gets Back Together – The talks led by Vice President Biden resume Thursday after a week-long hiatus with a meeting of the bicameral, bipartisan group that is trying to negotiate a deal to raise the statutory debt limit and achieve $4 trillion in deficit reduction. Getting the group to sing the same tune will be difficult. One of the items on the meeting agenda is to discuss possible revenue increases, but Republicans have been adamant that taxes should be off the table. The group reportedly will also discuss capping spending as a percentage of GDP, along the lines of legislation proposed by Senators Claire McCaskill (D-MO) and Bob Corker (R-TN). Conveniently, the Peterson-Pew Commission today unveiled a new Fiscal Toolbox explaining and comparing various budget process tools like spending caps and debt targets that can help set the nation on a sustainable fiscal path.

To the Letter – Washington hasn’t yet produced much in the way of legislation dealing with our fiscal challenges, but lawmakers sure are churning out a lot of letters.

  • Members of the House Republican Study Committee (103 in all) sent a letter to Speaker of the House John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) calling for “cut, cap and balance” to gain their support for a debt limit increase. Specifically, they suggest about $380 billion in spending cuts in 2012 to cut the deficit in half; capping spending at 18% of GDP; and a balanced budget amendment like the one supported by all Senate Republicans, S.J. Res. 10.
  • Five Democratic senators forwarded a letter to Vice President Biden asking his group that is negotiating a debt limit increase and deficit reduction agreement not to accept the plan to reform Medicare included in the House-passed budget. They say “[w]e hope to identify delivery system reforms and other sources of savings that can extend the life of Medicare in its current form. But we will never allow any effort to dismantle the program and force benefit cuts upon seniors under the guise of deficit reduction.”
  • A group of House GOP freshmen (76) penned a letter to President Obama demanding he put forth “a detailed plan that reduces the national debt and addresses entitlement reform.”
  • More than half of House Democrats (109) wrote to Speaker Boehner demanding that revenues be put “on the table” in debt talks.
  • Congressmen Frank Wolf (R-VA) and Jim Cooper (D-TN) wrote a “Dear Colleague” letter asking for support for the Gang of Six. They write “[t]here is never a convenient time to make tough decisions, but the longer we put off fixing the problem, the worse the medicine will be.”

Gang of Six Continues – Speaking of the Gang of Six, the bipartisan group met on Tuesday, absent Sen. Tom Coburn (R-OK), who has taken a break from the group. The rest of the gang continues to work towards a comprehensive fiscal plan that all members, including Coburn, can agree to. Two members, Senators Saxby Chambliss (R-GA) and Mark Warner (D-VA) spoke to the Economic Club of Washington Wednesday about their work on deficit and debt reduction.

Panetta Hints at Pentagon Penny-Pinching – In his responses to a questionnaire from a Senate committee overseeing his confirmation process, Secretary of Defense-designate Leon Panetta implied that the Pentagon would see significant budget cutting under his watch. Although he didn't offer much in the way of specifics, he did caution that "it must be understood that a smaller budget means difficult choices will have to be made." Senators may try to get the CIA director, and former OMB chief and CRFB co-chair, to elaborate more during his confirmation hearing before the Senate Armed Services Committee tomorrow. The DoD belt tightening has already begun under departing Secretary Bill Gates, who is looking for $400 billion in defense savings over 12 years. Gates, who is stepping down at the end of the month, recently suggested that military pay and retirement benefits be looked at for savings.

Washington Starts to Address the Process – Lawmakers are seriously looking at budget process reforms as a part of efforts to improve the fiscal outlook. The House Judiciary Committee is set to approve a constitutional amendment requiring a balanced federal budget each year next week when it returns from its recess. The bill, H.J. Res. 1, was amended in the committee last week to change the spending cap from 20 percent of GDP to 18 percent and to increase the congressional majority required to raise revenues from a three-fifths vote to a two-thirds vote, putting it in line with the Senate bill supported by all GOP senators. House Republicans are also reportedly considering including biennial budgeting in any deal to raise the debt limit. Under such a measure the annual budget process would be replaced by one where budgets are approved for two years at a time, with the off year used for closer oversight of federal spending. The Peterson-Pew Commission on Budget Reform, a project of CRFB, has spent over two years examining budget process reforms to make the process more functional, transparent and effective in putting the country on a sustainable fiscal course. It offered a suite of reforms in the report, Getting Back in the Black. It also released today a new Fiscal Toolbox that summarizes and compares ideas like spending caps and balanced budget amendments.

