The Bottom Line
Today, the House Ways and Means Committee launched a new website on tax reform, compiling all of the Committee's useful resources on the subject. We've talked about the great benefits of reforming the tax code by eliminating the many of the complicated, inefficient, and regressive tax expenditures that will cost the federal government over $1.2 trillion in forgone revenues in 2014.
But pictures speak better than words: the House Ways and Means Committee has put many of the best arguments for tax reform into an informative video. Their new website also contains links to past hearings and the Committee's three discussion drafts.
Getting our fiscal house in order will likely require taking a serious look at our outdated tax code. Broadening the base through tax reform represents an opportunity to raise the revenues needed as part of a comprehensive deficit reduction plan, lower marginal rates and simultaneously promote economic growth. We hope tax reform can make more progress in 2014.
Last night, Congressional appropriators unveiled a $1.1 trillion omnibus appropriations bill that would fund the government for the rest of FY 2014. The announcement comes just in time to avoid a government shutdown after tomorrow; lawmakers are working on a three-day stopgap to buy time to pass the broader package. There are a number of different resources to read more about the omnibus bill, including at the House and Senate Appropriations Committee websites, the CBO, CQ, and Politico.
The agreement adheres to the new spending cap levels enacted in the Bipartisan Budget Act, which repealed a portion of the sequester for FY 2014 and FY 2015. Total base discretionary spending is $1.012 trillion, up from the current $986 billion level and the 2014 sequester level of $967 billion but below the pre-sequester 2014 level of $1.058 trillion. The bill also includes about $100 billion of other spending on the war, disaster relief, and program integrity provisions -- with war spending comprising the vast majority of that amount -- to bring the total to $1.11 trillion.
Compared to FY 2013 post-sequester levels, defense spending remains roughly the same while non-defense spending increases by about $20 billion. Thus, a number of non-defense programs turn out to be winners in the deal compared to current levels. Funding for things like Head Start, the National Institutes of Health, and Community Health Centers got sizeable boosts, in many cases pushing funding above 2013 pre-sequester levels.
Source: CBO, CQ
The bill also includes $92 billion for war spending ("overseas contingency operations"), $1 billion below last year's final levels but more than $20 billion above what CBO assumes (and what we assume) for 2014 in a drawdown scenario. Defense spending in total is almost exactly the same as the current level but almost $40 billion below the pre-sequester 2013 level.
Source: CBO, CQ
Compared to the House and Senate budget resolutions, the omnibus bill provides $30 billion less for defense spending than either budget did. On non-defense spending, the level is $15 billion below the Senate level but $75 billion above the House level. As such, non-defense allocations are generally much closer to the Senate than the House, while defense spending is below both.
Source: CBO, CQ
One important change that was widely anticipated was to make a correction to the military pension cost-of-living adjustment reduction contained in the Bipartisan Budget Act. That change also applied to disabled veterans' pensions by mistake, and the omnibus bill corrects that.
The table below shows funding levels for each of the 12 appropriations bills and war spending (overseas contingency operations), compared to 2013 pre-sequester levels, 2013 post-sequester levels, and the allocations that the House and Senate Appropriations Committees were previously using.
|Allocations in Omnibus Appropriations Bill (billions of budget authority)|
|2013 Pre-Sequester||2013 Post-Sequester||House Appropriations||Senate Appropriations||Omnibus|
|Subtotal, Base Budget||$1,043.0||$986.4||$966.9||$1,058.0||$1,012.2|
|Overseas Contingency Operations||$98.7||$93.3||$92.3||$84.5||$91.9|
Source: CBO, CQ, Appropriations Committees
*Passed by full chamber
**Passed by Appropriations Committee
^Not passed by Appropriations Committee
Note: Disaster relief does not include one-time Hurricane Sandy relief.
To see supplemental data for the table, click here.
Congress entered 2013 with a great deal on its plate, but it still has some work left to do. Our budget problems are still far from solved and ideally lawmakers would make a comprehensive deficit reduction deal a priority. However, at the very least, they can do no harm.
In today's The Hill, CRFB President Maya MacGuineas writes that one of the greatest accomplishments of the Murray-Ryan deal was being able to fully pay for a reduction in the sequester, with a little extra savings on top. But sequestration was not the only important issue that needed to be resolved in 2014. Congress still has quite a bit of unfinished business to attend to, including the expiration of unemployment benefits, the expiration of the three-month "doc fix" signed at the end of last year, and the expiration of many temporary tax provisions known as "tax extenders."
MacGuineas proposes pay for these three expiring provisions with three separate $150 billion savings packages:
Already, discussions are underway about an extension of unemployment insurance. Given the still weak condition of the economy, it makes sense to extend unemployment benefits and to consider doing a larger package to create jobs and spur the economy. A package could extend and reform unemployment benefits, along with other measures such as infrastructure investments, job training, or targeted tax breaks aimed at promoting job growth or investment.
One option to pay for this, would be to switch to chained CPI—a more accurate way of measuring inflation—and use $150 billion of the non-Social Security portion of the savings to pay for the growth package and some deficit reduction. (The additional savings that would come from the Social Security program should be used to help shore up the program and provide enhancements to low income beneficiaries.) Such a deal would have the multiple benefits of helping the economy, the fiscal situation, and, separately, Social Security.
A second $150 billion package could pay for fixing the impending 25 percent cut in doctors’ payments, or the unsustainable “Sustainable Growth Rate” (SGR). The Congressional health committees have put forward packages which would replace the SGR with a formula that promotes quality over quantity of care and encourages participation in coordinated care models. What they have not done? Proposed how to pay for it.
Congress could pay for these reforms with a $150 billion package of structural health reforms that help slow its cost growth. Such a package could include expanding new forms of cost-controls like bundled payments and readmission penalties; restricting supplemental health plans which lead to the overconsumption of health care; reforming overly-complicated cost-sharing rules; increasing the use of generic drugs; and expanding the means testing of Medicare premiums.
Finally, a third $150 billion package could pay for a one-year extension of the “tax extenders” which expired at the end of 2013, along with a permanent extension of the low-income support from the child tax credit and earned income tax credit scheduled to expire in 2017. One payfor option would be a plan developed by myself, Dan Feenberg and Martin Feldstein of Harvard University, where the amount of tax breaks any one individual can claim are limited to a certain dollar amount, or share of one’s income. It’s not comprehensive tax reform which we need, but it’s a step in the right direction.
At the very least, lawmakers should pay for extensions of expiring provisions with permanent savings that would help our long-term outlook. We will need to do more, but in the meantime, lawmakers can show their commitment to fiscally-responsible budgeting.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Last month, President Obama gave a speech on rising income inequality in the United States, which is a theme expected to be prominent throughout the President's 2014 agenda. He noted that the majority of the economic gains since 1979 have gone to the richest households, and "the income of the typical family has increased by less than eight percent." As part of the speech, Obama proposed a number of solutions: raising the minimum wage, encouraging education reforms, supporting the social safety net, and extending unemployment benefits.
In an op-ed posted today in the Washington Post, Glenn Hubbard, former chairman of the Council of Economic Advisors under President Bush, seems to agree that income inequality is "the defining challenge of our time," but instead argues that reforming the tax code is the best way to lessen income inequality.
However, he says it is not enough to change the tax code solely in the name of reform. Instead, it must be purposefully restructured to better benefit low-wage workers.
A policy shift in favor of mass prosperity — dynamism and inclusion — is best conducted via fundamental tax reform. The discussion and policies to be considered, however, should look different from those in the present debate. The Obama administration has supported raising taxes on high-income earners and corporations to pay for expanded benefits to low-income Americans. Such an approach is unlikely to raise labor demand or labor-market earnings for those or other workers.
The opposing view, by contrast, centers on classic tax reform of “broaden the base, lower the rates.” Unlike the Obama administration proposals, this tax reform will increase capital accumulation, economic growth and employment. But it is insufficient for increasing the inclusion of low-wage workers, whose incomes may not benefit fully from economic growth.
In particular, Hubbard points out two changes that could make the tax code work better for low-income Americans.
For employees, the tax code does little to encourage human capital formation, education or skills development. For many Americans, a simplification and expansion of education-related deductions would be a positive step. With an eye toward raising inclusion in the labor force, one could consider a voucher for low-income individuals for education, training, tuition or their children’s education.
A second employee-based approach builds on the earned-income tax credit, which promotes work as it reduces poverty. While successful, the credit could be improved if inclusion were the goal. As currently constructed, the credit mixes support for families with a tax credit on earnings. Increasing the credit for childless workers to an amount closer to that for families with children would augment the direct work incentive and help counter poverty among the working poor.
