The Bottom Line
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.
On Tuesday, President Obama signed the continuing resolution funding the government for the remainder of FY 2013. As we've explained before, the bill is a hybrid, with full appropriations bills for Agriculture, Commerce-Justice-Science, Defense, Military Construction-Veterans' Affairs, and Homeland Security, and a continuing resolution for other budget categories. While the bill will prevent a government shutdown, it does little to address sequestration or move us further in solving our debt problem.
CRFB board member and former Congressman Bill Frenzel (R-MN) makes this point in an op-ed today in Forbes. These CR's may keep the government running, but a temporary budget is a terrible way to manage the nation's finances. What could help the country is a grand bargain. Frenzel explains:
CRs are, in fact, a clumsy way to conduct the people’s business. They include all functions of government in one ugly package. They include some reviews of some spending, but they lack the careful scrutiny that is applied when all 13 appropriations bills are passed separately. Lacking a common budget target, legislators are forced to bundle all spending in to a CR.
In the past few years, frequent budget crises have become the rule for Congress. This year we avoided the cliff, dodged the debt ceiling, and now have eased the effect of the sequester. We will face another debt ceiling expiration in August, and probably have another CR in September. All of these could have been avoided had our political leaders agreed on a long term budget plan to stabilize the debt ratio at a reasonable level.
This year both the Republican House and the Democratic Senate have passed budgets. The Senate budget was the 1st in 4 years, and was a cause for public celebration. The bad news is that the House and Senate versions are poles apart. A compromise is considered highly unlikely.
The Republican budget balances after 10 years, and stabilizes the debt ratio at 55%. It raises no new taxes, and makes drastic cuts in health care spending. The Democratic budget lowers debt slightly, but does stabilize it. It increases taxes by $1 trillion, and makes small spending cuts. These budgets are reconcilable, but only if the politicians regard each other as the opposition, instead of the enemy.
Without a reconciliation, our budget process will move the country backwards into more CRs and more cliffs in 2014. We will survive, but continue to lurch from crisis to crisis.
Our economy will be denied the certainty it requires for a faster recovery.
What is lacking here is the Grand Bargain, a 10-year program to tame the long term deficit-drivers, and stabilize the debt so we can deal effectively with future emergencies. Every budget observer has a personal favorite version of the big compromise. The well-known Bowles-Simpson Plan is just one of many possible models....
There is still time for compromise, but, so far, the will has been absent. The political parties and their leaders have to make an agreement. Nobody can do it for them. One day the light will dawn. They will begin to understand that compromise is strength, not weakness. The sooner that day comes, the better.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Bittersweet – The madness is here. The NCAA tournament field has been reduced to 16 teams, and after this weekend there will be only four remaining. While the budget field has been reduced to two, don’t expect a clean conclusion like the one we will see in Atlanta. In Washington, the brackets are broken before the action begins (for a really scary bracket, check this out). The elimination process gets especially byzantine at this point. In fact, a third budget will enter the picture next month. On the brighter side, a government shutdown will be avoided -- at least until October, but plenty of potential pitfalls remain. However, that’s not deterring Congress from taking a two-week spring break despite some backlash.
Budget Battle Moves to Next Round – Last week, the House and Senate approved vastly different budget blueprints for fiscal year 2014, which starts October 1. The House approved with no Democratic votes the budget drafted by House Budget Committee chair Paul Ryan (R-WI) that relies on deep spending cuts and no additional revenue, and the Senate approved with no Republican votes the budget from Senate Budget Committee chair Patty Murray (D-WA) that features a mix of spending cuts and additional revenue. Several other budgets were rejected. While they all put the debt as a share of the economy on a downward path, they diverged sharply on how to do so. You can compare all the congressional budgets here. The Senate budget was passed after a marathon vote-a-rama where over 100 amendments were voted on. Check out some of the most relevant amendments to fiscal policy here and the full list here.
No Celebrating Yet – A select group of lawmakers will now try to reconcile the two surviving budgets, which not only contain many differences, but also many holes as well. That process probably won’t begin until President Obama unveils his budget proposal around April 8. The negotiations could serve as the new platform for forging a grand bargain to address the debt comprehensively and if a deal is arranged, the reconciliation instructions for the budget could aid the passage of the deal by shielding it from a filibuster.
Spending Bill Signed – As they marched through next year’s budget lawmakers also managed to finally cut down the nets on spending for the rest of this fiscal year. Last week Congress passed a bill funding the government until September 30, the end of fiscal year 2013. President Obama signed the bill on Tuesday. The $984 billion measure takes into account the spending cuts of the sequester and moves around funding for some agencies to make the cuts more palatable. See here for a closer look at how the spending is allocated.
Eyeing a More Accurate Inflation Measure – Chained CPI may sound like a 16-seeded school, but it is actually a small fix with bipartisan support that can significantly reduce the deficit. In previous debt negotiations, President Obama has offered to include switching to the more accurate measure of inflation, known as chained CPI. An updated paper from the Moment of Truth Project says the change can reduce the deficit by $390 billion over the next decade.
