The Bottom Line
In an op-ed in The Hill, former Senator Judd Gregg (R-NH) makes the case for one approach towards reforming Medicare which he believes could bring lawmakers on both sides of the aisle together. The idea Senator Gregg calls "a way out of the Medicare maze" is known as a value-based withhold, which has been proposed by Jonathan Skinner, James Weinstein, and Elliot Fisher at the Dartmouth Institute for Health Policy and Clinical Practice. We've discussed this idea before when the National Coalition on Health Care included it in their health savings package last fall.
The way a value-based withhold would work is that a percentage of provider payments would be withheld and rewarded to providers only if certain savings and quality targets are met. If the targets are not achieved, Medicare would keep the withheld amount as savings. Senator Gregg explains:
To state it another way, this is a carrot, rather than a stick, approach based on definable standards that assure higher quality outcomes at lower costs. It is based around the retention of a certain percentage of the Medicare payments by HHS, the department of Health and Human Services. The money is only released as these standards and outcomes are met.
The appeal of this policy is that it provides a scorable mechanism to ensure savings, whereas other alternative payment models may not achieve savings in the eyes of CBO. Depending on the quality targets and whether it is paired with other payment or delivery system reforms, it also has the potential to drive efficiency and improve health outcomes. Instead of cutting payments across-the-board for all providers, it targets withheld payments to high-cost providers and allows low-cost providers to share in the savings. Not only does this mechanism get scorable savings from delivery system reforms that are intended to reduce costs by providing for more efficient care but that CBO otherwise scores with little or no savings, it could also help achieve the policy goal of making those reforms more likely to succeed by giving providers an incentive to change their behavior.
Additionally, this approach has a great deal of flexibility as it can be designed and scaled in a number ways according to savings goals and policy priorities. The Dartmouth proposal Senator Gregg points to would withhold 6 percent of payments, yielding what they estimate would be roughly $400 billion of savings over the next decade. On the other hand, the NCHC proposal set a much lower savings target of $64 billion. Deciding the amount to be withheld and the savings that can realistically be achieved could be problematic. Setting the savings target too high could be perceived as a provider cut by another name and generate opposition from provider groups. More importantly, from a fiscal policy perspective, setting a savings target that exceeds the amount that can realistically be achieved by more efficient delivery of care could create another Sustainable Growth Rate-like situation in which the automatic reductions in payments under the withhold are considered draconian and are regularly overridden by Congress.
Another issue when designing a value-based withhold is how to define and quantify the quality targets. There is still much debate over how to best measure quality, while accurately taking into account various factors that affect cost and quality such as a patient's health, geographic variation, or socioeconomic status. Also, Dartmouth proposes applying the targets on a provider-specific basis, but it could be designed to apply more broadly to a whole health system.
Senator Gregg’s piece is a good reminder of the need for lawmakers to come together on reforming the way we pay Medicare providers and repeal the broken SGR formula. Overall, the value-based withhold policy is an interesting approach that should certainly be on the table as lawmakers explore options to reform federal health spending and put it on a more sustainable path.
Getting Congress to take on tax reform will be difficult, but the two lawmakers in charge of the tax-writing committees seem to be committed to reforming our nation's inefficient and overly-complicated tax code. In a joint op-ed in today's Wall Street Journal, Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) write that despite the ideological differences between the two parties, there is a bipartisan agreement on the need for comprehensive tax reform. The op-ed is a very encouraging sign that the chairs continue to be focused on producing tax reform legislation.
In 2013, the federal government will forgo nearly $1.3 trillion in revenues from individuals and businesses due to the many tax expenditures that litter the tax code, according to the latest estimate from the Joint Committee on Taxation. Baucus and Camp point out that the last time Congress took a serious look at the tax code was more than 25 years ago, and many tax provisions have been added since then. Furthermore, there has been little review to see what provisions accomplish their intended goals effectively and efficiently. It is Baucus's and Camp's hope that by engaging the public, they can overhaul the tax code in a fair and rationale manner.
We've held more than 50 hearings and heard from hundreds of experts. The House Ways and Means Committee has released several discussion drafts on pieces of the tax reform puzzle and formed working groups so committee members can dive into the details of the code. The Senate Finance Committee is on a parallel track, reviewing discussion papers and collecting feedback from members and stakeholders.
In the coming weeks, we will give you the opportunity to provide your input as well. No need to travel to Washington. Through the use of social media, we will enable everyone to participate directly.
We are dedicated to writing bills in an open and transparent fashion. No cutting deals behind closed doors. You get a say, employers get a say, and our colleagues—your representatives and senators—will get a say.
In taking up reform, Baucus and Camp lay out three principles to guide the process. They elaborate:
The first is a boost for America's families. People don't mind paying their share as long as they know they're not getting the short end of the stick. Simplifying the code means regular families will be on a level playing field with those who can afford high-price tax advisers.
We've agreed that tax reform should result in a system that is as progressive as the current one. Tax reform will close special-interest loopholes to help lower rates. We will ensure that low-income and middle-income Americans will pay no more taxes than they do under current law.
The second principle is to level the playing field for U.S. employers. The current U.S. corporate tax rate is the highest in the world. Yet in recent years, some of America's largest corporations have paid zero tax. The current system picks winners and losers and puts the U.S. companies at a disadvantage in the global economy, a situation that hurts job creation. Tax reform must make our companies more competitive in the global economy.
The third principle is parity for small businesses. As a Montanan and a Michigander, we know that small businesses are the heart of most communities and of the American economy. We will work to ensure that any tax reform plan does as much to help a small family business create jobs and compete as it does for a large company.
These are solid goals for reform, and ideally it would also raise more revenue to put the debt on a downward path as a percent of GDP. Other tax reform plans, such as those from the Fiscal Commission and the Domenici-Rivlin Task Force were able to broaden the tax base, lower marginal rates, and raise significant revenues as well. We know that our current trajectory of debt is unsustainable and it will be difficult to put debt on a downward path without a mix of both additional revenue and spending reductions. We commend Baucus and Camp on their effort and hope more members of Congress follow their lead to simplify the code, promote growth, and get our fiscal house in order.
It's President's Budget week! On Wednesday, President Obama will release his FY 2014 budget, illustrating another possible path in addition to the already-passed House and Senate budget resolutions.
The President's budget includes estimates by OMB and more detailed recommendations than those proposed by the budget committees in Congress, making it a useful reference in the fiscal debate. A few details of the budget have already been announced and based on reporting so far, President Obama's budget will incorporate many of the provisions in the White House's last fiscal cliff offer and some priorities from his State of the Union address. While we wait for the final budget, we have released a list of Ten Things to Look for in the President’s Budget, outlining ten principles of a responsible budget proposal.
Ideally, the President's budget will:
- Put the debt on a clear downward path relative to the economy.
- Include serious health care reforms.
- Include comprehensive Social Security reform.
- Include pro-growth tax reform.
- Put other areas of the budget on the table for discussion.
- Focus on the long term.
- Not ignore expected costs or offset costs with unspecified savings.
- Avoid budget gimmicks to inflate savings numbers.
- Build upon, don’t water down, previous proposals.
- Demonstrate willingness to compromise on a bipartisan basis.
President Obama's last budget stabilized debt at the end of the ten-year window, but still fell short of putting debt on a sustainable path in the long-term. Just as we did last year, we will break down the details of the budget on the Bottom Line later this week.
While the Senate and House have already passed their respective budget resolutions, this budget could be useful for finding ways to bridge priorities between Democrats and Republicans in Congress and lay the groundwork for a compromise. Hopefully, the President's budget will move the conversation forward.
Click here to read the full release.
