The Bottom Line
Yesterday, President Obama addressed the nation in his sixth State of the Union address. Unsurprisingly, the main focus of his speech was not on our country's fiscal issues and national debt, but instead on restoring opportunity and equality to all Americans. However, we were still disappointed the President spent so little time discussing the major fiscal issues facing the country such as growing entitlements and reforming an outdated tax code.
Our partner Fix the Debt enumerated several suggestions for what they wanted to hear during the State of the Union address. Specifically, they called for the president to: remind the public that our debt problems are not yet solved; present ideas to make entitlement programs more sustainable; call for comprehensive tax reform to encourage growth and competitiveness; offer ideas for how to pay for new proposals; and explain the important connection between jobs, economic mobility, competitiveness, and the debt.
We - and Fix the Debt - were disappointed with the lack of focus on the national debt and fiscal issues.
“The declining deficit and the President’s lack of focus on the nation’s fiscal situation has lulled many into a false sense of security, but the fact remains that the debt is at historically high levels and is slated to continue to grow unsustainably later this decade,” said Maya MacGuineas, head of the Campaign to Fix the Debt.
Indeed, the President did not mention the national debt once during his 65-minute address. He did, however, state that deficits have been cut by more than half in recent years, which we discuss here. Most notably, the President did not address at all two of Fix the Debt's suggestions: "present ideas to make entitlement programs more sustainable," and "offer ideas for how to pay for new proposals." And while he touched on tax reform, the President did not offer any new ideas or serious proposals.
Encouragingly, President Obama said that "we can still do more to invest in this country's future while bringing down our deficit in a balanced way." We agree with a balanced approach of deficit reduction, focusing on both entitlement and tax reform, but wish the President had laid out more of an agenda on how to tackle these items.
The President did touch on tax reform briefly: he called for an expansion of the Earned Income Tax Credit, for an end to tax breaks for fossil fuels, and for business tax reform that reduces the incentive to move business overseas. President Obama went on to say that tax reform should be used to raise revenue, and the revenue should be used to pay for new investments, instead of going toward deficit reduction.
CRFB and Fix the Debt President Maya MacGuineas responded:
"Rationalizing our spending and dealing with the longer-term debt problems would help free up the space for the kind of investments in infrastructure, education, and worker training that President Obama called for tonight; investments that could help add jobs and promote economic mobility. What we need though is a comprehensive economic growth strategy that includes smart investments and reforms partnered with measures to get the long-term debt under control--otherwise the looming debt will continue to threaten our future prosperity.
Every day that we fail to deal with the long-term drivers of the debt – including out-of-control entitlement spending and trillions of dollars of tax loopholes – is a day lost in making these changes in a smart and thoughtful way that would help grow the economy. While it may be politically convenient for politicians to try to avoid facing real budgetary tradeoffs, failing to do so puts at risk the economy and our citizenry. Tonight the President missed an important opportunity to get the process of confronting these issues underway."
In yesterday's State of the Union address, the President called for extending unemployment benefits that expired in December, which would affect roughly 1.6 million long-term unemployed people. Lawmakers were unable to agree upon an extension last December, when the emergency unemployment compensation program—originally passed in 2008—expired. In the wake of the President's speech, lawmakers are still debating whether to extend unemployment compensation, and how to pay for it.
A full one-year extension of the program would cost $25 billion, but many Democrats have set their sights on a lower hurdle: extending the benefits for three months, at a cost of $6.4 billion. If lawmakers extend unemployment insurance, they should abide by "pay-as-you go" principles and find savings or revenues elsewhere in the budget to prevent increasing deficits. However, news reports indicate that lawmakers are considering using a budget gimmick to "pay for" the extension (as we've explained before, as have other groups on the left and right).
Democrats are reportedly considering extending the "pension smoothing" gimmick from the 2012 transportation bill as a way to offset unemployment insurance costs. That provision raised money by temporarily reducing the amount that companies are required to pay into their pension funds. While pension smoothing saves the government money in the short term, it increases future deficits by more than it saves. This occurs because in the near term, companies have higher profits (or employees have higher wages) subject to taxes, since companies take fewer deductions for employee compensation (or employees have more taxable income). However, contributing less to pension plans now means that companies must make greater contributions in later years, thus increasing their deductions, reducing revenue, and increasing the deficit. In addition, underfunding pensions makes it more likely that a company will need a bailout from the federally funded Pension Benefit Guaranty Corporation.
On February 7, CBO estimated that the provision would raise $17 billion over the first six years, but lost money afterward. The losses in the next five years reduce the net savings to $4 billion. However, the provision continues to lose money outside the 10-year projection window. If lawmakers extend the pension smoothing gimmick to "raise" $4 billion, it will save $4 billion over the next ten years only, but lose money over the long term.
Lawmakers should abide by PAYGO and find savings to pay for the cost of extending unemployment insurance. But they should avoid budget gimmicks like pension smoothing that only appear to save money, while actually driving up our deficits.
Update 2/7/14: This post has been updated to reflect the Congressional Budget Office score for the actual pension smoothing provision used in the unemployment insurance legislation, released on February 7. The original version cited pension smoothing legislation from 2012.
The threat of the "dairy cliff" is receding. On Monday, lawmakers in the farm bill conference committee emerged with an agreement that would save $17 billion through 2023. These savings come on top of an estimated $6 billion over ten years of savings that will come from the sequester. Although CBO does not estimate it, we expect the bill would save $19 billion through 2024. Like past farm bills, this one lasts for five years so the issue will have to be revisited at the end of 2018, although we hope lawmakers will monitor programs in the meantime. The bill has already passed the House and will get a vote in the Senate next week.
Perhaps the largest roadblock—though not the only one—to a deal was deciding the amount to be spent on nutrition programs like food stamps. The nutrition provisions which passed the House last summer in a standalone bill contained much more aggressive cuts than those in the Senate's farm bill, a difference of $35 billion. The final agreement is estimated to save $8 billion over ten years from current law, double what the Senate would have saved but one-fifth of what the would have saved.The final agreement also drops two controversial provisions to limit benefits in the House bill and instead agrees upon a policy that was in both bills that seems to be politically acceptable. This change would restrict the ability of states to increase federal food stamp benefits by giving out minimal amounts of energy assistance. Previously, states could give out just $1 a year in benefits, and recipients would receive credit for paying a standard amount for utilities, regardless of whether they actually paid that amount. Now, instead of having to receive $1 in benefits, they would have to receive $20.