Lawmakers Send Themselves Home – Congress is taking a two-week spring break, but their work is coming home with them. Lawmakers are bracing to hear from their constituents about sequestration. If lawmakers get enough pressure from voters, they will be more likely to replace it with a smart, comprehensive plan that is phased-in and more targeted.
Tax Reform Could Be a Cinderella – The powerful chairs of Congress’ tax-writing committees, Sen. Max Baucus (D-MT) and Dave Camp (R-MI), have achieved the type of bipartisan collaboration that has mostly alluded policymakers these days by quietly laying the groundwork for fundamental tax reform. Charles Krauthhammer suggests that tax reform could be the key to a grand bargain and further suggests that reform could involve capping tax expenditures as proposed by Martin Feldstein, Maya MacGuineas and Daniel Feenberg. Read more about the Feldstein-Feenberg-MacGuineas approach here.
Interest in Interest Rates -- The Congressional Budget Office (CBO) says in a new blog post that if interest rates go up higher than expected, it can have a profound affect on budget deficits. We took the data further and illustrated what the CBO scenarios would do to the national debt. Implementing a credible fiscal plan now could keep interest rates from rising higher than they normally would, thus aiding the economy and the budget.
Key Upcoming Dates (all times are ET)
- Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.
- Congress must pass a budget resolution as specified in the Congressional Budget Act. Also, due to the debt ceiling suspension bill, lawmakers will have their pay withheld after this date until their respective chamber passes a resolution.
- 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.
As the Senate worked on its FY 2014 budget resolution, which passed by a 50-49 vote late last week, hundreds of amendments were filed in a process commonly referred to as “vote-a-rama.” Most of the amendments that actually received a vote were largely symbolic, establishing non-binding “deficit-neutral reserve funds” to make it procedurally easier for Congress to make changes in the future. However, several of them were very interesting from a deficit reduction perspective, and could show a few hints about what budget measures or ideas might resurface in the coming months. The amendments covered a range of issues, many of which we’ve discussed on our blog before. Below are a few highlights:
- Isakson amendment (#138) to establish a deficit-neutral reserve fund related to establishing a biennial budget and appropriations process. Agreed to 68 – 31. We’ve discussed the importance of reforming the budget process in the past, and Senator Isakson’s amendment (similar to his bill on biennial budgeting) provides an opportunity for it to be discussed again.
- Portman amendment (#154) to require the Congressional Budget Office to include macroeconomic feedback scoring of tax legislation. Agreed to 51 – 48. This amendment allows for dynamic scoring of legislation (see our report on the subject here), having CBO show revenue and spending impacts of economic growth when scoring a deficit reduction package as a supplement to their official score.
- Sanders amendment (#198) to establish a deficit-neutral reserve fund to protect the benefits of disabled veterans and their survivors, which may not include a swtich to the chained CPI. Agreed to by Voice Vote. However, in addition to not having a binding impact, it only applied to legislation that would move through the Veterans Affairs committee, which is a small portion of what would be affected. Importantly, some members, such as Senator Richard Burr, supported this amendment but expressed their support for the chained CPI more broadly.
- R. Johnson amendment (#213) to create a point of order against budget resolutions that do not assume the 75-year solvency of Social Security and Medicare. Not agreed to 46 – 53.
- Paul amendment (#263) in the nature of a substitute budget. Not agreed to 18 – 81. In this amendment, Senator Rand Paul (R-KY) proposed his own budget alternative which he calls “A Clear Vision to Revitalize America.” His proposal is more aggressive than the House Republican budget and would bring debt down to 46.6 percent of GDP by 2023. We have updated our comparison graphs of the different budget proposals to include his plan.
- Hatch amendment (#297) to repeal the medical device tax enacted in the Affordable Care Act. If legislation was enacted akin to this amendment, it would be deficit-increasing unless offset with other savings. Agreed to 79 – 20.
- Crapo amendment (#318) to include instructions to the Senate Finance Committee to achieve the Budget’s stated goal of $275 billion in mandatory health care savings. Not agreed to 47 – 52.
- Levin amendment (#430) to provide for a deficit-reduction reserve fund to provide for legislation to eliminate offshore tax shelters used by large corporations. Agreed by Unanimous Consent.
- Stabenow amendment (#432) to establish a deficit-neutral reserve fund to reject the House-passed budget plan to reform Medicare into a premium support program. Agreed to 96 – 3.
- Enzi amendment (#489) to establish a deficit-neutral reserve fund to phase-in any changes to the individual or corporate tax systems. Agreed to by Unanimous Consent. We’ve discussed many times before on our blog the importance of phased-in reforms as the fragile economy continues to recover.
- Johanns amendment (#624) to establish a deficit-neutral reserve fund repealing the $2,500 federal cap on flexible spending accounts (FSAs) and the requirement that individuals obtain a prescription from a physician before purchasing over-the-counter drugs with their own flexible spending account or health savings account dollars. Agreed to by Voice Vote. Again, this would be deficit-increasing if considered in future legislation without offsets.
