Yesterday, the AARP published a report and sent an accompanying letter to members of Congress and President Obama in opposition to switching to the chained CPI for calculating cost-of-living adjustments (COLAs) for Social Security. In the letter, the AARP argues that the chained CPI is not an accurate or appropriate COLA calculation for Social Security and suggests that its effects are regressive -- including the tax portion.  These points are simply not true.

We have written extensively on the chained CPI, including a full paper on the subject last May. As we have explained, economists of all stripes believe the chained CPI is the most accurate measure of inflation, as it is unbiased for consumer substitution between goods when relative prices change (for example, between apples and oranges). The AARP advocates going in the other direction by switching to the CPI-E (Experimental CPI for the Elderly). However, the CPI-E suffers from serious methodological flaws, including that it is only a sub-index, it has a small sample size, it doesn't account for certain elderly consumption patterns (use of catalogues, senior discounts, etc.), and it suffers from the same substitution bias as the unchained CPIs. Partly because of these concerns, CBO concluded that "it is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people."

AARP also criticizes the chained CPI for being harder on older beneficiaries as the lower COLAs compound. It is true that the effect of the chained CPI grows as beneficiaries age, but this can be addressed in the context of Social Security reform -- for example, by bumping up benefits for those have been in the programs for 20 years, as the Domenici-Rivlin and Simpson-Bowles plans do.

AARP's claim that the tax impact would be regressive is also false, as we've pointed out before. The JCT study used in justifying the claim is based on percent change in tax burden rather than percent change in income as well as current law rather than current policy -- making the study virtually irrelevant for measuring the distributional impact. When one corrects those issues, as Tax Policy Center did, the distributional result is roughly even by income group.

^{Source: Tax Policy Center}

At the end of the day, switching to the chained CPI would save more $200 billion over ten years through a combination of spending reductions and revenue increases while closing one-fifth of Social Security's funding shortfall. Being able to save that amount of money from a technical change that most experts believe should be happening anyway should be a no-brainer. Though groups from the left and right may criticize it, we hope policymakers can look past this and do the right thing.

Former Oklahoma 1st District Congressman and CRFB Board Member Jim Jones penned an op-ed in today's Tulsa World calling for policymakers to put everything on the table for a plan to replace the fiscal cliff. Many members of Congress have just come off tough races, but as we saw yesterday the leadership in both chambers appears to be looking for a compromise. Jones believes that compromise is both needed and possible given the tremendous fiscal challenges faced by our country.

For almost a decade and a half, I was honored to serve the great people of northeastern Oklahoma in Congress. Today, a centrist Democrat in Congress may be about as rare as a polar bear in northeastern Oklahoma, but through my experience as a fiscally-conservative Democrat on the Ways and Means and Budget Committees, I was able to see how much agreement there was between the two parties, and how deals can be struck when there's a common interest. Even in today's climate of hyper-polarization, this remains true, and even for this era's most important issue: the national debt.

Having hit $16 trillion with no signs of slowing, the national debt promises to eat away at your favorite government policy, regardless of your party or politics.

Whether you prefer to maintain spending levels on, say, transportation programs or scientific research, or you're more interested in keeping taxes low, your preferred policy is about to be swallowed up by what we need to pay to service our debt. Unless we act now.

And now really is the time to act. With the "fiscal cliff" - the club-footed combination of tax hikes and spending cuts, $500 billion in 2013 alone - looming come Jan. 1, our political leaders have been given a firm deadline to get something done.

It will not be easy though, Jones explains that the only way to solve this problem is by putting everything on the table.

Any deal worth the paper it's printed on must make sure to treat nothing as sacrosanct. Any promise made to keep a constituency's favored spending program or tax break is short-term thinking; unless we put everything on the table, we will never come close to plugging the hole we're in.

I've seen much agreement across party lines when it comes to fiscal issues. And I am optimistic that, even in this age of political polarization, that we'll be able to do so again.

The full piece can be found here.