We've long noted the need for reforming the nation's tax code. Many tax preferences are expensive, regressive, economically distorting, and do not pass the cost-benefit analysis. Getting rid of some of these preferences offers the opportunity to make the tax code simpler, fairer, and more pro-growth. Reforming the lower-income credits as Hubbard mentioned has been a part of many tax reform plans which also went after tax expenditures, including the 2005 Tax Reform Panel and Domenici-Rivlin plans.
In addition, our ongoing Tax Breakdown series analyzes many of the biggest tax expenditures, showing how some of them could be made more progressive or increase the "bang-for-the-buck," having a greater impact for less money. Tax reform done right offers an opportunity to simultaneously raise revenue, reduce tax rates, and increase progressivity. Glenn Hubbard offers two ideas to reform the tax code that could be considered.
As the Senate looks for offsets for an unemployment insurance extension, there is one provision that has gotten some attention: ending "double-dipping" for those receiving both UI and federal disability benefits. Although options to address this issue, even in their most aggressive form, would not fully offset a year-long (or through mid-November) extension, it could offset most of the costs of a three month extension and could be used in combination with other policies to make a longer extension deficit-neutral.
The policy at stake involves disallowing beneficiaries in unemployment insurance (and in some cases trade adjustment assistance) from also receiving disability insurance benefits. The justification is simple: UI (and TAA) recipients are supposed to be actively seeking work, while disability insurance is generally supposed to go to people who are unable to work for an extended period of time (DI beneficiaries are allowed to earn up to $1,070 per month). This problem has to be addressed with legislation since, according to the Government Accountability Office, "While SSA must reduce DI benefits for individuals receiving certain other government disability benefits, such as worker’s compensation, no federal law authorizes an automatic reduction or elimination of overlapping DI and UI benefits." The GAO noted that such payments could be an indication of "improper payments" and suggested that the Department of Labor and the Social Security Administration look into the circumstances of people receiving both benefits and taking action (or urging Congressional action) where appropriate.
There are a few ways to go about ending double-dipping. Both the President's budget and Senate Majority Leader Harry Reid's (D-NV) amendment to the three-month UI extension would reduce DI benefits dollar-for-dollar by the amount of UI benefits the person is receiving. This less aggressive version of the policy would save $1.2 billion through 2023 and $1.3 billion through 2024.
A more aggressive version, proposed by Sen. Tom Coburn (R-OK), would suspend DI benefits in any month a person is also receiving unemployment benefits. This would save about $5 billion over ten years. The most aggressive version from Sen. Rob Portman (R-OH) and House Ways and Means Social Security Subcommittee Chairman Sam Johnson (R-TX) would remove those who receive UI or TAA benefits entirely from the DI rolls. Those beneficiaries could re-apply for DI when they are no longer receiving those benefits after going through the requisite waiting period. This policy would up the savings to $5.4 billion.
|Different Policies for Eliminating/Reducing UI and DI Overlap|
|President's Budget/Reid Amendment||Coburn Bill||Portman/Johnson Bills|
|Treatment of Overlap||
DI benefits reduced dollar-for-dollar by amount of UI benefits
|DI benefits eliminated during month UI is received||Removed from DI rolls if UI or TAA is received|
|Treatment in Waiting Period||N/A||Immediately eligible for DI when receipt of UI stops||Must wait 5 months to re-apply|
|Savings||$1.2 billion||$5 billion||$5.4 billion|
Source: CBO, Sen. Coburn's office
In short, there are different ways of going about eliminating "double-dipping" of unemployment and disability benefits. The Senate has several approaches that would help offset the cost of reinstating extended unemployment benefits, but we will see how lawmakers ultimately choose to do it, if at all.
We spend a great time on The Bottom Line discussing the economic and policy consequenses of the nation's unsustainable debt. But what about the moral and ethical dimensions of the current fiscal situation?
On Thursday, CRFB will host a panel discussion from 12:00-1:30 PM at 1899 L Street, Suite 400. Lunch will be served at the event.
During the discussion, topics like generational equity and the possible consequences debt could have on its most vulnerable citizens will be discussed. The discussion will be moderated by Rev. Dr. David Gray, a Senior Fellow at the New America Foundation and include the following panelists:
- Marc Goldwein, Committee for a Responsible Budget
- Josh Good, Values and Capitalism Project, American Enterprise Institute
- Rev. John Allen Newman, Senior Pastor, The Sanctuary at Mt. Calvary Church
- Dr. Jay Richards, Distinguished Fellow, Institute for Faith, Work and Economics
- Mark Tooley, President, Institute for Religion and Democracy
The event should be an excellent opportunity to discuss the issue from a different perspective, a moral and ethical one. We hope to see you attend.
Yesterday, the IRS Taxpayer Advocate released its 2013 annual report, detailing what it sees as the largest problems facing taxpayers. The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers resolve problems with the IRS and recommend changes that will prevent those problems.
Each year, the report focuses on a different theme. This year, it focused on IRS budget cuts as "one of the most serious problems facing taxpayers." The report argues that these cuts have forced the IRS to work with fewer resources despite heavier workloads, ultimately hurting customer service. For instance, the report finds that the agency received 109 million calls, but could only answer 61 percent of the calls from those seeking to speak with a customer service representative, down from 87 percent a decade earlier. People who reached the agency spent an average of nearly 18 minutes waiting on the phone. Many of these taxpayers would voluntarily pay the taxes they owe if they could only get an answer from the IRS.
Further, the report describes how the IRS does not even fully answer questions on the calls:
During the filing season (January through April), it will answer only “basic” tax law questions; it will not answer “more detailed” questions. After April, it will not answer any tax law questions (even basic ones), including from the millions of taxpayers who obtain filing extensions and prepare their returns later in the year. At the risk of vast understatement, it is a sad state of affairs when the government writes tax laws as complex as ours — and then is unable to answer any questions beyond “basic” ones from baffled citizens who are doing their best to comply.
The report identified several other major problems, noting that the IRS needs a taxpayer bill of rights to bolster taxpayer confidence in the agency, further employee training, and education on taxpayer rights. The report also called to allow the IRS to regulate tax preparers after a recent court case prevented the IRS from ensuring preparers meet basic competency requirements.
Among the report's legislative recommendations:
- Permanently repeal the AMT: The Alternative Minimum Tax's original goal was to ensure that wealthy taxpayers who used lots of tax provisions to reduce their tax bill still paid a minimum level of tax. However, the report notes that the AMT falls short of this goal: about 1,000 millionaires will pay no federal income tax in 2013. Nonetheless, many taxpayers are required to calculate their taxes twice, even if they do not end up paying the AMT. The AMT only serves as an extra burden on taxpayers with children and those who live in high-tax states.
- Remove the IRS from spending caps: "Because the IRS is the federal government’s accounts receivable department and generates a substantially positive return on investment, it is self-defeating to treat the agency like a pure spending program. With most spending programs, a dollar spent is simply a dollar spent from a budget perspective. With the IRS, a dollar spent generates many dollars in additional revenue."
- Fix the regulations around the Affordable Care Act tax credits: Under the Affordable Care Act, tax credits paid to the insurance company are supposed to prevent any person from paying more than 9.5 percent of their income toward health insurance. However, current IRS regulations may prevent the tax credits from being used to support a family insurance plan since the regulations only reference the cost of insuring one person, even if the whole family needs coverage. Thus, families may face significantly higher costs than if the regulation interpreted the law differently.
- Allow more taxpayers to claim the EITC: The Earned Income Tax Credit (EITC) provides refunds to low-income taxpayers, but is also a common target for fraud by taxpayers or their preparers. In these cases, the IRS has the authority to ban a family from claiming the credit for three years. However, this report suggests that the IRS has been banning families without knowing if it was fraud, inappropriately penalizing people for math errors and honest mistakes. The IRS should improve its procedures for handling these cases.
- Allow colleges to verify their student's social security numbers: Currently, colleges must report the amount of tuition paid or billed to the IRS, using the Social Security numbers reported by students. Unlike other reported information, however, colleges are not allowed to verify whether the numbers are correct. If the numbers are incorrect, either due to a typo or name change, the college can be liable for penalties for each error, which can add up to millions of dollars for large universities.
We have pointed out before that the complexity of the tax code increases the burden on both taxpayers and IRS enforcement efforts. Given that lawmakers have apparently chosen to live with sequester spending levels in the near future, it would behoove them to simplify that burden. The Taxpayer Advocate highlights potential problems from expecting an agency to do more work with a smaller budget. The report offers a number of helpful recommendations to improve the tax code and citizens' interactions with the IRS.
Read the full report here.