The FY 2014 President's Budget will not be released until next Wednesday, April 10th, but already some details about what will be in the budget have been surfacing.
According to early reports, we can expect this budget to be a little different than the President's past budgets in that the FY2014 proposal will incorporate a many of the policies in the President's final offer to Speaker John Boehner during the fiscal cliff negotiations. Some of these provisions reported so far include:
- The chained CPI: Reports have indicated that the President's Budget will include a more accurate measure of inflation, the chained CPI, for indexing provisions in the tax code, Social Security, and other spending programs. CBO has estimated that this could save $390 billion over ten years (including interest), although savings would be less if protections for the most vulnerable were included, which seems to be the case in the budget.
- Universal Pre-K and other spending initiatives: The President is expected to propose new initiatives for early childhood education, as he previewed in his State of the Union remarks. The additional spending would be paid for by increasing in the cigarette tax, limiting individual retirement accounts (IRAs) to $3 million, and not allowing people to collect both unemployment insurance and disability insurance at the same time.
- Repeal of sequestration: Full repeal of the sequester is expected to cost over $1.2 trillion (including interest) over the next ten years.
- $600 billion in additional revenues from tax reform: Revenue would be raised by limiting the value or eliminating various tax expenditures, including a previously proposed 28 percent cap on deductions and exclusions. Other reports indicate that total new revenues, including reforms to the corporate tax code and other provisions, could be greater than $600 billion and possibly as high as $1 trillion.
- $200 billion in other mandatory savings: Mandatory savings will be achieved by reducing farm subsidies, enacting federal retirement reforms and postal reform, and other provisions.
- $200 billion in discretionary cuts (after the repeal of sequestration): These cuts will likely be split evenly between defense and non-defense.
- Roughly $400 billion in health care savings: Health savings are expected to include expanding Medicaid drug rebates to Medicare Part D, increasing means-testing of Medicare premiums, and reducing certain provider payments, among others.
Of course, we will have to wait until the actual budget is released for many of the final details. These early indications suggest the President's Budget will be a bit different than the budget resolutions produced by the House and Senate last month, in that it will contain much more specifics. We will follow up on the release next week with an in-depth analysis of many aspects of the President's budget. Hopefully, it will follow the trend of the FY 2014 budget proposals released so far and put debt on a downward path, but also avoid the use of budget gimmicks and demonstrate a willingness to compromise.
Click here to see what The Campaign to Fix the Debt hopes to see in the President's Budget.
CBO's latest Monthly Budget Review (MBR) for March means that we now have budget data for the first six months of FY 2013. The six-month deficit stands at $601 billion, down from $779 billion over the same period last year. For context, CBO previously projected that the deficit for FY 2013 would be $845 billion, compared to the actual FY 2012 deficit of $1.089 trillion.
The MBR is interesting this year because of many budgetary changes that have been made compared to last year. We have seen the expiration of a portion of the 2001/2003/2010 tax cuts, the expiration of the payroll tax cut, the implementation of some tax increases from the Affordable Care Act, the beginning of the sequester, the continued drawdown of war spending, and the enactment of other smaller spending changes. While most of these changes have only been in effect for the last three months, they are clearly already having an impact.
In nominal terms, compared to 2012, revenue is up by 12.4 percent and spending is actually down by 2.5 percent. So far, this is more fiscally favorable than what CBO predicted for the full fiscal year, having revenue up by 10.6 percent and spending up by 0.4 percent. It is unclear whether this trend will continue given the asymmetric nature of spending and revenue from month to month, but if it did, we would certainly see a lower 2013 deficit than CBO has projected.
|Six-Month Budget Totals (billions)|
|FY 2012||FY 2013||Percent Change|
Given the recent tax changes, it is not surprising that higher income and payroll taxes are driving the revenue growth. In addition, growing corporate profits have pushed up corporate income tax revenue. On the spending side, Social Security, Medicare, and Medicaid have grown steadily while other categories of spending have declined. Defense spending is down six percent mostly due to war spending being drawn down. Unemployment benefits are down by one quarter due to lower unemployment and longer-term unemployed people exhausting their benefits. Other mandatory and discretionary spending is down about nine percent due to the discretionary spending caps, improvements in the economy resulting in lower safety net spending, and some legislative changes. The sequester is unlikely to factor a great deal into these totals since only a small amount of cuts have actually hit money going out the door so far; rather, sequester cuts have affected the amount of new obligations that the federal government is able to incur (budget authority).
Over the past few years, the deficit has been steadily coming down as the economy has grown at a modest pace and lawmakers have enacted some deficit reduction. The six-month budget review of FY 2013 shows that trend has continued.
Over the last week, we’ve highlighted two potential area of common ground on Medicare reform: cost-sharing reforms and raising the Medicare age with a buy-in. Even more momentum is building behind Medicare cost-sharing reforms. The Washington Post editorial board has endorsed the idea and called on President Obama to take the lead by including it in his budget proposal.
There are ways to generate meaningful savings that don’t involve either abolishing Medicare “as we know it” or perpetuating the status quo. Among the best ideas is to revise Medicare’s illogical, fragmented structure, so as to present beneficiaries with a streamlined, transparent program that both protects them better and saves medical resources.
No doubt there would be political opposition. But it’s a good sign that House Majority Leader Eric Cantor (R-Va.) has publicly embraced this kind of Medicare reorganization. So far, Mr. Obama has not — though he has offered other ideas, such as increasing premiums on upper-income beneficiaries, that could work in tandem with the combination of Parts A and B.
The White House view of entitlement reform in general, and Medicare reform specifically, is that it is to be traded for Republican agreement to higher taxes. No doubt the GOP has to move on that front as well. But it would be a badge of leadership for Mr. Obama to take the lead on this idea, rather than ceding it to Mr. Cantor — perhaps by including a version in his forthcoming budget plan. If Medicare reform is in the national interest, and it is, it’s up to the president to say so.
The Post's endorsement comes on the heels of reports that the Administration is planning on including some $400 billion in savings from health programs in the budget proposal, along the lines of his fiscal cliff and sequester offer.
It’s unclear whether cost-sharing reforms will be included in the President’s budget; however, a Wall Street Journal article suggests the President has been open to it in previous negotiations. The article also highlights some of the recent bipartisan support for cost-sharing reforms:
Senior House GOP aides said it was among the deficit-reduction options the White House and Republicans have discussed in the past. They also said President Barack Obama indicated he was open to the idea when he met recently with House Republicans on Capitol Hill.
Sens. Mark Warner (D., Va.) and Tom Coburn (R., Okla.) have pushed it among their colleagues, and a Democratic aide said many Senate Democrats are open to the idea. House Republican leader Eric Cantor of Virginia touted it in a high-profile speech earlier this year.
As we’ve said before, it’s going to take more than just one of these policies ideas to put federal health spending on a more sustainable path. But the growing consensus around these entitlement reform options is a promising step forward toward a broader bipartisan deficit reduction plan.
Last week we discussed the potential for bipartisan agreement on Medicare cost-sharing reforms, and today Politico reports on another area of entitlement reform where lawmakers may be able to reach middle ground: raising the Medicare age. The article points to a recent Urban Institute report which proposes raising the Medicare eligibility age from 65 to 67, aligning it with Social Security, while also allowing 65- and 66-year olds to buy into the Medicare program with subsidies for low- and middle-earners. This addresses some of the chief concerns of raising the age that it would leave many seniors uninsured, be particularly harmful for lower income seniors, and increase overall health costs.
The way this could work is that once the Medicare age is raised to 67, seniors age 65 and 66 would be offered an actuarially fair "buy-in" so they could continue to receive Medicare benefits. The upper half of the income earners would pay the full cost of their benefits, while those with incomes below 400 percent of the poverty line would receive income-related subsidies similar to those provided under the Affordable Care Act. Additionally, seniors below 133 percent of the poverty line -- who would generally qualify for Medicaid under the Affordable Care Act -- would instead receive a full Medicare premium subsidy.
