April 2012

When It Comes to Deficit Reduction, Timing Matters

The news that Britain has entered into a double-dip recession touched off a fierce debate last week over the role of austerity in the country's downturn. Many commentators say that the fiscal contraction the coalition government undertook starting in mid-2010 is the primary reason for the UK's U-turn (see here and here for example), while a few others (here, for example) believe that things would have been worse if it hadn't taken been place as evidenced by rising bond yields right before the package was passed. 

In either case, it is important to first note that the United States is not Great Britain -- and declarations of "death to austerity" should not be taken to suggest that a medium-term deficit reduction plan is not needed in the United States; the two are different. Rather than ignoring the problem or putting in place immediate austerity, the United States should enact a gradual and thoughtful fiscal plan that gradually puts the debt on a stable and declining path relative to the economy.

On the British question, it is important to consider the counterfactual: what if UK fiscal policy simply stayed the course? Critics of the coalition government's fiscal contraction believe that concerns about rising borrowing costs were overblown and that, per standard economics, the cuts simply derailed the recovery that was underway. However, defenders of the government's actions believe that economic performance would have been worse had nothing taken place because bond yields would have spiraled out of control and ultimately would have caused more pain than the austerity measures. They point to the fact that yields have subsided relative to German yields since fiscal contraction began as proof of success.

Bond yields are an ambiguous way of determining the effects of economic policies: it could be the result of strengthening confidence in the British fiscal situation or waning confidence in their economy. It is difficult to know for sure what the policies' effects were and how things would have been different in their absence.

Either way, US fiscal policy is not in the same position as the countries that have been undertaking austerity. Treasury rates have remained subdued, at least in part because of the safe haven that Treasuries represent. This is not an excuse for inaction, but it means we can be nuanced about how we go about it. We should enact a fiscal plan now, but we should utilize our luxury to phase in changes gradually. As CBO has explained, such a plan would offer the medium- and long-term benefits of deficit reduction while minimizing the drag on the economic expansion, allow sufficient time to plan, and "provide some boost to economic activity by reducing uncertainty and holding down interest rates."

We have long made the case that there would be a positive "announcement effect" in which enacting a credible longer-term deficit reduction plan can boost the economy in the short term. Importantly, this announcement effect is not contingent on substantial deficit reduction occurring early while the economy is still weak, but rather on the plan being enacted at that time. In addition, people should not expect the increased confidence to be large enough to fully offset the contractionary effect of whatever short-term deficit reduction does occur. Rather, the confidence effect could help ease what short-term pain does occur, and do so without any reduction in the long-term gain associated with deficit reduction.

Former Obama Council of Economic Advisors chair Christina Romer recently made this case. As she explained:

The best policy [in the United States] is to combine the backloaded consolidation I’m recommending for troubled countries with the short-run stimulus I’m advocating for countries like Germany. We could enact something like the Bowles-Simpson plan to reduce the deficit sharply over 10 years, and include in it more near-term investment in infrastructure, education and scientific research...

These policies are nuanced, so they are easily caricatured as doing something with one hand and undoing it with the other. Their key element is dynamics — using credible plans to lower borrowing costs and address long-run fiscal problems, while not taking immediate austerity measures that would raise unemployment when what countries need most is growth.

In deficit reduction, timing is essential. Lawmakers must carefully balance short- and long-term economic goals. But with the right timing and the right composition, a comprehensive fiscal plan offers a lot more up side than down side to the U.S. economy.

Americans Have Their Say in Reducing the National Debt

The politicians don't seem to want to budge on the budget, but our simulator is allowing the public to nudge them along.

The results from the simulator offer insight into what debt reduction choices Americans could support once they get a first hand look at the kinds of changes it will take to control rising debt. Although our results are not scientific, they can be very informative for policymakers as they seek solutions that both parties can agree on. As we note in a summary of the results, almost all of the entries (94 percent) relied on some combination of spending cuts and tax increases, rather than just doing one or the other.

The plan below represents all the simulator options that received majority support from users who voluntarily submitted their results. Implementing all of those options would easily meet the simulator's goal and then some, with debt at 48 percent of GDP.

