The Bottom Line

July 1, 2015

The Congressional Budget Office (CBO) has released new estimates of the cost of climate change, specifically as it relates to hurricanes. The report forecasts hurricane damage in 2075 to cost an expected $156 billion in today's dollars, more than five times larger than costs under current climate conditions. Hurricane damage in 2075 is forecasted to cost between $104 billion and $226 billion annually, four to eight times larger than under current conditions.

The increased costs that CBO projects reflect two factors, which are captured in two different scenarios:

  • Rising sea levels and increased hurricane frequency and intensity as a result of climate change.
  • Greater coastal development, which increases the value of property at risk from hurricanes.
Expected Annual Cost of Hurricane Damage (Billions, 2015 Dollars)
  2025 2075
Under current conditions (baseline) $29 $29
Scenario with climate change only $32 $60
Scenario with climate change and increased coastal development $37 $156

Source: CBO

July 1, 2015
The First in a Series of Issue Briefs on the SSDI Program

In advance of the August 4th SSDI Solutions Conference, the McCrery-Pomeroy SSDI Solutions Initiative has released a short primer to kick off its new issue brief series. The series will provide basic explanations on how the Social Security Disability Insurance (SSDI) program functions with issue briefs based on the program basics, the determination process, program financing, program demographics, and demonstration projects that have been piloted in the past.

To RSVP to the August 4, 2015 SSDI Solutions Conference, click here.

Below is a sample of the material covered in the first brief.

What is Social Security Disability Insurance?
Social Security Disability Insurance, or SSDI, is a component of the Social Security program. It provides cash benefits to insured workers below the retirement age who have a significant disability or illness that is expected to preclude substantial work in the labor market for at least a year or to result in death.

July 1, 2015

Ways and Means Ranking Member Sander Levin (D-MI) and Senator Tammy Baldwin (D-WI) have introduced a bill to close a well-known tax loophole that allows investment and private equity fund managers to pay a lower rate on their taxes. The Carried Interest Fairness Act would close a loophole allowing fund managers to classify their income as long-term capital gains, which is taxed at a top rate of 20 percent, instead of wage income, which is taxed at a top rate of 39.6 percent. (Neither number includes Medicare taxes on investments and wages.)

Investment managers often have a partnership share in their investment fund, which is structured as a "passthrough" entity. When the fund does well and its assets increase, each partner's share of the gain is taxed as capital gains. Fund managers receive some of their compensation in the form of capital gains, even though they are being compensated for their work, not investing their own money.

June 30, 2015

Last week, the Senate Budget Committee passed a bill to limit the use of the Crime Victims Fund (CVF) as a back-door method to increase appropriations. The bill, S. 1495, is sponsored by Senator Pat Toomey (R-PA). It creates a point of order against appropriations bills containing a Change in Mandatory Program (CHIMP) that would cause the amount available to be spent from the CVF to be less than the 3-year average of incoming funds.

A similar measure was proposed in this month's markup of the Senate's Commerce, Justice, and Science appropriations bill by Senator James Lankford (R-OK). He proposed an amendment that would have prevented further use of these specific CHIMP funds in the bill after FY 2016, but it was defeated in committee.

As we explained in our blog, CHIMPs are provisions in appropriation bills making changes (usually reductions) in mandatory spending programs. The savings are then available to be used to offset increases in discretionary spending above the spending cap. This can be perfectly acceptable when the savings created are real, but lawmakers often use fake savings to fund real increases in spending.

The Crime Victims Fund is a frequently used source of CHIMPs: according to CBO over half of the $19 billion in CHIMPs from FY 2015 came from the CVF.

To combat gimmickry, the Senate budget included a phasedown and eventual elimination of CHIMPs that saved no actual money. And during markup of the Senate budget, the Budget Committee adopted an amendment by Senator Mike Crapo (R-ID) that would have created a point of order against CHIMPs originating from the CVF. Senator Toomey’s bill forces CVF payouts to equal recent incoming funds, which essentially creates a cap of $10.5 billion in CHIMPs from the CVF, preventing the size of the CVF CHIMPs from growing.

June 30, 2015

In a newly released ticker, the Department of Transportation has shown that there is one month left for lawmakers to decide on funding for the Highway Trust Fund before cash flows to transportation projects are affected. After extending the highway authorization for two months at the end of May, lawmakers will have to come up with a new authorization and find a way to fund that spending to close the gap that has persisted since 2008.