"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.

First off, CRFB would like to congratulate President Obama and all of those who were elected and re-elected to the Senate and the House. CRFB is looking forward to continue working with policymakers from both sides of the aisle to help make deficit reduction a reality.

While the campaigns may be over, there's no time to waste in transitioning into governing mode. Lawmakers have a ton on their plate over the cmoing months and an incredible opportunity to make meaningful progress on controlling federal debt this decade and beyond. The lame duck session is going to be a busy and critical time of negotiations as we work to avoid the fiscal cliff and a mountain of debt. There will be plenty of work to do.

To get a sense of how big the fiscal cliff really is, here are all of its components:

• 2001/2003/2010 Tax Cuts: The 2010 tax cut will expire at the end of the year, taking with it many provisions originally enacted in 2001 and 2003. This will mean rate increases for earned income, capital gains and dividends, and large estates; reductions in refundable tax credits; the return of phaseouts of personal exemptions and itemized deductions for higher-income taxpayers; the elimination of reductions in marriage penalties; and reductions in education tax benefits. Extending these provisions permanently would cost $2.7 trillion over ten years.
• AMT Patch: The Alternative Minimum Tax is a tax intended to ensure that higher-income taxpayers pay at least a minimum amount of tax. However, the exemption from the AMT is not indexed for inflation, so Congress does so manually every so often to ensure the tax does not ensnare millions more taxpayers. The most recent patch expired in 2011, meaning that Congress would have to retroactively patch it for 2012. If the AMT is not patched, it would hit 30 million taxpayers, as opposed to the current four million who are affected. Permanently patching the AMT would cost about $860 billion by itself, but almost $1.8 trillion if the 2001/2003/2010 tax cuts are extended.
• Sequester: The sequester, enacted in August 2011 in the Budget Control Act, would make a 9.4 percent across-the-board cut to defense spending and a roughly 8 percent cut to non-defense spending on January 2. Neither party wants the sequester to go off then, but there are differences about how to pay for a delay and whether to keep some of the savings for the later years. The House Republican budget, for example, re-assigned the defense cuts to non-defense discretionary spending, keeping the total savings about the same (other than repealing the 2013 cuts). By contrast, the President's budget repealed the sequester entirely. Full repeal would cost about $970 billion over ten years.
• Payroll Tax Cut and Unemployment Insurance: The payroll tax cut was originally passed in the 2010 tax cut, reducing the employee tax rate by 2 percentage points. It was extended through the end of this year in February. There was initially little interest in extending it for 2013, but recently Democrats have started to jump on the bandwagon again. The White House reportedly has interest in bringing back the Making Work Pay tax credit, which the payroll tax cut replaced. Extended unemployment benefits will also expire at the end of the year, at which time the maximum number of weeks a person could collect benefits would fall from 73 weeks to 26 weeks. There has been less discussion about what will happen to UI benefits, but it will certainly be on the table in December, given the continued high unemployment rate.
• Doc Fix: Due to the Sustainable Growth Rate (SGR) formula, which was intended as a backstop to limit Medicare spending growth, Medicare physician payments will be cut by 27 percent at the end of the year. Congress has rolled back the SGR every few years since 2003, usually freezing physician payments but leaving a cliff in place for future years. Permanently repealing the SGR and freezing physician payments would cost $245 billion over ten years. There are also a number of small "health extenders," temporary provisions related to Medicare and Medicaid that are typically extended along with the doc fixes.
• Tax Extenders: Tax extenders are temporary provisions of the tax code that are routinely extended. Many of these extenders are business tax breaks, like the R&E tax credit, but there are also some individual tax breaks for things like education expenses and state and local sales taxes. Like with the AMT patch, the most recent extension ended in 2011, so a retroactive extension in 2012 would need to take place. So far, the Senate Finance Committee has passed a two-year extension (extension through 2013) of most of the extenders, but otherwise there has been little action. We'd expect that there will be by the end of the year. Extending all of the extenders permanently would cost $890 billion over ten years.