Budget Simulator Plan As Selected by Average User
Options Savings/Cost (-) Through 2018
Users Selecting % Users Selecting
Eliminate Certain Outdated Programs $60 7180 88%
Cut All Earmarks in Half and Use Half for Deficit Reduction $120 6670 82%
Gradually Reduce Scheduled Benefits Protecting Some Earners $150 6590 81%
Decrease Troop Levels $140 6584 81%
Include State and Local Workers in Social Security $160 6263 77%
Reduce Ship Building $80 6082 75%
Raise Normal Retirement Age to 68 $280 6040 74%
Grow Discretionary Spending With Inflation $0 6024 74%
Enact Medical Malpractice Reform $90 6024 74%
Reduce Tax Gap $30 5984 74%
Cut Various Weapons Systems $50 5947 73%
Repeal LIFO and Eliminate Oil and Gas Preferences $150 5861 72%
Use a More Accurate Measure of Inflation for Social Security $200 5792 71%
Reduce Iraq/Afghanistan Troops to 30,000 by 2013 $1,700 5711 70%
Impose Financial Crisis Responsibility Fee $130 5702 70%
Reduce Farm Subsidies $140 5679 70%
Surtax on Income Above $1 Million $330 5530 68%
Cut Foreign Aid in Half $180 5363 66%
Establish a Public Option $100 5350 66%
Limit Mortgage Interest Deduction and Other Deductions for High-Earners $430 5323 65%
Rescind Unused ARRA Funds $140 5319 65%
Reform Federal Retiree Benefits $70 5304 65%
Freeze Civilian Pay for 2 Years $80 5274 65%
Increase the Medicare Retirement Age to 67 $160 5268 65%
Enact Carbon Tax/Cap-and-Trade $590 5017 62%
Reform Treatment of Employer Sponsored Health Insurance $300 4847 60%
Freeze Average Unemployment Benefits at 2009 Levels $90 4802 59%
Allow All Tax Cut Extensions, Except AMT, to Expire -$840 4772 59%
Raise Social Security Tax Base to Cover 90% of Earnings $740 4464 55%
Repeal Part of ACA $200 4533 54%
Cancel Missile Defense System $90 4402 54%
Increase User Fees Across the Board $60 4382 54%
Increase Years Used to Calculate Social Security Benefits $90 4300 53%
Index Tax Code to a More Accurate Measure of Inflation $190 4289 53%
Increase Gas Tax by 10 Cents Per Gallon $140 4242 52%
Eliminate New Markets Tax Credit $70 4220 52%
Sell Government Assets $80 4187 52%
Increase Medicare Cost-Sharing $160 4163 51%
Eliminate Subsidies for Biofuels $170 4136 51%
       
Median Simulator Plan Debt as % of GDP in 2021 48%

 

The simulator continues to be a helpful tool in guiding the discussion and identifying solutions. We have recently updated it to account for changes in the projected debt as well as laws passed or options that have entered/exited the discussion. Options in the table above that have been taken out include eliminating earmarks, canceling a missile defense system, and rescinding stimulus funds. New policies on the spending side include reducing nuclear arsenal spending, block granting food stamps, and repealing the individual mandate in the Affordable Care Act. New policies for revenue include raising or reducing capital gains rates, enacting the Buffett Rule, and phasing out the mortgage interest deduction.

Be sure to check out the updated simulator here.

What Will Congress Do With the Tax Extenders?

Last week, the House Ways and Means Subcommittee on Select Revenue Measures held a review of "tax extenders" -- tax provisions that have been enacted on a temporary basis but are frequently extended. The hearing featured testimony from members of Congress who had sponsored legislation to extend one or more extenders, with each of them having to defend their particular tax breaks.

The Joint Committee on Taxation has previously reported that 75 tax extenders either already expired at the end of last year or would expire by the end of the year, adding to the impact of the fiscal cliff created with the expiration of the 2001/2003 tax cuts and the sequester, among other policies.

These tax extenders are wide ranging (see a closer look at five of the extenders here) from tax breaks for fossil and renewable fuels; to the deduction of state and local sales taxes; to credits for maintaining railroad tracks, film and TV production, and R&D; to accelerated depreciation for "motorsports entertainment complexes" (i.e. NASCAR tracks). Howard Gleckman in a post on TaxVox states that having these tax provisions be temporary should theoretically allow Congress to review their effectiveness, but that this is not the case in reality.