The centerpiece of the farm provisions is the elimination of direct commodity payments. They are replaced by two options to cover losses, one related to prices and one related to gross revenue of each crop. While elimination of direct payments, which made fixed payments regardless of how well farmers were doing (or even if they were farming at all), is a positive step, but the new loss programs create a risk of increased costs if farm conditions are worse than expected. The conference committee settled significant disparities in the benchmarks used to determine what level of prices or revenue would trigger payments from the federal government. Overall, the bill shifts resources away from commodity payments and more towards crop insurance. The below graph shows how much we will spend over the next decade on various types of farm subsidies under current law and under the legislation. It does not include nutrition spending, on which we are projected to spend $764 billion under current law and $756 billion under the legislation.
Note: "All else" does not include nutrition spending
Below is a breakdown of the CBO scores of the House farm bill, the Senate-passed farm bill, and the conference agreement. The savings in the conference agreement are similar to the Senate's amount but more concentrated in nutrition.
2014-2023 Savings/Costs (-) in the Farm Bills
It is encouraging that Congress is close to the finish line on this legislation, considering the farm bill has already technically expired. Conferees also deserve credit for ensuring their legislation will reduce deficits over the next decade, rather than spending all proposed savings on new measures. Yet legislators should have gone further. With regards to farm subsidies, the bill saves less than both the House and Senate farm bills, the President’s budget, the House budget resolution, the Domenici-Rivlin plan, the new Simpson-Bowles plan, and other deficit reduction proposals. In addition, the two new “loss” programs in the legislation have the potential to end up costing more than advertised.
Lawmakers should continue to monitor the costs and effectiveness of farm subsidies in order to identify reforms that can be made now and in the future.
Tonight at 8:00 PM, President Obama will address Congress and the nation in the State of the Union address. As he lays out his agenda for the next year, CRFB will be following along and providing analysis of policies related to the budget. Hopefully, the President will address our long-term debt problem in his remarks and set the stage for a bipartisan deficit reduction effort.
Stay tuned below or at @budgethawks on Twitter as we live tweet and fiscal fact check the debate. Our friends at @FixtheDebt will also tweeting and providing reactions. And if you haven't printed out your DEBT-O boards tonight, go here and play along!
In the State of the Union address tonight, President Obama is not expected to focus heavily on fiscal issues or the national debt. However, in laying out an agenda for the nation, we hope the President will mention that we have not yet tackled the drivers of our long-term fiscal imbalances.
Fix the Debt has enumerated some suggestions for what the President should say in his speech:
1. Remind the public that our debt problems are not yet solved. At 74 percent of GDP, debt levels are currently the highest they have been since the aftermath of World War II, and failing to address our long-term debt trajectory can result in slower economic growth, higher interest rates, less flexibility, an increased burden on future generations, and the potential for an eventual economic crisis.
2. Present ideas to make entitlement programs more sustainable. The President should reiterate his support for proposals he has already made, such as pegging cost-of-living adjustments to a more accurate measure of inflation, reducing and reforming certain Medicare provider payments, and increasing Medicare premiums for wealthy seniors. He could also introduce new ideas to improve the delivery and cost-effectiveness of health care, and to make adjustments for an aging population.
3. Call for comprehensive tax reform to encourage growth and competitiveness. President Obama should explain how tax reform can improve fairness, reduce complexity, decrease compliance costs, foster competitiveness, help grow the economy, and help to reduce deficits and debt.
4. Offer ideas for how to pay for new proposals. If the President proposes new initiatives, he should also offer ways to pay for the costs of these proposals, either with new revenue or with lower spending. The first rule of fiscal responsibility is to do no harm - at minimum we should not be making our debt situation worse.
5. Explain the important connection between jobs, economic mobility, competitiveness, and the debt. The president should explain that high debt levels can ultimately hurt mobility by slowing wage growth, increasing the cost-of-living for Americans, and making it more difficult for middle-class families to borrow for important investments in homes, education, and new businesses. Reforming our unsustainably growing entitlement programs makes these programs solvent, and allows us to invest in priorities that are central to encouraging economic mobility, like education.
Presidential leadership on these issues could help put pressure on lawmakers to focus on our country's fiscal issues and make important reforms to the drivers of our national debt. We hope the president recognizes the importance of gradually bringing down our elevated debt levels, and that the sooner a comprehensive plan exists to do so, the better.
While you're watching the State of the Union tonight, be sure to play along with our fiscal-themed bingo game, DEBT-O!
Last week, Senator Bernie Sanders (I-VT), chairman of the Senate Committee on Veterans’ Affairs, introduced legislation expanding many veterans' benefits and addressing long standing concerns of the veterans' community. The expansions would cost approximately $30 billion, and could be debated in the Senate as early as this week. It would also undo a military retirement reform in the Ryan-Murray budget agreement. Senator Sanders has suggested that instead of identifying specific policies to offset the costs of the legislation, it could be funded using war savings in the overseas contingency operation category.
Repealing the military retirement provision in the Ryan-Murray agreement without putting any alternative reforms in its place is troubling, because it would reverse a small first step in needed reforms of an outdated military retirement system. Former top generals have been outspoken about the need to reform the growing military retirement system before it crowds out other defense spending. As they described, "Congress was wise to take the first step toward military retirement benefit reform...Much larger reforms must come in the near future." Even if Congress decides to restore the pension cut, they should take a hard look at broader reforms needed to the military pension system instead of relying on phony savings and avoiding the need to make choices and set priorities.
The debated provision will save $6 billion over 10 years by slightly reducing the cost-of-living increases received by military retirees under age 62. These servicemembers can retire as early as age 38, often take high-paying jobs as defense contractors, and get 60 years of pay for 20 years of service. Payments after age 62 are unaffected, as are payments to those who medically retired, such as those wounded in the line of duty.
We've often called on legislators to abide by "pay-as-you-go" provisions, ensuring that policymakers do no harm to the deficit by paying for any change with savings or new revenue elsewhere in the budget. However, press reports suggest that the Sanders bill would rely on the war savings gimmick to offset its costs. This gimmick would count savings from winding down the wars in Afghanistan and Iraq. However, as the Congressional Budget Office has noted, there is not an “overseas contingency operations fund” set aside in the Treasury that can be tapped to fund other programs but rather a category of spending exempted from budget caps that is already scheduled to decline. Since this decline is already scheduled, using these "savings" will increase the deficit. (See our infographic summarizing the war gimmick here.) Capping the amount spent on wars overseas is a responsible step forward by locking in already scheduled savings, but does not represent new savings that can be used to pay for other legislation. For example, the omnibus legislation in mid-January may have skirted the strict caps on defense spending by labeling extra money as uncapped war spending.
When the Senate debates this legislation later this week, they can consider the benefits of the proposed veterans' expansions. If Senators conclude that the improvements in veterans' programs and restoring full cost of living adjustments for working-age military retirees are worthwhile priorities, they should be willing to make tough choices to offset the costs of these benefits with other savings. It would be a mistake to avoid this tough choice about budget priorities by pretending to pay for the bill with a phony war savings gimmick.
