The Bottom Line

July 18, 2014

The Congressional Budget Office’s (CBO) new Long-Term Budget Outlook presents plenty of good news on Medicare costs yet still highlights the role that increased federal health care spending plays in driving the medium- and long-run growth in our debt. While costs are lower than in last year's projection, health care spending is still expected to increase significantly as a percent of GDP over the long term.

Projected federal health care costs overall may be down only a small amount (0.1 percent of GDP annually) since last year's report, but they have now been lowered by an astounding $900 billion cumulatively from 2011-2021. Moreover, CBO also slightly lowered its estimate of underlying health care cost growth because it is based on the historical average of spending growth since 1985 (with recent years weighted more heavily), which now incorporates one more year (2012) of very slow growth. For Medicare, this works out to slower long-term spending per beneficiary growth of about 0.07 percentage points annually.

Despite the improvements, spending on these programs is still scheduled to grow from 4.8 percent of GDP this year all the way up to 8 percent of GDP by 2039.

July 18, 2014

New calculations in the Congressional Budget Office's Long-Term Budget Outlook show that the high debt projected under current law could diminish average annual income by $2,000 within 25 years, and that a $4 trillion debt reduction package would not only prevent that $2,000 hit but could also increase average income in the economy by another $2,000, among other findings.

The report details the economic drag that will be caused by our growing debt once the economy has fully recovered by the Great Recession, if Congress does nothing to address it. Under CBO's "Extended Baseline Scenario," debt would increase from its current 74 percent of GDP to exceed the size of the economy, reaching 108 percent of GDP, by 2040. Yet even the Extended Baseline Scenario is perhaps too optimistic in assuming that some provisions are allowed to expire as scheduled and that Congress won't take any more fiscally irresponsible decisions. CBO also projects an alternative baseline (the "Alternative Fiscal Scenario (AFS)"), which roughly illustrates what would occur if lawmakers continue current policies, keep non-health, non-Social Security spending from reaching historical lows, and do not allow taxes to continually increase as a result of "bracket creep." Under the AFS, debt skyrockets to 170 percent of GDP by 2040, over twice its current level.

CBO's standard budget estimates utilize historical trends of economic growth, inflation, and other variables. They do not, however, incorporate the effects of changing levels of debt on the economy, often called “feedback” or “dynamic" effects. In reality, high and growing debt levels will hinder long-term economic growth. In particular, CBO explains that "higher debt crowds out investment in capital goods and thereby reduces output relative to what would otherwise occur." In other words, high debt harms economic growth.

In its report, CBO has analyzed the harmful effects of debt.  If its economic projections are modified to include these negative effects, the economy is 3 percent smaller in 25 years. If lawmakers return to their more profligate ways and follow the policies in the AFS, the economy will be another 5 percent smaller. In contrast, reducing the debt can lead to modest but real gains in economic growth: a 2 percent larger economy within 25 years.

A bigger economy means increased income for each individual. CBO also shows the effects on per-capita GNP, a rough proxy for average income.  By 2039, GNP would be $78,000 per person before accounting for the negative effects of high debt levels, in today's dollars. If the economic drag from higher debt is included, per capita GNP drops to $76,000 – a $2,000 cut in income. If Congress continues profligate spending and increases debt to the levels in the AFS, GNP will drop by another $3,000, which means the average income will have dropped $5,000 dollars because of high debt.

July 16, 2014

Budget rules require new policies to be paid for with savings elsewhere in the budget. Policymakers must balance the new policy against the choices necessary to offset the costs, forcing them to prioritize and exercise cost restraint. Once PAYGO rules are suspended, however, legislation can be loaded up with new spending or tax breaks without the same scrutiny.

The tax bills considered by the House this year to permanently extend certain breaks are a prime example. These bills have all have been exempted from PAYGO rules which require legislation to be paid for and the budget limits established by the Ryan-Murray budget agreement. As a result, these bills have advanced new tax breaks and expanded existing tax breaks to the tune of $275 billion.

We've long called for Congress to abide by PAYGO with the tax provisions that expired at the end of 2013 known as the tax extenders. However, Congress appears to be holding themselves to a more relaxed standard where they are not required to pay for the costs of extending current policy: the tax cuts can be "extended for free." Even though this is a mistake which allows costs to disappear from the budget process, the door is opened to even greater problems once legislation is exempt from PAYGO. Without PAYGO, nothing prevents legislation from becoming a spending free-for-all of new and expanded tax breaks. 

