The Bottom Line

July 29, 2014

Eugene Steuerle is the cofounder of the Tax Policy Center, a senior fellow at The Urban Institute, a columnist for Tax Notes Magazine, and a CRFB Board member. This morning, he testified before the House Ways and Means subcommittee on Social Security. Below is a transcript of his spoken remarks, as posted on his blog.

July 29, 2014

With the release of the Social Security Trustees Report, CRFB held an event examining the trustees report on July 29, 2014, at the Hyatt Regency in Washington, DC. Video of the event is below.

July 28, 2014

This afternoon, Chairman Bernie Sanders (I-VT) and Chairman Jeff Miller (R-FL) announced compromise legislation to address the serious problems at the Department of Veterans Affairs. The authors said that the legislation would fund private health care for certain veterans, provide for hiring of additional health care providers by the VA, and make other changes in the VA health care system with a reported net cost of $12 billion.

July 28, 2014

The Social Security and Medicare Trustees reports provide a detailed projection of each program's finances over the next 75 years. In response, we have condensed the 250-page Social Security report into a concise, 6-page analysis.

July 28, 2014

Today, the Social Security and Medicare Trustees released reports on the financial state of the country's largest entitlement programs.

July 28, 2014

The American Enterprise Institute held an event Thursdsay commemorating the 50th anniversary of the start of the War on Poverty. The event, “Expanding Opportunity in America,” featured House Budget Committee Chairman Paul Ryan (R-WI) as well as a panel of experts.

July 25, 2014

This week, the Senate agreed by unanimous consent to consider the House-passed highway bill, H.R. 5021. The agreement allows for the consideration of several amendments, including an amendment by Senators Tom Carper (D-DE), Bob Corker (R-TN), and Barbara Boxer (D-CA), that would remove the pension smoothing offset, a gimmick that we have written about previously.

As outlined in the table below, the Carper-Corker-Boxer amendment would replace the offsets in the House bill with the measures approved by the Senate Finance Committee, excluding pension smoothing. This funding would be sufficient to keep the HTF solvent through December 20.

Short-Term Proposals to Fund Highways
Policy H.R. 5021 (passed by House)
Senate Finance
Carper-Corker-Boxer Amendment
Enact pension smoothing $6.4 billion $2.7 billion  -
Extend customs fees by 1 year to 2024 $3.5 billion $2.9 billion  $0.9 billion*
Increase mortgage reporting - $2.1 billion  $2.1 billion
Clarify of statute of limitations on overstatement of basis - $1.3 billion  $1.3 billion
Withhold payments from Medicare providers with delinquent taxes - $0.8 billion  $0.8 billion
Transfer funds from the Leaking Underground Storage Tank Fund $1 billion
$1 billion $1 billion
Rescind old transportation earmarks - <$0.1 billion  -
Add due diligence requirement for tax preparers regarding the Child Tax Credit - <$0.1 billion <$0.1 billion
Other provisions - <$0.1 billion <$0.1 billion
Total Revenue Raised
$10.9 billion $11 billion $5.7 billion*
Percent Raised From Pension Smoothing Gimmick ~60% ~25% 0%
Date of Highway Trust Fund Exhaustion May 2015 May 2015 December 2014*
July 25, 2014

In a recent New York Times column, economist Paul Krugman argued that the focus on the national debt represented “an imaginary budget and debt crisis.” He stated that current debt increases are manageable, there is little danger of a debt crisis, and it would be “no big deal” economically to stabilize the debt-to-GDP ratio.

July 24, 2014

In its release this week of the economic effects of the President's budget, CBO found it would increase the size of the economy, mainly due to immigration reform. As a result, under the President's budget Gross National Product (GNP) would be about 2.1 percent higher in 2024 than before the enactment of the budget, though GNP per capita would be about 1 percent lower. Importantly, higher economic growth would lead to additional revenue collection and lower deficits. Because CBO accounted for certain economic effects of immigration in its analysis of the President's budget, the additional economic effects would actually increase the deficit by less than $100 billion over ten years.