- Editorial Boards: Tiny Pension Cut is a Good Move
- Understanding the Defense Retirement Reforms in the Bipartisan Budget Act
- Lawmakers Must Abide By PAYGO...Here's Why
- Keep the War Gimmick Out of Doc Fix Discussions
- The War Gimmick Simplified
Update: While the $30 billion cost estimate was provided by Sanders during a news conference, CBO later released an estimate of the portion of the bill dealing with direct (mandatory) spending. The bill would increase direct spending by $7.6 billion over 10 years, along with requiring an additional "tens of billions of dollars over the 2014-2018 period, primarily to expand veterans’ healthcare benefits."
Senator Johnny Isakson (R-GA) and the presumptive incoming Chairman of the Senate Finance Committee, Ron Wyden (D-OR), have sponsored a new bill that attempts to improve the way Medicare manages care for patients with chronic conditions. Although it is unclear whether the legislation will be scored as achieving any savings, it puts forward the framework for an alternative delivery system and payment model that offers the potential of providing more cost effective care and ultimately achieving savings for beneficiaries and the Medicare program.
With the 68 percent of Medicare enrollees suffering from two or more chronic conditions accounting for 93 percent of Medicare spending, and patients with at least one chronic condition accounting for 84 percent of total national health care expenditures (and 50 percent of the population), addressing the needs of these patients and better coordinating their care (which is often fragmented today) should be a critical priority of our health care system.
Source: Bipartisan Policy Center
The Wyden-Isakson proposal (also co-sponsored in the House by Reps. Peter Welch (D-VT) and Erik Paulson (R-MN)) seeks to remedy this by creating a new option for Medicare beneficiaries – Better Care Plans (BCPs). BCPs share many traits in common with the enhanced Accountable Care Organizations (ACOs) at the heart of recent proposals from the Bipartisan Policy Center, the Brookings Institute, and Jim Capretta.
Unlike today’s ACOs, BCPs would require patients to actively enroll in a plan, which should help to engage enrollees, rather than the current model of attributing Medicare beneficiaries to ACOs administratively based on their care patterns. Health care providers who form BCPs would be given a single payment for their collective efforts to meet the health needs of qualified beneficiaries, and would be given greater tools and incentives to coordinate care and encourage more cost effective care.
BCPs would be given some flexibility to design a benefit package that would better encourage the use of high-value services through lower cost sharing requirements. However, the option for value-based insurance design would be limited to incentives for high quality care and would not allow BCPs to increase cost sharing requirements for non-BCP providers or low value services above the current Medicare cost-sharing requirements.
The proposal also prevents supplemental Medigap policies from covering patient cost-sharing for non-emergency services from providers not part of the BCP, to reinforce BCPs efforts to use cost-sharing requirements to direct patients to higher-value, better-suited care. Under this model, therefore, BCP enrollees who also purchase a Medigap policy would likely face strong cost-sharing incentives to receive care within their BCP.
Medigap policies, if allowed for BCP enrollees, would also undercut the effectiveness of BCPs, because of their known effects on increased utilization of care. However, it appears that employer-sponsored supplemental insurance plans, including federally-administered ones like TRICARE-for-Life, would not be prohibited from covering cost-sharing for BCP enrollees.
Source: Bipartisan Policy Center
BCPs would also be required to accept two-sided risk (sharing the burden of losses from higher spending as well as gains from lower spending) at their outset. BCPs would become available to eligible Medicare beneficiaries starting in 2017, and would further have to accept full capitation for their enrollees after three years, at the latest. To accept such risk, BCPs would have to essentially meet the insurance requirements currently required of Medicare Advantage (MA) plans (including network adequacy and financial solvency), or could simply contract with an MA plan directly. BCPs could also offer Part D (prescription drug) benefits or contract with an existing prescription drug plan to administer them.
In BCPs, state-licensed and certified providers will also be allowed to practice to the top of their license, which can help alleviate provider shortages that may exist in parts of the country. While this allowance does not preempt state licensing laws, it could help encourage states to loosen their regulations on providers’ scope of practice, and at the least removes barriers within the Medicare program.
Perhaps most distinctly, though, BCPs would only accept enrollees who have chronic condition(s). Although enrollment is limited initially, with roughly 80 percent of Medicare beneficiaries having at least one chronic condition, most of those in Medicare will become eligible eventually. If BCPs are successful in providing more effective and efficient care at a lower cost to beneficiaries as well as the Medicare program, one might even expect political and beneficiary pressure to expand BCP-eligibility to all Medicare beneficiaries at some point.
One shortcoming that may reduce the impact of the Wyden-Isakson plan is that few financial incentives are given for providers to form and beneficiaries to join a BCP. It is unclear if BCPs could offer enrollees reduced premiums, outside of if they explicitly formed as a Medicare Advantage plan. There are also no penalties or bonuses for providers who do not form or contract with a BCP. However, if BCPs were included in the existing Senate Finance SGR replacement bill as a form of Alternative Payment Model (APM), then physicians participating in a BCP could be eligible for a 5 percent bonus payment while non-APM physicians would have their payment rates frozen from 2016-2023. Notably, though, non-physician providers such as hospitals and post-acute care facilities would still face no such incentives to participate in a BCP.
Controlling the growth of Medicare spending will require us to change the way we deliver and pay for care to make the system more cost effective. Senators Wyden and Isakson and Representatives Paulson and Welch are to be commended for putting forward a thoughtful proposal designed to shift away from volume-based reimbursement toward paying for quality and coordination of care.
Given that Senator Wyden will likely soon become the Chairman of the Senate Finance Committee, this bill may provide insight into what the Alternative Payment Models (APMs) in the SGR replacement bill might look like. BCPs are a form of enhanced ACOs in many ways, but may also co-exist with them quite well for a period of time. If this legislation or a similar proposal to improve care coordination were enacted, the basic framework of BCPs or other coordinated care models could be improved and strengthened to achieve greater savings as policymakers see how they work.
Regardless of its fate, the Wyden-Isakson proposal makes a valuable contribution to the discussion about the future of Medicare by putting forward a model that offers the potential of providing better quality care at a lower cost.
On Friday, the Congressional Budget Office (CBO) released cost estimates for two bills to permanently replace the Sustainable Growth Rate (SGR) formula that determines Medicare payments to physicians -- one from the House Ways and Means Committee and another from the Senate Finance Committee.