Dr. Robert Berenson, a past vice-chairman of the Medicare Payment Advisory Committee (MedPAC) and one of the authors of the Urban proposal explains:
“We begin with the understanding that life expectancy has increased since Medicare was established in 1965, and it’s reasonable to raise the eligibility age, just as we have with Social Security…But it’s not reasonable to leave people unprotected in the private market. So we think it’s best to allow them to buy in to the best deal, Medicare. And that establishes continuity for them when they reach 67 and are eligible.”
On the one hand, a Medicare buy-in still addresses the issue of population aging, which is the largest driver of entitlement spending growth over the next few decades. It would extend the life of the Medicare program and stave off untargeted, across-the-board cuts when the program is scheduled to become insolvent in 2024. Berenson notes that since its inception, Medicare eligibility has remained unchanged while life expectancy after age 65 has increased and health care costs have skyrocketed. In 1970, people turning 65 could expect to live another 15 years on average, spending 24 percent of their adulthood on Medicare; whereas people turning 65 today can expect to live another 20 years, spending 30 percent of adulthood on Medicare.
On the other hand, a buy-in provides a coverage option for those 65- and 66-year olds who may not have access to health insurance. Moreover, it offers subsidy assistance parallel to that under the Affordable Care Act (ACA) for low and middle income seniors to afford Medicare coverage for two years before aging into the program at 67. This provides a progressive subsidy structure, targeting resources to whose who need it most. Raising the Medicare age on its own was found to help the most disadvantaged. Adding a Medicare buy-in as the Urban proposal describes would lead to an even better distribution since Medicare costs are expected to be lower than exchange costs and since they call for some additional subsidies for those above 400 percent of the poverty line.
Another concern of raising the Medicare age has been the impact 65- and 66-year olds would have in the ACA exchanges with rules allowing insurers to charge older enrollees up to three times what they charge younger enrollees. More broadly, one study has suggested that raising the age would increase total health care spending by pushing people into higher cost private plans or uncompensated care. However, creating a Medicare buy-in helps to mitigate these rate and cost-shifting issues to a significant degree. It also provides a mechanism for younger, and therefore typically healthier, seniors who currently help to bring down average Medicare costs enroll in Medicare while still raising the age and alleviating budgetary pressure.
Urban’s proposal offers just one approach to raising the Medicare age. Overall, the authors estimate their proposal would save $90 billion over ten years. While this is less than estimates for raising the Medicare age without a buy-in, there is room to dial the policy to be more or less generous depending on policy and savings goals. For example, lawmakers could lower the subsidy assistance, allow for a buy in option at age 62, or index the retirement age to longevity after raising it to 67. We shared estimates for some of these options in our Health Care and Revenue Savings Options report last December.
It's encouraging to see these types of ideas that could garner bipartisan support gain more interest as lawmakers get ready to return from recess and restart negotiations on a budget deal. It is certainly not the silver bullet for reforming Medicare, as health care cost growth will continue to be an issue, but it is a policy that warrants fair consideration. Let’s hope this is a sign they can come together on real entitlement reform that could help put our debt on a downward path as a share of the economy.
As reported in The Hill over the weekend, a proposed change to the United States’ yearly budgetary process is gaining steam in the Senate. An amendment to the Senate-passed budget, which passed by a bipartisan 68-31 vote, would create a deficit-neutral reserve fund for changing the federal budget process to a biennial budget system. Biennial budgeting means that instead of having to propose a new budget and pass appropriations bills every year, the Congress would only have to do so every other year, with intervening years used to improve budgetary oversight. CRFB has been supportive of the idea of before (Senator Johnny Isakson (R-GA) has proposed such legislation each year since 2005), but the idea is worth revisiting given the new momentum it has gained recently.
The purpose of the legislation is essentially to afford some respite from the nitty-gritty of the budget battles that occur each fall -- or sometimes throughout the year -- and instead provide legislators with enough time on the off-years to take a deeper dive look into how the budget actually functions. This could have a number of benefits, enabling better oversight, planning, and reform. Furthermore, with a longer view of the budget, lawmakers may also look at longer-term budget targets that will be necessary to get our debt on a sustainable path.
A 2009 staff working paper from the Peterson-Pew Commission (PPC) discusses a few other pros and cons of the process. One pro of the budget process is that having a two-year cycle allows budgetary decisions to be made in off-election years, potentially reducing partisanship in the process. In terms of oversight, an "off" year would allow legislators the time to perform the vital process of combing through spending programs (and tax provisions as well) to better determine which policies are working properly, which ones are not, which ones need improvement, and which ones should be expanded.
When putting biennial budgeting into practice, however, we should use caution. As noted by the Center on Budget and Policy Priorities, it is possible that changing circumstances would lead agencies to need to submit frequent revisions and requests for supplemental appropriations. In fact, if department heads chose to ignore the biennial budgetary process, they could simply continue submitting revisions each year; this could actually lead the budget process to be more piecemeal than before, making matters worse instead of better. This could be addressed, however, by implementing special rules on when supplemental appropriations are suitable, and what constitutes an "emergency" for emergency budget revisions. Another drawback that the PPC paper brings up is that it could make discretionary spending on somewhat of an autopilot like mandatory programs are if lawmakers do not take advantage of the time to conduct oversight.
While there may be both benefits and issues with budgeting biennially, one thing is clear: the current budget process is broken. Reforms to the budget process that give our government better insight into how our budget functions and how to effectively implement strategy and achieve policy changes should be explored. Biennial budgeting is one such reform that offers some promise.
Over the last few weeks, we've seen several different budget proposals emerge from the Senate and the House, and President Obama is expected to release his FY 2014 budget next week. But while the budgets released offer some good ideas, none seemed to offer the bipartisan "grand bargain" approach that we often argue for here on The Bottom Line. As it turns out, polling suggests Americans may favor the compromise approach over all others.
Yesterday in Forbes, political pollster Doug Schoen comments on the findings of a new poll on the new Simpson-Bowles framework (different from the original Simpson-Bowles plan), which would replace sequestration with a smarter $2.4 trillion debt reduction plan to put the debt on a downward path as a percent of GDP to below 70 percent. The plan deals with all areas of the budget, reforms entitlement programs, protects the most vulnerable, calls for pro-growth tax reform, and addresses other spending. Schoen found that a 46-37 percent margin of those polled approved of the House Republican plan, with the same being true for the Senate Democratic plan by a 56-31 percent margin. However, 49 percent also believed that neither side had a realistic plan, implying that a compromise between the two approaches will be necessary. The Simpson-Bowles framework might just be that. Writes Schoen:
By an overwhelming margin—80 percent to 8—our respondents support the new Simpson-Bowles plan, which cuts wasteful spending, reforms our outdated tax code, and makes the necessary changes to entitlements such as Medicare and Social Security in order to protect them for future generations of Americans. This plan would reduce our debt by $2.4 trillion.
The plan stood up to scrutiny. When we gave specifics of the plan—including arguments against it that included cuts to Medicare and Social Security—support dropped, but remained between 56 percent and 65 percent favorability. Opposition to the plan never increased above 24 percent.
Compromise often sounds better in theory than it turns out in practice, but note that after pollsters gave a few details of the plan and an argument against it, a majority still supported the Simpson-Bowles approach. Clearly, Americans want to deal with our debt problem, and shared responsibility and a comprehensive approach is the best way to get there.