There are also many other fiscal-related issues that will come up in the lame duck session and into next year. They are:

• Debt Ceiling: The Treasury Department recently stated that the U.S. may breach the debt ceiling by the end of this year, although it will be before early 2013 before there is serious danger. As they did previously, Treasury will use "extraordinary measures" to create extra space under the ceiling. House Speaker John Boehner (R-OH) has reiterated his position from last year that any increase in the debt ceiling must be accompanied by an equal or greater amount of spending cuts. If all goes well, an increase in the debt ceiling would be rolled into a deal that responsibly replaces the fiscal cliff.
• Appropriations: In September, Congress passed a continuing resolution to fund the government through March 27. This setup is somewhat parallel to what happened in the spring of 2011, when there nearly was a government shutdown. Although the partisan make-up of Congress and the Presidency (is the same?), it does not seem likely that there will be another showdown. There may be a dispute over riders, however, which has been commonplace in the past few years.
• Farm Bill: The 2008 farm bill lapsed on September 30 with no Congressional action on either that or a discussed drought relief bill. Although the Senate passed a farm bill in June, the House did not take one up. The expiration means that we now revert to the 1949 law, the last time a permanent bill was passed. For now, the expiration means that certain conservation and other programs will no longer take new enrollees. In terms of commodity programs, the expiration will affect dairy products on January 1 and other crops sometime during the 2013 crop season, at which point commodity payments would soar and the target prices for many crops would be well above the market price. 

^{Source: CBO
*Includes interaction with 2001/2003/2010 tax cuts
^CBO has scored the leading House and Senate-passed farm bills as saving $35 billion and $23 billion, respectively, relative to CBO's baseline. CBO has estimated that these bills would authorize slightly less than $1 trillion of spending over ten years.}

There are also, of course, many non-budget related items that Congress is also looking to deal with, so they have their work cut out for them to say the least. In these last couple of months, politics has dominated. But now it's time to govern and focus on policy. We hope lawmakers will use this election to give the country a comprehensive debt deal.

The Urban Institute's Eugene Steuerle and Caleb Quakenbush have updated their estimates calculating lifetime Social Security and Medicare benefits and taxes. In order to compare contributions to benefits received, they assume that the contributions have a rate of return (discount rate) of inflation plus two percent. We previously presented inflation-adjusted numbers based on the older estimates.

Their new estimates show the same story as the old: Social Security and Medicare benefits exceed taxes for past, present, and future age groups. In reality, though, this difference is more about Medicare benefits and taxes.

For Social Security, lifetime taxes largely compensate benefits on average--with the exception of middle-income one-earner couples--for recent retirees with that trend projected to continue into future years. For Medicare however, benefits exceed taxes by a factor between 2.5 and 4 for the recently retired. This discrepancy is due to the fact that only Part A of Medicare is financed with a dedicated tax. Parts B and D, on the other hand, finance only 25 percent of their program costs (net of cost-sharing) from premiums, while the other 75 percent comes from general revenue.

^{Source: Urban Institute}

Steuerle's and Quakenbush's estimates should dispel the myth that benefits, particularly in Medicare, are paid for and that we can avoid entitlement reform. With health care costs projected to keep rising and population aging, policymakers are going to have to look to make changes to the Medicare program, as this problem is not going away.

Richard Kogan at the Center for Budget and Policy Priorities has released a new report that argues that it may be a better goal for an upcoming budget deal to stabilize the debt as a share of the economy, rather than "Going Big" and coming up with a deal that will put the debt-to-GDP ratio on a downward path. Kogan agrees that a rising level of debt is a threat to the economy, but argues that stabilizing the debt, even at its current high levels, should be our current goal. As he says:

Nevertheless, by stabilizing the debt for the next decade, an additional $2 trillion in savings would give experts and policymakers time to figure out how to slow the growth of health care costs throughout the U.S. health care system without impairing the quality of care. An additional $4 trillion of deficit reduction over the next decade would, in contrast, result in a declining debt ratio (as Figure 1 shows) but would require policymakers to make decisions today on policies, particularly in health care, where desired solutions remain elusive.

