The Bottom Line

February 13, 2015

The President proposed last week, through his FY 2016 budget, a number of proposals to reform Social Security in small ways, including measures to shore up the strained Social Security Disability Insurance (SSDI) Trust Fund by shifting funds from the Old-Age and Survivors' Insurance (OASI) Fund and to improve data sharing and coordination with other agencies. Overall, the Office of Management and Budget (OMB) estimates that these measures would save money through better program integrity and increased payroll revenues for the program. OMB expects that over the next 10 years these changes will cut Social Security's costs by $14 billion and increase revenue by roughly $46 billion. 

Here is a summary of the President’s proposed changes to the SSDI program:

    • Reallocating payroll taxes from OASI to SSDI. The budget proposes reallocating an additional 0.9 percent of the payroll tax from the old-age program to the disability program for five years in order to extend the life of the SSDI trust fund to about 2033.
    • Completing Continuing Disability Reviews (CDRs). The budget proposes mandatory funding for CDRs starting in 2017. Annual funding would be determined through a formula rather than the appropriations process. The budget proposes $15.2 billion of new spending for CDRs through 2025 which would generate estimated savings of $37.7 billion. About 80 percent of the spending and a similar proportion of the savings would go to and come from the Supplemental Security Income (SSI) program, leaving $7 billion of net savings to the SSDI program.
February 12, 2015
Cost of Ten Bills Would Be Added to the Deficit

The House of Representatives is considering this week whether to revive several tax breaks known as the "tax extenders" and add their cost to the deficit. The bills under consideration, which include extensions of previously renewed tax breaks in addition to new and expanded tax breaks, would cost almost $320 billion, or almost $385 billion with interest.

The tax extenders are a set of temporary tax breaks that have typically been continued for a year or two at a time. Most recently, about 55 extenders expired at the beginning of 2014 and were renewed retroactively for one year last December, before expiring a few weeks later at the end of 2014.

The House Ways & Means Committee today approved renewing and permanently extending two of these provisions, including a drastically expanded research tax credit and a deduction for sales taxes paid, as well as new modest expansions to 529 education savings accounts. The three approved bills being considered would cost about $225 billion, or $265 billion with interest.

The House is also voting today and tomorrow on permanent extensions of six more provisions, as well as a policy from last year's Tax Reform Act that would reduce taxes paid by private foundations on their investment income.

February 12, 2015

In two months, lawmakers will encounter their third Fiscal Speed Bump of 2015 when the "doc fix" expires, leading to a 21 percent cut in Medicare physician payments starting in April. Replacing the Sustainable Growth Rate (SGR) formula permanently would cost at least $131 billion through 2025, according to the Congressional Budget Office (CBO), or $177 billion if the bipartisan tricommittee bill agreed to in the last Congress is pursued.

At a House Energy and Commerce hearing recently, former Sen. Joe Lieberman (I-CT) stated that it was very unlikely any SGR replacement would pass in this Congress without offsets. To that end, the Heritage Foundation recently specified four reforms that could be used to offset the SGR.

    1. Reforming Medicare cost-sharing: Many Medicare reform plans have proposed to overhaul Medicare's cost-sharing. These policies would replace the many different deductibles, copays, and coinsurance in Parts A and B with a single deductible with unified coinsurance across services. These changes were usually accompanied by a restriction on cost-sharing coverage by supplemental coverage plans like Medigap and a limit on out-of-pocket costs to reduce exposure to exorbitant cost-sharing. CBO's latest estimate had one version of this policy saving $110 billion over ten years.
       
February 12, 2015

President Obama sent a letter to Congress yesterday asking for a formal three-year authorization for a campaign against ISIS. At the same time, though, the President's budget includes a plan for phasing down the war spending category, known as Overseas Contingency Operations or (OCO), over time. Not only does the budget lay out an aggressive drawdown plan, it also states that the Administration will develop a plan to transition all OCO spending that will remain back to the non-war defense budget by 2020. This blog will take a look at the recommendations of the budget for OCO.

As combat troops have withdrawn completely from Iraq and mostly from Afghanistan, war spending has fallen by 60 percent from its peak in FY 2008 (from $187 billion to $74 billion in FY 2015). The reduction in the spending path for OCO as a result of the drawdown going forward has been made uncertain by the tendency of lawmakers to use the uncapped OCO category to backfill the non-war defense budget that is subject to spending caps. For example, the FY 2015 "CRomnibus" legislation provided $7 billion more than the Administration's OCO request. This included $1.7 billion for Migrant and Refugee Assistance, an amount larger than the State Department's request for that category in both the base budget and OCO combined.