Out of the hundreds of amendments that were filed but did not come to the floor for a vote, two of them recommended approaches taken by the Fiscal Commission. An amendment by Senator Heller would have expressed the sense of the Senate that the Fiscal Commission proposal should be considered by the Senate. Similarly, another amendment by Senator Coburn would have proposed health savings of $630 billion, the level which was proposed in the Simpson-Bowles plan. Several other amendments would also have addressed various components of tax reform. For example, Senator Thune offered amendments on the charitable deduction and estate tax.
At this point, the Senate and House budget resolutions have significant differences which have yet to be worked out. Lawmakers will likely revisit the FY 2014 budget when the President releases his budget proposal in a few weeks. Until then, these amendments voted on during the Senate budget vote-a-rama foreshadow some of the debates likely to be had in the broader context of a comprehensive debt deal.
The Congressional Budget Office has been busy on its blog lately, posting both snapshots of federal programs and also publishing responses to questions they have received from Members of Congress at hearings. Their latest post from director Doug Elmendorf is the latter variety, showing the sensitivity of budget projections to changes in interest rates.
Of course, interest rates are a big factor in a government's interest burden. As an example, the low interest rates the federal government currently faces allow them to pay the same amount in nominal dollars as they did in 2000, despite debt held by the public being more than three times higher.
To see the effect of interest rates on the federal budget, the CBO models three alternate scenarios to their baseline economic projections:
- Nominal interest rates rise to their average for 1991-2000.
- Nominal interest rates rise to their average for 1981-1990.
- Nominal interest rates follow a path consistent with the average of the highest ten economic forecasts in the October 2012 and February 2013 Blue Chip publications.
Using those parameters gets the three-month and ten-year interest rates for Treasury securities seen below. Scenario 2 has by far the highest interest rates, in part due to the higher inflation that prevailed particularly at the beginning of the 1980s.
CBO also shows how these different scenarios would affect deficits. Scenario 1 would increase ten-year deficits by $1.4 trillion, Scenario 2 would increase them by $6.3 trillion, and Scenario 3 would increase them by $1.1 trillion. These numbers come with a caveat that they do not account for other economic changes which may drive or be the result of the higher interest rates. Higher inflation or better economic performance than CBO expects could be a driver of higher interest rates. Similarly, high interest rates themselves could harm economic growth or otherwise cause the Federal Reserve to tighten monetary policy, affecting other economic indicators. All of these factors would affect the budget through channels other than their effect interest payments, but CBO holds their other economic projections constant.
Also, the fact that CBO uses nominal interest rates means that Scenarios 1 and 2 may be a less telling indicator of future interest rates, since inflation rates going forward may differ from those in the 1980s and 1990s -- CBO's projections have them lower -- or other factors could mean that even real interest rates are lower than in those two decades, which is the case in CBO's baseline projection. Scenario 3 would likely be more telling in terms of how a higher interest rate alternate scenario could look in the coming years, again with the caveat that the higher rates could be the result of other factors which themselves would affect budget projections.
Still, the numbers give an idea of the effect of interest rates on debt. We used CBO's deficit numbers to project what debt held by the public as a percent of GDP would be in each scenario.
The low interest rates we are currently experiencing are unlikely to last for a long time, but the path they take to rise and what "normal" they reach has profound implications for the budget outlook. As we've said before, perhaps the best takeaway is to err on the side of caution, agreeing upon a plan with enough deficit reduction to put it on a downward path even if CBO's projections end up being overly optimistic.
CRFB board member and former CBO and OMB director Alice Rivlin is somewhat of a legend in the budget world, with a long line of work spanning from being the first director of the Congressional Budget Office to most recently serving as a member of the Fiscal Commission and as co-chair of the Domenici-Rivlin Debt Reduction Task Force. It then comes as no surprise that the National Academy of Social Insurance (NASI) would present her with its 2013 Robert M. Ball Award for her work on social insurance.
The award was created to honor Bob Ball, the Commissioner of Social Security from 1962 to 1973, and was a notable advocate of the program. Rivlin's recent work with the Simpson-Bowles and Domenici-Rivlin plans has centered on taking a comprehensive approach to deficit reduction that can protect the most vulnerable and find ways to ensure the 75-year solvency of Social Security to strengthen the program.
Dr. Rivlin will recieve her award at a ceremony hosted by NASI on June 25 in Washington, DC. The past five winners have been Robert Reischauer, John Rother, Alicia Mundell, Peter Diamond, and Henry Aaron. It's good to see Rivlin join an accomplished group, and we congratulate her on a well-deserved honor.
It's a well known fact that the U.S. spends much more than other industrialized countries on health care, but just how much more can be surprising. Ezra Klein over at Wonkblog highlights 21 graphs comparing the costs of various procedures in different countries, including routine doctor exams, hospital stays, various surgeries, and different drug prices, using data from the International Federation of Health Plans. The U.S. stands out in every example, and it comes as no surprise that the U.S. spends much more as a percentage of GDP on health care, when including public and private spending together.