Smart deficit reduction should include reforms of entitlement programs and the tax code, which can be done in ways that protect the most vulnerable. In order for these goals to be realized, members from both sides of the political aisle will be required to meet somewhere in the middle. Schoen's polling data makes that very clear.
It’s Back – The long wait finally ended on Sunday as the HBO hit series "Game of Thrones" debuted its third season, gratifying those who have longed for the intrigue, action and, ahem, certain other pleasures of the show. Congress returns next week, with plenty of intrigue, but lacking the other stuff. Immigration and gun control will be high on the agenda, but the federal budget and national debt will also continue to occupy center stage with the release of the President’s budget and more outreach to Congress to work towards a debt deal. In the show's season premiere, Sansa Stark offered some insight that may explain why the issue has been difficult to address, “the truth is always either terrible or boring.” It can sure seem that way with the debt. There is no easy solution and the details can get quite tedious, but it won’t go away on its own. Hopefully, it won’t take White Walkers to spur action.
Budget Is Coming – The White House confirmed that it will release its Fiscal Year 2014 budget request on April 10, more than two months after it was due by law. The White House says the fiscal cliff drama at the end of last year delayed the process. That evening the President will also sit down for dinner with Republican senators as part of his congressional outreach to get a bipartisan "grand bargain."
Pieces to a Deal Emerge – Getting a debt deal has appeared to be harder than reuniting the Seven Kingdoms of Westeros, but all is not lost; encouraging signs remain. Reports are that President Obama will offer some entitlement reforms in his budget that can acheive bipartisan support, possibly a fix to how inflation is measured known as the chained CPI. This comes as some Republicans like Sen. John McCain (R-AZ) have expressed a willingness to accept some increased revenue from closing tax loopholes known as tax expenditures in exchange for savings from entitlements. Read more about switching to Chained CPI here and some tax expenditure reform ideas here and here.
Tax Reform Marches On – Like Robb Stark's army, tax reform continues to move forward. Senate Finance Committee chair Max Baucus (D-MT) remains committed to fundamental reform and is convinced he can get a bipartisan deal that lowers tax rates and the deficit. Meanwhile, the RATE Coalition sent a letter to Baucus and other tax-writing committee leaders calling for corporate tax reform that makes the U.S. more internationally competitive. Yet, some businesses are wary of reform that will get rid of tax breaks they enjoy. You can create your own corporate tax reform plan using our tool.
Deese Tapped as Hand to the OMB – President Obama recently announced that he will nominate White House economic adviser Brian Deese to be deputy director of the Office of Management and Budget (OMB), which is responsible for preparing the federal budget.
Key Upcoming Dates (all times are ET)
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.
- The White House is expected to release its FY 2014 budget request.
- Congress must pass a concurrent budget resolution as specified in the Congressional Budget Act.
- Tax Day! Federal tax returns due by this date.
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.
- Dept. of Labor's Bureau of Labor Statistics releases April 2013 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.
- The debt limit is re-instated at an increased amount to account for debt issued between the signing of the suspension bill and this date. After re-instatement, the Treasury Department will be able to use "extraordinary measures" to put off the date the government hits the debt limit potentially for a few months.
- Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.
Today, Moment of Truth Project Director Ed Lorenzen published an op-ed responding to a recent piece from Michael Hiltzik of the Los Angeles Times which criticized the rationale of switching to an alternative measure of inflation, the chained Consumer Price Index (CPI).
Lorenzen first takes on a claim from Hiltzik that there are "no grounds" for asserting that the chained CPI is a more accurate measure of inflation than the current standard. However, there are many economists and institutions that have supported chained CPI over the current measure CPI-U for this reason:
In fact, experts across the ideological spectrum agree that the chained CPI is indeed more accurate. In his 2005 book "The Plot Against Social Security," Hiltzik listed various proposals for reforming Social Security, among them chained CPI. He wrote, "Many economists maintain that CPI consistently overstates inflation ... because it doesn't account for so-called substitution effects." Hiltzik doesn't explicitly endorse the proposal, but this is certainly a far cry from his objection that there are "no grounds" for the claim that chained CPI is a more accurate measure of inflation.
Advocates for using chained CPI to more accurately index government programs to inflation include Austan Goolsbee, who served as chairman of the president's Council of Economic Advisors under President Obama, and Michael Boskin, who held the same position under the President George H.W. Bush. Their view is shared by the overwhelming majority of economists. A report by the nonpartisan Congressional Budget Office stated that the chained CPI "provides an unbiased estimate of changes in the cost of living from one month to the next." Two of the most respected and prominent defenders of Social Security, the late Sen. Daniel Patrick Moynihan (D-N.Y.) and the late Robert Ball, the longest-serving Social Security commissioner, who founded the National Academy of Social Insurance, both supported the use of chained CPI to more accurately achieve the goal of providing inflation protection for seniors and disabled beneficiaries.
The Bureau of Labor Statistics has noted the shortcomings of the current inflation indexing and specifically designed the chained CPI to be a closer approximation to a cost-of-living index. The bureau has developed and refined the chained CPI over more than a decade.
Lorenzen also notes that that the post only focuses on applying the index to Social Security, while using the chained CPI would affect features of the tax code indexed to inflation and other spending programs as well. The chained-CPI does not have to be implemented in isolation either, many bipartisan proposals have included it along protections for vulnerable populations:
The government indexes benefit programs such as Social Security as well as provisions in the tax code to ensure they keep pace with inflation. Using a more accurate measure of inflation is not a benefit cut, but rather ensures that the benefits increase by the proper amount to achieve the desired policy goal. This change does not single out Social Security, as Hiltzik implies, but would apply to provisions throughout the federal budget. Social Security accounts for slightly more than one-third of the $390 billion in total savings over the next decade that would result from switching to chained CPI, with a similar amount of savings from revenue and the remainder from other government programs indexed to inflation along with interest savings.
To the extent that the overpayments under the current formula provide important help to certain low-income and elderly individuals, a switch to the chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations rather than providing higher-than-justified inflation adjustments for everyone. Every significant bipartisan deficit reduction effort, including the Simpson-Bowles plan, the Domenici-Rivlin plan and the negotiations between Obama and House Speaker John Boehner (R-Ohio) has proposed using chained CPI to index spending programs and the tax code, with a portion of the savings used to provide enhancements for low-income, elderly and other vulnerable populations.
Switching to the chained CPI makes sense for many reasons, which the Moment of Truth Project covers in full detail in its report, Measuring Up: The Case for the Chained CPI. Both putting debt on a sustainable path and making Social Security solvent will require tough choices, but chained CPI is one of the more straightforward.
Click here to read the full response.
"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.
In a surprising move yesterday, the Centers for Medicare and Medicaid Services (CMS) announced a reversal in their previous plans to cut payments to Medicare Advantage (MA) plans by 2.2 percent in 2014. Instead, CMS announced MA plans will now receive a 3.3 percent increase in payments next year. So, what changed their position so dramatically?
The answer boils down to a technical interpretation of whether or not MA payments should be based on current law or current policy. Read: whether or not they expect Congress will enact another doc fix at year's end. The surprise is not that the Sustainable Growth Rate (SGR) formula is presenting yet another headache for policymakers, but rather that this is the first time CMS has changed its position of basing payments on current law to now incorporate the assumption that Congress will override the 25 percent provider cut the SGR calls for. This action results in an interesting discussion on the budgetary impact and the need to reform the SGR.