Only half of the 14 bills approved by the Ways and Means Committee even hold themselves to the more relaxed standard where extensions are free. The other half either expand current tax breaks or enact entirely new breaks, which would add about $275 billion to the debt over and above the $550 billion cost of simply extending current policies. And there are several dozen provisions that haven’t even been considered; all told with interest costs, the expansions could reach $1.5 trillion.

July 16, 2014

One of the biggest stories of last year's long-term outlook was the deterioration in Social Security's financial picture. Largely due to CBO's expectation that people will live longer, its estimate of the 75-year shortfall grew by more than half from their 2012 outlook – from 2.1 percent of taxable payroll to 3.4 percent (1.2 percent of GDP). CBO predicted that the combined Social Security trust funds would run out of money by 2031, two years earlier than predicted by the Trustees. This year's projections show a further deterioration in Social Security's financial situation, with the 75-year shortfall now projected at 4.0 percent of payroll (1.4 percent of GDP) and the trust fund expected to be exhausted by 2030. The Disability Insurance trust fund faces a more immediate issue, with its exhaustion date set for FY 2017.

This year's change is not due to demographics – which look similar to last year – but two broader economic factors: lower interest rates and slower short-term economic growth. CBO has revised its estimate of long-term interest rates down by about 0.5 percentage points. Lower interest rates mean lower debt payments and are actually good for the budget overall but cause estimates to place a greater weight on later years when Social Security is running greater deficits. Thus, the higher weight placed on later years worsens the actuarial balance (and creates a lower return to the assets in the Trust Fund) and is responsible for about half of the change.

The second major change is from changes in ten-year projections since last September, mostly from the February 2014 outlook when CBO revised down its economic growth projections. The resulting forecast had less income tax and payroll tax revenue, which contributed to the worsening Social Security balance by reducing Social Security payroll tax revenue by $230 billion over ten years. This factor represents about 0.2 percentage points of the change in the actuarial shortfall. The remaining 0.1 percentage point comes from technical factors that CBO does not specify.

Change in Social Security Long-Term Projections
  75-Year Change (Percent of Payroll)
September 2013 Shortfall 3.4%
Economic Projections (Interest Rates) +0.3%
Ten-Year Projections (Revenue) +0.2%
Other Changes +0.1%
July 2014 Shortfall
July 15, 2014

CBO's Long-Term Budget Outlook is a long and detailed 140-page document – filled to the brim with facts, figures, scenarios and assumptions – and comes with a spreadsheet with even more data. To help people navigate the report and pull out its key takeaways, we've boiled down the document into a concise 6-page analysis with all the key facts and findings.

July 15, 2014

Earlier today, the Congressional Budget Office (CBO) released its latest Long-Term Budget Outlook. Although CBO normally makes ten-year projections, it also occasionally shows 25- and 75-year projections that highlight our long-term fiscal challenges. As the report states clearly, the fiscal situation is unsustainable, and within the next quarter century, growing debt levels will "push federal debt held by the public to a percentage of GDP seen only once before in U.S. history."

Under CBO's projections, debt will rise from 74 percent of GDP in 2014 (a post-war record high), to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. The projections are modestly higher than last year's over the next three decades but somewhat lower over the very long term. As expected, the growing debt is largely the result of the rapidly growing costs of Medicare, Medicaid, and Social Security – and the failure of revenue to keep up.

Importantly, those projections assume that Congress follows current law, letting several provisions (such as the tax extenders and doc fix) expire, allowing revenue to grow far above historical levels, and allowing discretionary spending to fall far below historical levels. Under CBO's more pessimistic Alternative Fiscal Scenario (AFS), debt will reach nearly 90 percent of GDP by 2025, 170 percent by 2040, and exceed 250 percent beyond 2050.

July 15, 2014

Yesterday, the Commmittee for a Responsible Federal Budget released a paper detailing the problems with the federal budget process. In light of the 40th anniversary of the enactment of the Congressional Budget and Impoundment Control Act of 1974 this past Saturday, the paper details many problems facing the current budget process.

The paper focuses on three main issues -- each with many aspects to them -- with the modern budget process: lack of transparency, lack of accountability, and lack of a long-term focus. These issues have resulted in poor planning and policy around the debt, with the process increasingly becoming ad hoc, ineffective, and short-sighted in practice.

July 14, 2014

Today at 12.15 p.m., the Peterson Institute for International Economics is hosting a book launch for "Post-crisis Fiscal Policy," a book by the International Monetary Fund (IMF) staff on the role of fiscal policy during the global financial crisis and its aftermath.