The House bill is estimated to cost $121 billion through 2023 and $137 billion through 2024, primarily reflecting the cost of providing 0.5 percent payment increases to physicians through 2016 while alternative payment models (APMs) are given time to develop, and frozen base payments at those levels through 2023. Alternatively, under current law, the SGR is set to cut physician payments in Medicare by nearly 25 percent on April 1.
CBO estimates that the Senate bill will cost $150 billion through 2023 and $168 billion through 2024. But the Senate bill also permanently extends a host of other temporary policies, generally referred to as the "health care extenders," that comprise roughly $39 billion of the cost through 2023 and $44 billion through 2024. Therefore, the SGR fix portion of the Senate Finance proposal would be less expensive than that proposed by Ways and Means, costing $112 billion through 2023 and around $124 billion through 2024. The main reason for the lower cost is that the Senate bill would freeze physician payments at 2013 levels through 2016, rather than provide 0.5 percent payment updates as the House bill does.
These scores from CBO put the cost of both bills somewhat above the cost of a simple freeze in payments, which CBO estimates would cost roughly $109 billion through 2023.
In House score, the trajectory of the score's cost in the 2022-2024 period is particularly interesting. The cost dips from $16.5 billion in 2022 to $15.5 billion in 2023, then it rises back up to $16.2 billion in 2024. Some of what is going is due to the calendar: capitated payments to Medicare Advantage plans are made on the first of the month, and when the first falls on a weekend, those payments are pushed forward (and Medicare Advantage is projected to make up roughly one-third of Medicare's Part A and B costs by the end of the 10-year window). Because October 1, 2022 falls on a weekend, a payment from FY 2023 is pushed into FY 2022, meaning that there are 13 payments in the latter year. In addition, a payment is pushed from FY 2024 into FY 2023, meaning that there are only 11 payments made in FY 2024.
There is one more Medicare Advantage payment in FY 2023 than FY 2024 results in projected spending appearing higher in FY 2023 than it normally would be and lower in FY 2024. This timing quirk is important because it partially obscures the true amount that costs are growing under the House bill from FY 2023-2024 once payment updates become unfrozen and begin increasing at either 1 or 2 percent annually. That is, on an apples-to-apples basis, comparable costs are increasing even faster than the $15.5 billion to $16.2 billion jump from FY 2023-2024 would indicate.
Below is our rough estimate of the various components of each bill.
|2014-2024 Cost/Savings (-) in the Doc Fix Bills (billions)|
|Policy||House Ways and Means
|| Senate Finance
|Alternate Payment Models||$6||$6|
|Other Payment Changes||-$3||-$6|
|Effect on Medicare Advantage||$45||$44|
|Effect on Part B Premiums||-$40||-$35|
|Effect on IPAB||-$1||-$1|
|Effect on TRICARE||$1||$1|
|Subtotal, SGR Replacement||$137||$124|
|Subtotal, Health Extenders||$0||$44|
|Memo: Freeze payments at 2013 levels through 2024||$124|
|Memo: Energy and Commerce Committee Doc Fix||$175|
Source: CBO, CRFB rough extrapolations
The growing cost of the replacement system over the longer term means that lawmakers should focus on health care offsets with savings that also grow over time. At a minimum, the offsets should be growing as fast as costs of the replacement system and fully offset the cost in FY 2024, when annual increases in payments begin to ensure that the legislation will not increase the deficit after 2024. Replacing the SGR would be a useful case to request a score that goes beyond ten years to see what costs are in the out-years and make sure that policymakers are not increasing health spending later on. It also means that they certainly should not resort to using timing gimmicks -- like they did for the three-month doc fix -- or war funding as offsets.
Replacing the SGR permanently represents a great opportunity both to reform the physician payment system and to make the provision of federal health care more efficient as a whole.
President Obama's State of the Union address is tomorrow night. In preparation of his speech, we've brought back our great State of the Union fiscal bingo game - DEBT-O!
Play with your friends and keep track of budget-related words and terms used by the President. Although President Obama is expected to focus on a range of issues, with an emphasis on enhancing economic opportunity and mobility, he should still address many of the nation's fiscal issues in his speech. Click here for a printable PDF of ten different boards.
Click HERE for a printable PDF and play Debt-O!!
Yesterday in an interview on CNBC's Squawkbox, former Treasury Secretary Larry Summers chimed in again on his views that boosting economic growth should be a more important priority than making long-term budget reforms. As CRFB said late last year in response to one of his op-eds, Dr. Summers's arguments seem to feed the false notion that long-term debt reduction and a growth strategy somehow conflict, when in reality they are one and the same. In addition, Dr. Summers continues to mistakenly believe that growth alone can solve our budget problems.
Specifically, Dr. Summers states that:
"If the economy grows fast, the long-term budget will be fine. If the economy does not grow fast, we can do one measure or another, [but] we're still going to have to have rapid debt accumulation...The most important determinant of opportunity for my children and your children is how rapidly we grow this economy. I hope we move to a focus on more rapid growth."
Let's address these and a few other claims he has made.
Can Economic Growth Solve the Debt Problem?
First of all, we completely agree with Dr. Summers that strong growth is imperative to successfully bringing the debt down to healthy levels. However, economic growth alone cannot solve our debt challenge. When we analyzed a slight increase in annual growth rates along the lines of what Summers suggested would solve the long-term budget problem -- about a 0.2 percentage point increase in real GDP growth from a 15 percent increase in productivity -- we found it would not, in fact, reduce the debt as a share of the economy. And even according to his estimates, slightly faster economic growth alone would still take decades and decades just to bring the debt down to where it is now—an already elevated level.
Faster economic growth helps to bring debt levels down by generating more revenue, decreasing short-term spending on some safety net programs, and increasing the denominator in debt-to-GDP calculations. However, higher growth has also been linked to increased health care spending and would also drive up retirement spending as wages rose, moderating some of the long-term budget gains from faster growth.
Rising long-term debt levels should continue to prompt serious concern. The non-partisan CBO makes it very clear that rising debt levels will hold back economic growth and higher incomes down the road, in addition to the interest rate risk and budget flexibility problems that rising debt creates.
But Wait, What about The Risk of "Secular Stagnation"?
Even if stronger growth could solve the problem, Dr. Summers has also been advancing the idea that the normal economy may have become incapable of creating sustained periods of full employment and financial stability, an idea known as secular stagnation. A recent paper from an economist at the Federal Reserve Bank of San Francisco estimates that in the wake of economic downturn, potential GDP growth in the business sector may only be 2.1 percent—notably lower than the CBO's projection of 2.6 percent for the non-farm business sector and 2.2 percent for the economy at large. Our estimates, based on CBO data, show that slower growth of 0.5 percentage points a year would push the debt up from nearly 110 percent of GDP in 2040 under current law to nearly 140 percent. Even a 0.2 percentage point growth reduction each year would yield notably higher debt levels -- exceeding 120 percent of GDP in 2040.