For background, payments to MA plans,which cover nearly one in four Medicare beneficiaries, are based on a comparison of each health plan's bid (or projected cost of covering Medicare services) and the local benchmark which represents the maximum amount CMS will pay plans in that service area. If they are below the benchmark, plans get paid their bid amount plus a share of the difference, but if they’re higher than the benchmark then they have to charge the excess to their beneficiaries. Most recently, the ACA changed the way benchmarks are calculated by making benchmarks lower in higher Medicare spending areas and higher in lower Medicare spending areas and adjusting them based on quality. In calculating these benchmarks, CMS must assume spending levels which would greatly change if the 25 percent physician fee cut from the SGR went into effect on January 1, 2014 as it is scheduled to under current law.
That brings us to yesterday’s announcement. The Secretary has until April 1 to review and set these MA rates for the following year. In the past, CMS based their formula on current law, assuming cuts from the SGR, and made modifications once Congress enacted a doc fix. This time, CMS was pressured by insurers and lawmakers from both parties to take into account a doc fix when calculating the benchmark for MA payments. Even the Medicare Payment Advisory Commission (MedPAC) weighed in, citing uncertainty and confusion to beneficiaries and providers.
Just last week, the Congressional Research Service (CRS) released a legal memo that said the Secretary could have the authority to base benchmarks on current policy instead of current law, and could change her past position on a "reasonable basis" considering the SGR’s 11-year history of being overridden by Congress.
Here's the tricky part. If for whatever reason Congress doesn’t pass a doc fix, then it may become a bigger legal and budgetary issue. According to the CRS memo:
The Antideficiency Act, prohibits federal payments from being made in excess of available appropriations. The Act may be implicated if funds are expended for unauthorized purposes, which would arguably be the case if the Secretary’s assumption concerning future legislation ended up being incorrect. On the other hand, if the Secretary’s interpretation that she has the authority to incorporate assumptions concerning future congressional actions were found by the courts to be reasonable, and not arbitrary or capricious, or contrary to the statute, then the Antideficiency Act may not be implicated.
Many argue the Secretary would probably have a strong case considering Congress’s track record. Prior to changing their position, CMS also sought public comment about the challenges of using current law. Additionally, CMS accounts for the possibility of a doc fix in their actuarial assumptions when determining Medicare Part B premiums and advising MA plans on bid submissions.
Overall, we won’t really know what impact CMS’s decision will have until Congress considers legislation for a doc fix. More importantly, this reminds us of the real world impact of the broken SGR formula and the dire need to reform it. We've discussed the need for reform many times before, and included a list of potential reforms in our Health Care and Revenue Savings Options report. As MedPAC said in their letter to CMS:
The effect on [MA] may be an unintended consequence of the timing of Congressional action and CMS administrative actions, but it is another very real effect of the delay in action to repeal the SGR and replace it with a more rational system.
The recent NPR segment from Chana Joffe-Walt on the disability insurance program has certainly started a conversation. The Washington Post's Wonkblog in particular has been examining the story, and last week Dylan Matthews posted a story with five ways to reform the program. Matthews's list includes:
- Creating an employee-sponsored disability insurance program that would transition to SSDI: This proposal comes from MIT's David Autor and University of Maryland's Mark Duggan, under which employers would be required to pay premiums for their employees for disability insurance. Initially, employees would be covered by that disability insurance but would transition into Social Security Disability Insurance after 27 months.
- Imposing higher taxes on businesses that send a great proportion of workers to the DI program: Mary Daly of the San Francisco Federal Reserve and Richard Burkhauser of Cornell have suggested giving a tax break to businesses with low rates of enrollment in disability insurance among their employees, and higher taxes for businesses with high rates.
- Creating demonstration projects: Jeffrey Liebman of Harvard and Jack Smalligan of OMB have proposed creating demonstration projects to see what works including creating the employee-sponsored program, using wage subsidies to incentivize work, and allowing waivers for states so they can experiment with their own reforms.
- Easing the phase-out of benefits as earnings increase: Reducing the severity of the phase-out would decrease disincentives to work.
- Increasing the waiting period: Extending the waiting period from 5 months to 12 months would reduce the cost of benefits and potential fraud.
These are all ideas worth considering, but this list is no by no means exhaustive. Given that the Social Security Disability trust fund is due to be exhausted by 2016, all ideas for how to make the program solvent should be on the table.
Source: Social Security Administration
Reforming disability insurance benefits and eligibility should be considered, as well as ways to raise additional revenues for the program. Other options not mentioned above (explained further here) include:
- Increase funding for continuing disability reviews
- Limit months of retroactive benefit payments (currently 12 months)
- Increase the 1.8 percent DI payroll tax
- Eliminate or increasing the taxable maximum on the 1.8 percent DI payroll tax
- Hold constant the ratio between DI benefits and EEA benefits as the NRA increases
- Instruct the Social Security Administration to tighten vocational grids
- Increase the ages in the vocational grids
- Close the record for the submission of evidence one week before hearings
- Require beneficiaries to regularly reapply to DI
- Disallow those above the EEA to apply for DI benefits (could be phased in beginning at an early age)
- Increase work requirements (currently 5 of the past 10 years) to apply for DI
- Restrict disability claimants to one application at a time
- Eliminate the "Reconsideration" level of disability appeal
- Time limit benefits based on likelihood of improvement
- Adjust DI payments to account for veterans disability benefits
- Reform the workers' compensation offset
- Disallow DI for the highest earners
Other temporary solutions to avoid a funding cliff include reallocating a portion of the payroll tax to DI or allowing the DI fund to borrow from the old age fund. However, none of these options would strengthen the combined OASDI trust fund, due to be exausted by 2033. CFRB Senior Policy Director Marc Goldwein laid out what a plan should accomplish if it must use these temporary financing mechanisms in an op-ed in The Hill:
Making the disability system solvent simply by taking money from the already-underfunded old-age system would represent a double policy failure by committing a disservice to both programs. Instead, policymakers should use the fast-approaching insolvency date in the same way they did when the trust funds ran low in 1983 – come together and fix both programs for this generation and the next.
Specifically, any plan which reallocates money from the old age program to the disability program should do the following:
- Enact reforms to improve Disability Insurance over the short-term...
- Take steps toward more structural reform...
- Fix Social Security: Make it sustainable solvent
The Social Security Disability Insurance program could benefit from these reforms, which help reduce fraud and abuse while better targeting benefits to those who need the support the most. In any case, the trust fund needs to be shored up to preserve this valuable program. There are many options out there, so a reasonable solution should be possible.
Today, the RATE Coalition sent a letter to the chairs and ranking members of the House Ways and Means and Senate Finance Committees, urging them to take up corporate tax reform which lowers rates in order to make the tax code more competitive. As they write:
Twenty five years ago, the U.S. had one of the lowest corporate tax rates among members of the Organization for Economic Cooperation and Development (OECD). Today, at 35 percent, the top federal statutory corporate tax rate is 10 percentage points above the OECD average and nearly 15 points higher when state and local taxes are included. The costs to our economy are significant and already being realized. According to a new Ernst & Young study, GDP in 2013 is expected to be between 1.2 and 2.0 percent lower as a result of our OECD-leading corporate tax rate. Simply put, the U.S. can no longer afford to stand still.
We are big believers in corporate tax reform, but much or perhaps all of the economic benefit of lower corporate rates would be lost if we financed them by increase deficits and debt. To this end, we've argued that any corporate tax rate reduction should be fiscally responsible, paid for with a broader corproate tax base. Last year, we wrote a detailed report on this very topic.
So how would one pay for a reduction in the corporate tax rate? To answer this question we created a tax reform calculator that allows users to design their own plan. Users can set a revenue target, pick a number of options for base-broadening or, in a few cases, deficit-increasing provisions, and see what corporate rate allows them to satisfy both parameters. The base-broadening options include a number of tax expenditures and a few non-tax expenditure deductions that could also be changed.