Today, the Congressional Budget Office released their score of the proposal from Majority Leader Harry Reid (D-NV) to renew extended unemployment benefits in concert with other reductions in spending. We are quite pleased that, as we called for, the conversation has turned from whether to pay for unemployment benefits to how; and we appreciate that Senator Reid has a specific proposal to pay for the new costs. The statutory pay-as-you-go law requires new spending to be fully offset through 2024. Unfortunately, the CBO score shows that the proposed offsets still fall short of what is necessary to comply with this standard.
Specifically, Senator Reid’s proposal would:
- Renew extended unemployment benefits through November 15th, reducing the maximum weeks from 73 to 57
- Reduce disability insurance benefits for people who also receive unemployment benefits
- Extend the mandatory sequester cuts which end in 2023 into 2024
Eventually, the savings from the UI/DI provisions and mandatory sequester would exceed the cost of extending unemployment benefits (excluding interest), however this would not be true until 2025. By our estimates, the legislation would increase the deficit by about $5 billion through the ten year budget window ended in 2024, and by $17 billion through 2023. With interest (which is not counted under PAYGO rules), the legislation would increase the deficit by about $11 billion through 2024.
Budgetary Effect of UI Extension Bill (in billions of dollars)
Source: CRFB calculations from Congressional Budget Office data
Note: The PAYGO window is 2014-2024. Figures for 2024 and 2025 are rough CRFB estimates.
Although the decision to include offsets in the legislation is a huge step forward, policymakers should amend this legislation so it is at least deficit neutral over the next five or ten years and not rely on one-time savings outside of the budget window.
If something is worth having, it is worth paying for. And it is important that Members stick to fiscal rules and principles along the way. Providing offsets as opposed to deficit-financing the entire legislation is a good start. But improvements are necessary to ensure this bill is not adding to the deficit (and preferably is subtracting from it) over the next decade and beyond.
On Monday, the Centers for Medicare and Medicaid Services (CMS) released their annual update on health care spending growth, showing that 2012 was another year of slow cost growth and lending further insight into the burning question of what’s causing the recent slowdown.
- Health care cost growth, across-the-board, continues to remain subdued.
- The Baby Boom generation is hitting retirement. “Enrollment in Medicare for all beneficiaries (fee-for-service and Medicare Advantage) jumped 4.1 percent in 2012—the largest one-year increase in enrollment in thirty-nine years.”
- Medicare Advantage plans are getting really popular. The private insurance plans offered as an alternative to traditional Medicare, primarily in the form of closed network health maintenance organizations (HMOs), were chosen by “more than half” of new Medicare enrollees in 2012.
- High-deductible plans continue to grow in popularity. “Net enrollment gains in high-deductible plans contributed to the slow growth in premiums. Enrollment in high-deductible health plans, which generally have lower premiums and higher cost sharing than other more popular plans, accounted for 19 percent of all covered workers and 31 percent of the under-sixty-five insured population in 2012.” The growing use of high-deductible plans and more limited networks among the under 65 population might help explain the increasing popularity of Medicare Advantage plans when those people turn 65.
- The “Patent Cliff” is lowering health care spending. Part of the explanation for the recent health care slowdown is generally attributed to a slowdown in prescription drug expenditures, and the authors show that a few blockbuster medications going off-patent in 2012 reinforced this trend. It is unclear, however, what the recent deceleration in the development of high-volume, life-changing drugs portends for future innovation.
The unemployment insurance saga continues. Today, Senate Majority Leader Harry Reid (D-NV) proposed an alternative unemployment benefit extension which would run through mid-November, in place of the three-month extension previously considered.
Thankfully, and unlike the prior version, this extension would be fully offset [Update: After this blog was written, CBO released a score of the Reid proposal which shows that it would not be fully offset unless the budget window were extended through 2025. The bill will add $17 billion to the deficit through 2023 and about $5 billion through 2024. It would reduce the deficit by about $1 billion through 2025 excluding interest.] -- it appears through a combination of extending the mandatory sequester through 2024 and a modest version of the proposal we previously discussed preventing UI beneficiaries from also receiving Social Security Disability Insurance. We will withhold judgment of this proposal until we have time to see and fully analyze the specifics, but we are glad to see the conversation is turning to offsets, which we have called for several times.
If the offsets put forward by Reid are not adopted, policymakers have many other options. The total cost of the Reid extension, which would also lower the maximum number of weeks one can receive benefits, is reported at about $17 or $18 billion; a full extension of current benefits through the end of 2014 would cost about $25 billion.
These costs could be covered by adopting a combination of policies we previously presented to offset a three-month extension or other small policies to get to the $25 billion cost. There are also a number of bigger options which would mostly, fully, or more than offset the cost in one fell swoop. The table below presents some of these options, in addition to two we highlighted in the previous blog post: extending the 0.2 percent UI surtax and prohibiting UI beneficiaries from also receiving disability insurance. All estimates are through 2024 to reflect the new budget window.
|Options for Offsetting UI Extension|
|Extend UI surtax permanently||$16 billion|
|Prohibit "double-dipping" with UI and DI||$5 billion|
|Increase UI wage base to $14K, index to wage growth, and lower rate to 0.33%||$18 billion|
|Eliminate direct commodity payments||$25 billion|
|Restrict categorical eligibility for food stamps to cash assistance programs||$14 billion|
|Require DI beneficiaries be moved to Social Security at age 62||$14 billion|
|Close carried interest loophole||$19 billion|
|Encourage use of generic drugs by low-income beneficiaries in Part D||$33 billion|
|Require derivatives be marked to market and tax them as ordinary income||$17 billion|
|Reduce crop insurance premium subsidy||$25 billion|
|Allow USPS to end Saturday delivery||$24 billion|
|Restrict cost-sharing for TRICARE for Life||$35 billion|
|Reduce Medicare payments for bad debts||$27 billion|
|Freeze Medicare means-tested premium thresholds through 2023||$28 billion|
|Require Social Security number to claim refundable portion of child tax credit||$30 billion|
Policymakers could also look beyond a ten month or one-year extension to come up with more long-term extensions and reforms to unemployment insurance and other jobs measures. A jobs package could include new infrastructure spending, job training or community college initiatives, targeted tax breaks aimed at promoting job growth or investment, and possibly some additional sequester relief. The President's proposal for correcting the way we measure inflation would generate about $210 billion from the on-budget, non-Social Security portion. If this was used to pay for such a package it would likely promote short-term economic growth, encourage long-term economic growth, slow the growth of the debt, and improve Social Security solvency.
Just like with other extensions, unemployment benefits should be offset. There are a lot of ways lawmakers could do that, so they should have little trouble finding a way that they can agree on.
Over the past few months, the subject of Social Security has been hotly debated, centering Recently, Jane White authored an article in the Huffington Post supporting Senator Warren, and mischaracterized CRFB's position toward Social Security. On Thursday, Ed Lorenzen weighed in on the facts about Social Security in a Huffington Post article.
In the article, Lorenzen sets the record straight on CRFB's position on Social Security:
While CRFB has not endorsed a specific Social Security reform plan, we have commented favorably on a variety of plans which rely on a mix of reductions in promised benefits, increased revenues and targeted benefit enhancements. We have also developed an online tool, the Social Security Reformer, which allows individuals to view the options for changes in benefits and revenues and design their own plan to restore solvency.
Additionally, Lorenzen lists five facts to know about Social Security.
- Benefits will be cut by over 23 percent in twenty years if no changes are made.
- Social Security benefits will increase in real terms for future retirees even with changes in benefits to restore solvency.
- The Social Security Shortfall cannot be closed solely through increased taxes on upper income taxpayers.
- Delaying action will make the options for restoring solvency more painful. Not only does waiting to act mean any tax increases or benefit cuts will be steeper, it literally means they will need to be bigger.
- The major Social Security plans that rely on a combination of benefit changes and increased revenues to restore solvency include targeted benefit enhancements for vulnerable populations at greatest risk of poverty.
Lorenzen ends the article acknowledging the need for real discussion about Social Security, before our options are limited.
The future of the Social Security program is a serious issue that deserves a serious debate that honestly acknowledges the challenges facing the program and trade-offs involved in addressing the problem. Absolutist positions ruling out options before even considering them does a disservice to the debate.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Note: This piece was originally posted on the Angry Bear blog.
The late Senator Moynihan once said that “everyone is entitled to his own opinions but not to his own facts.” In response to our piece, “Setting the Record Straight on Social Security,” Dale Coberly calls both our facts and our opinions “lies.” In his treatise, Coberly adds several important ideas to the discussion, but much of his piece misrepresents CRFB’s views, misattributes our motives, and asserts claims which are simply not based in fact.