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, will participate in a panel discussion at the event, along with the following speakers:

July 14, 2014

Around this time of year, the Social Security Trustees usually issue their report on the status of the program over the next 75 years. In advance of that release, CBO has provided a report to Senate Finance Committee ranking member Orrin Hatch (R-UT) with options for making Social Security solvent over 75 years through payroll tax increases. If no action to address the insolvency is taken, Social Security will see a 23 percent across-the-board benefit cut in the early 2030s. Because CBO's own estimate of Social Security's shortfall is larger than the Trustees', it finds that larger increases would be required to keep Social Security solvent than the Trustees estimate.

Closing the 75-year shortfall through the payroll tax alone would require an immediate 3.54 percentage point increase in the payroll tax rate (to 15.94 percent), compared to the 2.7 percentage point necessary increase projected by the Trustees. CBO also evaluates increases in the cap on income subject to Social Security payroll taxes (the "taxable maximum"), which is currently set at $117,000 for 2014 and increases with average wage growth each year. The cap currently covers 83 percent of wages; raising it to 90 percent would close 30 percent of the funding gap, and eliminating the cap altogether would close 45 percent.

The report also shows that getting to 75-year solvency would require a 2.3 percentage point payroll tax increase in combination with the 90 percent option and a 1.6 percentage point payroll tax increase for the elimination option. There are a number of permutations of these options included in the report, which you can see below.

July 11, 2014

The Office of Management and Budget (OMB) this afternoon released the Mid-Session Review, updating its budgetary and economic estimates for the President's budget. The MSR shows a worse outlook for debt, reaching 72 percent of GDP in 2024 instead of 69 percent as originally estimated, although debt is still on a downward path (albeit a shallower one) as a share of GDP.

July 11, 2014

Both the House Ways and Means Committee and the Senate Finance Committee approved legislation on Thursday to fund a short-term patch for the Highway Trust Fund. Both had previously announced plans with offsets: the Finance Committee had an $8 billion plan relying on increasing tax compliance while the Ways and Means Committee had a $10.9 billion plan relying largely on a budget gimmick known as pension smoothing.

The plans have a lot in common, indicating a degree of bipartisan and bicameral agreement. Both deposit almost $11 billion into the Highway Trust Fund to fund highways through next May, extend customs fees expiring in 2023, and rely on pension smoothing. Yet there are significant differences: the Finance Committee legislation, which passed with bipartisan support, includes several tax compliance measures and only partial versions of some policies in the House bill. Unfortunately, one of the House policies, pension smoothing, is a budget gimmick that only raises revenue in the short term and should not be used to pay for anything.

Pension smoothing, which temporarily reduces companies' pension obligations, changes the timing of some taxes paid, raising money in the first six years and costing money thereafter. Since not all of the costs are measured in the 10-year budget window, the provision appears to raise money in the short term.

If Congress decides it wishes to relieve companies of some of their pension obligations, it should not count the temporary revenue generated by that policy. Further, CBO estimated that as a result of pension smoothing, pensions will be more underfunded, likely resulting in more companies' plans being taken over by the PBGC.

Short-Term Proposals to Fund Highways
Policy House Ways & Means
Senate Finance
Enact pension smoothing $6.4 billion $2.7 billion
Extend customs fees by 1 year to 2024 $3.5 billion $2.9 billion
Increase mortgage reporting - $2.1 billion
Clarify of statute of limitations on overstatement of basis - $1.3 billion
Withhold payments from Medicare providers with delinquent taxes - $0.8 billion
Transfer funds from the Leaking Underground Storage Tank Fund $1 billion
$1 billion
Rescind old transportation earmarks - <$0.2 billion
Total Revenue Raised
$10.9 billion $11 billion
Percent Raised From Pension Smoothing Gimmick ~60% ~25%
July 11, 2014

The House passed legislation today to expand and make permanent the bonus depreciation rules that expired at the end of last year. A key argument for this proposal is that making bonus depreciation permanent would reduce the tax rate on capital and therefore encourage investment and faster economic growth. Some analysts have even found that economic growth would generate enough dynamic revenue to more than pay for the $287 billion cost of the legislation. At the same time, others have claimed that permanent bonus depreciation would not have any significant effect on the economy and would only add to deficits and debt.