Reforming the corporate tax system is one way policymakers can "Go Smart" in a the context of a broad deficit reduction plan. As the RATE Coalition argues, there is a real opportunity to pursue this reform:
It has been more than a quarter century since comprehensive tax reform was last enacted and, like in 1986, we face a divided government with many doubting our chances of success. However, we are confident that bipartisan reform – reinforced by your leadership – will put us on a path that leads to broad economic growth and job creation. President Reagan and Speaker of the House Tip O’Neill achieved meaningful reform and we believe that it is possible again today.
Former Chairman of the Council of Economic Advisors and Harvard Professor Greg Mankiw explains how a sustainable budget would affect debt levels in a piece in Saturday's New York Times.
Professor Mankiw was one of 160 economists that signed a letter to President Obama and Congressional leadership a few weeks ago, urging them to take up comprehensive debt reduction. In his NYT article, Mankiw explains the target that lawmakers should focus on: the debt-to-G.D.P. ratio.
So what does President Obama mean when he talks about fiscal sustainability? He doesn’t mean running a surplus and repaying the debts that have been incurred on his watch, as people who spend more than they earn would have to do. Nor does he mean balancing the budget, as Representative Ryan suggests. Rather, the president seems to mean keeping the debt-to-G.D.P. ratio stable at this new, higher level. That is certainly what the last budget he submitted proposed to do.
Achieving this goal is much easier than balancing the budget. Because G.D.P. grows, the government debt can continue to grow as well, just not too fast. Stabilizing the debt-to-G.D.P. ratio requires that future budget deficits be smaller than they have been over the last few years, but they can still be sizable.
Mankiw argues that just stabilizing the deficit does not go far enough, for many of the same reasons that we identified in our paper Our Debt Problems Are Far From Solved. As we show below, an additional $2.4 trillion in deficit reduction should be enough to put debt on a clear downward path.
Budget projections are not perfect, so debt should be put on a clear downward path in case anything should go wrong, in addition to allowing more fiscal flexibility and leading to greater economic growth:
Yet this goal, hard to reach as it might be in the current political environment, is still too modest. The problem is that budget projections are based on forecasts, and such forecasts exclude the extreme events that have historically driven up government debt.
Military and economic catastrophes are, by their nature, unpredictable. While we can’t plan on one, prudence requires that we take their possibility into account. In normal times, when we are lucky enough to enjoy peace and prosperity, the debt-to-G.D.P. ratio shouldn’t just be stable; it should be falling. That has generally been the case throughout our history, and it should become the case again as we look forward.
The bottom line is that President Obama is right that sustainability is a reasonable benchmark for evaluating long-run fiscal policy. But the standard he applies when evaluating it appears too easy. It will leave us too vulnerable when the next catastrophe strikes.
President Obama is expected to release his FY 2014 budget next week. Hopefully, it will follow the trend of Congressional budget resolutions this year and put debt on a clear downward path. Lawmakers will still need to agree upon reforms to entitlement programs, the tax code, and other spending programs in order to reach that goal, but agreeing on the proper target is a good place to start.
The New York Times has an editorial criticizing switching to the chained CPI for Social Security cost-of-living adjustments (COLAs). Recall that the chained CPI is widely regarded as a more accurate measure of inflation because it better accounts for consumer substitution between different categories of related goods as relative prices rise or fall. As a technical matter, the chained CPI is the best available price index for accomplishing the goal in many spending programs and in the tax code of accurately accounting for inflation in determining various benefits.
The NYT's arguments are flawed for a number of reasons. Their main arguments against the chained CPI are:
- Deficit reduction should be held off until the economy has fully recovered.
- Social Security is not driving the deficit. It will not be able to pay full benefits in 20 years, but that is a separate issue which should not be dealt with in the context of deficit reduction.
- The chained CPI may be a more accurate measure of inflation for the working age population but it is not for the elderly population. Instead, the Bureau of Labor Statistics should develop a retiree-specific price index.
On the first point, the issue of when deficit reduction occurs is actually a strong point for the chained CPI. Because the savings compound over time, the deficit reduction associated with the chained CPI starts off small and is very backloaded. Of the $390 billion in total savings over the next decade from switching to chained CPI, only a miniscule $12 billion would arise in the first two years. Based on CBO's report on the macroeconomic effects of deficit reduction, that means an economic effect of 0.03 percent of GDP in 2015, essentially a rounding error.
On the second point, we have said before that whether one views Social Security as a stand-alone program or part of the federal budget, it leads to the conclusion that changes should be enacted sooner rather than later. The editorial appears to take the off-budget view of Social Security, but that view shows that small gradual changes made now can avoid abrupt and harmful changes later. Switching to the chained CPI would close about one-fifth of Social Security's 75-year funding gap. By the unified-budget approach, Social Security is the single largest government program currently. Although it isn't expected to grow as fast as Medicare and Medicaid, it is growing faster than eveything else, certainly much faster than the areas of the budget we have addressed in the spirit of deficit reduction so far.
Note: Numbers in the chart are out of date and should not be cited. This chart is being used as an example of the two views.
On the third issue, the Times to their credit does call for a "statistically rigorous" index for elderly-specific inflation, rather than calling for using the Experimental Consumer Price Index for the Elderly (CPI-E). The CPI-E is not a fully developed price index (hence, the "experimental") and suffers from a number of methodological flaws, including its small sample size, its failure to account for senior discounts and other purchasing habits, and the question of whether the CPI actually measures health care inflation correctly. Still, even a robust version of the CPI-E would represent a policy change rather than a technical correction, since the current COLA, as with most other government programs and provisions, is based on overall inflation. If policymakers were to use a retiree-specific price index for Social Security, this would represent a benefit expansion that should only be done in the context of a plan to make the program solvent. And to be technically accurate, that retiree-specific price index would still need to be "chained."
Finally, it is worth pointing out that while The New York Times editorial is only about Social Security, switching to the chained CPI would actually result in savings throughout government. Indeed, while it would generate savings on the entitlement side it (as Republicans have called for), it would also generate new revenue (as Democrats have called for).
In total, Social Security only accounts for about one-third ($127 billion) of the ten-year deficit reduction ($390 billion), with revenue counting for another one-third and the rest from other spending programs and interest. Indeed, if accompanied with protections for the poor and very old as most chained CPI proposals would, an even smaller portion of the net package would come from Social Security. Maintaining overly generous COLAs for everyone makes little sense when protections can be targeted to the specific vulnerable populations.
Experts from across the spectrum agree that the chained CPI is the best available measure for overall changes in the cost of living. Improved accuracy of inflation measurement should be a goal even absent budgetary impact, but especially given the many tough tax and entitlement choices policymakers will be facing to put the debt on a clear downward path. That is why every serious bipartisan budget plan -- from Simpson-Bowles, to Domenici-Rivlin, to the forming Obama-Boehner plans -- has recommended it. We hope the President's budget follows suit.
Click here to read our full analysis of the chained CPI, "Measuring Up: The Case for the Chained CPI."
In today's Politico, CRFB board member and former Secretary of Commerce Pete Peterson calls for a long-term solution to our national debt, which addresses the drivers of our debt, protects the vulnerable, and encourages economic growth.
Similar to what we’ve written previously, he makes the case that sustainable fiscal policy is the path to a favorable legacy for future generations. To get there will require both parties to work to compromise.
On the problem, he writes:
[We will face] a slow-growth crisis, in an economy that is starved of badly needed investments. Over the next quarter-century, even if interest rates rise only to historically average levels, interest costs on public debt are projected to soar to about four times the total federal investment in R&D, education, and non-defense infrastructure combined. Those of us who believe more investment is needed in this technological and competitive global economy also have a responsibility to advocate for policies that ensure we have the resources to pay for it.