We pride ourselves on our fact-based, non-partisan analysis, which Coberly calls into question in his piece. Below, we review and debunk many of his claims:
Claim #1: CRFB advocates a cuts-only solution to Social Security.
FALSE. Coberly claims that “CRFB would like you to believe the only solution is to cut benefits,” that we only “pretend to be open to revenue enhancements,” and that our Social Security Reformer “is rigged so you can’t give the correct answer [of gradually raising the payroll tax rate].”
This claim is nonsense. The blog clearly states that a reform “could increase revenue coming into the system, slow the growth of benefits being paid out, and even offer some targeted benefit enhancements to those who truly need them” – and we have said this consistently over the years. In fact, our do-it-your-self Reformer offers users a number of different revenue options to choose from and lets users increase the payroll tax rate by whatever amount they wish (it’s true we don’t have the functionality to adjust the phase-in rate of tax or benefit changes, which we hope to include in a future version). In addition, the two plans we repeatedly cite in our blog – Simpson-Bowles and Domenici-Rivlin – both propose a mix of revenue and benefit changes, and a separate plan developed by CRFB President Maya MacGuineas along with Jeff Liebman and Andrew Samwick relied heavily on revenues as part of a solution, which also included targeted benefit enhancements.
Claim #2: CRFB wants to turn Social Security into a welfare program.
FALSE. Colberly claims that our goal is to “turn Social Security into a welfare program by means testing” and that “CRFB would tax you to pay for benefits that only ‘the deserving poor’ would receive after careful examination to be sure they were poor enough to ‘deserve’ welfare.”
This claim also has no basis in fact. CRFB takes no position on whether benefits should be means-tested and nowhere in our entire blog do we propose means-testing benefits in any form. The plans we reference – Simpson-Bowles and Domenici-Rivlin – do make the benefit formula more progressive, but they still maintain a link between contributions and benefits received.
In fact, our only mention of the concept is to warn that those who support eliminating the cap on income subject to Social Security payroll taxes must make a choice between offering huge benefit increases to the rich and means-testing benefits for that group; this may be an unattractive choice for progressive supporters of social insurance.
Claim #3: Social Security’s Finances Could be Solved by Raising the Payroll Tax 0.1 Percentage Points Per Year Until It’s Increased by 2.7 Percent
HALF TRUE. Coberly argues that we need not worry about Social Security’s finances because raising the payroll tax rate by only 0.1 percent per year would make the program solvent, until it’s increased by 2.7 percent. It’s true that solvency can be maintained by increasing the payroll tax by 0.1 percentage points a year, but the ultimate increase would have to be far in excess of 2.7 points percentage points.
Indeed, to make Social Security solvent for 75 years, the payroll tax would have to be raised by 0.1 percentage points per year for the next 40+ years – by over 4 percentage points in total. In other words, the payroll tax rate would ultimately have to be increased by one-third. And achieving sustainable solvency would require an additional decade of increasing the payroll tax rate, ultimately raising the payroll tax rate by 5 percentage points – from 12.4 to 17.4 percent. (As we explain in claim #4, the reason this increase is so much higher than Coberly claims is related to the real cost of waiting to implement savings.)This increase, importantly, would apply to all workers, including the very poor. Increasing the payroll tax is a legitimate policy option that should be part of the debate, but many progressives would be concerned with large tax increases on low-income workers in order to finance the rapid continued growth of retirement benefits, a good share of which goes to the wealthiest seniors.
Claim #4: There is No Cost to Waiting to Reform Social Security
FALSE. Coberly calls our claim that delaying action on Social Security has costs “a lie,” positing that “waiting will not lead to increased costs or deeper cuts. It would [only] lead to a steeper rate of increase.”
Coberly is mistaken. As Doug Elmendorf, director of the non-partisan Congressional Budget Office recently stated in testimony before Congress “there is certainly a cost to waiting….the longer one waits to make changes, the larger the changes need to be and the more abruptly they would need to take effect.”
Not only does it mean any tax increases or benefit cuts will be steeper, but it literally means they will need to be bigger in magnitude. This is true for at least two reasons. First, waiting will mean that there are fewer total people to share in the tax increases or spending cuts – that means more increases/cuts per person. Secondly, the longer we wait, the less money is in the trust fund and the less interest it will generate.
Although Coberly suggests that the actuarial deficit of 2.7% of payroll over the next seventy five years could be closed by gradually implementing a 2.7% increase in the payroll tax over twenty plus years, the 2013 Social Security Trustees report clearly states that in order to make Social Security solvent for 75 years, “revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax increase of 2.66 percentage points.” (emphasis added) In a paper on this topic, we showed that what could be solved with a 16.5 percent across-the-board benefit cut today would require a 19 percent cut if we wait a decade and a 23 percent cut if we wait two decades. Similarly, the 2.7 percentage point increase in the payroll tax needed to close the 75-year gap today would be 3.3 points if we waited until 2023 and 4.2 if we waited until 2033.
Claim #5: Social Security Does Not Really Run a Deficit
MOSTLY FALSE. Coberly calls our claim that benefits exceed payroll tax revenue “a clever lie” because we do not (but should) count assets from the trust fund as revenue. Specifically, he argues that “the revenue from previous payroll taxes … were saved exactly in anticipation of the higher costs that Social Security is facing today. It’s as if you saved up money in advance to pay for your Christmas shopping, and then, when December comes, the CRFB runs around telling your neighbors you are bankrupt because you are ‘spending more than you are taking in.”
Here, Coberly confuses the flow of funds with the stock of funds. If an individual, business, or government spends more than they take in, they are running a deficit. If an individual, business, or government spends more than they have, they are in debt. We never claimed Social Security was in debt, but it is running a large cash deficit – totaling about $75 billion in 2013 alone. Notably, Social Security is still running a small surplus when interest is included, but even that surplus is expected to disappear in a few years; and most analysts prefer to focus on cash flow.
Don’t believe us? Ask Social Security’s own Trustees who say that “for both the OASDI and HI [Medicare] programs, the Trustees project annual deficits for almost every year of the projection period” or the Congressional Budget Office who explains that “in 2012, outlays exceeded noninterest income by about 7 percent, and CBO projects that the gap will average about 12 percent of tax revenues over the next decade.”
As for the suggestion that we’ve saved money for the current deficits, Coberly’s metaphor simply doesn’t match since (unlike Christmas) these deficits are not a temporary event. The more comparable situation would be if an individual saved money every year of his 20s and then decided to spend more than he earned for the remainder of his life. In his 30s, he might be able to rely on past savings to make up the difference, but that money will dry up soon. In the case of Social Security, that will likely happen in the early 2030s; and when the trust fund runs out, our revenue will only cover about three-quarters of our spending.
Claim #6: Social Security’s Deficit is Due to the Payroll Tax Holiday CRFB Advocated
FALSE. Coberly states that, “Another reason CRFB can say the cost of benefits are ‘well in excess of revenue from payroll taxes’ is that recently the friends of CRFB persuaded the politicians to ‘cut payroll taxes’ to provide a stimulus to the economy.”
In fact, the payroll tax holiday has nothing to do with Social Security’s trust fund or deficit. The revenue loss was made up for with a general revenue transfer that is not included in the $75 billion cash deficit we cite. The Office of Management and Budget noted that “general fund transfers…substitute[d] for the payroll tax revenue lost by the payroll tax reduction, so that the balances of the Social Security trust funds are the same as they would have been in the absence of the legislation. As a result, the payroll tax reduction did not impact the long-term solvency of the trust funds.”
Moreover, CRFB did not advocate for or against a payroll tax holiday. It’s true we do have many friends that supported the payroll tax holiday (along with some progressive organizations who disagree with us on Social Security), but we also have many friends that opposed the payroll tax holiday. The assertion that CRFB advocated for a payroll tax holiday as part of a plot to undermine Social Security has no basis in fact.
Claim #7: Social Security Does Not Add to the Budget Deficit
MOSTLY FALSE. Coberly claims that CRFB is trying to confuse readers by suggesting that Social Security is currently adding to the federal budget deficit. Yet if we are trying to confuse the reader, so too is the non-partisan Congressional Budget Office and the President’s own Office of Management and Budget.
As we’ve explained before, there are two ways to look at Social Security – as its own isolated program and part of the broader budget. There are also at least two ways to measure the federal budget deficit – by looking at the “on-budget deficit” and by looking at the “unified budget deficit.” Social Security does not add to the on-budget deficit. But most economists, analysts, reporters, and politicians prefer to look at the unified deficit. And here, Social Security is – net of its payroll taxes – contributing to the deficit.