The DOT shows the balance of the highway account of the trust fund dropping from $8 billion at the end of May to $3.5 billion by the end of July, below the $4 billion cushion DOT says it needs to be able to make timely reimbursements of projects. The smaller mass transit account will have a little more time, falling below its $1 billion cushion by the end of August, but lawmakers consider these accounts together since they have the same funding source, so the true deadline is the end of July.

June 30, 2015

In a move that could stall promising health care delivery system reforms and drive up entitlement spending, the House Appropriations Committee last week voted to defund the Center for Medicare and Medicaid Innovation (CMMI) and the Agency for Healthcare Research & Quality (AHRQ) in their 2016 Labor, Health and Human Services, and Education bill.

Abandoning CMMI in particular would increase deficits this decade by $45 billion (or by $37 billion before incorporating the additional interest payments needed to service the higher debt), according to the Congressional Budget Office (CBO), and potentially by much more over the long run. The Innovation Center, created by the Affordable Care Act (ACA), is in charge of testing new approaches to improve quality and reduce cost within Medicare and Medicaid, including promising programs such as Accountable Care Organizations (ACOs), bundled payments, and initiatives to increase care coordination among low-income seniors and people with disabilities who are dually-eligible for Medicare and Medicaid.

Rescinding CMMI’s remaining $6.8 billion ($6.5 billion of outlays) in funding through 2020 (funding beyond 2020 is not eliminated) would put these initiatives and many more in jeopardy or delay them significantly, and severely curtail CMMI’s ability to fine-tune them as time progresses. Moreover, they would no longer be able to undertake new delivery system reform efforts with the potential to improve quality and lower costs, which is part of the reason CBO finds that defunding would increase mandatory federal health care spending by about $37 billion over the next ten years.

The rescission also represents an egregious budget gimmick, and is perhaps the worst CHIMP  (change in mandatory program) we have seen so far. As we’ve explained before, CHIMPs allow policymakers to cut mandatory spending in order to pay for discretionary spending increases. More often than not, the discretionary spending increases are real, but the mandatory cuts are fake – and for one reason or another do not generate actual savings. In this case, the situation is far worse – rather than failing to generate savings, this CHIMP creates significant future costs.

June 29, 2015

Any budget projections, including CBO's long-term outlook, are inherently uncertain, and it is important to understand how projections might change. The agency's usual ten-year projections are uncertain enough and can change based on any number of new developments. That problem only grows when looking out 25 or 75 years into the future.

For example, the Brookings Institution last year discussed the usefulness of long-term projections, how to convey uncertainty in those projections, and how policymakers could make the budget more responsive to changing conditions. In its long-term report, CBO addresses the latter two issues, spelling out a number of ways its projections could change and providing examples for how lawmakers could reduce budgetary uncertainty.

A main source of uncertainty is the actions of lawmakers. CBO's Extended Baseline assumes that Congress will not pass new laws (with some exceptions) to change deficits, allowing temporary policies to expire and keeping permanent savings in place. To illustrate a potential scenario where lawmakers add to the debt, the Alternative Fiscal Scenario assumes that lawmakers extend temporary tax breaks, repeal the sequester, prevent revenue from rising as a share of GDP, and raise non-health care/Social Security spending to its 20-year historical average. Under this scenario, debt exceeds the size of the economy ten years earlier than in the Extended Baseline and in 2050 reaches 250 percent of GDP, twice the Extended Baseline level.

Outside of legislative uncertainty, several economic and technical factors could influence projections.

June 26, 2015

Health care spending is arguably the most important part of CBO's long-term outlook, being a key driver of our nation's growing debt over the long term. Little has changed, though, since CBO's outlook last year, with similar assumptions for excess health care cost growth but a small improvement towards the end of the 75-year period due to a change in an assumption about Medicaid.

As a result of the fiscally-irresponsible physician payment law passed this year and slightly higher assumed long-term cost growth, Medicare spending is projected to be higher than last year's outlook by about 0.1 percent of GDP per year for the next ten years and by increasing amounts in later years. CBO expects Medicare spending to grow from 3 percent of GDP this year to 5.1 percent by 2040 (about as much as all federal health care spending this year), 7.2 percent by 2065, and 9.6 percent by 2090.