In order to lock in the savings from the drawdown and try to shut down OCO as a slush fund for defense, the budget would cap total OCO spending through 2021. It would establish an aggregate cap of $450 billion of total OCO budget authority between 2013 and 2021, which after a FY 2016 request of $58 billion would allow an average of $27 billion per year after that. Beyond 2021, the OCO category and separate spending for war activities outside the regular defense budget is completely eliminated even though the regular spending caps would be extended through 2025. In total, this path "saves" $557 billion compared to growing current spending with inflation (which nobody plans on doing). CBO's drawdown path has a similar amount of spending but assumes continued troop presence after 2021, so it saves $100 billion less.

February 12, 2015

In addition to a paper and blog series on the President's budget, CRFB has created a number of tables, graphs, and charts focused on specific aspects of the budget.

Today we released a full chartbook on the President's budget. Select charts are below, with more detailed descriptions.
 

February 11, 2015

Last week, the Heritage Foundation released the Budget Book, a catalog of 106 ways to cut the budget or reduce the size of government totaling roughly $3.9 trillion in ten-year savings. (However, Heritage notes that the total does not include interactions from enacting multiple proposals.) Here are a few highlights:

  • 65 percent of the cuts proposed are from a single item – capping spending on means-tested programs at 110 percent of pre-recession levels and growing that amount with inflation. Heritage estimates that this could save $2.7 trillion over the next decade. Heritage does not provide any details about which programs to cut, leaving it up to "policymakers to direct welfare spending to the areas of greatest priority."
  • Limiting Highway Trust Fund spending to existing revenue would result in about $180 billion in savings. Since transportation spending would be reduced, "states or private sector [could] take over the other activities if they value them."
  • Repealing the Davis-Bacon Act would reduce spending by $86 billion over the next ten years, by Heritage's estimate. The Act requires federally funded construction projects to pay "prevailing wages" based on the project's location. However, the Congressional Budget Office estimated that this would save less than $12 billion. We mentioned this as an option to reduce highway spending in our paper last year, Trust or Bust: Fixing the Highway Trust Fund.
  • Ending Supplementary Security Income (SSI) benefits for children would save $125 billion. Heritage would instead direct SSI toward disabled adults and seniors, and only keep the children's payments for medical expenses that Medicaid does not cover.
  • Other proposals would end Head Start, higher education programs, and job training programs, resulting in $170 billion in education and training services cuts.
February 11, 2015
The Risks of Delaying Fiscal Reforms

Erskine Bowles is a former co-chair of the Simpson-Bowles Fiscal Commission and a member of the Committee for a Responsible Federal Budget. He wrote a letter to the editor that appeared in the New York Times as a response to a column by Paul Krugman.

Paul Krugman’s Feb. 2 column, “The Long-Run Cop-Out,” claims that we don’t need to deal with our long-term fiscal challenges any time soon, and that those who argue otherwise are lazy and lacking in courage. His message is a disservice to the critically important debate about our nation’s economic future.

America’s unsustainable fiscal outlook is not a question — even Mr. Krugman concedes that we have a long-term problem. The more important, and still unanswered, questions are: If not now, when and how do we address our fiscal challenges?

Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery.

Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration. In our report we recommended delaying significant budget cuts until the economy recovered, and implementing reforms gradually.

February 11, 2015
WSJ's Greg Ip on the President's failure to address the debt

In a commentary published on Monday, the Wall Street Journal’s Greg Ip wrote about President Obama’s budget and the declaration that it is moving away from “mindless austerity.” He approached the question of when, if ever, is a good time to implement austerity measures when deficits get too large.

Ip explains that there are two aspects of deficit spending – “structural” and “cyclical” – with the former referring to long-term differences between revenues and outlays and the latter to weak economic conditions that push up spending and lower revenue automatically.

The President's budget predicts the economy to be back at full capacity by 2017, meaning the cyclical portion of the deficit should be at or near zero. Ip points out this would be the best time to address the structural portion and put debt on a declining path. Although the President’s FY 2016 budget stabilizes debt as a share of GDP,  the debt is barely declining under its projections.

February 10, 2015

The President's FY 2016 Budget last week proposed dealing with the upcoming fiscal speedbump of the exhaustion of the Social Security Disability Insurance (DI) fund by shifting existing sources of money. The budget would shift payroll tax income from the Old-Age and Survivors Insurance (OASI) Fund to the Disability Insurance (DI) Fund. This proposal comes amidst the ongoing debate of whether this strategy, commonly known as a reallocation, is the right way to tackle the impending exhaustion of the DI fund next year.