Claim #8: Social Security is a way for workers to save their own money.
MOSTLY FALSE. In attacking the idea of means-testing, Coberly asserts that Social Security “is a way for workers to save their own money, protected from inflation and market losses, and insured against personal misfortune. That is, it is protected by the government, but not paid for by the government.”
This assertion shows a misunderstanding of how the Social Security program works. Social Security is a government program in which the government collects payroll taxes and then pays benefits to seniors, disabled workers, and their dependents. Some view Social Security as just another government program, others view it as a publicly-administered (and mandated) social insurance policy, but no serious analysts view Social Security as a true savings program.
For one, payroll tax contributions are not set aside in a savings account or even a pooled fund of savings; they are used to pay current benefits. Additionally, benefits are not determined based on payroll tax contributions – they are determined by applying a progressive formula to wage history that assures higher lifetime earners receive more in nominal benefits than lower earners, but less as a share of their salary. It’s true that Social Security does have a few things in common with a system of forced savings – it reduces the amount a worker can spend now and provides more resources later – but the program is not a “way for workers to save their own money.”
Claim #9: The question of whether past surpluses have been saved in an economic sense is an irrelevant issue invented by CRFB to justify benefit cuts.
FALSE. Coberly suggests that “CRFB would have you believe the United States of America cannot pay back the money it borrowed because it ‘did not save’ that money ‘in an economic sense.’”
Actually, we specifically explain that the budgetary impact of Social Security’s shortfalls exist “regardless of whether past surpluses were saved in an economic sense or not,” and none of our critique focuses on that question. Nor do we suggest that the Treasury cannot pay back the money it borrowed from the Social Security system. We simply pointed out that the government will need to borrow money from the private sector to cover Social Security’s cash shortfalls.
Although barely mentioned in our blog, it is widely accepted that the existence of trust fund balances has no bearing on the ability of the government to pay benefits unless the past surpluses were saved in an economic sense. The Analytical Perspectives volume of President Obama’s Fiscal Year 2014 budget stated, “The existence of large trust fund balances, while representing a legal claim on the Treasury, does not, by itself, determine the Government’s ability to pay benefits. From an economic standpoint, the Government is able to prefund benefits only by increasing savings and investments in the economy as a whole.”
The question of whether Social Security’s surpluses have led to an increase in savings in the rest of government is a hotly debated one in the economic community. If it has, it could be argued that the government is better-equipped than it would otherwise have been to pay back Social Security benefits. If it hasn’t, it means that the Social Security program is ultimately leading to higher net borrowing than would otherwise be the case. But either way, in the here and now, the federal government has to borrow more on the open-market to finance Social Security deficits than if the program were in balance.
Claim #10: CRFB Advocates Cuts to Means-Tested Programs and Doesn’t Care About Investing in Future Generations
FALSE. Coberly calls our claim that raising revenue for Social Security might leave less money for investments and younger generations disingenuous, suggesting that “these are the people cutting food stamps (for children) in order to fund investments … in the next dot.com bubble or housing finance fraud.”
This is false. The deficit reduction plans we cite in our piece – Simpson-Bowles and Domenici-Rivlin – specifically take most low-income support programs off the table. Neither includes reductions to food stamps, welfare, SSI, or related programs.
It is irresponsible to look at Social Security in isolation without considering the impact that meeting its financial obligations will have on our ability to meet other needs. The Congressional Budget Office and other non-partisan analysts have made warnings similar to ours that the rapid growth in spending on entitlement programs and interest on our debt will squeeze out other government spending. Much of our concern about the growth of entitlement programs and deficits is motivated by our view that unchecked growth of entitlement spending will harm the economy and the living standards of future generations by squeezing out spending on programs that invest in the future.
And the claim that Social Security competes with other programs is not just theoretical. The recent budgetary discussions show just how concrete the competition is. Both sides entertained adopting the so-called Chained CPI, which would have slowed Social Security cost-of-living adjustments (COLAs) and other inflation updates in the budget and tax code to the actual rate of inflation, in order to replace part of sequestration. Because this and other changes were not adopted, most of sequestration is being allowed to take place, leading to large reductions in programs like Head Start, health and scientific research, low-income housing assistance, primary education, and job training.
Despite Coberly’s efforts to dismiss our warnings, the reality is that numerous non-partisan analyses confirm that Social Security is facing serious financial problems that adversely affect both the ability of the program to meet future obligations and the federal budget as a whole. We can and should have a vigorous debate about the best mix of policies to address this problem. But that debate should be based on an honest recognition of the facts regarding Social Security’s financial condition.
Out with the Old, In with the ? – 2013 is history and 2014 is just underway. While the New Year is usually a time for optimism, this year begins with many questions and concerns. Although there is hope for stronger economic growth in 2014, there is still much anxiety. Moreover, a new poll indicates that few voters think our political system is functioning properly, with little optimism that Washington will be able to address the major problems facing the country, including the national debt. The past year was the least productive for Congress since 1947 when measuring the total number of bills passed and another poll shows many Americans see it as the least productive in their lifetime. Record-low congressional approval ratings underscore the damage such ineffectiveness has caused. If Washington is to improve its performance and regain the trust of Americans, it must start with carrying out the most basic function of government, agreeing on a federal budget. The budget deal approved by Congress and signed by the president last month is a step in the right direction, but much more needs to be done. As Congress gavels in its 2014 session this week, more tests are around the corner with government funding expiring January 15 and the debt ceiling rearing its ugly head again next month. While there is lots of work to be done, with 2014 an election year with control of Congress at stake, there is little hope of much cooperation across the aisle. President Obama will have an opportunity to present his vision on January 28 in his State of the Union address. Will Washington exceed expectations in 2014?
May Old Appropriations Be Forgot – Years of going from one stopgap measure to another to fund the government may be coming to an end. Appropriators were busy over the holidays negotiating federal spending bills based on the overall spending level agreed to in to the Bipartisan Budget Act. Congressional appropriators say they are very close to finalizing an omnibus bill tying together the 12 annual spending bills and may complete work by the end of the week. Lawmakers face a January 15 deadline to agree on funding the government in order to avoid another shutdown. The biggest obstacle could be politically-motivated policy riders that some legislators want to include. This week will be a pivotal one in determining if agreement can be reached as time runs short. Lawmakers may end up passing another continuing resolution for just a couple of days in order to buy some time to pass the omnibus.
Some Have 2013 Regrets – Some lawmakers enter the New Year regretting some things that were done in 2013. Namely, extended unemployment benefits expired on December 28 and the Bipartisan Budget Act reduced Cost-of-Living-Adjustments (COLAs) for military pensions for those under 62. Legislation reversing both these actions is being considered. On Tuesday the Senate voted to lift a filibuster on a three-month extension of expanded unemployment insurance as President Obama promoted an extension at a White House event. A vote on final passage could come at the end of the week. The three-month extension is intended to buy time to adopt a year-long extension and the $6 billion cost is not offset. House Speaker John Boehner (R-OH) said that the House would only consider an extension that is paid for with cuts elsewhere in the budget. Senate Majority Leader Harry Reid (D-NV) and House Minority Whip Steny Hoyer (D-MD) both indicated that Democrats would be willing to consider offsets. Any extension should be paid for and we highlight several ways to offset it. Likewise, while some vow to to reverse reforms to military pensions, it is unclear how they will replace those savings. We took a look at the reforms and why they are needed. While it is tempting to adopt such policies without paying for them, abiding by pay-as-you-go (PAYGO) rules is critical both economically and fiscally.
New Year Brings New Focus on Doc Fix – The budget deal was paired with a three-month delay of a 24 percent reduction in Medicare payments to physicians while lawmakers continue work on a permanent “doc fix.” Last month both the Senate Finance Committee and House Ways and Means Committee approved of bills to permanently fix the Sustainable Growth Rate (SGR). In what is a recurring theme, finding a way to pay for the cost of about $117 billion over ten years is the main holdup at this point.
Waiting for a Debt Ceiling Resolution – The New Year brings a new debate over the statutory debt ceiling. Congress last year agreed to “suspend” the debt limit until February 7. Last month Treasury Secretary Jacob Lew warned lawmakers that “extraordinary measures” could only hold off a default for about a month after the suspension is lifted. While some Republicans want to concessions in exchange for raising the limit, others are urging restraint.