Other major health care spending – including Medicaid, the Children's Health Insurance Program, and the Affordable Care Act's (ACA) health insurance subsidies – has improved both as a result of short-term revisions to spending in CBO's ten-year projections and a change in CBO's assumption about Medicaid eligibility over the long term. CBO now assumes that, since Medicaid eligibility is largely determined by the poverty line, which grows with inflation, as real wages increase, more and more of the currently eligible would eventually lose eligibility. In the past, CBO assumed that states would either expand eligibility, increase outreach to the currently eligible, or expand benefits in order to offset this effect, but now it assumes they will only offset one-half of the effect. This assumption reduces their Medicaid eligibility projections by 4 percent over the next 25 years.

June 26, 2015

As Washington digests this year’s CBO Long Term-Budget Outlook, Robert J. Samuelson of The Washington Post offered up his criticism of the country’s current fiscal path: The elderly get too much. The real issue, he argues, is that massive and growing spending on the elderly threatens to crowd out domestic spending that liberals support and defense spending that conservatives support.

As he explains:

...budget deficits are not the problem. They are simply the consequences of the problem, which is that the combination of an aging society and expensive health care threatens many vital government functions. Whatever the economic costs of endless deficits — a controversial subject — the political effects seem straightforward. The young are being forced to subsidize the old through higher taxes and reduced public services. Some essential public services, starting with defense, are being sacrificed to avoid antagonizing the elderly.

Samuelson is not the only one concerned with the disproportionate growth of spending on the elderly. In an opinion piece in February, Forbes contributor Jeffrey Dorfman went as far as to accuse seniors of “bankrupting the country.” A New York Times analysis published earlier this month found that while younger Americans have struggled to see their incomes to keep pace with inflation, Americans ages 65 and older have made substantial gains.

June 25, 2015

In their recently released long-term outlook, the Congressional Budget Office (CBO) laid out multiple scenarios for addressing our unsustainable long-term debt path. They show that it would take a long-term deficit reduction path that would include about $2.6 trillion of deficit reduction over the first 10 years to stabilize the debt at current levels, or about 1.1 percent of GDP per year. However, waiting even 5 years to start would necessitate a reduction of 1.4 percent per year. In other words, stabilizing our debt over 25 years will cost another $850 billion if we wait 5 years instead of acting today.

CBO explains why costs increase with delay:

The sooner significant deficit reduction was implemented, the smaller the government’s accumulated debt would be, the smaller the policy changes would need to be to achieve a particular long-term outcome, and the less uncertainty there would be about what policies would be adopted.

Delaying the start of deficit reduction makes the goals of stabilizing the debt and putting it on a downward path much more difficult.

Quantifying the cost of waiting can be done by estimating the fiscal gap, or the amount of non-interest spending and revenue changes necessary to keep debt stable (or reduce it to some other level) over a period of time. Focusing on the 25-year fiscal gap, CBO shows that keeping the debt stable would require a reduction in non-interest spending and/or an increase in revenues of 1.1 percent of GDP (as indicated above), while reducing the debt to its 50-year historical average share of 38 percent of GDP would require revenue increases and/or spending cuts equal to 2.6 percent of GDP (a path of deficit reduction nearly $6 trillion over the first ten years alone). These figures assume that changes are implemented today and grow considerably larger if policymakers wait five or ten years to take action.

 

June 25, 2015

In recent years, lawmakers have frequently used budget gimmicks to get around rules designed to maintain budgetary discipline -- if they pay attention to them at all. Whether through sleights-of-hand to comply with rules on paper only or simply ignoring rules all together, lawmakers have undermined the integrity of budget enforcement regimes. Today the Better Budget Process Initiative released a paper entitled "Strengthening Statutory Budget Enforcement" that recommends several ways to close loopholes in budget rules and make it harder for lawmakers to ignore them.

The report has 8 specific recommendations:

Strengthening enforcement of existing rules

1. Establish a separate point of order against provisions to exclude costs from PAYGO
2. Prohibit legislation blocking any sequester enforcing statutory PAYGO or discretionary caps

Restrict the use of phony offsets

3. Prohibit the use of spending cuts with no real savings
4. Restrict the use of timing gimmicks to claim savings within the budget window
5. Prevent the use of artificially inflated baselines to claim savings
6. Prohibit double-counting of increased revenues and spending cuts involving trust funds

Ensure all costs are subject to budget discipline

7. Limit the use of Overseas Contingency Operations as a slush fund
8. Expand the deficit-neutrality requirement in PAYGO to apply to debt service

June 24, 2015

Last week, CBO Director Keith Hall testified before the Senate Budget Committee on the release of CBO’s Long-Term Budget Outlook. Senators questioned Hall on the implications of debt and deficit projections for issues like economic growth, income inequality, and climate change.