The U.S. spends almost double the OECD average of health care spending as a percentage of GDP, and roughly less half of that by the federal government. Federal spending on health care is projected to rise in the coming years, driven especially by population aging in the next two decades. Without reforms, health care could begin to dominate the federal budget, shifting funds away from other priorities.
This graph is a reminder that lawmakers need to begin looking at ways to control federal spending on health care, a few of which are presented in our Revenue and Health Care Savings Options paper. The longer we wait to address entitlement reform, the more difficult the problem will be to solve.
In a recent story called “Unfit for Work: The Startling Rise of Disability in America,” Chana Joffe-Walt of NPR's Planet Money takes an in-depth look at the Social Security Disability Insurance (SSDI) program, which covers a growing number of Americans and is projected to face insolvency by 2016. NPR features the report on This American Life, where Joffe-Walt presents a complex picture of disability and highlights the role that SSDI plays in the communities of its beneficiaries, as well as trends in the growth of the program. Disability insurance currently covers 14 million Americans, many of whom heavily rely on SSDI cash payments and health insurance benefits, costing the government about $230 billion annually. Joffe-Walt notes that disability is not a medical diagnosis, but rather a reflection of an individual's ability to work, which makes the determination of eligibility that much more complicated.
Joffe-Walt points to the decreased demand for unskilled labor, change in job skills over the last few decades, and lack of education as factors which have expanded demand for the Social Security Disability Insurance program. She finds many individuals receiving disability have physical conditions which would render work difficult under any circumstance, but also shows that there are some beneficiaries that say they could work if given the right opportunity.
Joffe-Walt's report helps to explain some of the challenges in trying to reform the disability system, but also highlights why reform is necessary. Chief among these reasons for reform is the program's looming insolvency. The Social Security Disability Insurance trust fund is projected to run out in 2016, at which point benefits would be cut across-the-board by 20 percent. Lawmakers could use funds from the old-age component of Social Security, but the combined OASDI fund is due to become insolvent by 2033. Waiting to reform the program will require greater changes and lawmakers would be missing an opportunity to make the program simpler and fairer.
Source: Social Security Trustees
Jeffrey Liebman of Harvard University and Jack Smalligan of the White House Office of Management and Budget (OMB) recently proposed reforms to the Social Security Disability Insurance program as part of the Hamilton Project's 15 Ways to Rethink the Federal Budget. Their proposal included demonstration projects with the hope of increasing incentives to work while protecting the truly disabled, such as offering wage subsidies or temporary cash payments to those who could rejoin the workforce, or by allowing states to reallocate existing funding streams to target those who will receive disability benefits. They also propose intervention projects for employers, such as requiring private disability insurance for the first two years an individual is eligible to increase incentives for businesses to retain workers, with the private insurance offset with tax credits to companies that can reduce disability incidence of their employees by 20 percent.
Lawmakers can also look at a wide range of options proposed by the Congressional Budget Office to make the program solvent, such as eliminating eligibility at age 62, increasing the share of earnings taxed, or increasing the work requirement. CRFB Senior Policy Director Marc Goldwein has argued that both efficiency and solvency need to be part of reform, and if lawmakers are willing to put all ideas on the table, much can be done to improve the program.
Update: This blog has been updated since its original posting to incorporate the House Democratic, Republican Study Commitee, and Senator Rand Paul (R-KY) budgets.
Throughout this week we have done a lot of analysis of budget resolutions as they have been released, breaking down many aspects of their policies and estimates. Now it's time to take a step back and see how the House Republican (Ryan), Senate Democratic (Murray), House Democratic (Van Hollen), Congressional Progressive Caucus (CPC), Republican Study Committee (RSC), Congressional Black Caucus (CBC) and Senator Rand Paul (Paul) budgets stack up on spending, revenue, deficits, and debt. The comparison is useful not just to compare the levels for each, but also to look at the timing and pace of the changes that are made.
First, we look at spending levels in the seven budgets. The CBC and CPC both increase spending to varying degrees -- the CPC budget much more in the short term -- but bring spending to 23 percent of GDP by 2023. The Murray and Van Hollen budgets hold spending between 21 and 22 percent of GDP for most of the decade. By contrast, the Ryan budget reduces spending below the baseline throughout the ten-year window, falling to 19 percent in 2023, while spending is reduced under the RSC budget reduces it to about 18 percent and the Paul budget to below 17 percent.
Source: HBC, SBC, CBC, CPC, RSC
Next is revenue. The four Democratic proposals all raise revenue to various degrees, CPC's revenue increase being the highest followed by the CBC and then the Murray and Van Hollen budgets, which are roughly the same. The difference between each is about a percentage point of GDP by 2023. The Ryan budget calls for comprehensive tax reform that would maintain revenue at current law levels, while the RSC would roll back the tax increases in the American Taxpayer Relief Act, thus having revenue slightly below Ryan.