This review almost never happens. Instead, after much delay and speechifying, Congress mindless extends the subsidies en bloc.

The political pressure to do this is immense. Today, for instance, the Business Roundtable, which represents CEOs of many of the nation’s biggest companies, told Congress it "strongly supports the immediate and seamless extension of the expired business tax provisions from last year."

My guess is that if you asked one of these corporate execs to name just three of the dozens of tax breaks the BRT has so wholeheartedly embraced, you’d get a blank stare. Yet, this group—which regularly demands that Congress address the budget deficit–wants all the business extenders extended (it said nothing about individual tax breaks that are also expiring).

The tax extenders to some extent represent a lot of what is wrong with the current code. As these provisions are temporary, individuals and businesses cannot plan that they will be available in the future, creating significant uncertainty; in addition, making them temporary also hides their deficit impact. But even if they were permanent, many are mostly parochial carveouts that create additional complexity and economic inefficiency in the tax code. As if we needed more of that!

Gleckman was somewhat encouraged by the hearing, which showed Congress finally doing its job of evaluating the extenders individually rather than mindlessly extending them as a whole. Ideally, they would at least pay for the ones they feel should stay and discard ones they don't all in the context of tax reform. Whether this review will yield any dividends in the form of a better tax code or whether we will see the same old horsetrading result will be apparent by the end of the year. Still, whatever the result, any extensions should be at least be fully paid for, if not more than offset in the context of tax reform.

MacGuineas: Make Candidates Debate the Debt

Today, we are launching DebateTheDebt.org, a site where you can sign a petition calling for a real debate devoted to the debt. In that vein, CRFB president Maya MacGuineas reiterated the call to have one of the three presidential debates focus exclusively on the debt in an op-ed at CNN.com. She joined CRFB co-chair Bill Frenzel in calling for presidential candidates to discuss real, specific plans for dealing with our debt situation.

Noting the challenge of navigating between the fiscal cliff that is looming and the mountain of debt that is projected to skyrocket, MacGuineas said that it is as important as ever to discuss fiscal issues in a manner where candidates have to be as specific as possible. She rightly stated that "candidates should not even apply for the job of running the country if they aren't willing to share the details of their approach for fixing the debt."

On the question of how this debate would work specifically, MacGuineas said:

At the debate, each candidate would present a detailed plan of his preferred approach for reducing the deficit. Any plan should save at least $4-6 trillion over the next decade -- the amount most experts have pegged as the minimum needed to stabilize the debt -- or at the very least, a candidate should explain why his plan achieves any less...

In the debate, the candidates would be led through a discussion of their proposals on defense, domestic spending cuts, reforms to Social Security, Medicare, and other entitlement programs, and taxes, and make the case for their specific proposals.

The plans could be scored by outside experts ahead of time so that fuzzy math wouldn't even enter the discussion. No avoiding the question, no magic asterisks, no talking about the fun parts, like lower tax rates or new investments, without the real work of detailing how they would pay for them. Voters would see beneath the hoods and assess the trade-offs of the different approaches.

The fall presidential debates represent the best opportunity for getting the candidates to discuss getting control of the debt in a meaningful way.

Support the effort for getting a presidential debt debate at DebateTheDebt.org, encourage your friends to do so and be a part of the discussion on Twitter using #DebateTheDebt.

How Is the House Replacing the Sequester?

Update: CBO has posted scores for the Energy and Commerce and Oversight bills. They would save $113 billion and $83.3 billion, respectively, over ten years.

The sequester -- the automatic across-the-board cuts that will hit equal parts of defense and non-defense spending -- is only eight months away, and some of the hand-wringing over its happening is now starting to turn into high-level action. The House Budget Committee held a hearing yesterday on "Replacing the Sequester," featuring remarks from Daniel Werfel of OMB and Susan Poling of GAO. Poling's testimony focused on technical issues around the sequester: which programs it would hit, how much it would hit, and the fact that agencies could not withhold funds in anticipation of the cuts in mid-FY 2013. Werfel's testimony focused on the President's plan to replace the sequester -- the President's budget.