This debate, recently fueled by a change in House rules, has been full of myths and misunderstandings. Supporters of a “clean reallocation” – unaccompanied by other program reforms – argue that it is a routine, technical step to move money between Social Security’s old-age program and its disability program. Opponents claim that we should not compromise the financial position of the OASI fund and oppose taking money from OASI unless we take steps to improve OASDI overall. This posts attempts to dispel some of the myths around the DI Trust Fund and reallocation debate.

Myth: We can prevent SSDI from running out of money by reducing fraud instead of reallocation

Fact: Reducing fraud will not provide enough, or timely, savings to avoid Trust Fund exhaustion.

Although it is always a good idea to reduce fraud, doing so will not provide enough savings to secure SSDI, and it will certainly not provide savings soon enough to avoid Trust Fund exhaustion. While several recent prominent cases show that SSDI fraud costs the program both money and support, estimates from the Social Security's Office of the Inspector General put the total fraud rate in the program at less than 1 percent of beneficiaries. To put this in context, if spending on SSDI benefits was reduced by 1 percent, only 6 percent of the program’s shortfall would be closed – and of course, no policy could completely eliminate fraud.

Moreover, no benefit change could occur quickly enough to avoid the need for some reallocation, inter-fund borrowing, or transfer. With little time left until the trust fund runs out, program costs would need to be reduced immediately by nearly one-fifth to prevent such exhaustion. That would mean essentially kicking off one-fifth of current beneficiaries or reducing current benefits by that same amount, neither of which is a plausible option. More thoughtful reforms could reduce program costs, but savings would accrue gradually over time, not all at once.

February 10, 2015

In addition to showing estimates over the next ten years, the President's budget includes in its lengthy Analytical Perspectives section a 25-year estimate of the important budget metrics. This long-term outlook shows the budget stabilizing debt between 73-74 percent of GDP over the entire period, compared to an increase to over 100 percent by 2040 in their "adjusted baseline." This stabilization is a clear improvement from the sharp upward path of debt in current law, but it would still leave debt at a high level, and the estimate relies on some assumptions that may be optimistic.

At the end of the first ten years, spending and revenue sit at 22.2 percent and 19.7 percent of GDP, respectively, for a 2.5 percent of GDP deficit. Over the following 15 years, both spending and revenue increase gradually by similar amounts, ending up at 22.7 percent and 20.4 percent, respectively, in 2040. Deficits, like debt, remain stable in the 2-3 percent range throughout this period.

 

The relative stability of the budget between 2025 and 2040 over time masks the change in its composition over time. Population aging and health care cost growth push up spending on Social Security and health care, particularly the latter, by nearly 2 percentage points of GDP while other categories of spending gradually fall over time. Revenue increases come from the individual income tax as increases in income push people into higher tax brackets.

February 5, 2015

The President's budget follows the important budget principle of PAYGO, responsibly identifying tax and spending offsets sufficient to pay for new spending and tax cuts, and setting aside additional savings for deficit reduction. While we have refuted the President's claim of $1.8 trillion in deficit reduction, the true figure of $930 billion is nothing to sneeze at.

Some parts of the President's budget tie initiatives to specific offsets – an increase in the cigarette tax to fund universal prekindergarten, a one-time tax on foreign income as part of business tax reform to pay for transportation spending, increases in capital gains taxes and a bank tax to pay for middle-class tax cuts.

Proposals Paired With Corresponding Savings
Paired Policy
Ten-Year Savings/Costs (-)
Provide universal prekindergarten, other children's initiatives - $90 billion
Increase tobacco taxes and index to inflation  $95 billion
Paired Policy  
Create a second-earner tax credit, increase child care credit, and other individual tax cuts - $275 billion
Increase and reform the taxation of capital gains and impose a tax on large financial institutions $320 billion
Paired Policy  
Additional highway spending - $270 billion
Impose one-time tax on untaxed foreign earnings of U.S. corporations $270 billion
Policies That Are Offset, But Not By Specific Items  
Partially eliminate the sequester  - $590 billion
Extend refundable credits for college, children, and work that expire in 2017 -$165 billion
Replace the Sustainable Growth Rate (SGR) - $155 billion
Net Deficit Reduction, after Paying for New Policies* $930 billion

*Total line includes all other policies in the President's Budget, which both increase and decrease deficits, not listed here.
Source: CRFB calculations based on OMB documents. Savings are costs are measured against a "PAYGO Baseline", which assumes continuation of current law.