Source: HBC, SBC, CBC, CPC, RSC
On deficits, the Murray, Van Hollen and CBC budgets take very similar paths, slightly increasing deficits in the short term above the baseline, but bringing them down to about two percent of GDP by 2023. The CPC budget does more on both fronts, increasing deficits by much more in the short term with jobs measures, but bringing deficits down more aggressively over the longer term than the other two budgets. The Ryan, RSC, and Paul budgets bring down deficits more aggressively in both the short and long term, reducing deficits throughout the ten-year window and beyond.
Source: HBC, SBC, CBC, CPC, RSC
Finally, we come to the debt-to-GDP ratios, which somewhat reflect the deficit story. The Murray, Van Hollen, and CBC budgets both have slight debt increases in the short term and put the debt on a downward path thereafter (the CBC is slightly more aggressive on debt reduction). The CPC includes large debt increases in the short term, but they get down to about Murray and Van Hollen's debt level by 2023. The Ryan, RSC, and Paul budgets have debt heading downward as a share of the economy throughout the ten-year window, with the RSC's path being slightly more aggressive than Ryan's, and the Paul's path much more agressive than both.
Source: HBC, SBC, CBC, CPC, RSC
We are pleased to see that each of these budgets calls for putting the debt on a downward path as a share of the economy this decade. The RSC and Paul budgets are obviously the most aggressive and successful towards accomplishing this goal, although the Ryan and Progressive Caucus budgets also put debt on a sharp downward path. We look forward to any additional budget resolutions lawmakers may introduce, which we will continue to analyze as they come out.
It is well known that the corporate tax code is littered with tax provisions that cost the government revenue. Today, the U.S. has the highest top marginal rate in the world, discouraging growth and investment, and a complex corporate code that diverts resources from more productive purposes and creates disincentives. While some tax provisions may be serving a legitimate purpose, there are others that provide spillovers beyond lawmakers' original intent. Currently, the House Ways and Means Committee is making significant progress on tax reform, releasing three discussion drafts on international taxes, financial products, and small businesses.
A new report from Robert Shapiro of the Progressive Policy Institute, "Anatomy of a Special Tax Break and The Case for Broad Corporate Tax Reform", examines one such tax expenditure in Section 199 of the tax code. Since 2006, corporations have been able to take a deduction for qualifying "domestic production activities." The intent was to promote domestic manufacturing, replacing an earlier export subsidy that was frowned upon by the World Trade Organization, but the report estimates that the provision now covers one-third of corporate economic activities. Shapiro provides a table that shows that over one-third of the deduction was claimed by industries other than manufacturing, including businesses in the information, mining, wholesale, and finance and insurance sectors. Shapiro in particular uses the example of Starbucks; while the retail food business doesn't qualify for the deduction, a special exception exists for business that roasts beans to make coffee, allowing Starbucks to lower its effective rate by 2 percentage points in 2009.
In the report, Shapiro finds little evidence that Section 199 has had a substantial contribution to job growth. Rather, he argues that the provision may distort business decisions and investments by incentivizing businesses to shift resources to qualify for the deduction. This may be especially true with pass-through businesses that face a higher tax rate under the individual code. Shapiro explains:
However, tax provisions such as Section 199 artificially raise the post-tax returns of certain industries and companies and, within those industries and companies, the post-tax returns of certain activities. The result is that investment, entrepreneurism and other economic resources are no longer allocated based simply on their economic returns. By raising the post-tax returns of certain industries, firms and activities which happen to qualify for Section 199 deductions, the provision channels economic resources, on the margin, to those qualified industries, firms and activities. In so doing, it inescapably reduces the efficiency and productivity of the economy.
Not only may the deduction be creating distortions, a significant amount of revenue is forgone as a result of the provision. The Joint Committee on Taxation estimated the Section 199 provision that $14.1 billion in 2013 and $78.2 billion from 2013-2017. Revenue from tax expenditures like the domestic production activities deduction could be used to lower corporate marginal rates, deficit reduction or a combination of both.
We've explored corporate tax reform in a paper and also have created a corporate tax calculator, in which users can eliminate corporate and individual tax expenditures with the goal of lowering the top corporate tax rate or reducing the deficit or a combination of both. Eliminating the domestic production deduction for all businesses is estimated to raise roughly $16 billion per year, or finance a 1.5 percentage point reduction in the corporate rate, while eliminating it just for C-corps would finance a 1.2 percentage point reduction (actual rate reduction would dependent on base and starting point). It's not surprising that this provision was eliminated in the Fiscal Commission, Domenici-Rivlin, Rangel, and Wyden-Gregg tax reform plans.
Both the individual and corporate tax codes are overly complex and inefficient, but this can be corrected in comprehensive tax reform. We can reduce arbitrage in the tax code and promote growth, but lawmakers must be willing to take a close look at many provisions in the tax code to either eliminate or improve them. With both House Ways and Means Chairman Dave Camp (R-MI) and Senate Finance Chairman Max Baucus (D-MT) committed to taking up comprehensive tax reform, this deduction could be one many tax provisions to be reformed or eliminated.