What Does 2014 Hold for Tax Reform? – Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Dave Camp (R-MI) had hoped to put forward legislation fundamentally reforming the tax code in 2013, but the government shutdown and other factors delayed action. Now that Baucus has been nominated to be the U.S. Ambassador to China, the future of tax reform is unclear. However, there are still signs that progress will be made. Baucus has released several tax reform discussion drafts and another on infrastructure is expected soon. We recently looked at his ideas for reforming energy tax incentives. Baucus set January 17 as the deadline for tax reform comments. In addition, the likely successor to Baucus as head of the Finance Committee, Sen. Ron Wyden (D-OR), is also committed to tax reform. Meanwhile, the need to address the 55 tax breaks known as the “tax extenders” that expired at the end of the year will ensure that tax reform remains a key piece of conversation on Capitol Hill.
Social Security Debate Heats Up – While the temperatures in much of the country have been frigid, discussion of Social Security reform has warmed up. We set the record straight regarding suggestions by some that the financing problems faced by the program are not real. And we noted the warnings from one Social Security Trustee about proposals to expand the program without addressing the underlying financial shortfalls. Try your own hand at strengthening the vital program with our Social Security Reformer.
Key Upcoming Dates (all times are ET)
- House Committee on Government Reform and Oversight hearing on "Waste in Government: What's Being Done?" at 9:30 am.
- Unemployment report for December.
- Treasury budget report for December.
- The continuing resolution funding the federal government expires.
- 2014 sequester cuts take effect.
- First set of IPAB recommendations expected.
- Federal Reserve Beige Book release.
- Tax reform comments due to Senate Finance Committee.
- President Obama delivers the State of the Union address.
- Statutory deadline for the President to submit the Fiscal Year 2015 budget request.
- The extension of the statutory debt ceiling expires.
- "Doc fix" expires.
Among the elements of the budget deal that passed Congress last month was a small $6 billion change to the way military pensions are calculated for military retirees younger than 62. In the face of lawmakers who would roll back this change, both the Washington Post and Wall Street Journal editorial boards defended the provision in the last two days.
The change would reduce by 1 percent the cost-of-living increases for retirees that are younger than a normal retirement age. Depending on the exact rank and year of retirement, an average retiree's lifetime payments would be reduced by less than 3 percent, and payments to retirees over 62 would be unchanged. This policy is far more modest than the recommendation of the Bowles-Simpson Fiscal Commission, which recommended completely eliminating COLAs for retirees under age 62.
The Wall Street Journal criticized proposals to repeal the provision in an editorial this morning, stating:
The budget act signed in late December by President Obama takes a modest step to alleviate the Pentagon's crisis in pension costs, but good deeds in Washington rarely go unpunished. Some in Congress who should know better are now pledging to overturn the reforms as soon as this month.
Pensions are taking an increasing share of the Department of Defense's budget, and Defense officials such as Defense Secretary Hagel to Army Chief of Staff Ray Odierno have noted the need to reform military compensation. CRFB's Moment of Truth project warned that the current military retirement system is not sustainable and does not serve in the best interest of our national security.
On Monday, the Washington Post editorial board put context around how small the change is, and how few retirees are affected:
For one thing, the cut is an exceedingly modest one on a pension plan that is already far more generous than private-sector equivalents. For someone who enlisted at age 18 and retired as an Army sergeant first class at 38, lifetime retirement pay would decline from $1.734 million to $1.626 million, according to House Budget Committee staff. And that $1.626 million would still be filled out with generous military health coverage and earnings for working in the civilian sector, which most military retirees do.
This is not “breaking faith with the promise that was made to these folks that have waged war for this nation for the last 12 years,” as the president of the Military Officers Association of America, Vice Adm. Norbert Ryan, said on the PBS NewsHour Thursday. It is a small shift in resources toward training and equipping those who might have to defend us in the future. Rhetoric notwithstanding, many of the war-fighters who bear the biggest combat burdens get no pension at all; only one-eighth of enlisted personnel serve the 20 years necessary to qualify, according to a 2011 report by the Defense Business Board. As these numbers imply, most recruits didn’t join for the pension. “Surveys consistently report that military retirement has little value in recruitment or retention for at least the first 10 years of service,” the board found.
As we’ve said before, the Ryan-Murray budget agreement is a small step forward, but far short of the $2.2 trillion still needed to put debt on a downward path as a share of the economy. Since discretionary spending is already at historic lows, most reforms that meaningfully change the trajectory of long-term debt must come from the mandatory side of the budget. It is a discouraging sign that there are already efforts to repeal one of the few entitlement reforms that were in the agreement.
The Washington Post described the causes for disappointment:
It’s impossible to say whether either the Democratic or Republican proposals to undo the pension trim will pass; their respective “pay-fors” seem equally unacceptable to members of the opposing party, while the White House seems disinclined to revisit the issue. It’s sufficiently depressing that the debate sank to this level so quickly. Like civilian entitlements, military retirement — a $50 billion-plus item in the defense budget — is overdue for deeper reforms, such as adjustment to the all-or-nothing 20-year service requirement. And it does the men and women of our armed forces no dishonor to say so.
It is encouraging that most of the proposals thus far have respected the "pay-as-you-go" principle by suggesting alternative savings when repealing this provision, but offsets put forward thus far are unlikely to receive bipartisan support. Any remaining offsets that could receive bipartisan support should be reserved for more pressing needs such as extending emergency unemployment benefits or paying for a package of tax extenders, rather than undoing budget savings that have already been decided.
Moreover, the pension provision is designed to produce greater savings over time, so even if legislation offsets the $6 billion cost over the next ten years, it is unlikely to replace the greater savings over the long term. In addition, repealing the COLA provision would also require the Department of Defense to shift an additional $8 billion in defense spending towards retirement accounts which would require an additional $8 billion in cuts in military programs and could create additional pressure to increase or evade the limits on defense discretionary spending.
As the Wall Street journal described it, the pension shift actually frees up money for more pressing defense needs:
Few things in politics are easier than seeming to stand up for the men and women in uniform—or in this case as disingenuous. The Paul Ryan-Patty Murray compromise begins to slow the spiraling personnel costs in the Pentagon budget in order to free up resources to keep America's active military strong into the future. As Mr. Ryan has noted, the Pentagon brass endorsed the idea as a way to maintain adequate budgets for current readiness and new weapons.
To help make politically sensitive changes, Congress created the Military Compensation and Retirement Modernization Commission to provide reform recommendations by May of this year. However, the Commission has been granted an extension until 2015, putting off much needed reforms for at least another year. But Congress does not need to wait for that commission report to consider reforms of the military retirement system since it already has proposals from the Defense Business Board and the Quadrennial Review of Military Compensation.
The Ryan-Murray budget agreement made a small but meaningful step forward when they included a modest reduction in entitlement spending. If policymakers want to undo the change, they should offset it with at least the same amount of other entitlement savings that grow over time. Even better, they should keep the policy change and use this as an opportunity to begin a serious discussion of the fundamental reforms of military retirement programs that are necessary. As the Journal concluded:
[...] the real threat to the military isn't the sequester or spending caps. It's the politics of entitlements. Medicare, ObamaCare and Social Security are slowly squeezing defense as a share of overall spending. And inside what's left of the Pentagon budget, pensions and health care are eroding military muscle. Members of Congress who vote to repeal the Ryan-Murray reform will be weakening American defenses.
The passage of the Bipartisan Budget Act was a positive move away from governing by crisis, and a demonstration that policymakers can meet self-imposed legislative deadlines. Yet substantial unfinished business remains, and much of it has significant fiscal implications. Below are some issues Congress should address early this year:
- Farm bill: On January 1, the one-year extension of the 2008 farm bill expired, technically reverting farm policy to the 1949 version of the law. Members of the farm bill conference committee say that they are close to a deal, but time is running short. Under the 1949 law, milk prices could rise substantially, and subsidies to different commodities would differ dramatically from last year, although these changes would take time to actually take effect. The farm bills proposed by the House and passed by the Senate would both eliminate direct commodity payments and replace them with a form of shallow loss program (among other changes), saving on net about $15 billion from farm programs. Although they must reconcile a number of differences on farm policy, the biggest sticking point may be on the nutrition side where the House has proposed large reductions in food stamp spending and the Senate only modest change. To buy time, the House has passed a one-month farm bill extension, though it has not been taken up by the Senate. Given the broad bipartisan support for reducing farm subsidies on net, we hope Congress can pass a long-term farm bill which significantly reduces the deficit.
- Unemployment benefits: In late December, the emergency unemployment compensation which was originally passed in 2008 expired. As a result, extended unemployment benefits ended for 1.3 million workers and the maximum number of weeks a person can collect benefits fell from as high as 73 weeks (in Illinois and Nevada) to 26 weeks. (This helpful graphic from the Center on Budget and Policy Priorities offers a state-by-state look at the maximum weeks UI would be collected under an extension.) Many Democrats are pushing hard for a one-year extension, which would cost $25 billion, but it is not clear whether Republicans want an extension or how lawmakers would offset the cost if they did. A bill has also been introduced in the Senate to extend the benefits for three months, at a cost of $6.4 billion. House Speaker John Boehner (R-OH) is reportedly open to an extension as long as the cost is offset and other efforts are taken to encourage job creation. Regardless of how long benefits are extended, CRFB believes the costs must be fully offset.