February 5, 2015

The President's budget would put debt on a very slight downward path over the next ten years, but that is by the Office of Management and Budget's own estimate. Usually about a month after the budget is released, the Congressional Budget Office weighs in, and it has often been less kind in its estimates than OMB (although sometimes it has actually shown a better estimate). While we can't say for sure how CBO would see the President's policies this time, we can get a good idea substituting CBO's baseline and a few policy estimates for OMB's; in past years, like last year and 2011, this method has worked pretty well. Our verdict this time? CBO could see a slight upward instead of slight downward debt path, although 2025 debt as a percent of GDP would be about the same.

OMB's estimate of the budget saw debt rise from 74 percent of GDP in 2014 to 75 percent this year before it would decline very gradually to 73 percent in ten years. Our estimate using CBO numbers shows a more complicated story. Debt would be stable between 2014 and 2015 and then decline to 72 percent by 2020. It would then start on a slight upward path which would moderate a bit by the end of the window. In short, the budget would not have sufficient savings to prevent an upward path, but the back-loaded nature of its savings would start to curtail that path in the last few years of the ten-year period. By 2025, deficits could be about $100 billion, or one-third of a percent of GDP, higher than OMB estimates.

February 4, 2015

In touting the low deficits in the President's budget, White House Press Secretary Josh Earnest claimed that by reducing the deficit below 3 percent of GDP, the budget met fiscal targets set by the Simpson-Bowles Fiscal Commission. Yet neither the Commission nor Erskine Bowles or Al Simpson ever set any target like this – the White House did. In fact, the President's budget doesn't even meet that goal until seven years after the target date.

In a press conference on Monday, Earnest claimed :

The 3 percent target was also the one advocated by the minor deities that served on the Simpson-Bowles Commission.  So it’s worth pointing out that while that certainly included the wisdom of the Obama economic team, it also included the stamp of approval from that bipartisan commission.

Yet Earnest fails to mention that this target was not set by the Fiscal Commission, but by President Obama when he created it. In establishing the Commission, the White House wrote that it should "make recommendations that put the budget in primary balance so that we are paying for all operations and programs for the federal government (achieving deficits of about 3 percent of GDP) by 2015 and meaningfully improve the long-term fiscal outlook."

The Fiscal Commission clearly viewed this target as inadequate, particularly over the long-run. In its report, the commission noted that its plan would:

Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP)...Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035. [emphasis added]

February 4, 2015

October 1 of this year marks the beginning of fiscal year (FY) 2016 and the return of the sequester on discretionary (appropriated) spending. No longer does the sequester require across-the-board cuts to such spending, but it does mandate lower topline levels for both defense and non-defense discretionary spending, under which appropriators determine exactly where to spend money.

The sequester will reduce discretionary appropriations by $91 billion in FY 2016 and result in the spending caps rising by only $2 billion from this year (FY 2015). If lawmakers adhere to the sequester caps, discretionary spending will reach a modern-era low as a share of GDP in just two years and continue to decline after that.

President Obama, as he has in every budget since the failure of the Super Committee, would repeal part of the sequester. While the budget does not identify specific savings to pay for the sequester, it includes enough cuts to mandatory spending and new revenue to offset the sequester, and indicates that it would be offset "by cutting inefficient spending, and closing tax loopholes." Lawmakers should follow a similar approach in any efforts to roll back sequestration this year, replacing all resulting costs with other cuts to mandatory spending and/or new revenues. Replacing the cuts mandated by sequestration with savings from specific changes in mandatory spending programs and revenues, particularly policies which result in savings that grow over time, is consistent with the original purpose of sequestration and would represent sound economic and fiscal policy.

Like last year, the budget repeals the entire non-defense sequester in 2016 and provides the same dollar amount of relief to defense, which would roll back about 70 percent of the defense cuts. The 2016 relief would total about $75 billion. After that, the budget would replace less and less of the sequester over time, with the relief falling to $40 billion in 2021, the last year the discretionary sequester is technically in effect.

February 3, 2015

The administration may claim that its budget "achieves about $1.8 trillion in deficit reduction," but our analysis finds that it only reduces deficits by roughly half that amount -- $930 billion.