Thus, it is curious that Dr. Summers has been arguing that all we need is slightly stronger growth, when in other forums the ideas he's advancing suggest it might be tough to achieve current growth rates, let alone even stronger ones.
To be sure, Dr. Summers argues for policies he believes can help get us out of secular stagnation -- namely a massive new set of infrastructure projects. Certainly, well-targeted public investments can improve short-term and longer-term growth prospects. But it would be quite ambitious to think we can make enough productive investments to get out of secular stagnation and further increase productivity by about 15 percent each year going forward. This is especially true given that an effort of this size would dramatically increase the national debt due to its cost, which would threaten to both slow long-term growth rates and, more directly, work against debt reduction efforts. For these reason, it is unlikely any amount of new investment would help with long-term debt levels unless accompanied by other reforms.
A Comprehensive Strategy
A better approach for policymakers would be to pursue short-term and long-term growth strategies that are either a part of a long-term debt reduction package -- including reforms to health care programs, retirement programs, and the tax code -- or are implemented in tandem with it.
A comprehensive growth strategy could support increased spending, temporary tax provisions, or a combination of the two in the short term -- such as renewing emergency unemployment benefits on the low end and large-scale investment projects on the high-end. Policymakers could focus more on productive investments in infrastructure, education, and research and development. On the fiscal reform side, lawmakers would have to look to comprehensive tax reforms to reduce economic distortions and enhance competitiveness and investment. At the same time, entitlement reforms would be critical to encourage more savings, more work, and constrained growth in national health care costs. The critical piece in all this will be putting the debt on a clear downward path relative to the economy.
Pursuing regulatory reforms, immigration reform, trade-related issues, and other components of a growth strategy could also be in the picture. In the end, a comprehensive growth and deficit reduction strategy could also reduce uncertainty and improve confidence in the future course of the economy and what policy steps lawmakers will take.
Debt reduction and economic growth over the long term will go hand-in-hand.
Yesterday, Treasury Secretary Jacob Lew sent a letter to Congress, updating the Treasury's projections of when the nation would hit its statutory borrowing limit. In mid-October, the deal that ended the government shutdown also suspended the nation's $16.7 trillion debt limit until February 7. On that date, the debt limit will automatically be reinstated, with an increase to cover any borrowing that occurred from October to February. The new debt limit will be set at approximately $17.3 trillion. If Congress does not raise the limit by February 7, the Treasury Department can use "extraordinary measures" to allow the federal government to continue borrowing until Congress raises the limit.
Previously, Secretary Lew had estimated that these extraordinary measures would allow the nation to borrow until late February or early March. In yesterday's letter, he revised the estimate, stating that the debt limit will almost certainly need to be raised by late February. Because many people file for tax refunds in February, it is traditionally the month with the biggest deficit.
Lew explained the importance of raising the debt limit before February 7, but especially by late February:
Protecting the full faith and credit of the United States is the responsibility of Congress, because only Congress can extend the nation's borrowing authority. No Congress in our history has failed to meet that responsibility. I respectfully urge Congress to provide certainty and stability to the economy and financial markets by acting to raise the debt limit before February 7, 2014, and certainly before late February.
Congress should avoid the debt-limit brinkmanship that has undermined financial market confidence in the markets, yet should use the opportunity to focus on the drivers of the national debt. Even though recent deficit reduction agreements have improved the debt picture over the next few years, the long-term drivers of our debt—entitlement spending and an outdated tax code—have barely been addressed.
To read the full letter, click here.
Confused? Read our short Q&A: Everything You Should Know About the Debt Ceiling.
The war savings gimmick is back! As the debate over how to offset a permanent "doc fix" to Medicare's Sustainable Growth Rate formula heats up, the idea of "paying for" it with "savings" from the war drawdown already underway has resurfaced.
The issue arises because the Congressional Budget Office (CBO), Congress' official scorekeeper, automatically assumes that uncapped discretionary spending grows with inflation, which allows lawmakers to technically bank significant "savings" (around $500 billion over ten years) by placing caps on war spending consistent with the draw-down policy that has been in place for a number of years. Thus, they are claiming savings just by codifying a policy that is already being carried out, not by enacting a new policy that would actually reduce deficits.
Putting these caps in place is not problematic in isolation. As we pointed out last week, lawmakers may have labeled extra money as war spending in the omnibus bill to supplement base defense spending, which unlike war spending is subject to strict spending caps. But capping war spending has often been proposed to offset deficit-increasing policies, particularly the doc fix. In reality, this just increases future deficits. You can see our infographic explaining the war gimmick here.
The current fear is that lawmakers may be tempted to resort to the war gimmick as an offset for the permanent physician payment solution under debate (the temporary fix expires on March 31). CBO estimated that a bill reported from the House Energy and Commerce Committee would cost $153 billion over ten years, and a 10-year physician payment freeze would cost $117 billion over the same period (CBO has not yet publicly score the Senate Finance Committee's proposal). We have said before that there remains a whole host of options to offset the doc fix, including many reforms that would work in concert with the physician payment reform to help bend the health care cost curve. Resorting to the war gimmick is harmful and would partially thwart the purpose of the earlier three-month doc fix extension, which was to buy time to find offsets.
Putting caps on war spending can be helpful in order to avoid the backfilling of defense cuts with supplemental funding, but it should not be used as an offset. Since it's codifying a policy that is already in place, it does not represent legitimate savings and should not be used as such.
One Debate Spent, More to Come – The long saga over the Fiscal Year 2014 budget came to an end as Congress approved of spending bills funding the government. While the votes on the appropriations package in both houses were lopsided, the bipartisan result came only after a protracted process that included a shutdown in October, two sets of tense negotiations, and several stopgap measures. Observers hope that the Ryan-Murray and Mikulski-Rogers deals can lead to fruitful bipartisan cooperation down the road and that returning to some semblance of budgetary order will spur what has been a dysfunctional and partisan Congress to work more effectively. But expectations remain tempered because 2014 is an election year with high stakes for both parties, and there are still difficult and politically volatile issues ahead -- namely the debt ceiling, which could arise as early as next month. Ahead of the coming battles, the House and Senate are in recess this week, and both parties will hold retreats to plan their respective legislative strategies.