Peterson makes the argument that addressing three major areas are required to solve the problem: defense, taxes, and entitlements. Moreover, he says that both ends of the political spectrum will have to make uncomfortable compromises in these areas:
On taxes, Republicans must acknowledge the need for additional revenue to achieve a lasting bipartisan solution. Simple math makes any reform package without revenues not only draconian, but politically impossible. Relying solely on spending cuts to stabilize debt at sustainable levels would require cutting nearly one-third of the overall budget. Tax reform that raises revenue by reducing deductions would be economically beneficial and more feasible politically.
At the same time, President Obama should lead his fellow Democrats — and the entire nation — to solutions that tame the growing costs of Medicare, Medicaid, and Social Security. With rising health care costs and 78 million Baby Boomers retiring, these programs account for 100 percent of the projected long-term increases in federal non-interest spending.
On the solution, Peterson argues for an alternative to hasty, across-the-board cuts we see in the sequester.
First, we simply must preserve the safety net for the vulnerable. Reforms should start by asking the relatively well-off to contribute more and receive less. And those who advocate for the status quo must remember that doing nothing is the worst thing we can do for low-income families — without reform, we’re headed toward an economic and political crisis in which no program is safe.
Second, retirees need time to plan for policy changes. Our leaders should agree now on reforms to Medicare and Social Security, so that people have time to prepare. Of course, entitlement reform that exempts those nearing retirement requires that we reach an agreement now—we can’t afford to delay both the decision and the implementation.
By making smart, phased-in reforms and investments, we can help boost the recovery rather than hinder it:
The suggestion that Washington should focus on economic recovery today and long-term debt reduction later presents a false choice. Our leaders can walk and chew gum at the same time. And entitlement reform with delayed implementation by definition won’t harm the recovery. To the contrary, a comprehensive plan that stabilizes long-term debt would generate much-needed confidence in all sectors — business, consumer, financial markets — that would in turn stimulate the short-term economy.
Ultimately, I believe the most persuasive argument for addressing long-term debt is moral. If we do nothing, we will leave more than $50 trillion of unfunded promises on the backs of our children and grandchildren over the next 50 years.
To read the full op-ed, click here.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Among the many amendments that were voted on to the Senate budget resolution, one caught the eye of POLITICO: Sen. Rob Portman's (R-OH) amendment to have the Congressional Budget Office/Joint Committee on Taxation use dynamic scoring. The amendment passed by a 51-48 vote, with a handful of Democrats joining all Republicans in voting for it. Having written a report on this topic last year, we figured we'd take a closer look at what the amendment would mean, assuming that it passed the full Congress.
First, a little background on dynamic scoring. CBO's scores of legislation do not take account into macroeconomic responses, changes to variables like gross domestic product, employment, or inflation. They do, however, take into effect microeconomic responses, explained as follows in our paper:
The types of behavior estimated under conventional scoring include effects related to the timing of economic activity, shifting of income between taxable and nontaxable categories, effects on supply and demand, and interactions with other taxes. For example, an estimate for a future increase in the capital gains tax will account for the fact that taxpayers will accelerate their realization of gains into the year prior to the tax
increase to avoid the higher tax rate, and will also assume that future taxpayers will sell their assets less often and hold more assets until death. Estimates of lower income tax rates, as another example, would show an increased tax base as people are enticed to shift more compensation from nontaxable benefits, such as employer provided health care and retirement plans, to taxable wages.
Estimates of spending programs also take microeconomic effects into account, such as expected changes in participation, utilization, or reported income. For example, when CBO estimates the effect of changes to Medicare cost-sharing rules (such as higher copayments), they take into account changes in health care utilization (such as fewer visits to the doctor). Similarly, CBO’s estimates for agriculture legislation include anticipated effects on crop prices and production.
Portman's amendment requires that CBO provide a macrodynamic estimate for any changes in revenue (increases or decreases) larger than $5 billion in any fiscal year. For example, while CBO would already take into account a tax rate increase's effect on how much income a person receives in taxable versus non-taxable form, this estimate would also take into account the rate increase's effect on things like GDP or inflation. CBO's budget score would thus reflect these changes, showing how revenue and spending are altered not only from first-order effects and the microdynamic effects, but also the macrodynamic effects. Note that the amendment only requires that this estimate be provided as supplemental information rather than as a replacement for the traditional CBO/JCT score.
There are a number of arguments both for and against adopting or relying on macrodynamic scoring, which we summarized in last year's report. Arguments for it include providing lawmakers with more information about legislation, reducing bias against pro-growth policies in scoring, and taking advantage of advances in economic modeling and new research about the effects of various policies. Arguments against it include the sensitivity the score would have to what assumptions or model the scoring agency uses, the requirement that scorers make assumption about future policy changes or otherwise render an estimate meaningless, and the impracticality of having to keep updating CBO's baseline economic projections for new legislation.
In general, we believe deficit reduction efforts should be designed to add up without the effects of economic growth. Rather, the growth should be pursued to the greatest extent possible, and the benefits could provide an important fiscal dividend. As we explained in our paper:
Importantly, policymakers should be pursuing pro-growth policies regardless of how they are accounted for. In addition to having benefits in its own right, faster economic growth will lead to higher revenue, lower spending on safety net programs, a greater capacity for individuals and businesses to bear tax and spending changes, and a greater capacity of the economy as a whole to carry debt (i.e. higher GDP will lower the debt-to-GDP ratio) – all of which can help the country address its fiscal challenges. Even if scorers do not account for these effects directly, pro-growth policy changes can yield a bonus in the form of lower than projected deficits and debt. Currently, we are faced with making painful choices that, unfortunately, can no longer be avoided. Higher growth will not make painful choices go away, but it will make them relatively less painful.
There is a strong case for supporting something like the Portman proposal, which provides a secondary economic estimate and can thus offer policymakers additional useful information. At the same time, only applying this analysis to the revenue side of the equation neglects the real negative and positive effects that spending changes can have on the budget as well.
Regardless of what is and isn’t measured, we would encourage Congress and the President to pursue policies which both promote economic growth and put the debt on a clear downward path.
The Economic Policy Institute's Ethan Pollack has a blog post questioning the accuracy and ultimate usefulness of long-term (75-year) budget projection, especially CBO's Alternative Fiscal Scenario (AFS). Pollack's post builds off an analysis from Michael Linden of the Center of American Progress, who shows that much of the deterioration in the AFS relative to CBO's current law baseline is due to assumptions about future fiscal irresponsibility from lawmakers which may be unfounded. This leads both Pollack and Linden to argue that the AFS projection may mislead lawmakers to think that there is a much bigger problem than there actually is. But while AFS may be a worst case scenario, more reasonable projections still show an unsustainable debt path that demands our attention.
Pollack points out that there is inherent uncertainty with any sort of projection, uncertainty which is only compounded when doing a projection with such a long timeframe.
Imagine trying to figure out how the 138th Congress that will govern in 2063—likely with many members that aren’t even born yet—will feel about marginal tax rates, or the cost of an MRI. Will we still even use MRIs? On the subject of healthcare, consider this: a device was recently developed that, once implanted into a patient’s body, can provide ongoing monitoring of various blood chemicals and report the findings to a smartphone. This could have a hugely transformative impact on our currently reactive health care system. But would it reduce or increase the share of the economy we spend on health care? Would health costs fall because visits to the doctor would be less frequent and diseases and emergencies would be detected early? Or would costs rise because every patient would start demanding what may be an expensive implant that ends up telling doctors nothing they don’t already know about 99 percent of their patients?