Click here to try out our corporate tax simulator.
Note: This blog has been updated as of 5:15 PM on March 25.
In today's Cincinnati Enquirer, CRFB board member and former Senator George Voinovich (R-OH) calls on Ohio's congressional members to get serious about solving our national debt problem. The argument Senator Voinovich makes should concern not only Ohioans, but political leaders and citizens in every congressional district and state.
Higher interest payments, slower economic growth, and greater risk of fiscal crises could all occur if we are unable to put our national debt on a downward path as a share of the economy. It's a problem that will affect all of us, and short term fixes are not the solution. If lawmakers are willing to come together and make the necessary tough decisions, this problem can be solved. Voinovich explains:
Ohio’s congressional delegation must get serious about fixing the debt. In this time of serial self-inflicted fiscal crises, our Ohio leaders are in a powerful position to move Congress toward enacting a comprehensive plan that puts our economy back on track. We must push through the current deadlock between the two parties and find a way to deal with our growing national debt.
The debt problems we face are gigantic. At over $11.8 trillion, the publicly held portion of our national debt is over 73 percent of the size of our economy – the highest share since the 1940s – and it is slated to grow over the coming decades, despite the recent “fiscal cliff” tax increases and “sequester” spending cuts. Even after all of this, the truth is that we just haven’t done enough to get our debt under control.
It’s time for our leaders in Washington to come together and agree on a plan to get our debt under control. Because of the pivotal place in Washington that our representatives from Ohio occupy, they can be instrumental in leading the way to a bipartisan agreement that puts our debt on a downward path as a share of the economy over the long term.
Such a plan must reduce spending through smart cuts to unnecessary and inefficient programs, promote growth through reform to our overly-complex tax code and preserve the integrity of our entitlement programs by passing reforms that make them financially sustainable over the long term.
These reforms will require compromise from both parties and from both ends of Pennsylvania Avenue, but we owe it to our children and to future generations to stop accumulating more debt to leave on their shoulders.
We Ohioans have an opportunity to play a vital role in this process by showing our senators and representatives we support them in coming together to build a comprehensive plan and in making the hard decisions for the good of our country. We need to let them know that continuing to patch together short-term fixes, like we’ve seen over the past few months, is no longer an option.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Tomorrow marks the third anniversary of the enactment of the Affordable Care Act. The legislation expands health insurance to about 30 million people by expanding Medicaid and creating a new health insurance exchange for individuals to purchase subsidized insurance. Those spending increases are paid for in a number of ways, including provider payment and Medicare Advantage cuts, fees on health industry companies, and upper-income tax increases.
Over the last three years, the ACA has faced many political, legal, and regulatory challenges but remains largely intact today. Here at the Bottom Line, we’ve been following the implementation of the ACA and the impact the legislation is projected to have on the federal budget. In a timely piece, the CBO has put together an analysis comparing their previous cost estimates for the ACA’s coverage provisions and finds little change in net budgetary impact of these provisions since March 2010.
CBO’s analysis shows that year by year estimates have changed little. The main reason for the increase in estimated costs of the coverage provisions – now $1.329 trillion compared to $788 billion in the 2010 estimate – is the shift in the 10-year budget window. The ACA’s major coverage provisions begin next year (with expected enrollment for exchanges to be open for the first time this fall) and therefore the 10-year budget window now includes more years with this spending in effect. In addition, CBO has made a few other tweaks to account for various other changes, such as:
- Reduced marginal tax rates due to the American Taxpayer Relief Act (ATRA), which reduces the tax benefit of employer-sponsored health insurance and leads to greater enrollment in health insurance exchanges
- HHS regulations surrounding the expansion of Medicaid
- Lower expected enrollment in the early years of the coverage expansion due to exchange and Medicaid expansion readiness of states
- Healthier than expected Medicaid enrollees
- Updated income projections resulting in more subsidy-eligible taxpayers
These changes have led to a larger projected net reduction in employer coverage, from 4 million in the August 2012 baseline to 7 million in the February 2013 baseline, and an increase of 4 million in the number of uninsured. The chart below shows the projected sources of additional coverage from ACA and how they've changed since the initial estimate.
Over the last year, other changes have been made to the law such as reductions in the Prevention and Public Health Fund and the elimination of future funding for the CO-OP program to offset other legislation. Most notably, the Supreme Court’s ruling on the Medicaid expansion last summer, which allowed states to decline the expansion without losing all Medicaid funding, lowered net costs by $84 billion through 2022. The ruling has also opened a door for states to pursue greater flexibility in the administration of their Medicaid programs as they consider participating in the Medicaid expansion. Some experts and commentators believe this could serve as an impetus for additional cost containment reforms in Medicaid at both the state and federal levels.
On net, the law still reduces deficits due to various provider reductions, taxes, Medicare reforms, and other deficit reducing provisions. According to the latest estimate from July 2012, repealing the ACA would add an estimated $109 billion in deficits through 2022.
Note: Positive number indicates deficit reduction.