Ending on An Omnibus Note – Last week, Senate Appropriations Chair Barbara Mikulski (D-MD) and House Appropriations Committee Chair Harold Rogers (R-KY) unveiled an omnibus package wrapping together the twelve annual appropriations bills to fund the federal government through September. The bill fleshed out the budget deal reached by Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA) last month, divvying up the $1.012 trillion spending level agreed to in the previous deal among the various federal agencies and providing details on how the money is to be spent. The House approved of the legislation last Wednesday in a 359-67 vote and the Senate followed suit on Thursday with a 72-26 vote. Both votes included strong bipartisan majorities. After several years of moving from one stopgap bill to another to fund the government, the passage of the omnibus represents at least a partial return to a functional budget process and provides some guidance and stability to federal agencies that have had to rely on short-term funding measures. We did a brief analysis of what’s in the bill and also who the winners and losers are. In addition, we took a closer look at defense spending, including a concern that overseas contingency operations funding was being used to circumvent caps on defense spending. A breakdown of the bill can also be found here.
Wary of Getting Back on the Budget Cycle – After finally putting a bow on the FY 2014 budget, policymakers may not be enthusiastic about jumping right into the FY 2015 budget process. Word is already coming from the White House that it will likely be late in producing the president’s FY 2015 budget request, which according to statute is to be released by the first Monday of February. It is said to be running about a month behind schedule. Meanwhile, there are some rumblings on Capitol Hill that the House may not produce a FY 2015 budget resolution because the Ryan-Murray deal already set the topline spending number for 2015 as well, and House leaders may not want another messy budget debate in an election year.
Another Debt Limit Debate at Hand – Lawmakers will have to contend with the statutory debt ceiling once again, perhaps very soon. The suspension of the debt limit expires on February 7. “Extraordinary measures” will be able to delay a national default, but Treasury Secretary Jack Lew is warning that those measures may not buy much time because of a wave of tax refunds going out at that time. The limit could be reached as early as late February according to Lew. The Bipartisan Policy Center has some resources explaining what the extraordinary measures are and factors that affect when the debt ceiling must be raised. Battle lines are already being drawn, with the White House saying it will not negotiate and congressional Republicans promising to seek concessions in exchange for raising the limit, though there is no consensus yet on what the demands will be. Read our primer on the debt ceiling.
Still Seeking Cloture on Unemployment Insurance Extension – The Senate continues to deadlock over extending expanded unemployment insurance benefits. Paying for the extension remains a key point of contention. Senate Majority Leaders Harry Reid (D-NV) proposed an extension until November that would be paid for by reducing disability insurance benefits for people who also receive unemployment benefits and extending the mandatory sequester cuts which end in 2023 into 2024. While we were encouraged that the debate turned towards offsets and a specific idea was offered, we also noted that under the proposal the cost of the extension would not be offset within ten years, which is the PAYGO standard. We explained the unemployment/disability insurance double-dipping option here. We highlighted several options for offsetting an extension. And CRFB President Maya MacGuineas also offered an idea for paying for an extension and two other priorities in an op-ed.
Regrouping on Tax Reform – The tax man may cometh, but tax reform will not goeth away, according to a key player. House Ways and Means Committee Chair Dave Camp (R-MI) is doubling down in his push for a fundamental rewrite of the tax code even though the conventional wisdom is that tax reform will not happen in an election year. Camp unveiled a new website, Twitter handle and video to tout the need for tax reform and its benefits to society. Although his previous partner in the effort, Senate Finance Committee Chair Max Baucus (D-MT), has been nominated to be ambassador to China, Baucus’s likely successor, Sen. Ron Wyden (D-OR) also has a strong interest in tax reform. Camp and his supporters plan to convince their colleagues to push reform at the upcoming retreat. And the New York Times sees a window for tax reform in 2014. Interestingly, a map from the Pew Charitable Trusts indicates deep disparities across the country regarding tax breaks. Meanwhile, the fate of the 55 tax extenders that expired at the beginning of the year are in limbo as Camp and his allies want to address them as a part of broader reform. If they are brought up outside of tax reform, a key question will be how to pay for an extension. The matter reportedly will be a top priority for Sen. Wyden when he takes the chairman's gavel and The Washington Post called for any extensions to be paid for. And Friday was the deadline for comments on Baucus’s tax reform drafts he released last year.
Social Security Debate Continues – The conversation about the future of Social Security continues, and CRFB has been busy making sure it is an informed discussion. We engaged in a debate on another blog to get the facts right on the vital program’s finances and our Ed Lorenzen wrote in Huffington Post about five facts you should know about Social Security. A recent event featured two distinct views on how to strengthen Social Security.
Hopes for a Farm Bill Grow – After several ups and downs, negotiators once again are upbeat about the prospects for reaching a deal on a farm bill. Movement has been made on several issues, such as dairy policy. The farm bill could have significant fiscal repercussions depending on what is agreed to.
Key Upcoming Dates (all times are ET)
- President Obama delivers the State of the Union address.
- Bureau of Economic Analysis releases advance estimate of 4th quarter GDP growth.
- Statutory deadline for the President to submit the Fiscal Year 2015 budget request.
- Congressional Budget Office (CBO) releases annual Budget and Economic Outlook.
- The extension of the statutory debt ceiling expires.
- Bureau of Labor Statistics releases January 2014 employment data.
- Bureau of Labor Statistics releases January 2014 Consumer Price Index data.
- Bureau of Economic Analysis releases second estimate of 4th quarter GDP growth.
- Bureau of Labor Statistics releases February 2014 employment data.
- Bureau of Labor Statistics releases February 2014 Consumer Price Index data.
- Bureau of Economic Analysis releases third estimate of 4th quarter GDP growth.
- "Doc fix" expires.
One of the most contentious provisions in the Ryan-Murray budget agreement that became the Bipartisan Budget Act was a provision that reduced cost-of-living increases for military retirees under age 62 (read our explanation here). The provision generated the ire of many veterans groups, and some lawmakers have vowed to reverse the reduction. But today, a group of retired generals wrote an op-ed in The Hill, explaining that the provision is a necessary first step towards getting personnel costs under control before they crowd out the rest of the military's budget.
The U.S. military is at a crossroads. We can either properly train and equip our future warriors or maintain overly generous benefits for young military retirees who have many years in the workforce ahead. We cannot do both. How the nation chooses will, to a great degree, determine how secure Americans will be in decades to come.
The current military retirement system is10 times more generous than equivalents in the private sector. The generals explain, "In the case of a service member who retires at age 38, pension payments and health coverage could easily continue for more than 40 years, totaling over 60 years of pay and benefits for 20 years of service, a very unusual – and expensive – benefit." They argue for keeping the reduction, which will make room in the Pentagon budget for other defense priorities. Already, rising personnel costs (largely due to health care, but also retirement payments) are taking a larger share of the Pentagon's budget than core military functions.