In analyzing the economic impact of the President's budget, CBO finds six main ways in which the budget would affect economic growth:

  • Increasing the size of the U.S. population, thus raising the number of workers;
  • Increasing federal budget deficits in the short term, mainly through higher government spending, which would boost aggregate demand and the use of labor and capital;
  • Reducing federal budget deficits in the long term, which would increase national saving and private investment;
  • Raising the marginal tax rate on labor income, thereby discouraging work;
  • Raising the marginal tax rate on capital income, thereby discouraging saving; and
  • Increasing federal investment in ways that would increase productivity and the skill level of the workforce.
July 23, 2014
Think Tanks on Left, Right, and Center Agree

In the coming days, the Senate will vote on the House-passed measure to replenish the Highway Trust Fund. The bill is a last-ditch effort to prevent the fund from going bankrupt, which would stall construction projects across the country.

July 23, 2014

Although most of our analysis of CBO's Long-Term Budget Outlook has focused on debt projections, CBO also makes projections about the solvency of trust funds over the long term. And, unfortunately, it finds that most major trust funds will become insolvent in the not-too-distant future.

CBO has already projected the impending disruption of construction projects due to the Highway Trust Fund depletion later this year, the 20 percent across-the-board benefit cut facing Social Security Disability beneficiaries sometime in FY 2017, and the need to address the Pension Benefit Guaranty Corporation's Multiemployer Pension fund by 2021. In this report, it finds that the the combined Social Security trust funds (assuming the SSDI program borrows from the Old-Age trust fund) and the Medicare Hospital Insurance (HI) trust fund will both run out of money around 2030. In other words, CBO projects that all the major trust funds will be depleted just over fifteen years from now. And, at that point, significant automatic benefit/payment cuts would take place.

As we touched on before, Social Security's projected finances are worse than last year, a product of lower payroll tax revenue and lower interest rates. On the other hand, the HI insolvency date has been moved back about five years due to CBO's continued downward revisions to Medicare spending. Still, these changes give a 15-year clock for both the Social Security trust fund and the HI trust fund. These trust funds would experience a sizeable cut in spending (benefits) to bring outlays in line with revenue when the trust funds are exhausted.

Exhaustion Dates for Major Trust Funds
Trust Fund
Exhaustion Date
Percent Cut Required
Highway Trust Fund FY 2015 28%
Social Security Disability Insurance FY 2017 20%
PBGC Multiemployer Fund FY 2021 87%
Medicare Hospital Insurance ~2030 ~15%
Social Security Old-Age and Survivors Insurance 2032 ~30%
Social Security Combined 2030 ~27%

 Source: CBO, CRFB calculations

July 23, 2014

In our series on the long-term budget outlook, we covered how debt projections would change if some of CBO's economic and technical assumptions turned out differently. Uncertainty is clearly a factor in any budget projection and especially so for 75-year estimates. But CBO also points out that there are ways for policymakers to remove or lessen this uncertainty by changing federal policies, including by reducing federal debt to lessen the risk of negative revisions to projections.

Recall that the four parameters for which CBO evaluated alternate assumptions were mortality, productivity, interest rates, and health care cost growth. While it is difficult to insulate the budget from productivity shocks, government policy can mitigate the effect of shocks for the three other variables on the budget.

Mortality

While lower mortality is clearly a good thing for the country, it is not the case for the budget, since it raises spending on retirement and health care programs (although it also can raise the number of years a person remains in the labor force). One way to make a positive development less negative for the budget is to index retirement ages, particularly for Social Security, to longevity. This would mean that the ratio of years worked versus years receiving federal retirement benefits for the average person would remain constant over time, rather than increasingly continuously as it does now. Alternatively, current Council of Economic Advisers chair Jason Furman wrote in a 2007 Brookings Institution paper that policymakers should focus on the concept of "robust solvency" for Social Security, by making it solvent enough to be robust to changes in demographics or other projections. As an example, he showed the effect of "dependency indexing" the payroll tax rate or the benefit formula, or changing those factors based on the projected ratio of workers to beneficiaries.