- Appropriations: The current continuing resolution that funds government expires on January 15. Although the recently-passed Bipartisan Budget Act set the overall discretionary spending limit at $1.012 trillion for FY2014, lawmakers will still have to decide how to appropriate funds within that overall limit. It is likely that Congress will appropriate these funds all at once through an "omnibus" bill rather than 12 different appropriations bills. One option is to pass a continuing resolution which starts with the $986 billion ($518 billion for defense and $468 billion for non-defense) currently appropriated and either pluses up spending uniformly (to reach $520 billion for defense and $492 billion for non-defense) or identifies specific areas to allocate the $26 billion of additional funds, mostly in non-defense spending. A better option would be to make specific decisions in each account by eliminating or reducing low-priority spending while reducing or reversing the sequester-imposed cuts to high-priority spending. Appropriators are currently working on an omnibus package, but it's not clear how much shuffling of funds they will do, or whether they will have the bill ready by January 15.
- Debt ceiling: The bill that ended the government shutdown suspended the debt limit through February 7. With extraodinary measures, Treasury Secretary Jack Lew expects that lawmakers will need to raise the debt ceiling by late February to mid-March, a timeline that the Bipartisan Policy Center agrees with and which is within the broader range suggested by CBO. As we've explained before, policymakers must absolutely raise (or suspend) the debt ceiling to avoid defaulting on our obligations, but discussions over the debt limit can offer an opportunity to take stock of and offer improvements to our fiscal situation.
- Medicare doc fix: A three-month "doc fix" was passed at the end of the year to temporarily avoid a 24 percent cut in Medicare physician payments called for under the Sustainable Growth Rate. By the end of the March, policymakers will need to take further action to avoid these cuts. Extending this "doc fix" through the end of 2014 would cost another $10-15 billion, and if policymakers pursue this extension they must offset the costs, preferably with other health reforms. But rather than pass a one-year doc fix, lawmakers should permanently replace the Sustainable Growth Rate with a new payment formula the rewards doctors based on quality instead of quantity, encourages new payment models, and helps to slow health care cost growth. Efforts are already underway in both the House and Senate to enact such a formula. But doing so will likely cost between $110 billion and $150 billion. Congress will have to identify additional health reforms to cover these costs and should go further to provide some deficit reduction along the way.
- Tax extenders: 55 temporary tax breaks expired at the end of 2013, most of which are regularly extended from year to year. Among the normal tax extenders include the research & experimentation tax credit, the wind production tax credit, the state and local sales tax deduction, and the Subpart F exemption for active financing income. Temporary "bonus depreciation" rules were also allowed to expire. Although these tax extenders are already expired, they can be reinstated retroactively; for example, the extension for 2012 was not passed into law until January 2013. Extending all of them for a year is likely to cost about $40 billion, though Congress should carefully review the extenders to identify which ones can be reformed and which should be allowed to expire. Whatever extenders are continued must be fully paid for so as not to add to the deficit.
We hope 2014 is the year that Congress passes comprehensive tax reform, identifies ways to dramatically slow the growth of health care spending, and makes Social Security sustainably solvent. But even if none of these occur, there is still much to do on the fiscal front. Policymakers must address the coming fiscal speed bumps in a fiscally responsible way, and then work toward putting the debt on a sustainable path.
Since 2009, the White House has held an annual contest for federal employees to submit their money saving ideas, called the SAVE Award (which stands for Securing Americans Value and Efficiency). The contest's finalists have their ideas included in the President's next budget submission (or implemented by executive action if possible), and the public votes on the winning idea. The employee who submitted the winning idea gets the chance to explain it directly to the President in the Oval Office.
Last month, the White House had announced four finalists for the SAVE Award. The winner was announced just before the holidays: Kenneth Siehr from the Department of Veterans Affairs, who suggested that patients should be able to track their mailed prescriptions online.
The White House blog explains the idea:
The Department of Veterans Affairs sends the majority of outpatient prescriptions to patients via mail. Currently, in order for Veterans to track the delivery of mailed prescription medications they must call their local VA Medical Center directly. Kenneth recommends saving pharmacy staff time and enhancing customer service by making the package tracking information available to Veterans online through the Veterans Health Administration’s existing web-based portal, MyHealtheVet.
According to the White House, over 80 cost-saving ideas from past recipients of the SAVE reward have been included in the President's Budgets or directly implemented. While these ideas won't solve our fiscal issues, they represent common sense ways to make the government operate more efficiently.
It's the beginning of 2014, and Congress did not pass legislation to extend the "tax extenders," a collection of over 50 provisions that expired at the end of 2013. Although they might later be extended retroactively, that means that a motley collection of tax breaks for research and spending by small businesses, along with specialized breaks for Puerto Rican rum, NASCAR tracks, racehorses, and movie studios have vanished, at least for now. Some of the largest incentives that expired were for energy, especially the wind production tax credit and the credit for the blending of biodiesel. Rather than extending these breaks for another year in their current form, Senate Finance Chairman Max Baucus (D-MT) released a discussion draft last month that would have simultaneously extended them, simplified the credits, and made them available to a wider range of industries. It is the fourth discussion draft he has released as part of his joint effort with his House counterpart Dave Camp to revamp the U.S. tax code and make it more competitive.
The draft is a dramatic simplification of the current tax incentives for energy. It consolidates 42 different energy incentives into 2: one for clean energy and one for clean fuel. The idea behind these two credits is to avoid picking "winners and losers" among clean energy industries and to offer some long-term certainty to the markets.
During the transition, the largest of the current credits are extended for three years. Meanwhile, the Environmental Protection Agency will perform the complex calculations needed to determine the cleanliness of a fuel and write rules for accomodating new technologies. The new credits take effect in 2017 and phaseout once their respective sectors are 25 percent cleaner than today's technology.
Below, we describe the reform in more detail.
Credit for Clean Electricity
The Baucus draft reforms the wind production tax credit (PTC), which was the largest of all the tax provisions that expired at the end of 2013. Since the credit is still paying existing wind farms, this credit will provide $22 billion to wind producers between 1992 and 2022. Baucus would reform this credit by making it available to all producers of clean energy, not just wind farms. An energy source that produced no greenhouse gas emissions would be eligible for the full current tax credit. The credit decreases for energy that produces more greenhouse gases, disappearing entirely for energy that is not at least 25 percent cleaner than the current national average.
For example, under this system, a plant with zero emissions - like wind, solar, nuclear, or hydroelectric - could receive a credit of 2.3 cents for every kilowatt-hour (kWh) of electricity it produced. A plant that was not emissions-free, but cleaner than the national average would get a smaller credit; a wood burning biomass plant would get a credit of 2 cents/kWh. A coal or pure natural gas plant would not qualify for any credit.
Currently, investors can claim an alternate investment tax credit (ITC) instead of the PTC. The credit is between 10 and 30 percent of the amount invested to build a plant, depending on the type of plant built. Baucus would make this credit permanent at 20 percent for zero-emission plants and similarly decrease it for plants expected to produce more greenhouse gases.
The credit is available for the first 10 years of a new power plant's operation and indexed for inflation. It is available for all electricty produced, not just electricity sold, so small producers (like an individual with a solar panel on their roof) can now qualify for the revised credit.
Credit for Clean Fuel
The Baucus draft provides a very similar production and investment tax credit for producers of clean fuels. The maximum credit is $1 per gallon (the current credit available for biodiesel) for a zero-emission fuel. The credit decreases for fuels that produce more greenhouse gases, disappearing entirely for fuels that are not at least cleaner than corn ethanol.
For instance, biodiesel produced from soybeans, which produces 41 percent of the greenhouse gas of ethanol per unit of energy, can claim a credit of $0.41 per gallon. EPA would have the ability to certify new technologies as they are developed, so a future fuel that produces zero emissions could claim the full $1 credit.
The fuels are measured on lifecycle emissions as determined by the EPA, a standard which considers not just by the gases produced by burning the fuel, but all the energy used to produce the fuel (e.g., the energy used to grow crops for biofuels). Similar to the electricity credit, it is available for the first 10 years of a new refinery's operation and indexed for inflation.