For its part, the House is actively working to replace the sequester, but for only one year (more on that here). The FY 2013 House budget resolution included reconciliation instructions to six committees to save $260 billion over ten years ($330 billion minus $70 billion of instructions that overlap between multiple committees) in order to offset the $78 billion cost of delaying the sequester for one year.  Here is a summary of where that effort is right now.

  • Agriculture Committee: We discussed the Agriculture Committee's $34 billion of savings in a blog on Tuesday. The savings in the bill come from food stamps (SNAP) by ending the temporary benefit increase a year earlier and tightening eligibility requirements, among other things. It advanced out of committee last week.
  • Energy and Commerce Committee: The Energy and Commerce reconciliation bill advanced out of committee two days ago, but it has not been scored yet by CBO. The bill achieves savings from the Affordable Care Act by defunding the health insurance exchanges, eliminating the Prevention and Public Health Fund, and defunding the CO-OP program. It also reduces Medicaid spending by repealing state "maintenance of effort" requirements (requiring states to maintain their current eligiblity standards), extending cuts to hospitals that serve a disproportionate amount of low-income people for one year, and reducing Medicaid state gaming. The bill also includes medical malpractice reform, which overlaps with the Judiciary Committee's bill. Energy and Commerce is required to produce $97 billion of savings over ten years, including tort reform.
  • Financial Services Committee: The Financial Services Committee advanced recommendations that would save $30 billion over ten years. It would so by rolling back many Dodd-Frank related provisions, along with a few other cost saving options. The bill would eliminate the resolution authority that allows the FDIC to wind down large financial institutions, cut the Consumer Financial Protection Bureau and make it subject to the appropriations process, and repeal the Office of Financial Research. In addition, the bill would eliminate the Home Affordable Modification Program and reform flood insurance.  
  • Judiciary Committee: The Judiciary Committee advanced their reconcilation bill two days ago, one which enacts malpractice reforms. The bill was scored by CBO as saving $49 billion over ten years. Note that this score indicates that the tort reform in the bill is less aggressive than one in CBO's Budget Options that would save $62 billion.
  • Oversight and Government Reform Committee: The Oversight Committee approved their reconcilation bill yesterday, which must save $79 billion over ten years. The bill would aim to do so by increasing employee retirement contributions, a move that they say would save $83 billion (there has not yet been a CBO score). There are also a few provisions related to regulations that would likely have no budgetary effect.
  • Ways and Means Committee: The Ways and Means Committee approved its reconciliation bill last week, with the three provisions scored separately by CBO. Those three provisions -- increasing repayments for people who receive excess health insurance subsidies, eliminating the Social Services Block Grant, and requiring Social Security numbers for taxpayers receiving the refundable portion of the child tax credit -- would save about $70 billion combined. That well exceeds their ten-year target of $53 billion.
Savings from House Reconciliation Bills (billions)
  2012-2017 2012-2022
Agriculture Committee
Benefit Increase Sunset $4.4 $4.4
Restrict Categorical Eligibility $5.6 $11.5
Change Rules for Standard Utility Allowances $6.7 $14
Other $1.6 $3.8
Subtotal $18.3 $33.7
Energy and Commerce Committee
Target* $28.4 $96.8
Financial Services Committee
Eliminate Resolution Authority $13.4 $22.5
Eliminate HAMP $2.1 $2.3
Reduce CFPB $2.5 $5.5
Eliminate OFR $0.5 $1.0
Subtotal $18.0 $30.4
Judiciary Committee
Tort Reform $13.6 $48.6
Oversight Committee
Target* $30.1 $78.9
Ways and Means Committee
Recapture of Subsidy Overpayments $12.9 $43.9
Require SSN for Refundable CTC $3.7 $7.6
Eliminate SSBG $8.2 $16.7
Subtotal $24.8 $68.2
     
Total, Scored Legislation $76.7 $180.9
Total, Including Targets $135.2 $356.6

*Bill has not been scored by CBO. Numbers represent the committee's target from the budget resolution

CRFB’s Simulator: A Tool for Fixing the Budget

To hear the news coming out of Washington, finding the route to fiscal stability can be pretty hopeless as our leaders all steer in different directions. If only we had a GPS! Well, maybe we do.