Health Care Cost Growth

July 22, 2014
How Long-Term Debt Looks With Different Assumptions

Any budget projection is inherently uncertain, and that uncertainty is magnified when the projection period is extended to 25 or 75 years, as the Congressional Budget Office (CBO) does in its long-term outlook. That's why CBO publishes an Alternative Fiscal Scenario (AFS), to illustrate what would happen to debt if lawmakers cut taxes and increase spending differently than projected by current law (the Appendix of our analysis explains the differences). However, policy is not the only source of uncertainty in long-term projections; the economic and technical assumptions used also greatly affect CBO's estimates. Fortunately, CBO provides a band of assumptions for mortality, productivity, interest rates, and health care cost growth, showing how they would each affect debt in 2039 (at 111 percent of GDP in the Extended Baseline, including economic feedback effects). We delve into these details below.

Mortality

CBO's projections assume that population-wide mortality rates decline at 1.2 percent per year. This is somewhat higher than the 0.8 percent decline that the Social Security Trustees assume and is a main reason why CBO's Social Security projections look worse than the Trustees'. CBO evaluates what would happen to debt through 2039 if mortality rates declined 0.5 percentage points faster or slower annually. These different declines result in life expectancy for a 65 year-old being about one year longer or shorter than the default by 2039.

Different life expectancy and mortality rate assumptions affect spending on Social Security, Medicare, and Medicaid (and certain other mandatory programs), but they also can affect revenue by changing the labor supply; CBO assumes that every additional year of life expectancy would cause a worker to spend three more months in the labor force. However, these alternative assumptions make little difference for debt through 2039: it rises from 111 percent of GDP to 113 percent with the faster decline in mortality and goes to 110 percent with the slower decline. These differences would compound over time though, so greater separation would occur in later years.

July 21, 2014

The Bipartisan Policy Center held an event Tuesday commemorating the 40th anniversary of the Congressional Budget Act, which became law on July 12. The event featured two panel discussions: The first panel included six former directors of the Congressional Budget Office (including CRFB Board members Alice Rivlin, Rudy Penner, and Dan Crippen), and the second panel consisted of former chairmen and members of the House and Senate Budget Committees (including CRFB Co-Chair Bill Frenzel and Board member Jim Jones). Bill Hoagland, another CRFB Board member, presided over the event. Both panels touched on the merits of the Congressional Budget Office, which the Budget Act created, and the failure of Congress to pass concurrent budget resolutions in recent years. The speakers also touched on many of the issues raised in our recent paper on the problems with the budget process. On the whole, the panelists stated that the political polarization of Congress, not inadequacies in the Budget Act, was a main reason for the gridlock in the process.

See the full videos of the panels here.

July 21, 2014
Easier to add debt than choose

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

The United States debt now stands at $18 trillion. This is double what it was just a few years ago. The trend, under the presently proposed budgets of President Obama, is that it will triple in another five to seven years.

People point facts like this out all the time. But the response from the president and the Congress is to add more spending that has not been paid for, thus increasing the debt problem.

The two most recent cases are the supposed ‘fix’ of the Department of Veterans Affairs and the highway bill.

July 21, 2014
The Two Budgeteers: All for One in Effort to Update Budget Act

Kent Conrad, a former Democratic senator from North Dakota, and Judd Gregg, a former Republican senator from New Hampshire, are both former chairmen of the Senate Budget Committee. They recently co-wrote an op-ed featured in Roll Call. It is reposted here.

Since ratification of the constitutional authority given to Congress to tax and spend in 1788, our government has struggled to manage the federal budget. After numerous failed budget concepts and commissions, the Budget Act was finally enacted in 1974 to establish the modern-day budget process. Almost exactly 40 years since the Budget Act was signed into law, there is growing consensus among policymakers and budget observers that the system no longer functions as intended.