To get to that $1.8 trillion figure, the President's budget is at odds with standard budget practices, ignoring the costs of permanently extending several deficit-increasing policies and significantly understating the amount of sequester relief being proposed.

Source: OMB and CRFB estimates

Specifically, the administration ignores the costs of 1) extending refundable tax credit expansions that are set to expire after 2017; 2) overriding a 21 percent cut to Medicare physician payments scheduled to occur in April; and 3) repealing the sequester of mandatory spending -- including Medicare and farm programs -- currently in law.* Enacting these policies would cost $165 billion, $115 billion and $185 billion, respectively, through 2025. This allows the administration to effectively double count savings that are necessary to offset these policies toward deficit reduction as well.

February 3, 2015

With the release of the President's FY 2016 Budget yesterday, CRFB published a condensed analysis of the President's baseline and major proposals.

February 2, 2015

The President released his FY 2016 budget today, describing his proposals for this year and the next decade. We already published a short blog describing the key fiscal numbers in the President's Budget, and will publish a full paper later today. 

Here are the major proposals in the President's Budget, with additional deficits in black and additional savings in red. The "OMB Baseline" measures the savings that are claimed by the President's Budget. "PAYGO Baseline" represents our calculations of how the proposal might score against a current law baseline. The PAYGO baseline also excludes savings from reducing war spending.

February 2, 2015

Today, President Obama released his FY 2016 budget, outlining his priorities for FY 2016 and the coming decade. Later today, we'll publish a full analysis. Be sure to stay tuned to CRFB and The Bottom Line throughout the day and throughout the week as we take a closer look at all aspects of the President’s budget. Below are the highlights.

The President's budget would reduce medium-term deficit and debt levels relative to current projections, and slightly reduce them relative to current levels. Under the budget, deficits would remain around 2.5 percent of GDP for the rest of the ten-year window. Debt would rise from 74 percent of GDP today to a post-World War II record of nearly 75 percent in 2016 before declining to 73 percent by 2025.

The budget puts debt on a stable – and actually on a very modest downward – path compared to baseline scenarios where debt continues to rise. However, debt would still remain near its post-war record high levels. 

*PAYGO baseline assumes continuation of current law, including inflation adjustments of the 2021 post-sequester discretionary levels, along with a drawdown in war spending as in the President’s budget.

January 30, 2015
Compensation Commission Releases Long-Awaited Report

After a more than a year-long process, the Military Compensation and Retirement Modernization Commission released its final report yesterday, recommending changes to military pay, pensions, health benefits, and other benefits. The report is highly anticipated because of the Pentagon's repeated insistence that personnel costs need to be addressed to avoid other areas from getting squeezed by the defense caps. Lawmakers so far have often ignored or only partially implemented their policies. Since the Pentagon spends some of its current budget paying for future retirement and health benefits in addition to current costs, the longer policymakers hold off, the tighter the defense budget gets.

The report includes fifteen specific recommendations in the three areas of Pay and Retirement, Health Benefits, and Quality of Life programs. The Commission was prohibited from recommending changes to the benefits of existing servicemembers (who could still opt into the new retirement system), so these changes generally only apply to new troops. Using policies that only apply to new servicemembers, as policymakers did for the Murray-Ryan cost-of-living adjustment change, has trade-offs: it reduces upfront savings and creates disparities in benefits among new and old servicemembers, but it also makes changes more politically palatable and ensures that servicemembers can still claim the benefits they were promised, while ultimately achieving similar savings in the long run. Importantly, the report indicates that servicemembers would prefer the new benefit structures by wide margins.

The Commission's recommendations are:

January 30, 2015

On Monday, the President is scheduled to release his FY 2016 Budget. Based on press reports, we know some rough outlines of what he will be proposing. Here are some other things to look for.

Will it put debt on declining path? 

Our long-term fiscal challenge is addressing the unsustainable growth in the national debt. Thus, all of this year's budgets, including the President's, should put debt as a percent of GDP on a declining path over the next ten years and beyond. After CBO’s baseline release this week indicated that debt will start to rise after 2018, we calculated that $2.4 trillion in deficit reduction will be needed to put the debt on a clear downward path. The budget somewhat hit this goal last year, when OMB projected that the FY 2015 budget would put debt on a declining path, but CBO's re-estimate projected that debt would continue to grow as a percent of GDP. CBO has generally, though not always, projected higher debt when it re-estimates the budget due to different economic and technical assumptions and not counting some gimmicks, so we may have to wait for that score. The President has said his budget will place debt on a declining path, but will it hold up to scrutiny?

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