Today, we released the results of our online budget simulator. The results indicate that when the scope of the budget problem is evident, people are willing to make the difficult decisions to correct the course we're on. They are showing the way for their leaders.

In the period from October 2010 through January 2012, over 8,000 simulator users voluntarily submitted their results for analysis. Although these results are not scientific, the findings are nonetheless informative for policymakers. Eighty percent of the sample accomplished the goal of stabilizing the debt at 60 percent of GDP by 2018.

The top ten most selected options (see table below) are illustrative. Sure, the most popular choices were to eliminate outdated programs and get rid of earmarks – the lowest hanging fruit that lawmakers have mostly picked already. But they didn’t stop there. Once users saw the paltry savings from these choices (a mere $120 billion through 2018) they moved on and made tougher choices. Three of the top ten top choices involved reducing military spending and two involved Social Security – two areas where policymakers are very entrenched right now.

CRFB’s “Stabilize the Debt” budget simulator offers users a sizeable list of options and shows how each of those choices affects America’s fiscal outlook. The user has a clear goal of stabilizing the public debt in the medium term at 60 percent of the economy, an internationally recognized standard.

This is how budgeting should be done -- setting priorities and calculating trade-offs, with a fiscal goal in mind. This thinking seems absent in the current environment, with the budget process becoming more and more dysfunctional. The lack of action is why we moved the target date back to 2021 in the newer version, 2018 isn't realistic anymore. Hopefully, we will not have to move the goal posts any further.

But constituents seem to get it. The simulator has been used in classrooms, living rooms and offices across the country.

As can be expected, there were choices where users split clearly along party lines, but there were also substantive options that saw remarkable consensus (see table below). Reducing farm subsidies and adding new state and local workers to Social Security – two timely issues – saw a great deal of support across the political spectrum.

As we seek to navigate between a “fiscal cliff” and a mountain of debt, there is a path to sustainability. Americans are pointing the way. Hopefully, politicians will be sensible enough to ask for directions.

Read the summary of results

View the full results

Try the newest simulator yourself

Chairman Bernanke Addresses the Fiscal Cliff

Federal Reserve chairman Ben Bernanke held a press conference yesterday following the conclusion of the Federal Open Market Committee meeting. Questions spanned a variety of topics including the Fed's current monetary policy stance, the economic outlook, the possible threat posed by European troubles, and Fed transparency. But one question did come up about the fiscal cliff and how the Fed would react if no action were taken. Here are his remarks:

I think we'll have to take fiscal policy into account to some extent, but I think it's important to say if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there's, I think, absolutely no chance that the Federal Reserve could, or would, have any ability whatsoever to offset that effect on the economy. So, as I have said many times before, it is imperative for Congress to give us a fiscal policy that achieves two principle objectives. The first is, of course, to achieve fiscal sustainability over the longer term. That is critical and that is something that needs to be addressed. At the same time, I think that can be done in a way that doesn't endanger the short-term recovery of the economy, and I am concerned that if all the tax increases and spending cuts that are associated with the current law--and which would take place absent any Congressional action--were to occur on January 1, that that would be a significant risk to the recovery. So I'm looking and hoping that Congress will take actions that will address both requirements of the fiscal policy.

Bernanke's message to Congress boils down to this: It's all on you. The Fed could loosen monetary policy if we fell into the fiscal cliff, but it would not come close to bailing the economy out. Bernanke continued to recommend the fiscal path that balances short-term economic vulnerability with long-term fiscal sustainability - which is a path that we have frequently advocated, one that would make the country's economic situation much better.

MY VIEW: Jim Kolbe and Charlie Stenholm

Today, two of CRFB's co-chairman, former Representatives Charlie Stenholm (D-TX) and Jim Kolbe (R-AZ), penned an op-ed in The Hill, saying that the new Trustees report should give lawmakers a new sense of urgency over Social Security reform. Noting that the program's finances had deteriorated since last year and that disability insurance would become insolvent in just four years, they urged lawmakers to overcome the toxic politics of reform to strengthen the program's finances. Of course, the two would know well about the politics, having put out a bipartisan plan for Social Security reform themselves.