There are major unknowns in the health arena. Health care cost growth has slowed appreciably over the past two years. Experts don’t yet know whether this slowdown is permanent or only temporary, and the answer will affect both the magnitude of the long-term fiscal problem and the extent to which further slowing of health-care cost growth is required.

More fundamentally, we currently lack needed information on how to slow health cost growth without reducing health care quality or impeding access to needed care. Demonstration projects and other experiments to find ways to do so are now starting, some of them government-funded and others being undertaken in the private sector. By later in the decade, we should have substantially more knowledge of what works and what doesn’t.

There's no doubt that stabilizing the debt should be the first step over the next few years, but stopping there would not be ideal. There are a number of reasons why "going big" would be preferable to "going medium":

• Economic Projections: The largest uncertainty in budget projections is always in the economic projections, and there is a good chance that we could be overestimating economic performance. For example, CBO does not attempt to predict when a recession will occur, so it projects steady economic growth over the next ten years. It is quite possible that there would be a recession by 2022; otherwise, we would be in the middle of the longest expansion in U.S. history by far. In general, CBO has been revising downward its economic projections in recent years, which could cause a much worse fiscal outlook as we have seen in the past decade. If the debt path was only stable, it would take only a slight downward revision to throw it off track.
• Budget Projections: It's very possible, indeed likely, that CBO will be wrong about certain projections in the budget. It is difficult to predict with great certainty the budget outlook for the next few years, let alone the next decade. CBO may find that they are underestimating the growth rate of health care spending, the number of people receiving benefits in a variety of programs, or the share of compensation going to taxable income is lower than they anticipated. Obviously, they could be doing the opposite as well, but prudent budgeting is wiser, especially in the current fiscal environment. If we were only to stabilize the debt, an unexpected surprise in CBO's projections would push debt unequivocally back up.

• Breathing Room: It is important to keep the budget flexible. We could have an unanticipated emergency such as a natural disaster or recession that presents a drain on the budget. In these cases, it would be wise to do what was necessary to combat the challenge, but a stabilized debt path would quickly turn upward, perhaps to dangerous levels. Putting debt on a clear downward path would provide space for lawmakers to overcome unforeseen emergencies without risking our fiscal standing. Merely stabilizing the debt at a high level may leave little margin for error.
• The Politics of Going Big: This is a point we have made frequently. Doing a medium-sized plan would take most, if not all, the low-hanging fruit off the table and may still require another bite at the apple if things go wrong. Then, the only solutions left would be painful policies that would be politically difficult to enact by themselves. Going big can make a plan more successful by allowing both palatable and unpalatable policies to be enacted together in a package that is much easier to swallow as a whole.

On the topic of health care cost containment, it is difficult and we do expect health care reform to be a work in progress as this decade goes on. But just because we may learn new ways to control health care costs in the upcoming years does not mean we should hesitate in putting policies in place that we believe could be successful in reducing health care spending. We have discussed some of these ideas (see here, here, and here) in the past. These may not be fundamental reforms to the way health care is delivered and financed, but they would certainly help.

Stabilizing the debt is a useful benchmark for early negotiations, but ultimately a deal needs to go beyond that. Deficit reduction is hard, and the opportunity for both Democrats and Republicans to come together on this issue might not always be there. Lawmakers have a real opportunity to act on fixing the budget as a result of the approaching fiscal cliff.  We urge policymakers to "Go Big" in their approach.

On Wednesday the Tax Relief Coalition, a group made up of notable business councils including the U.S. Chamber of Commerce, National Associations of Independent Business and the National Association of Manufacturers, released a letter urging replace the fiscal cliff with a comprehensive deficit reduction plan using both tax reform and entitlement reform.