For example, in Fiscal Year (FY) 2013, the federal government budgeted more for military retirement and health care benefits ($143 billion) than it did for military procurement ($110 billion). When total personnel costs are considered, the contrast is even starker. The total budget for pay and benefits for active and retired service members in FY 2013 ($264 billion) was greater than the budget for military operations and maintenance (excluding healthcare-related operations, which are more appropriately classified as a personnel cost).
As the generals conclude:
Congress was wise to take the first step toward military retirement benefit reform in the BBA. Much larger reforms must come in the near future. We must rethink every aspect of military spending, including benefits. In doing so, policymakers should protect the Veterans Administration and other benefits for service members who were wounded or disabled in the course of their service. Very generous health care and pension benefits for able-bodied, working age (38-62) military retirees – benefits that have no parallel in either the private or public sectors – cannot remain the same without causing damage to our war-fighting ability in an era of constrained resources.
We couldn't have said it better ourselves! A Washington Post editorial today called on Congress to break with the trend of recent Congresses and actually pay for any extensions for expired and expiring tax provisions. The editorial argues that not doing so would be both irresponsible and hypocritical, given that the recent Bipartisan Budget Act was based on the understanding that increased spending from sequestration levels would be fully offset. Why wouldn't the same premise hold for the tax side of the budget?
CRFB has long said that Congress should fully offset the costs of any extensions to expiring provisions, either on the spending side of the budget (like the "doc fix") or on the tax side (like the extenders). Here are the key lines from the editorial:
Mr. Wyden, and his opposite number in the House, Ways and Means Chairman Dave Camp (R-Mich.), will face pressure to pass an unpaid-for bill, with the excuse that all tax breaks must be dealt with in a grand bargain on tax reform. That’s a fiscally irresponsible cop-out — and a hypocritical one, too, given that the House-Senate budget deal was premised on offsetting relief from sequester spending cuts. Even if it’s unlikely the tax-writers could get an agreement to eliminate or pay for the entire package, they could target the most expensive, least-efficient breaks.
A good candidate is bonus depreciation, which lets businesses deduct the cost of capital equipment in the year of its purchase, rather than more gradually. This provision accounts for nearly one-tenth of the bill’s cost, according to the Committee for a Responsible Federal Budget.
If lawmakers are unwilling to pay for any extensions, then they should allow the provisions to end.
Military personnel costs continue to increase as a share of the defense budget. One of the fastest growing components is military health care, where spending has outpaced even overall health care spending growth, according to the CBO. With base defense spending being reduced in recent years and through 2021, as a result of the Budget Control Act and sequestration, controlling health care spending will be important, or it will crowd out other defense priorities. Not surprisingly, the same dynamic that threatens to crowd out important investments in the federal budget also threatens our defense capabilities. CBO's newest report lays out options to reduce military health care spending and help control this trend.
CBO notes that the share of military spending devoted to health care has grown from 6 percent in 1990 to 10 percent today. During that time, both TRICARE and TRICARE for Life were established, and troops have been deployed overseas in Iraq and Afghanistan. However, CBO finds that the bulk of the health cost increase can be attributed to the growing use of TRICARE (fueled by its relatively low cost-sharing), with the wars being a smaller factor. The report goes into great detail, breaking down the sources of spending increases within military health programs.
CBO evaluated three different ways to control health care costs — better managing chronic diseases, making health care administration more efficient, and increasing TRICARE cost-sharing — and determined that TRICARE reforms would be the only options that would produce significant savings. CBO discusses general ways to proceed with the first two approaches, but presents specific options for TRICARE.
The first TRICARE option is to increase enrollment fees, deductibles, and co-pays (which have increased little since TRICARE was created) for working-age retirees, which would reduce deficits on net by $18 billion through 2023, assuming that lawmakers reduced spending caps accordingly. The second option would be to prohibit working-age retirees from enrolling in TRICARE Prime, the managed care plan in the program that currently offers comprehensive coverage with low enrollment fees and cost-sharing. This option would save $60 billion on net, with $85 billion of savings in TRICARE being offset by spending increases and revenue losses elsewhere. The third option would restrict TRICARE for Life (TFL), the relatively new free supplemental coverage provided to TRICARE beneficiaries when they become eligible for Medicare, from covering the first $550 of patient cost-sharing and prevent the plans from covering more than 50 percent of the next $4,950, saving $31 billion through 2023. The current structure of TFL has been shown to increase beneficiaries' use of Medicare services and blunts incentives to choose more efficient means of care.
These options are not the only ones available to policymakers, and CBO has presented other ways to reform military compensation in its Budget Options report, but they are all worth a long look as we work to both control our country's debt and prevent military health care spending from crowding out our defense capabilities.
Yesterday, the Senate passed the Omnibus appropriations act (72-26), following strong passage in the House (359-67). The bill will now be sent to President Obama to sign. Earlier in the week, we took a look at what is in the $1.1 trillion spending bill, and also documented the winners and losers.
Although the threat of a government shutdown is over, we haven't cleared all impending fiscal hurdles just yet. Yesterday, Treasury Secretary Jack Lew warned that the nation is more likely to run out of borrowing authority before the end of February than later. Though the debt limit is technically suspended on February 7, the Treasury can use extraordinary measures to free up borrowing authority to continue paying the country's bills for a short while.
Originally, Treasury Secretary Lew said that these extraordinary measures wouldn't be exhausted until the end of February or early March. Now, however, he believes it's likelier these measures will run out by the end of February. Traditionally, February and March are high-deficit months for the government, when it pays out tax refunds and doesn't yet collect much of its tax season revenue until April. This severely limits the ability of the government to pay bills without issuing new debt during those months.
Yesterday, Senator Tom Coburn (R-OK), M.D., announced that he would retire at the end of the year, two years before his Senate term would normally expire. Dr. Coburn has had a long career in the Senate, and his decision represents a big loss for advocates of fiscal responsibility.
Dr. Coburn has been one of the most vocal Senators about the need to get the national debt under control. He went beyond the usual platitudes about the need to control both spending and tax loopholes, detailing his ideas in a $9 trillion deficit reduction plan Back in Black. For the last five years, his office published an annual Wastebook with detailed examples he identified as "wasteful government spending" (read about the latest edition here). His lists of targeted savings not only include trimming government spending, but also lists of wasteful tax expenditures to eliminate.
Coburn served on the Bowles-Simpson Fiscal Commission, which recommended changes to place debt on a downward path as a share of the economy. After those recommendations failed to get a vote in Congress, he joined the "Gang of Six," a bipartisan group of Senators that tried to update the recommendations and get a vote in the Senate.