Over 75-years, the period during which the Trustees measure the “solvency” of the program, Social Security faces an actuarial shortfall of 2.67 percent of payroll, increasing to an annual deficit of 4.5 percent of payroll by the end of the 75-year window. Everyone knows Social Security is in trouble, and everyone knows why. Our leaders in Washington have not made the important changes necessary to keep the system funded as the baby boom population retires and we all enjoy the benefits of higher life expectancy.

Yet those who come forward with solutions are attacked by the special interests in Washington. Propose raising the retirement age by just two years over a 50-year time period and they accuse you of forcing seniors to eat cat food. Ask high-earning workers to pay payroll taxes on a small amount of their income above the $110,100 cap and you are accused of proposing job-killing tax increases. In our combined 48 years in the United States Congress, never did we hear more hyperbole than when we proposed a permanent fix to Social Security.

The goals of Social Security reform are pretty simple – find a way to gradually bring benefits and taxes in line while protecting and strengthening the benefits of those who rely on the program most and rewarding work and savings where possible. And the options are very well known. We can change the retirement age, improve the way we measure inflation, slow the growth of initial benefits for new and higher-earning seniors, raise the payroll tax rate, increase the income subject to the payroll tax, and/or make other modest tax and benefit changes.

Reps. Kolbe and Stenholm are not alone in their view. The Trustees themselves said in their recent report that "[l]awmakers should address the financial challenges facing Social Security and Medicare as soon as possible." The sooner that changes are made, the more gradual they can be and the more time future retirees will have to plan for them. Congress cannot delay getting these programs' finances in order.

Click here to read the full op-ed.

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

Comparing the House and Senate Agriculture Changes

Recently, both the House and Senate proposed cuts to the Department of Agriculture. Though the proposals are fairly similar in magnitude, they achieve their savings in very different ways. With the 2008 Farm Bill expiring in September, it will be interesting to see how these bills will shape the final outcome for that legislation.

The House Agriculture Committee's savings are in the reconciliation bill to comply with the savings target from the budget resolution. It would cut $34 billion through 2022, entirely from food stamps and related nutrition programs (all under the Supplemental Nutrition Assistance Program, SNAP, which we looked at in a previous blog). This total represents 4.4 percent of projected SNAP spending, or 3.4 percent of USDA spending. 

The House bill ends the temporary benefit increase from the 2009 stimulus in June 2012, more than a year earlier than scheduled. It also limits categorical eligiblity--where people participating in other low-income programs qualify for SNAP automatically--to just cash assistance programs, limits an allowance that is automatically given if a recipient gets energy assistance from LIHEAP (allowing states to bump up benefits by giving only a few dollars of LIHEAP money), and eliminates federal funding for a state employment and training program.

In its proposed Farm Bill, the Senate majority would cut $26 billion, or 2.7 percent of USDA spending, mostly from farm subsidies, but with small reductins in SNAP as well. The bill eliminates direct payments, reduce other commodity payments, cuts conservation programs, and also limits the SNAP energy allowance (although in a way that saves less). It replaces direct payments with a risk assurance program that costs less, although this is largely dependent food prices remaining elevated as they are in CBO's baseline projections.

These two bills can be compared to the President's budget, which cuts agriculture spending by $26 billion. The budget is more similar to the Senate bill. It eliminates direct payments and replaces them with a disaster assistance mechanism, while it reduces crop insurance subsidies and conservation programs. The budget also creates various user fees for agriculture-related services. All of those savings are netted against an extension of the temporary SNAP benefit increase for a year and funding for the Secure Rural Schools program.

Comparing House and Senate Agriculture Cuts (billions)
Category 2013-2022 Savings/Costs (-)
House Reconciliation Bill
Food Stamp Benefits $15.6
Heating and Cooling Assistance, SNAP $14
Other SNAP $4.1
Total
$33.7
Senate Farm Bill
Heating and Cooling Assistance, SNAP $4.5
Other SNAP -$0.2
Commodity Programs $48.3
Commodity Risk Assurance -$28.9
Conservation Programs $6.4
Crop Insurance -$3.2
Other -$0.5
Total $26.4
President's Budget
Extend Temporary SNAP Benefit Increase -$1.2
Eliminate Direct Payments and Reduce Crop Insurance Subsidies $25.6
Reduce Conservation Spending $1.6
Enact Various User Fees $0.7
Extend Secure Rural Schools Program -$0.8
Total $25.8

 

It is important to note that under the sequester from the 2011 Budget Control Act, low-income programs under SNAP would be spared, but various farm subsidies would absorb an estimated $15 billion of cuts through 2021.