Cut Back Other Incentives
The draft would eliminate other tax credits for energy-efficient homes and appliances, along with tax breaks for fuel cell-powered and electric cars. Industries would lose special credits for carbon sequestration and a mine safety tax credit.
A previous Baucus draft already trimmed some breaks available to oil producers: the ability to deduct drilling costs (see our analysis here), tax credits for refineries, and a special form of “LIFO” accounting used disproportionately among oil & gas companies (see our analysis here). Under that draft, alternative energy companies would lose special depreciation for solar and wind energy investments.
Certainty Through Long-term Credits
Currently, most alternative energy incentives are passed as short-term provisions. For instance, prior to the enactment of the American Taxpayer Relief Act, 27 energy tax extenders were set to expire in 2011 or 2012, creating uncertainty among investors who did not know whether a specific tax credit would be available in the future. These credits end uncertainty by persisting for many years. They take effect in 2017 and last until their respective sectors are significantly cleaner: when electricity produces 25 percent less greenhouse gas per unit of energy than in 2013 and the fuels are 25 percent cleaner than gasoline.
Most of the energy incentives expired at the end of 2013 but would cost about $150 billion over the next ten years if extended permanently. The draft trims the total amount of tax credits by about half, meaning it would cost about $75 billion compared to current law. Some of Baucus' other business tax reforms have raised enough one-time revenue to cover this additional cost. Under Baucus' fiscally responsible standard of steady-state revenue-neutrality, one-time revenue generated by repealing other tax incentives can be used to pay for these temporary energy incentives (in addition to reducing the deficit), while the bill is intended to be revenue-neutral over the long term – the money raised from corporations will be used to lower the corporate tax rate.
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The idea of evening out clean energy subsidies across sources, judging technologies based on their emissions, and offering long-term certainty to the marketplace are ideas that energy reformers have often promoted. The Baucus draft incorporates many of these principals and represents a thoughtful contribution to the debate about how to reform the nation's tax code. Now that Baucus has been named to serve as the next Ambassador to China, it is unlikely that the bill will be enacted this year. However, the Baucus drafts and any released by Chairman Camp this year are helpful tools for advancing the debate and reforming our outdated tax code.
This draft is the fourth in a series of drafts Baucus has released about how he would change the U.S. income tax code. We’ve written summaries on the previous three drafts on the international tax system, tax administration, and cost recovery.
At the end of 2013, Congress allowed extended unemployment benefits to expire, and as a result the maximum number of weeks for collecting benefits has declined from 73 to 26. While the White House and Congressional democrats have pushed for a one-year extension costing $25 billion, Sens. Jack Reed (D-RI) and Dean Heller (R-NV) offered a three-month unemployment insurance extension, costing $6 billion, which presumably would buy time for Congress to pass a full-year extension that includes offsets to pay for it. The Senate is expected to take this legislation up next week when they reconvene.
The relatively small cost of the extension does not justify abandoning pay-as-you-go principles. As we’ve explained before, it is important that policymakers stick to the budget principle that if something is worth having it is worth paying for. This is true for the tax extenders, and it is true for unemployment benefits.
Nor should finding $6 billion be all that hard. A Ways & Means Committee proposal to stop beneficiaries from simultaneously collecting unemployment and disability benefits would just about do the trick. So too would reinstating the 0.2 percent unemployment surtax through 2018, which was in effect from 1976 and 2011, and the savings would double if it were made permanent. And any number of spending cuts not related to unemployment insurance could also be used.
The table below shows several other mandatory policies which could offset the $6 billion cost.
|Ten-Year Savings from Mandatory Policies|
|Prevent "double-dipping" for UI and DI||$5 billion|
|Extend UI surtax through 2018||$7 billion|
|Extend Fannie and Freddie fees beyond 2021||$8 billion|
|Increase federal retirement contributions by 0.4 percentage points for current workers||$6 billion|
|Increase PBGC premiums to levels proposed in the President's budget||$6 billion|
|Calculate retirement benefits based on highest 5 earning years||$6 billion|
|Freeze Medicare premium means-tested thresholds for an additional two years||$9 billion|
|Reform Perkins loans as in the President's budget||$9 billion|
|Prohibit pay-for-delay agreements for generic drugs||$5 billion|
|Reform post-acute care payments||$9 billion|
|Establish air traffic control surcharge||$8 billion|
|Establish spectrum user fees||$5 billion|
|Eliminate in-school interest subsidy for undergraduate loans during graduate school||$8 billion|
|Eliminate S corp. reasonable compensation ("John Edwards/Newt Gingrich") loophole||$15 billion|
|Reduce "heat and eat" loophole||$4-11 billion|
|Enact Postal Service reform||$0-20 billion|
Source: CBO, OMB
Even if this legislation is just a three-month stopgap, the extension should be offset, and there are plenty of policies with the requisite savings to consider.
Late in 2013, a debate about Social Security erupted centering around calls from some progressives to broadly increase Social Security benefits at a time when the program is already financial unsound. We weighed in a few weeks ago, explaining that given the program's existing actuarial shortfall, expanding it with broad-based benefit increases would be misguided (though targeted benefit enhancements may be warranted). Shortly after, Social Security trustee Charles Blahous also responded on e21 and listed ten things to keep in mind when talking about Social Security in the current debates.
Specifically, he explains:
- On the positive side, these proposals acknowledge that the Social Security benefit formula should be changed.
- Social Security benefits are already increasing substantially under current law, and would continue to increase under various proposals to maintain solvency.
- Unless current-law benefit increases are substantially slowed, younger workers will shoulder unprecedented cost burdens.
- The left’s latest proposals embody a conscious effort to recast the Social Security debate by adopting a policy position well outside of longstanding mainstream opinion.
- Looking solely at Social Security benefits is uninformative; a meaningful analysis must compare both ends of the equation – the taxes collected from workers as well as the benefits paid later.
- Further increasing Social Security benefits does not increase total resources available to finance retirement income.
- Further increasing Social Security benefits for current participants would worsen existing inequities.
- Social Security benefits and cost burdens are already increasing faster than participants’ pre-retirement income.
- Social Security benefits and costs have already risen to the point of destroying many individuals’ ability and incentive to save.
- Social Security benefits are already growing so fast that Americans’ reliance on Social Security for retirement income increases even as national incomes rise.
An important point to be pulled from these ten is that real benefits across generations are already scheduled to increase in real terms, since initial benefits from year to year increase with average wages, and benefits are maintained at that inflation-adjusted level through cost-of-living adjustments. Blahous shows how initial benefits will increase over time for a medium earner.
Blahous also shows that rising tax burdens mean that maintaining current benefit levels will require pre-retirement living standards to fall significantly relative to retirement living standards. In other words, support for retirement is not only rising in real terms but also rising relative to after-tax income as well. Thought of another way, pre-retirement standards are falling relative to post-retirement living standards. Expanding Social Security benefits would accelerate this trend.
As we argued recently, there is a need to improve retirement security for Americans -- but that should start with ensuring that Social Security is on sound financial footing in order to prevent the 23 percent across-the-board cut scheduled under current law. Such reform could distribute the costs of solvent fairly across ages, incomes, and generations through gradual and well targeted tax and benefit changes, and those changes could increase benefit levels for low-income seniors.
Moving quickly to reform Social Security would be commendable, since it would provide a stable system for future retirees, ensure that the changes be smaller than if they were delayed, and give future beneficiaries time to prepare for changes. Our readers can try their hand at reforming the system by visiting our Social Security Reformer. The Reformer does offer the option to increase benefits across the board, though we worry doing so could be a costly mistake. Blahous' piece explains why, concluding by arguing:
Backers of proposals to expand Social Security benefits acknowledge their intent to recast the Social Security debate to draw new attention to thinking well outside the longstanding spectrum of bipartisan opinion. But there are good reasons why such proposals have not been supported by mainstream Social Security analysts to date. Not only would such a benefit expansion render it still more difficult to maintain Social Security solvency without large, economically damaging tax increases, it would worsen many existing program inequities, depress worker living standards, and further undermine low-income individuals’ ability and incentive to put aside savings of their own. Though such proposals may bear a superficial political attraction for some, the policy consequences of their actual enactment would be hugely damaging.
Read the full piece here.
We have an end-of-year tradition here at CRFB to take a look back at the prior year. In 2013, we wrote roughly 45 policy papers, budget updates, and releases along with more than 625 different blogs here at The Bottom Line.
Compared with last year, "fiscal cliff" has virtually disappeared from our vernacular, but discussion of the sequester has been considerable. 2013 was an important year for beginning to stabilize our medium-term fiscal situation. But as we've explained before, our long-term debt problems are very far from solved. Perhaps 2014 will offer an opportunity to improve them.