Some savings from the ACA are already in effect, such as slowing the growth of many provider payments and Medicare Advantage cuts, and are arguably contributing to the recent slowdown in health care cost growth. However, the future of health care cost growth remains uncertain, and many of the health reforms included in the ACA do not address the issue of population aging, which will be a major driver of deficits over the next two decades. As we mark this third anniversary, policymakers should be reminded of the work left undone and renew their commitment to reform federal health spending and put it on a sustainable path. Considering that federal health spending is projected to rise from 4.9 percent of GDP to 6.4 percent in the next ten years, it will be an important task.
Continuing in our analysis of the FY 2014 budget resolutions, we will be discussing the things in the budgets that the authors didn't tell you. There were a lot of specifics in these plans that were left up to committees to figure out or for policymakers to work out down the road. Doing so is not really a gimmick, since budget resolutions cannot enact any actual policies; rather, they create processes or parameters within which Congress works. Still, there were many areas where budgets did not specify what they would like to see in areas where they called for savings. Leaving these savings unspecified, without giving illustrative policies, may hide difficult choices that lawmakers would have to make.
We will examine some areas where the three party-endorsed budget resolutions -- from the House Republicans, Senate Democrats, and House Democrats -- left fill-in-the-blanks. They are:
- Tax Reform: This is definitely the biggest question mark in all three budgets. According to the Tax Policy Center, the Ryan budget specifies tax reform parameters -- 10 and 25 percent rates, Alternative Minimum Tax repeal, Affordable Care Act tax increase repeal, and a 25 percent corporate tax rate -- which would reduce revenue over ten years by $5.7 trillion. Since the budget maintains current law revenue levels, that means there is a $5.7 trillion hole that would have be filled with tax expenditure reductions and eliminations or other revenue sources. Both the Murray and Van Hollen budgets call for revenue -- $975 billion and $1.2 trillion, respectively -- from reducing tax expenditures for high earners and corporations. While this is a more easily reachable goal than the Ryan budget's, Howard Gleckman of TPC notes that political reality may make this goal more difficult than it seems. Still, it is in reach as long as policymakers are willing to put the largest tax expenditures on the table. Murray's budget specifically mentions a broad-based limitation on deductions.
- Doc Fix: Senator Murray's budget, to her credit, fully represents the cost of repealing the Sustainable Growth Rate (SGR) formula ($138 billion over ten years) in her budget. By contrast, both the Ryan and Van Hollen budgets call for repeal of the SGR in the context of a deficit-neutral reserve fund. This means that the details of how to offset the doc fix are left up to lawmakers, but they are able to count those offsets in their budget. Granted, both budgets call for health savings that are greater than the cost of the doc fix, but dipping into those pool of savings would obviously increase their deficit numbers. Which brings us to...
- Health Savings: Both the Murray and Van Hollen budgets call for about $275 billion of gross health savings but does not explicitly endorse any policies. The Van Hollen budget does say that those savings could include expanding Medicaid rebates to low-income beneficiaries in Medicare Part D and using recommendations from the Government Accountability Office (GAO) and MedPAC for reducing overpayments and altering mis-aligned incentives. CBO scored the drug policy itself last year, saying that it would raise $137 billion in the 2013-2022 period. Assuming the estimate hasn't changed drastically, that would get the budget half way to its target. The Murray budget is more vague about where the health savings would come from, mostly discussing expanding on the delivery system reforms in the Affordable Care Act and increasing program integrity spending in health care spending to root out waste, fraud, and abuse. As of yet, there aren't savings to be attached to the things mentioned in Murray's budget because they are not specific enough.
- Other Mandatory Savings: All three budgets call for other mandatory savings that are not fully specified. Both Van Hollen and Murray have holes of only about $75 billion to fill, about a third of which is taken up by reductions in farm subsidies. The Van Hollen budget also mentions reforms to the Pension Benefit Guaranty Corporation (PBGC) and eliminating duplications mentioned in GAO reports. The Murray budget mentions selling excess federal property, reducing improper payments, and taking a look at the President's budget's "Cuts, Consolidations, and Savings" section. The Ryan budget calls for $962 billion of other mandatory savings over ten years relative to current law. Its detailed committee report provides specific savings for a number of policies -- block granting food stamps, increasing federal employee retirement contributions, repealing the Social Services Block Grant, reforming the Postal Service, and reducing farm subsidies -- that total about $325 billion, leaving another $635 billion. The budget does mention other policies like reforming the PBGC, reforming or repealing financial regulations, and winding down Fannie Mae and Freddie Mac, and although the savings and policies are not exactly specified, they most likely would not total $635 billion. The budget also calls for reforms to education programs and other means-tested entitlements, but it is unclear how much they would save without more details.
Budget resolutions are not necessarily supposed to be fully completed documents, but this blog shows that if one of these resolutions was accepted, policymakers would still have plenty of work to do to figure everything out.