The looming fiscal cliff is growing closer and threatening and our economic recovery, so it is good to see more CEOs and business leaders call for action to replace the cliff. The Tax Relief Coalition writes:

TRC welcomes the recent action of corporate CEOs calling for action to avoid the looming fiscal cliff. We firmly believe that reforms of our tax code and entitlement systems is necessary to get our country back on a path to fiscal sanity.

They also called for a bipartisan debt reduction plan earlier this year in a letter to members of Congress:

TRC members believe that a credible bipartisan plan for long-term deficit reduction and economic growth would produce the immediate benefits of reducing uncertainty and improving financial stability and set the stage for long-term deficit reduction through comprehensive tax and entitlement reform.

The Tax Relief Coalition is worried about the increase in marginal rates that come with the fiscal cliff, arguing that it would be especially harmful for the millions of businesses that are organized as pass-through businesses and taxed through the individual code. Base-broadening, rate reducing tax reform could both raise more revenue and reduce tax rates, spurring more growth. Entitlement reform also needs to be included in the conversation, with health care spending as the greatest future driver of our unsustainable debt.

This is very much in line with what the Fix the Debt campaign argues; everything needs to be on the table with both revenue increases and spending cuts. Specifically, the campaign lists in its core principles that a plan should include reforming Medicare and Medicaid, strengthening the Social Security program by giving it solvency, and engaging in comprehensive and pro-growth tax reform that raises more revenue while broadening the base and lowering rates. If we are willing to put everything on the table, we can stabilize the debt and put it on a downward path without instituting the drastic spending cuts and tax increases in the fiscal cliff.

It's good to see both business leaders and citizens actively engaged in the current debate about the budget. We can replace the fiscal cliff with a plan that addresses all parts of the budget, but we are going to have to make the tough choices. With the stakes so high, everyone needs to be involved.

Yesterday in a blog post, IMF's Fiscal Affairs Director Carlo Cottarelli stressed the need for fiscal transparency on the part of governments around the world in attaining a comprehensive debt-deal. By fiscal transparency, Cottarelli means the necessity for governments to make fiscal information accurate and readily available. By doing this, governments are able to set reasonable parameters for making "good budget decisions," while at the same time, citizens become well-informed and are able to hold their governments liable for those decisions. Cottarelli writes:

Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. And unless that information is made public, citizens and their legislatures can’t hold governments accountable for those decisions.

Fiscal transparency—the public availability of timely, reliable, and relevant data on the past, present, and future state of the public finances—is thus to the foundation of effective fiscal management.

But how fiscally transparent have governments been? Citing a paper from the IMF, Cottarelli attempts to assess the gains governments have made, noting that there have been some improvements. In the same vein, he sets out ground rules governments must adhere to. Over the past few years, standards for reporting fiscal data have been enhanced significantly with the number of countries able to report data rising by over 50%. Many have also improved the timeliness of their reporting.

Of course, in the U.S., we have a wealth of budget information compiled by the CBO, OMB, Treasury Department, and the Social Security and Medicare Trustees, among other sources. They show not only historical data, but budget forecasts as far out as 75 years into the future. Information is readily available, and the sources that provide it are trusted to produce non-biased results. In terms of fiscal transparency, we're doing well compared to other countries. Still, Cottarelli has some advice that we could use with regards to our budget process:

Finally, the fiscal adjustment process requires, in many cases, governments to set ambitious targets for reducing deficits and debt. We know from experience that governments in these circumstances are often tempted to resort to creative accounting as a way of avoiding, albeit temporarily, the tough fiscal choices implied by those targets.

It is important that we have a blueprint for where our budget should go, and we should make sure that our accounting standards are up to the task.

Click here to read Cotarrelli's piece and click here to read the IMF paper here.

As the East Coast and other communities affected by superstorm Sandy begin the work of rebuilding and assisting those who need help, the CRFB and Fix the Debt teams are keeping everyone in our thoughts. Just as there are preparedness lessons we can learn from Sandy, there are very important takeways for the federal budget too.