Tax Cuts Turn Ten – The tax cuts first enacted in 2001 had their ten year anniversary on Tuesday. CRFB observed the occasion by saying that if they are to see their teenage years, they need to be paid for. The tax cuts are set to expire in 2012 and will cost over $2 trillion by that point.

PowerPoint to the People – CRFB has created a new PowerPoint presentation, Averting a Fiscal Crisis, that clearly and succinctly outlines the scope of our nation’s fiscal challenges as well as some possible solutions. It is designed to offer an objective view of the situation in an accessible format to help foster open discussion about the issue. It is a great resource for community groups, town halls, classrooms, etc. Check it out.

Bush Tax Cuts Turn Ten

For today's 10-year anniversary of the 2001 tax cuts (EGTRRA), CRFB issued a release this morning calling for any extensions of the 2001/2003/2010 tax cuts to be fully paid for. The 2001 tax cuts, along with the expansions and extensions in 2003 and 2010, will have cost the Treasury well over $2 trillion by 2012 when they are scheduled to expire.

Simply paying for any extensions in the tax cuts, whether through spending cuts or revenue increases elsewhere in the budget, could almost stabilize the debt this decade - which would be a great start on getting control of our longer-term challenges. Without patching the AMT the tax cuts would cost roughly $2.4 trillion over the next ten years, and nearly $3.2 trillion including interactions with the AMT. As you can see, the tax cuts are quite costly. Lawmakers should not extend them unless they're paid for.

In this blog we wanted to go a bit further than we did in our earlier release, and show you the costs of the main pieces of the tax cuts both with and without the interaction effects with Alternative Minimum Tax (AMT) patches.

 Numbers in Billions

2012-2021
(Not Including Interaction with AMT)

2012-2021
(Including Interaction with AMT)

Extend Tax Cuts on Income Below $200,000/$250,000 $1,285 $2,085

Extend Ordinary Income Rate Reductions

$610 $1,205

Extend Child Tax Credit Expansion

$385 $320

Extend Preferential Capital Gains and Dividends Rates

$125 $120

Extend Marriage Penalty Relief

$100 $315

Other

$70 $125
     
Extend Tax Cuts On Income Above $200,00/$250,000 $710 $790
     
Extend Estate Tax at 2011 Levels $365 $345*
     
Costs of Tax Cuts $2,360 $3,215
     
AMT

$1,540

$685
Net Interest $805 $805
     
Total Costs of Tax Cuts (Including AMT and Interest) $4,705 $4,705

Note: Numbers combine extensions supported by President Obama and House Republicans. All numbers rounded to the nearest $5 billion.
*CRFB estimate.

 

The AMT was enacted in the late 1960s, well before the Bush tax cuts were passed. The AMT was designed to ensure that high-income earners who qualified for many tax deductions, credits, and exclusions paid at least a minimum amount of taxes. . However, the AMT was not indexed to inflation. In addition it was not adjusted to take into account the 2001/2003 tax cuts, which pushed tax burdens low enough to subject more people to the AMT. To account for the lack of indexing and the failure to adjust the AMT in 2001, lawmakers indexed the AMT thresholds to inflation to help prevent more people becoming subject to the tax. Since then, Congress has repeatedly enacted AMT "patches" to prevent millions of Americans from facing higher taxes.

Making these patches permanent would cost about $700 billion over the next 10 years--however, the interaction with all the tax cuts would more than double those costs. If you attribute the interaction to the tax cuts, their cost increases from $2.4 trillion to $3.2 trillion, and the middle-income tax cuts increase from $1.3 trillion to $2.1 trillion (excluding the estate tax).

In our release we call on policymakers to fully pay for any extensions in the tax cuts, including making the tax code simpler, more efficient, and fairer. In addition, they should consider fixing this AMT problem once and for all.

Click here to read the release.

 

Averting a Fiscal Crisis: CRFB’s Backgrounder Powerpoint

There seems to be no lack of commentary and analysis from the media and think tank community on our fiscal challenges in both this decade and beyond. Much of this, however, can seem a little wonky and esoteric for those who have not been following the debate inside the beltway.

To remedy this situation, CRFB has recently released a PowerPoint backgrounder on our fiscal challenges, which we encourage policymakers and concerned citizens alike to read over and share. This Powerpoint is meant to offer an objective, non-partisan view of our country's fiscal situation as an educational tool meant to help foster open and honest debate about these issues.

In order to avert a fiscal crisis, policymakers must immediately address our rising public debt by enacting a comprehensive fiscal plan. Our long-term debt drivers—mainly, rapidly growing health care costs and an aging population—are placing a greater and greater strain on our budget. As our debt continues to grow, the U.S. will face less and less budget flexibility as interest payments on our enormous debt will squeeze out other available resources and joepardize strong economic growth over the long-term. Everything needs to be on the table, including spending cuts, tax reform, and budget process reforms. We need a fiscal plan.