A recent Joint Committee on Taxation (JCT) macroeconomic analysis aims to settle this debate. Using a variety of models, JCT finds that permanent bonus depreciation would in fact increase economic growth -- by an average of 0.2 percent over the next decade -- but would cost about the same as under conventional scoring.

JCT's analysis includes 6 different scenarios using two different economic models. The different scenarios are designed to account for differences in savings elasticities, monetary policy, and future fiscal policy to correct for the higher debt. All models find that permanent bonus depreciation would increase business capital -- by between 0.6 and 1 percent over the decade -- and as a result would modestly increase economic growth.

July 10, 2014

The White House this week requested an additional $4.3 billion in discretionary appropriations for the current fiscal year to cover the cost of the "urgent humanitarian situation" involving Central American children crossing the Southern border and to pay for fighting this summer's wildfires. $3.7 billion is dedicated to the situation at the border, while $615 million more for wildfires will likely provide enough funding for the whole wildfire season.

Of the additional funding for the migrant situation, about half ($1.8 billion) would go to the Department of Health and Human Services to provide medical and other care for refugee children. The Department of Homeland Security would receive $1.4 billion to cover the additional costs associated with increased arrests and deportations. The request includes $300 million of international assistance given to governments or non-profits in Central American countries to address the "root causes" of migration, including for economic support and to provide services and community support to the migrants that are most likely to attempt a return.

Administration Supplemental Spending Request by Category (billions of dollars)
Category FY 2015 Spending
Services and medical care for child refugees $1.8 billion
Apprehending, prosecuting, and removing undocumented families $1.4 billion
Repatriation of migrants and aid to Central American countries $300 million
Other increased enforcement and surveillance $177 million
Additional 40 immigration judges and other legal costs $64 million
Subtotal, Immigration Request
$3.7 billion
Wildfire Funding $615 million
Total, President's Request $4.3 billion
July 9, 2014

The House Ways and Means Committee just published its plan for a short-term fix to the Highway Trust Fund, which needs an additional $8 billion to fund highway construction through the end of the year.  Unfortunately, it relies on a known gimmick called "pension smoothing," which technically raises revenue on net over 10 years but may cost money in future years. Lawmakers should not be using any gimmick, let alone a "pay-for" that may increase future deficits.

Since lawmakers have less than a month before disruptions occur, they may need to rely on a short-term patch while a long-term highway bill is being negotiated. To help, we published a list of options to offset a transfer of general revenue into the highway fund, which intentionally left off pension smoothing, even though it was used to "fund" the last highway bill, because it is a gimmick.

The Ways & Means plan raises $10.9 billion for the Highway Trust Fund: $6.4 billion from the pension smoothing gimmick, $3.5 billion from extending customs fees through 2024, and $1 billion transferred from an over-funded trust fund for leaking underground oil tanks. However, the pension smoothing money is entirely a timing shift that raises money upfront and transfers the costs beyond the 10-year budget window.

July 9, 2014

CBO's release of the June Monthly Budget Review (MBR) gives us another data point in what has been an interesting story for Fiscal Year (FY) 2014: the slow growth of Medicare. Last month, the MBR showed Medicare spending growing by only 0.3 percent in FY 2014 compared to spending in the same time period (eight months) in FY 2013. We further noted that excluding the effects of temporary or phased-in policies (in order to illustrate Medicare's underlying growth rate) would bring the growth rate up to 2.5 percent, still well below anticipated economic growth and Medicare beneficiary growth. Incorporating the June data shows a mild acceleration in Medicare's growth rate, yet still remaining very low.

July 8, 2014

Congress returns from its July 4th recess this week, and it will have plenty of work to do. Most pressing is the looming insolvency of the Highway Trust Fund (HTF). In less than a month, federal disbursements for highway projects will be disrupted if nothing is done. In addition, the House will take up a bill to permanently extend bonus depreciation, a business tax break enacted as stimulus in 2008. Also, the conference committee on a bill to reform veterans' health benefits in response to the unfolding scandal at the VA is expected to resume, and the President has called for a $3.7 billion supplemental request for funds to secure the southern border in response to an influx of child migrants.

The first three issues, in particular, all have the potential to significantly impact the federal budget. First, the Highway Trust Fund faces a nearly $170 billion shortfall over the next ten years, an issue that has been addressed in recent years by mostly unpaid for general revenue transfers. Because of budget conventions, these transfers don't count as increasing the deficit, even though the transfers allow greater levels of spending than would otherwise be the case. The Senate Finance Committee is looking to transfer $8 billion to the HTF to extend it through the end of the year, offsetting the cost with other revenue provisions. Closing the ten-year shortfall within the HTF through various options available to lawmakers or fully offsetting a general revenue transfer would reduce debt by about 1 percentage point of GDP by 2024; put another way, it would avoid the 1 percentage point of GDP being added to the debt that would occur if lawmakers transferred general revenue without offsets.