As former chairmen of the Senate Budget Committee, we have personally witnessed the transformation away from a functioning regular order and toward an ad hoc approach to fiscal policy. Congress adopted an annual budget resolution, approved by both chambers, each fiscal year from 1976 through 1998. Since then, however, there have been eight fiscal years in which Congress has not approved a budget resolution. Government shutdowns, fiscal cliffs, temporary fixes and retroactive policy changes — all without serious consideration of our nation’s fiscal health — have become the new budgetary world order. Even when budget rules are in place, lawmakers evade them with gimmicks, emergency designations and waivers that result in the costs being added to our debt.

One of the core functions of Congress is to review and allocate discretionary spending each year through 12 appropriations bills. If not done by the beginning of the fiscal year on Oct. 1, then either the government shuts down or operates on a continuing resolution. As the Committee for a Responsible Federal Budget points out in a new paper detailing the problems with the current process, the average length and breadth of continuing resolutions has increased in recent years. These temporary funding extensions, along with shut downs, postpone important funding decisions and hamper the efficiency across the federal government.

We also know too well that even when budgets are produced on time, they are often political documents that lawmakers never expect to implement or enforce. Consideration of budget resolutions on the floor of the United States Senate in particular often devolves into late-night “vote-o-rama” sessions where hundreds of political messaging amendments geared to inspire campaign commercials are filed, while there is little debate on the ways to address the long-term drivers of our debt such as the need for tax reform and entitlement reform. In fact, we found the constraints of the budget process and the lack of political will to address the debt so stifling that we worked together to author legislation to create a special commission, later known as the Fiscal Commission or Simpson-Bowles, to bypass some of these process challenges.

July 21, 2014

In addition to showing the path of future debt, CBO's Long-Term Budget Outlook described the consequences of a large and growing federal debt.  The four main consequences are:

  • Lower national savings and income
  • Higher interest payments, leading to large tax hikes and spending cuts
  • Decreased ability to respond to problems
  • Greater risk of a fiscal crisis

According to the report, debt held by the public will rise dramatically in the coming decades, reaching 106 percent of GDP by 2039. The below graph shows the projected increase of the federal debt held by the public from 2014 (dashed line) through 2039 under CBO's extended baseline.

Debt rising to this nearly unprecedented level will have many negative consequences for the economy and policymaking.

July 18, 2014

This week, CRFB President Maya MacGuineas appeared on Bloomberg Television to discuss the CBO's Long-Term Budget Outlook and how imperative it is for lawmakers to address our nation's fiscal challenges.

Debt is basically twice the historical post war average, so that is much too high. But even more troubling is looking forward, the debt is growing and that its going to be the size of the entire economy by 2036.

You have a lot of troubling benchmarks along the way... the [disability insurance] trust fund's going to be running out of funds in a couple of years. By 2030, the combined trust funds of Social Security and Medicare Part A will have run out of reserves. There are so many warning signs that we need to be making changes, and yet you look at what's going on in Washington and we're not making a bit of progress on all these challenges that are so clearly laid out by the CBO.

July 18, 2014

The Congressional Budget Office's (CBO) Long-Term Budget Outlook shows a clearly unsustainable debt path over the long term, one that policymakers will have to address to avoid economic damage. While lawmakers may see the projections and think that getting debt under control is a daunting task, they should keep in mind that the longer they wait, the more difficult it will be to do so. This is true for both the Social Security program and the broader budget. CBO points out in the report that "waiting for some time before reducing federal spending or increasing taxes would result in a greater accumulation of debt ... and would increase the size of the policy changes needed to reach any chosen target for debt."

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. In the report, CBO shows that closing the 25-year fiscal gap, either by keeping debt stable or reducing it to its 40-year historical average share of 39 percent of GDP, would require a reduction in non-interest spending and/or an increase in revenues of 1.2 and 2.6 percent of GDP, respectively, if implemented today. Those changes would grow considerably larger if policymakers waited five or ten years to take action.

 

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.

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