Be sure to check out our Powerpoint, which outlines these challenges and some of the solutions offered.

 

Panel This Afternoon on Budget Deficit and National Debt

This afternoon, the University of Maryland's School of Public Policy is hosting a panel on the budget deficit and national debt. Panelists include former Congressional Budget Office directors and CRFB board members Alice Rivlin, Doug Holtz-Eakin, Rudolph Penner, and Robert Reischauer. The event starts at 3:00 pm so be sure to check it out.

Click here to watch the event live on C-SPAN.

Republican Congressmen Introduce Legislation to Reduce Size of Federal Workforce

Rep. Darrell Issa, (R-CA), Rep. Dennis Ross, (R-FL), and Rep. Jason Chaffetz, (R-UT) recently introduced legislation that would cut the federal workforce by 10 percent by 2015. H.R. 2114, the Reducing the Size of the Federal Government Through Attrition Act of 2011, would allow one federal employee to be hired for every three who retire or leave their job.

The bill is modeled after a recommendation from the President's Fiscal Commission, though it is slightly more aggressive. The Fiscal Commission recommendation called for two workers to be hired for every three who leave their job, and estimated that this would save $13.2 billion by 2015.

CRFB commends Reps. Issa, Ross, and Chaffetz for introducing legislation that would produce concrete savings and reduce the budget deficit. Hopefully more lawmakers will follow their example and start putting forth concrete proposals to improve our country's fiscal situation.

‘Line’ Items: French Open Edition

Clay Masterpiece – Rafael Nadal and Roger Federer played yet another classic tennis match yesterday, with Nadal once again emerging victorious for his sixth French Open title. The distinctive red clay of Roland Garros produces slow-moving tennis characterized by long rallies and lots of spin on the ball. Much the same can be said of the budget debate in Washington. Finding fiscal solutions is a slow, drawn-out process, with lots of back-and-forth. And both sides are using plenty of spin to find the winning shot.

Biden Group Tries to Hold Serve – The Biden talks are set to resume Thursday as the bipartisan, bicameral group of lawmakers convened by Vice President Biden looks to make progress on finding a deal pairing a debt limit increase with substantial deficit reduction. So far, both parties are seemingly content to stay at their respective baselines and pound away at the other. Republicans say they won’t budge on keeping revenues out of play and Democrats are digging in on no Medicare changes. CRFB has offered lots of ideas to bring the opposing sides closer to the net: providing a list of common-ground deficit reduction policies based on recent budget plans and specific ideas for Medicare and taxes that can draw bipartisan support.

Moody’s Blue on Debt Limit – Credit rating agency Moody’s stepped in as the chair umpire in the debt limit debate last week and it called fault on both sides. Stating that "the degree of entrenchment into conflicting positions has exceeded expectations," the agency warned that a default caused by a failure to raise the debt limit would likely result in a downgrade of the U.S. credit rating. Moody’s also cautioned that the lack of a “credible agreement on substantial deficit reduction” could result in a negative outlook on our cherished Aaa credit rating. See here for responsible approaches to raising the debt ceiling that combine a debt limit increase with a deficit reduction strategy.

Appropriations Mostly Keeps Pace in House – The House of Representatives is moving along with its end of the FY 2012 appropriations process. The full House approved of a Homeland Security spending bill on Thursday that appropriates $40.6 billion in regular discretionary spending, 2.6 percent less than current levels. However, the Military Construction-Veterans Affairs spending bill slipped from its schedule and now is expected to be voted on the floor when the House returns next week from recess. On the other hand, the Senate is not keeping pace, having not approved of a budget resolution. Without a top line spending figure to work with, the appropriations process cannot move in that chamber. The Peterson-Pew Commission on Budget Reform has solid recommendations for improving the broken budget process.

Key Upcoming Dates

June 7

  • Presidential Candidate Tim Pawlenty gives a speech on his views for boosting the economy, including deficit reduction, in Chicago.

June 8

  • Senators Mark Warner (D-VA) and Saxby Chambliss (R-GA) discuss the federal budget and deficit reduction before the Economic Club of Washington at 11:30 am.

June 9

  • The Biden group resumes its talks on the debt limit and deficit reduction.
  • CIA director, and former OMB director, Leon Panetta, has his confirmation hearing to be the next secretary of defense before the Senate Armed Services Committee at 9:30 am.

June 10

  • Federal budget deficit numbers for May released.

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.