Second, the House is expected to vote this week on bonus depreciation, a business tax break enacted as stimulus in 2008. The House bill not only permanently extends the current provision to allow 50 percent of many new business investments to be written off in year one but also expands the tax break by making eligible new categories of investments. In total, the bill would cost $360 billion through 2024 including interest, increasing debt as a percent of GDP in 2024 by 1.5 percentage points of GDP. We've written before on how bonus depreciation has already cost $220 billion since 2008, and should not be treated as a normal tax extender because it interacts with other parts of the tax code.

July 8, 2014

Citizens for Tax Justice released a new report detailing options to raise revenue, which could help lawmakers in their pursuit of tax reform to lower the debt. The revenue-raisers in the report are divided into three categories – those that raise money from high-income individuals, businesses, and multinational corporations. Within those categories, the report distinguishes between options that would only be considered in the context of tax reform and less significant changes that could be enacted on their own. Finally, the report helpfully separates the permanent and temporary impacts for provisions that raise greater revenue upfront.

July 3, 2014

The Pension Benefit Guaranty Corporation (PBGC) put out an annual report this week of its financial status insuring private pensions around the country. Although most pension plans look to be in better shape than last year, some plans covering multiple companies are likely to fail. At that point, between 1 and 1.5 million people would receive a guaranteed amount from the PBGC that is lower than their promised benefit. However, the PBGC itself is underfunded, and does not have sufficient reserves to sustain these payments for the long term. According to the report, the pension fund will "more likely than not" run out of funds by 2022 and is 90 percent likely to run out by 2025.

The PBGC provides insurance to defined-benefit private pension plans covering approximately 44 million people. Companies covered by PBGC pay premiums for this insurance. In exchange, PBGC will pay benefits to plan employees if the pension plan goes bankrupt. There are two separate insurance programs with different premiums, rates, and payout rules: one covering approximately 34 million workers in plans maintained by a single employer, and another covering 10 million workers in multiemployer plans.

First, the report's good news: single-employer plans are in a stronger financial position than last year, though they are not out of the hole yet. The PBGC's ten-year deficit improved from $32 billion last year to a deficit of $7.6 billion this year, mostly because of the improved economy and the increased premiums in the Murray-Ryan budget agreement. That agreement increased single-employer premiums for 2015 and 2016 and indexed them to wage growth. Although the program is still projecting a deficit, it is expected to be solvent throughout the next decade thanks to balances in its revolving fund.

Now, the report's bad news: many multiemployer plans are severely underfunded, particularly those involving unions with declining membership. Because of lower than expected market returns, declining numbers of employees, and other factors, the number of underfunded plans has increased dramatically this decade.

Multiemployer plans covering almost 1.5 Million people are severely underfunded (i.e., <40% funded)

July 2, 2014

Department of Transportation Secretary Anthony Foxx started the Highway Trust Fund clock yesterday, informing state transportation directors that disruptions in federal reimbursement of highway projects would begin on August 1. The cash management measures are intended to prevent outflows from depleting the Highway Trust Fund.

Starting August 1, the federal government would no longer reimburse states for projects immediately. Instead, they will distribute to states a proportionate share of available funds every two weeks when the fund receives incoming revenue. This is a major change from the current scenario of daily distributions. Of course, uncertainty will make it difficult for the state transportation departments to anticipate precisely how much they will be reimbursed and will lead states to delay some projects until there is a longer-term solution.

DOT considers $4 billion of funding the cut-off point for implementing cash management measures for the highway account. Their latest Highway Trust Fund ticker shows the account's fund running out by late August or early September, at which point spending could only be reimbursed with incoming revenue, enough to cover about three-fourths of spending.

July 2, 2014

In the context of a middling U.S. economic recovery, several commentators have argued that we should ignore deficit reduction in order to pursue growth-promoting policies. This debate, however, overlooks a critical point since both objectives can be achieved simultaneously. A recent report commissioned by the Peter G. Peterson Foundation, authored by economists Janice Eberly and Phillip Swagel, highlights just this point, that economic and fiscal health are not in conflict.

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