Each Congressional bill takes a step in the right direction toward additional savings, but each one also has disappointing aspects. The House bill abandons the current bipartisan consensus for some spending cuts to agriculture subsidies, instead leaving them untouched. The Senate bill does reduce agriculture subsidies, but it changes the subsidy mechanism from direct payments to risk assurance, with the potential for cost increases well above what is projected if food prices are lower than CBO expects.

However, both Houses deserve credit for offering new ideas to reduce the budget deficit.

A Hypothetical Debate on Social Security

A new article from Jeffrey Brown of Forbes succinctly captures much of the debate around the findings of the Social Security Trustees report. In many ways, the debate surrounding Social Security boils down to whether you view it as a stand-alone program or one that is part of the overall federal budget. We have devoted a full analysis on the two ways to view the program -- and as we said in that analysis and our overview of what the program's own Trustees said the other day, the implications from both are clear: we must reform the program, and soon.

To understand how these two views play out, Brown engages in an interesting hypothetical debate between CRFB and the National Academy on Social Insurance (NASI) on the fiscal position of Social Security. While we cannot speak for NASI, Brown articulates our preferred view quite well. Here is a snapshot:

So here is the key question.  Should the interest that Treasury is paying to the Social Security trust funds be counted as income? Here is how a discussion might go between NASI and CRFB representatives. (Any misrepresentations of views are mine alone).

NASI: "Of course the interest should count as income. The interest grows the trust funds, and the trust funds represent a legal claim by the trust funds that will be backed by the full faith and credit of the U.S. government."

CRFB: "Yes, but while these bonds – and their interest – represent an asset to Social Security, they are a liability to the U.S. Treasury. And because the Treasury spent that money rather than saving it, it is crazy to think that we should count this as income. The interest payments are just an accounting fiction, not a real flow of money into the government as a whole."

NASI: "If the Treasury had not issued this debt to Social Security, they would have had to increase public borrowing. So the Trust Fund balance represents money that the U.S. did not have to borrow – and that is a form of saving."

CRFB: "But for decades, Congress used the Social Security surpluses to hide the deficits in the rest of the government. As a result, Congress spent more money over the past few decades than they would have if they had not been able to hide the true cost of their profligacy behind a unified budget framework."

NASI: "There is no way to know for sure that the Social Security surpluses led to increased spending by Congress."

CRFB: "Ah, but there is – at least two academic studies (here and here) have shown that this is exactly what happened."

NASI: "Academic studies aside, there is no question that we should count this interest. And if we do count it, it is clear that Social Security is running a surplus. It is also clear that the program can pay 100% of promised benefits at least until 2033."

CRFB: "We care about the government budget as a whole – not just the narrow question of the Trust Funds. From that perspective, what we know is that the amount of money we are collecting in payroll taxes today is no longer enough to cover the payments to beneficiaries. The days of cash flow surpluses are gone. And because interest on the trust fund is just one arm of government (Treasury) making a paper transfer to another arm of government (the Trust Funds), this does not represent real income to the government as a whole. As such, the program is in dire straits, and needs to be fixed now."

Of course, regardless of your view, the conclusion should be that Social Security needs to be reformed soon. As the Trustees said:

Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.

The full piece by Brown can be found here

CRFB Co-Chairman Bill Frenzel Calls for Debt Debate

Bill Frenzel, CRFB co-chairman and former ranking member on the House Budget Committee, made a convincing case for a Presidential debate on specific steps the candidates would take to reduce the debt.

The American people deserve a full debate and discussion on our fiscal problems. With four $1 trillion deficits in row and a debt ratio over 70%, the Washington response of both political parties has been to "kick the can down the road." Kicking the can is political-speak for saddling future generations with this generation's refusal to meet its own obligations.

A fiscal debate would be a challenging but beneficial test for the candidates, and more importantly, it would provide voters a sense of the candidates' priorities. Instead of allowing the candidates to recite campaign talking points, this debate would force them as much as possible to put forward concrete, realistic proposals.