Linden has similar concerns about the assumptions of lawmakers' future actions:
It’s not unreasonable to assume that Congress will cut taxes and increase spending in the future, but that is not the same thing as projections based on underlying demographic or economic trends. Guesses about what policymakers will do a decade into the future are just that—guesses. It is just as reasonable to assume that in 2023—when the debt is already 80 percent of GDP—Congress won’t enact massive new tax cuts or spending increases without paying for them.
But it's worth noting that this is only one of CBO's two scenarios, the other being current law. CBO's Alternative Fiscal Scenario is their pessimistic projection of what could happen based on historical experience or trends, while current law is a more optimistic projection. Together, these baselines illustrate a range of possibilities, much like a confidence interval, but do not necessarily represent the most likely case. CRFB and many other think tanks including the BPC, CBPP, and Concord Coalition, have released more realistic baselines that include policies not in current law and also relax some of more unlikely assumptions in the AFS. CRFB has estimated what the long-term baseline would look like incorporating the legislative and technical adjustments since the last CBO Long-Term Outlook for the two CBO baselines and our own, seen below. All show an upward path for debt, as does Linden's own analysis.
Source: CRFB, CBO
While the AFS should be taken with a grain of salt, it doesn't mean more realistic projections should not concern lawmakers just because it is difficult to make predictions over a 75-year timeframe. While there is great uncertainty in many factors, there are also things we can predict with reasonable certainty. One area is demographics, which has a large effect on the budget going forward, accounting for a majority of the growth in entitlement spending in the next two decades. While health care cost growth has been subdued recently, we can reasonably predict some reversion to the trend we've seen in the past four decades as the economy recovers, with costs continuing to grow faster than GDP. We can also reasonably predict how much revenue will be raised if we continue to have the same tax code.
It's worth noting that all of the baselines may be too optimistic in one sense, given that their economic projections do not factor in recessions. We also showed earlier this week how sensitive budget projections are to interest rates, which could be higher than under CBO's projection if debt is allowed to rise unchecked. Given the pressures that will make it much more difficult to slow the growth of debt, it is better to get a running start by making changes to take effect later in the decade when the economy is better suited to handle them. Even if budget projections turn out to be too pessimistic, the political system has shown to be much better at giving away surpluses than it has at quickly getting to balance. Again, this does not mean having changes take effect now but planning to have them do so in the future. It is better to be cautious and agree upon a plan now rather than waiting for deteriorating projections.
Lawmakers have made notable progress since the last long-term outlook. The savings enacted under ATRA produced a debt path that is a little less worrisome than what was projected in last June (with the exception of current law). But that shouldn't lull anyone into a false sense of security. We still need to do more - lawmakers should look to find an additional $2.4 trillion in savings to put debt on a downward path.
So we agree with Pollack and Linden that CBO's projections are subject to a huge degree of uncertainty, and that AFS might not be the most likely scenario of what debt will be on our current path. But more modest projections of where we are heading given demographic pressures and continued excess health care cost growth still show debt on an upwards path. We should be prepared to deal with those pressures rather than having to scramble and enact changes quickly.
Listening to reports on recent budget negotiations in Washington may lead you to believe compromise between the two parties is near impossible, considering what sounds like countless irreconcilable differences. However, an article in yesterday’s New York Times shows that House Republicans and the Administration may not be as far apart as it may seem, at least when it comes to Medicare. The article highlights an area of potential consensus on the need to reform Medicare’s antiquated and complex cost sharing rules.
Currently, Medicare beneficiaries face two separate deductibles – a $1,184 deductible for Medicare Part A (hospital insurance) and a $147 deductible for Medicare Part B (physicians' offices) -- along with a hodge podge of other copays and coinsurance. With no out-of-pocket spending cap, many beneficiaries are exposed to significant cost sharing and therefore purchase private supplemental coverage, known as Medigap, to cover the possibility that they will face huge costs. Roughly 50 percent of the Medicare population have supplemental coverage of some form (i.e. Medigap, employer-based, Tricare) compared to 8 percent with only traditional Medicare (the rest have Medicare Advantage or Medicaid assistance). Because the extra coverage often defrays their health care costs, these beneficiaries do not always make cost-conscious decisions, leading to overutilization and driving up spending. As a result, many health economists and experts have called for reforming cost sharing rules by creating a single, combined deductible with a uniform coinsurance and an out-of-pocket cap.
As the article explains, both the President and House leadership have been open to such reforms. The President has included it in his offers dating back to the 2011 debt ceiling debate and House leadership has suggested their willingness to adopt the policy. Even before the 2011 negotiations, the Simpson-Bowles plan proposed creating a unified $550 deductible, a uniform 20 percent coinsurance rate on all services, and a 5 percent catastrophic coinsurance after $5,500 per year of out-of-pocket expenses, up to a $7,500 hard limit. The proposal would save up to $50 or $60 billion through 2022, and even more if combined with other reforms to supplemental coverage. For example, the Fiscal Commission also included an option to restrict first-dollar or near first-dollar Medigap plans by disallowing them to pay for the first $550 per year in cost-sharing and only half of cost-sharing up to $5,500, saving an additional $50 billion over the next decade. Significant savings could also be achieved if similar restrictions were applied to Tricare for Life, the Federal Employee Health Benefits Program, and employer-sponsored retirement plans that provide first dollar coverage as well. The Moment of Truth Project has a report explaining these options in greater detail.
Others have argued for different restrictions or even a tax on these supplemental plans. The President’s FY 2013 budget included a 15 percent tax on Medigap plans. Most recently, we discussed MIT economist Jonathan Gruber’s plan that would implement an excise tax of up to 45 percent on premiums for Medigap plans and employer-sponsored retiree coverage. In addition to yielding savings to the federal government, these reforms would benefit the poorest and sickest seniors on average. A 2011 Kaiser Family Foundation study found that reforming Medigap coverage could reduce out-of-pocket costs for nearly 80 percent of Medigap enrollees.
As these cost sharing reforms have gained considerable support and attention, different proposals have reflected the ability to easily dial the specifics depending on desired savings and policy priorities. In addition to the Medigap tax, Gruber's proposal offers greater protections for low-income beneficiaries by instituting a progressive out-of-pocket limit on a sliding scale based on income. He also proposed reducing the deductible to $250 for seniors below 200 percent of poverty. Similarly, the Urban Institute’s plan proposes a single income-related deductible with higher deductibles for people over 400 percent of the poverty line, about the same for people between 300 and 400 percent, and lower for people below 300 percent. Other options include changing the level of the coinsurance and/or applying higher levels of cost-sharing to specific services such as home health, skilled nursing facilities (SNFs) or clinical labs. Some other examples from our Health Care and Revenue Savings Options report are listed below.
Note: Rough estimates of potential savings from 2013-2022
Any of these changes could substantially reduce or increase the savings. The NYT article suggests the President would apply his policy to new beneficiaries after 2016. This type of grandfathering would erase the majority of the savings within the ten year budget window and increase complexity by leaving different Medicare beneficiaries with different deductibles, different copays, and other different rules. It would also leave current beneficiaries without the catastrophic cost protections which would be newly available to new retirees. A better alternative to grandfathering would be to phase in changes for all beneficiaries.
While there are many different approaches toward implementing cost-sharing reforms, it is clear that both sides agree our current benefit structure is costly and inefficient. They also tend to agree on a basic framework that includes a combined deductible with some level of out-of-pocket protection and restrictions to supplemental coverage. As we anticipate a growing number of baby boomers entering the Medicare rolls and increasing spending over the next several decades, reforming these outdated rules will be an important part of the discussion on serious entitlement reform that could forge a bipartisan agreement.
We are encouraged and hopeful that the emerging consensus on cost-sharing reforms will be used to help bend the health care cost curve and help put our debt on a downward path as a share of the economy.