In his testimony Hall confirmed the negative effects and risks associated with our current and projected debt levels, noting that high debt can lead to lower standards of living and crowd out private investment, which is bad for growth. Asked by Senator Bob Corker (R-TN) whether the federal government was ready for another crisis, Hall answered that another one would be “problematic” and that the government is not, in fact, fiscally prepared.

Hall also confirmed that the projected growth of deficits is largely attributable to an aging population and rising health care costs, which will place stress on mandatory spending. He agreed with a statement by Senator Tim Kaine (D-VA) that reforms to federal benefit programs, coupled with tax reform, are the answer to the country's fiscal challenges.

June 23, 2015

Much of the focus on the Congressional Budget Office's (CBO) score for repealing the Affordable Care Act (ACA) naturally has focused on the ten-year budgetary and economic feedback effects, which showed that repeal would increase deficits by $353 billion on a static basis, or by $137 billion if macroeconomic effects were incorporated. As we pointed out in our write-up, though, CBO also provides an estimate of the second-decade effects, finding that repeal would increase deficits over the second decade in the broad range of one percent of GDP (which implies around a $3.5 trillion deficit increase).

CBO doesn't provide a detailed year-by-year score beyond the first ten years because those estimates, as it explains, "would not be meaningful because the uncertainties involved are simply too great." However, the report does provide enough information for a reasonable estimate to be made based on the growth rates of the broad categories of policies, which show the savings generally rising much faster than the costs.

To estimate the long-term impact of the legislation, CBO divides the bill into parts and assigns simplifying growth rates to each part. Specifically, CBO assumes the following:

  • Savings from repealing coverage provisions – including new spending as well as revenue from the mandates and Cadillac tax – will grow by about 2 percent per year
  • Costs of repealing Medicare and Medicaid savings – including reduced growth rates for provider payments -- will grow by about 15 percent per year
  • Costs of repealing non-coverage tax increases – the biggest being the Medicare investment income tax  – will grow by about 6 percent per year
June 23, 2015

The main focus of CBO's long-term budget outlook is rightly on the unified budget numbers regarding spending, revenue, deficits, and debt. But it is also important to look at trust funds, both in what CBO estimates for their insolvency date and how CBO's assumptions about trust funds can affect debt.

CBO's ten-year projections also project insolvency dates for three trust funds: the Highway Trust Fund (later this summer), the Social Security Disability Insurance (SSDI) trust fund (FY 2017), and the Pension Benefit Guaranty Corporation's (PBGC) multiemployer pension fund (FY 2024). The PBGC's trust fund exhaustion is reflected in the budget numbers, meaning that spending is automatically limited to incoming revenue, but the other two much larger trust funds are assumed to continue spending at scheduled levels despite not having the resources to do so.

The same goes for the two trust funds whose exhaustion dates will come after ten years and thus are only discussed in the long-term outlook: the Medicare Hospital Insurance (HI) trust fund and the Social Security Old Age and Survivors' Insurance (OASI) trust fund. CBO does not specifically project an insolvency date for HI, which finances Part A of Medicare, because it doesn't do long-term projections for each part of Medicare. It does say that exhaustion would likely come shortly after ten years, and by the looks of the ten-year projections, that date would likely be around 2027.

As for OASI, CBO projects the trust fund to run out in 2031, the same as it projected last year. But on a combined basis, the Social Security trust funds would be depleted in 2029, one year earlier than CBO projected last year.

June 19, 2015

For the first time in nearly three years, the Congressional Budget Office (CBO) released a new estimate of the budgetary effect of repealing the entire Affordable Care Act (ACA). Just like in its previous estimates, CBO finds that repealing the ACA would increase ten-year deficits – and this time, they come to that same conclusion even with the economic effects included.

CBO's static estimate of repeal, which excludes macroeconomic effects, shows a ten-year deficit increase of $353 billion, the net effect of $1.174 trillion of tax cuts and $821 billion of spending cuts. Repeal would save money in the first three years of the budget window by $40 billion, but then increase deficits in subsequent years and by $118 billion in 2025 alone. Using this static score, debt would be about 1.4 percentage points higher in 2025 as a result of repeal.