The general idea is to guarantee, insofar as possible, that the candidates respond directly to unpleasant questions about the country's dire financial condition. Candidates love to talk about more tax cuts, and about preserving entitlements. That's easy. The hard part is telling the people about the difficult decisions that must be made so that future generations will not be subjected to slow growth, high interest rates and a lower standard of living.

Click here to read the full op-ed.

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

The Medicare Trustees Report

While we have already broken down the Social Security Trustees report, the Trustees have also produced a report for Medicare. Considering that health care spending is central to our fiscal challenges and Medicare is the largest program in that category, understanding the report's findings is critical.

The Hospital Insurance trust fund, which funds Part A of Medicare mostly through the 2.9 percent payroll tax, has been running cash-flow deficits for years and is projected to become insolvent in 2024, the same year projected in last year's report. At that point, benefits would be cut by 13 percent. The 75-year actuarial imbalance in HI is 1.35 percent of payroll, a significant jump over the 0.79 percent of payroll shortfall projected last year.

Sources of the increase come from higher utilization of services by providers other than hospitals, changes to the Trustees' methodology about health care cost growth, and higher than expected enrollment in private health plans (Part C) that reimburse at a higher rate than traditional Medicare. These changes are netted against lower expected utilization in hospitals, minor legislative changes, and lower than expected 2011 Medicare spending, all which improve the HI outlook.

Changes in HI Actuarial Imbalance (Percent of Payroll)
  75-Year Actuarial Shortfall
2011 Report Imbalance -0.79%
2011 Spending Levels +0.09%
Private Health Plans -0.12%
Hospital Utilization +0.26%
Other Provider Utilization -0.53%
Economic and Demographic Assumptions +0.01%
Long Range Cost Growth Assumptions -0.30%
Legislative Changes +0.03%
2012 Report Imbalance -1.35%

 

However, the financial status of the HI trust fund is not the most important measure for Medicare, since it only represents one portion of the program. A more useful metric is total Medicare spending, which also includes other spending on patient care and prescription drugs (mostly funded by beneficiary premiums and general revenue). Even under current law projections, which assume various cost control measures stay in effect longer than some other sets of projections, Medicare spending is on course to rise rapidly from about 3.5 percent of GDP today to about 6 percent by 2040. Thereafter, it would rise only gradually to 6.7 percent by 2086.

However, the Trustees note that current law includes some unrealistic assumptions. Notably, at the end of the year, physician payments would have to be cut by 31 percent to comply with the Sustainable Growth Rate formula. Congress has for the last ten years enacted "doc fixes" to avert that. In addition, the Affordable Care Act reduces provider payment updates by the increase in economy-wide productivity (projected at 1.1 percentage points annually over the long run) and mandates that the Independent Payment Advisory Board (IPAB) enact other Medicare savings if spending growth exceeds a certain target. 

The Trustees state that the productivity adjustments may prove to be unsustainable over the long run, although if and when that happens is less certain than with the doc fix. Also, the IPAB would not be much of a factor under current law, but it may have to come up with substantial reductions if the other two scheduled payment reductions do not happen.

Because of the likelihood that at least some of these reductions will be overridden, the Trustees have usually produced an alternative scenario. This year, they have very helpfully made two scenarios, showing what Medicare spending would be if just the doc fixes were passed and if the ACA reductions were overriden along with the doc fixes. For physician payments, the Trustees assume they are increased by one percent per year for the first ten years and then increase with per capita health care spending growth after that. For the ACA reductions, the Trustees assume they are phased out gradually from 2022 to 2036. 

As you can see, enacting doc fixes increases Medicare spending to about 8 percent of GDP 75 years from now, but its growth trajectory is somewhat parallel to current law; in other words, there still is a slow down in the growth rate, just from a higher level. On the other hand, overriding all three payment reduction mechanisms increases Medicare spending to 10.4 percent of GDP in 2086, and cost growth basically barrels through the 2040 yellow light. The report states that removing the productivity adjustments have by far the largest effect.

The Trustees report shows that Medicare spending will rise significantly over the next thirty years, but that it can be much more controlled if we stick to our "cost-control guns" and adhere to a PAYGO principle of paying for any savings measures that Congress unwinds.