He has been vocal about reforming the Social Security Disability Insurance (DI) Program, before the DI Trust Fund runs out in 2016. Although he was one of the Senate's more conservative members, Coburn sought common ground on several key issues. As a notable example, he joined forces with Joe Lieberman (I-CT) to release a bipartisan list of savings to the Medicare program. In some examples from the last few months, he worked with Democratic senators to repeal ethanol mandates, control fraudulent drugs, and increase transparency around settlements with the federal government.
When they were both included on Time's 100 Most Influential People last year, President Obama wrote the tribute to Tom Coburn:
The people of Oklahoma are lucky to have someone like Tom representing them in Washington — someone who speaks his mind, sticks to his principles and is committed to the people he was elected to serve.
So long, Dr. Coburn. Your voice will be missed.
A large national debt has far-reaching consequences. On the blog, we often talk about the economic consequences of debt, as they are perhaps the most easily quantified. However, there are also moral and ethical consequences to leaving a large debt burden to future generations and risking a fiscal crisis. Yesterday, CRFB hosted a discussion that examined the less covered side of the budget debate.
The event, The Moral Case for Addressing America’s Fiscal Crisis, was moderated by Rev. Dr. David Gray, Senior Fellow at the New American Foundation and five panelists: Marc Goldwein, Committee for a Federal Responsible Budget; Josh Good, Values and Capitalism Project, American Enterprise Institute; Rev. John Allen Newman, Senior Pastor, The Sanctuary at Mt. Calvary Church; Dr. Jay Richards, Distinguished Fellow, Institute for Faith, Work and Economics; and Mark Tooley, President, Institute for Religion and Democracy.
Marc Goldwein was the first speaker and laid out the current state of the budget, with a mixture of some good news, but unfortunately more bad news. Goldwein noted that our current debt levels are extraordinarily high: twice the historical average and the highest since WWII. The good news was that according to most projections, our debt will slightly decline over the next 5 years as a share of the economy and recent budget agreements indicate that Congress is actually starting to govern again. However, the types of deficit reduction enacted to date (large cuts to discretionary spending through sequestration) are the wrong kind of austerity debt reduction measures - upfront and anti-growth. Cuts to date have impacted low-income housing, education, and R&D, instead of implementing reforms to protect the most vulnerable and promote investments in future economic growth.
Perhaps the worst problem, said Goldwein, is that despite the deficit reduction, our debt problems are far from solved. Policymakers have not yet addressed the drivers of the debt: population aging and rising health care costs. The three fastest-growing programs— Social Security, Medicare, and Medicaid—have barely been changed. And, according to Goldwein, debt will return to its unsustainable path after 2018 or 2019.
Reverend Newman was second and talked about the importance of the faith community as a transcendent non-partisan voice that would call politics to a higher purpose. He remarked on the importance of hold politicians accountable for an honest discussion.
The third speaker, Dr. Jay Richards, asked an important question: "Is it just to borrow money that someone not party to the transaction must repay?" Richards argues that we do have a moral obligation to future generations that might not exist yet, and this creates a moral significance to our future debt burden.
Josh Good noted that a looming debt will eventually lead to austerity measures, the recent experience of Greece and Spain being prime examples. And when austerity measures do hit, they will not hit the very wealthy, but instead the poor. Good noted that while welfare policies might lead to "learned helplessness," government contracting could create a similar helplessness for those who received those contracts. However, there was every reason for optimism. There is still room to get ahead of the problem by making tough sacrifices.
Mark Tooley noted that deficit reduction plans are often challenged by a desire to protect programs that support the very poor. However, increased indebtedness will also hurt the very poor, especially the very poor of future generations. Fiscal responsibility remains key and lawmakers must not shy away from tough choices.
The questions presented to the speakers also presented some important questions to keep in mind in the budget debate. One question presented to the panel was the size of government. Richards noted that small governments could also have unsustainable debt, so that really the question was how to support the government that the people have chosen. Newman noted the importance of balance and staying above the fray, as it was possible to justify your own socioeconomic status through scripture. The faith community needed to rise above that to help guide the country said Newman.
The full discussion is worth watching as it covers many issues that we do not normally talk about on The Bottom Line. The budget discussion is more complicated than just revenues and spending, which makes solving the problem more difficult, but it's clear that the stakes go beyond economics as well. The decisions we make today will affect future generations that are not able to voice their opinion.
Largely due to changing demographics, the Social Security Trust Fund will be exhausted within the next 20 years. To avoid this, most reform plans follow the model used by the last major change to Social Security in 1983: modest adjustments to taxes and benefits to extend the life of the Social Security Trust Funds without dramatic changes. However, other reformers say that the current system does not adequately meet the nation's retirement needs and should be rethought. Yesterday, two Social Security experts, one from the left and one from the right, presented their ideas for a major overhaul of Social Security on a panel at the American Enterprise Institute. The event was entitled "More or Better? Rethinking Social Security for the 21st Century."
On the "More" Social Security side, was Michael Lind, one of the co-founders of the New America Foundation. Lind advocates for a large expansion of Social Security. He contends that Social Security is the most successful form of retirement savings, and that the other two forms (private savings and employer pensions) have not met the needs of low-income individuals. He recommends leaving Social Security in place, but also creating an entirely new entitlement program "Social Security B."
The new system would provide a flat benefit for all seniors regardless of income level. Between both Social Security programs, every retiree would be guaranteed benefits at least at the poverty line, and even the highest earners would see a benefit increase. By eliminating most tax incentives for private savings, Lind's plan would shift most private savings into the public system. Such a benefit expansion would need significant new revenues.
On the "Better" Social Security side was Andrew Biggs, a former deputy commissioner at the Social Security Administration and currently a resident scholar at the American Enterprise Institute. Biggs agrees Social Security has a funding problem, but argues that the United States does not have a retirement crisis. Because of the way data is measured, government surveys tend to understate the retirement savings available to most workers. In addition, the financial and mutual fund industry has an incentive to encourage people to oversave. Biggs argues that to improve the health of the retirement system, we would want people to work longer, save more, and retire later. However, he contends that the current system does the opposite—encouraging people to work less, save less, and retire earlier.
Biggs would overhaul the existing Social Security system, and scrap the current system where people receive more benefits by contributing more. Similar to Lind's system, retirees would receive a flat benefit at the poverty line. Such a system would cost less than the existing Social Security system (and collect less in tax revenue), so people could put more money into private savings accounts.
Both thinkers would add a new government benefit at the poverty line, decreasing elderly poverty from 15% to approximately zero, but use different approaches. Lind would decrease the role of private savings, while Biggs would expand it. We've written before about Social Security's pending fiscal problems and explained that it may be unwise to expand benefits without first bringing the system back into balance. We also put together the Social Security Reformer, a tool which lets people put together their own plan to fix Social Security's solvency through some of the most commonly discussed options.
See a summary of the event, or watch the archived video here.