Incorporating the dynamic macroeconomic effects into the budget score reduces the resulting ten-year deficit increase by $216 billion, making the total deficit increase with dynamic scoring $137 billion. The macroeconomic effects peak at $29 billion in 2019 and fall slightly to $20 billion by 2025. The main economic effects include: the decrease in labor supply due to a greater availability of insurance outside employment and from the implicit marginal tax rate increases from the insurance subsidies, as they diminish with income; the decrease in the capital stock from increased tax rates on investment income; and the decrease in aggregate demand from repeal of the insurance subsidies. CBO estimates that ACA repeal would boost GDP by an average of 0.7 percent in 2021-2025.

June 18, 2015

What do earmarks and dinosaurs have in common?

Both are extinct, but their skeletons still remain.

Last week, Senator Jeff Flake (R-AZ) joined the ranks of Rep. Steve Russell (R-OK), Sen. John McCain (R-AZ), and former Sen. Tom Coburn (R-OK) in calling attention to wasteful public spending. This time Flake draws attention to authorized in legacy earmarks through his own report titled “Jurassic Pork.” The report highlights nearly two dozen examples of projects once funded by earmarks that now receive federal funds through other means.

June 17, 2015

Isn’t it ironic, mere days after the Congressional Budget Office (CBO) warns about our nation’s long-term fiscal challenges in its annual report, the House of Representatives is set to vote on repealing a key mechanism put in place to constrain the core driver of our growing debt?

The Independent Payment Advisory Board (IPAB), scheduled for a repeal vote tomorrow, is a 15-member board of Senate-confirmed experts created by the Affordable Care Act (ACA) for the purpose of controlling Medicare costs. If Medicare per-beneficiary cost growth is projected to exceed GDP per capita growth plus one percentage point (GDP+1%), IPAB (or the Secretary of Health and Human Services if no Board members have been appointed) must make targeted recommendations to provider payments – which cannot affect Medicare benefits, eligibility, or cost-sharing – to bring per-beneficiary spending back in line. These recommendations then automatically take effect unless a majority in Congress votes to replace them with equivalent savings or a three-fifths majority of Congress overrides them entirely.

This last protection is valuable given how difficult it is for lawmakers to enact fiscally-responsible reforms otherwise. That repealing IPAB now has broad support in Congress just reinforces its importance.

June 17, 2015

CBO's Long-Term Budget Outlook, released yesterday, is a detailed 130-page document, filled with budget projections for the next 25 years, along with a supplemental spreadsheet with projections for the next 75 years. We've boiled down the document into a concise 6-page analysis with key facts and findings. CBO's debt projections have changed only slightly since last year – slightly higher debt in the next few years and a very modest decline in the still unsustainable upward track thereafter.

As we explain in our paper, CBO projects deficit and debt levels to remain fairly stable over the next few years, but then rise dramatically. Under CBO's "Extended Baseline Scenario," which generally reflects current law, deficits will rise from 2.7 percent of GDP over the next several years, to 3.8 percent by 2025, 5.9 percent by 2040, and 9.5 percent by 2090. As we explain, this will have major implications for debt:

The combination of deficit reduction legislation earlier this decade, low interest rates, and a slowdown in health care cost growth have certainly improved the long-term fiscal outlook, yet debt remains at record-high levels and is set to continue growing unsustainably with no end in sight. If policymakers continue to act irresponsibly – as they did with the “doc fix” legislation earlier this year – the situation will be far worse."

June 16, 2015

The Congressional Budget Office (CBO) today released its 2015 Long-Term Budget Outlook, showing a clearly unsustainable long-term path for debt. The featured projections go out 25 years, building off of their more frequently released 10-year projections, and the further they go out, the worse the fiscal picture gets.

CBO projects that debt will remain relatively stable at about 74 percent of Gross Domestic Product (GDP) through 2020, but then rise continuously, reaching 78 percent of GDP by 2025 and 103 percent by 2040. Beyond 2040, debt would continue to grow continuously to 181 percent of GDP by 2090. Under CBO's Alternative Fiscal Scenario, debt would reach about 175 percent of GDP by 2040. These numbers are very similar to last year, when CBO also showed an unsustainable path.

June 12, 2015

The House is considering trade legislation (H.R. 1314, H.R. 1295, and H.R. 644) this week that would fast-track authority for a few major trade deals that are currently being negotiated, change some trade enforcement rules, and extend various other trade-related provisions. Just as the House's previous bills and the Senate's bills (S. 995, S. 1267, S. 1268, and S. 1269) did, the costs contained in the legislation are paid for over ten years with savings from across the budget.

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