Although the budget resolutions out now take a variety of paths to deficit reduction, we've noticed something that all have in common: they all succeed in putting debt on a downward path as a share of the economy. It's been true of all the budgets released so far, including proposals from the House Republicans (Ryan), Senate Democrats (Murray), House Democrats (Van Hollen), Republican Study Committee (RSC), Congressional Progressive Caucus (CPC), and Congressional Black Caucus (CBC).
It's easy to take this for granted, but the consensus is striking. Earlier in the year, we set a goal for lawmakers of $2.4 trillion in additional deficit reduction, a target that would be enough to put debt on a clear downward trajectory. While some budget resolutions fell short of the target CRFB believes in necessary to provide fiscal flexibility, long-term stability, and greater growth, all were able to put debt at least on a slight downward path.
In a Wall Street Journal breakfast yesterday, Senate Majority Whip and former Fiscal Commission member Dick Durbin (D-IL) reiterated his support for entitlement reform in a comprehensive debt deal. We've said time and time again that the only way lawmakers are likely to resolve our long-term debt problem is by putting everything on the table, and we commend Durbin for his approach.
Many lawmakers often talk about health care as a driver of our long-term debt problem, and Durbin spoke of the importance of trying to slow the growth of health care, especially given our aging population. But Durbin also mentioned another entitlement program, Social Security and argued that it was also in need of reform, proposing a commission to come up with a plan to ensure solvency.
Well, first, it is a serious problem. And you know the numbers. Social Security untouched, unamended, will make its payments for 20 years. That’s pretty good by federal standards but not good enough, because a lot of people plan on being on Social Security 20 years from now.
When we talk about fixing Social Security, I’ve said before Social Security is simple math; Medicare is advanced calculus. We can figure a way through Social Security. I could give just, you know, off the top of my head some ideas that I think would move us toward additional solvency on Social Security.
I want to credit Mark Warner for giving what I think ought to be our standard for Social Security. And this came up in the Gang of Eight discussions. He said 75-year solvency reviewable every 10 years, which I think is a thoughtful approach, particularly in light of what I’m going through in the state of Illinois, which some of you know now, which is the worst possible shape, the lowest credit-rating in the United States because of our pension — unfunded pension liability. So yes, Social Security should be addressed, could be addressed, and I think under the right circumstances, we can come up with a good bipartisan approach.
Senator Durbin clarified that he did not believe that Social Security was a substantial contributor to our debt problem but said that ensuring long-term solvency for the program was greatly needed regardless. Making gradual changes now would give individuals time to plan and adjust while keeping the program paying full scheduled benefits.
But it is still our responsibility to make sure that it’s there. And I honestly believe, if you sit down with most people and said, for example, let’s extend the Social Security retirement age to age 68 – what we said in Simpson-Bowles, let’s do it over 40 years – 40 years. One year of eligibility over 40 years. That’s increasing the eligibility for Social Security by nine days a year. So next year, it’s 67 years and nine days you qualify for Social Security. And the following year, 18 days.
What I’m getting to is, there are things we can do if we do them early over a gradual period of time that will give this solvency to Social Security. But people are afraid to walk into this thicket. I think we can and we should. And I go back, again, to my Illinois illustration. We’ve ignored our pensions for 40 years, and now, we don’t know how to get out of this mess. I don’t want to see anything like that with Social Security.
Besides raising eligibility ages, Durbin also suggested another change that we talk about frequently on this blog, the chained CPI:
I think it’s – that chained CPI is a real possibility, and only if it is crafted in the right way. And let me tell you what I mean. Despite some of the projections on the impact of chained CPI, I would like to give you an illustration, which I’ve used over and over, maybe not convincingly, in my Democratic caucus elections. The average Social Security recipient receives about $12,000 a year. Assuming a three percent COLA is announced for the next year, and then you apply the chained CPI, it would reduce that COLA by .25 percent.
The cost, then, to the average recipient would be $3.50 a month reduction in the COLA payment that they were going to receive. At the end of the year, $42 in the reduction of the $360 COLA payment they were going to receive.
Now, you could play that number out, as my critics do, to thousands of dollars 20 years from now. And I’m sure they’re right in their calculations. But if you said to the average Social Security recipient, the cost is $3.50 a month, and the dividend is 50 more years of solvency – and I’m not saying doing this alone would reach that, but it’s an important part.
To get the process rolling, Durbin suggested proposing a Social Security commission to offer a proposal to achieve solvency. Here is how he described it.
Here’s what I’m working on, and it’s a Social Security commission like Simpson-Bowles. And it would basically say to a commission with a very limited timeframe — within a very limited timeframe to come up with a proposal for 75-year solvency of Social Security. And then — and this is important, it would be referred to both chambers and on an expedited procedure, allowing any members to offer substitutes to the commission proposal — substitute amendments as long as they meet the same test — 75-year solvency.
Social Security is often lost in the deficit reduction debate, given that it has its own revenue source. But Social Security is due to become insolvent by 2033, at which point benefits will be cut by 25 percent. Making changes to the program now should ease the transition, and Durbin should be commended for putting good ideas on the table.
To read a transcript of the full interview click here.