The storm can remind us that country's need the resources to be able to step in and respond to unpredictable disasters like hurricanes, tornadoes, or deep recessions. But of course, it isn't easy to predict these events, whick makes it very difficult to budget for. In order to maintain the ability of our country to respond to unpredictable events in the future -- be it a natural, international, or economic crisis -- we must have the budget flexibility and healthy levels of debt.

The breathing room to respond to crises before debt levels become suffocating is known as fiscal space, and it has been an important factor in allowing us to avoid making deep and abrupt spending cuts or tax increases to assuage our creditors during the recent downturn. Other countries did not have a sufficient buffer.

However, as a result of the economic downturn, the aging of the population, rising health care costs, and unsustainable policies enacted in the past, our fiscal space won't be what it once used to be. We previously discussed a study based on IMF data showing that the U.S. has a comparatively low level of fiscal space relative to other countries. The study looked at the projected debt to GDP path of the U.S. and compared it to the IMF's estimate of the point at which it would be impossible to get debt back under control without default. According to the study, we have similar levels of fiscal space to countries like Greece and Ireland, who have had debt troubles in the aftermath of the Great Recession and have been unable to respond with fiscal expansion. Reasonable people can disagree as to what the exact number level of debt will prompt a crisis, but it is clear that our current fiscal path would bring us to ever-increasing debt levels and an eventual debt crisis.

When disaster does strike, we need resources to deal with the damages that do occur. Having fiscal space can allow us to properly and adequately deal with rare and unpredictable events. In order to have that space we need to put the debt on a stable and downward path as a share of the economy. It's always better to prepare in advance and not wait until a crisis forces action.

Urban Institute Fellow and CRFB Board Member Gene Steuerle points out the great confusion in the recent Medicare debate. Both President Obama and Governor Romney are accusing each other of seeking to cut Medicare to the great loss for seniors.

However, if both candidates are going to be fiscally responsible as they have promised, then health care spending, especially spending in Medicare, must be constrained. Both should and do seek to cut Medicare, but the disagreement is how to do it to minimize the pain. Steuerle writes:

Both presidential candidates claim to save money on Medicare without cutting benefits.  President Obama says his reforms “will save Medicare money by getting rid of wasteful spending…that won’t touch your guaranteed Medicare benefits. Not by a single dime.” Meanwhile, Governor Romney promises that his “premium support” plan will save money while still providing “coverage and service at least as good as what today’s seniors receive.”

But politicians aren’t the only ones dispensing that free-lunch rhetoric. Even highly respected journalists and researchers get pulled into it.

Consider two New York Times stories. After the first presidential debate, Michael Cooper, Jackie Calmes, Annie Lowrey, Robert Pear and John M. Broder said that President Obama “DID NOT CUT BENEFITS by $716 billion over 10 years as part of his 2010 health care law; rather, he reduced Medicare reimbursements to health care providers.” A few days later, David Brooks cited an AMA study of a premium support plan put forward by vice presidential candidate Paul Ryan and Democratic Senator Ron Wyden, saying that “costs might have come down by around 9 percent with NO REDUCTION IN BENEFITS” [cap emphases mine].

Can you see what is going on? Politicians, reporters, and experts all recognize that cost growth must be brought under control. But they also want to suggest that benefits won’t be reduced—if only we go with a particular approach.

Steuerle argues that there is no magic bullet. There are many ways to make health care spending more efficient, but if were are going to contain costs we are also going to have to make some tough choices.

Ferreting out the truth in this Medicare debate also requires looking beyond health care. Benefit losses in health care must be contrasted with benefit gains elsewhere. Yet even health care will likely be much worse if we continue to borrow hundreds of billions of dollars more from unfriendly nations and let excessive debt inhibit economic growth.

Bottom line: both parties favor cutting Medicare benefits, or, more accurately, slowing down the rate of benefit growth. The issue isn’t whether but how this can best be done.

The full article can be found here.

"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.