The Bottom Line
In this next installment of our FY 2012 appropriations update, we will detail the actions that the House has taken since our last update on May 24. Despite the recess last week, the House has managed to stay active with the appropriations process.
There are a lot of moving parts in the House's action on the 2012 budget. So far, two appropriations bills have passed the full House: the Military Construction-VA bill and the Homeland Security bill. The former bill was relatively non-controversial, but the Homeland Security bill came under attack by Democrats for cuts to first responder grants.
Other bills are waiting for action by the full House. The controversial Agriculture bill was approved by the Appropriations Committee before the recess. This bill has been a lightning rod for Democrats, who believe the bill provides inadequate funding for a number of food programs, especially the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Also, just yesterday, the full Committee approved the Defense bill, including an additional $119 billion for war spending, and the Energy and Water bill just passed today.
Additional action will come tomorrow when the Financial Services bill is marked up in its subcommittee.
The table below sums up all the moving parts of the House process, along with the amount of cuts contained in each bill.
|Summary of House Appropriations Actions|
|Bill||Recent Action||Funding Level (billions)||Change from FY2011 (billions)|
|Homeland Security||Passed by House||$40.6||-$1.1|
|Military Construction-VA||Passed by House||$72.5||-$0.6|
|Agriculture||Passed by Committee||$17.3||-$2.7|
|Defense||Passed by Committee||$648.7*||-$22.1*|
|Energy and Water||Passed by Committee||$30.6||-$1.2|
|Financial Services||Just Released||$19.9||-$2.1|
Note: All numbers in the table only represent discretionary spending
*These numbers account for both DOD base budget and war spending. The 2012 DOD base budget is $17 billion higher than 2011, while war spending is $39 billion lower.
As for the Senate, well, we're still waiting for that budget resolution.
CRFB's debt conference yesterday, titled "The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go from Here?," featured an all-star cast of 40 of the biggest names in economic and fiscal policy, producing a fascinating discussion on the debt ceiling and our country's long-term outlook. Here's a brief summary of some of the things that were said.
According to an impromptu poll by moderator Steve Liesman of CNBC, about two-thirds of the participants expect the debt ceiling to be raised by the August 2nd deadline given by the Treasury Department. Although Ben Bernanke disapproved of using the debt limit to force action on the deficit, a number of experts felt that the debt ceiling in general and this debt ceiling vote specifically would be an appropriate way to force an agreement on a down-payment of deficit reduction.
However, most attendees were gloomy on the long-term outlook. They felt that any agreement that came out of the debt ceiling increase would likely be too small or not sufficiently focused on the long-term drivers of the debt. In addition, former NEC director Larry Lindsey noted a number of ways in which the status quo may actually understate projected deficits, including an understatement of interest rates and an overstatement of economic growth (although the latter example comes from the President's budget).
Most of the experts also felt that coming to an agreement of the magnitude necessary to set our country on a sound fiscal path would be very difficult to do, considering the political environment. Specifically, former OMB director Franklin Raines and Rep. Peter Welch (D-VT) lamented the polarization of Congress that makes agreements like we had in the 1990s much harder to pull off. And there was the usual criticism about Republican intransigence on taxes and Democratic intransigence on entitlements.
Most notable is what elected officials said during the conference. Rep. Paul Ryan (R-WI), unsurprisingly, plugged the House Republican plan, while Sen. Michael Bennet (D-CO) promoted the work of the Fiscal Commission for the 2-to-1 spending cut to tax increase ratio in its plan (3-to-1 if you include interest savings). When moderator Steve Liesman asked what the other side could offer up to bring them to the table, Ryan wanted Democrats to suggest health care entitlement cuts while Bennet wanted some give on taxes (once again supporting the Fiscal Commission's proportions).
Mark Warner (D-VA) and Mike Crapo (R-ID), members of the Gang of Six, unsurprisingly endorsed a bipartisan approach that touched all areas of the budget, including tax expenditures. Sen. Crapo said he believes the agreement that comes out of the Gang of Six negotiations will be one that has a decent shot at achieving 60 votes in the Senate -- the threshold no other plan as of yet has been capable of reaching.
With so many big names taking part in the debate, the conference produced some very interesting discussion. For an archived video of the entire conference, click here.
We were lucky enough to have Federal Reserve Chairman Ben Bernanke open our annual conference this week. His remarks were an important statement on the need for action and also offered some helpful guidance on how to move forward. Full text of his remarks is here and video of the event can be viewed here.
Bernanke on our current situation:
Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy.
Bernanke on what we can do to fix it and the timing:
Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk. At the same time, acting now to put in place a credible plan for reducing future deficits would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.
Chairman Bernanke is a charter member of CRFB's Announcement Effect Club, which promotes the idea that devising a credible fiscal plan now that would be phased in over time would aid the economy in the shorter term. You can compare the various fiscal plans here.
Bernanke on what a fiscal plan would look like:
Clear metrics are important, together with triggers or other mechanisms to establish the credibility of the plan. For example, policymakers could commit to enacting in the near term a clear and specific plan for stabilizing the ratio of debt to GDP within the next few years and then subsequently setting that ratio on a downward path. Indeed, such a trajectory for the ratio of debt to GDP is comparable to the one proposed by the National Commission on Fiscal Responsibility and Reform. To make the framework more explicit, the President and congressional leadership could agree on a definite timetable for reaching decisions about both shorter-term budget adjustments and longer-term changes. Fiscal policymakers could look now to find substantial savings in the 10-year budget window, enforced by well-designed budget rules, while simultaneously undertaking additional reforms to address the long-term sustainability of entitlement programs.
The Peterson-Pew Commission recommended a medium-term goal of stabilizing the debt at 60 percent of GDP and lowering it further in the longer-term. You can try reaching the goal yourself using CRFB's Stabilize the Debt budget simulator. The Commission also laid out budget process reforms to help enforce debt reduction goals in Getting Back in the Black; recommendations included debt targets and triggers. The Commission recently offered ideas for making President Obama's proposed "debt failsafe" trigger work and also created a Fiscal Toolbox summarizing and comparing triggers and other budget mechanisms. And CRFB has offered ideas for reforming Social Security and health care programs to strengthen their long-term sustainability.
Some great quotes by Chairman Bernanke! We were lucky and grateful to have him keynote our conference. We hope policymakers will listen closely.
We hope you tune in today to the live webcast below and Twitter feed (@budgethawks and #debtconference) of CRFB's 2011 Annual Conference The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here? The conference will run from 2:30 - 5:30pm.
We have all-star line-up of speakers throughtout the afternoon to help us dive deeper into these fiscal issues, including Chairman of the Federal Reserve Ben Bernanke, Senator Bennet, Senator Crapo, Senator Warner, Congressman Ryan, and Director of the National Economic Council Gene Sperling, among many other distinguished guests. For a full list of conference speakers and more conference info, click here.
The live webcast will begin at 2:30pm (if you're tuning in before 2:30pm you may catch the end of a New America Foundation event).
Update: As it turns out, increasing the Medicare age actually improves benefits for low-income seniors, thus helping to most disadvantaged.
Since Senator Lieberman proposed a package of Medicare reforms last week, he has come under attack, particularly for his proposal to increase the Medicare retirement age from 65 to 67 by 2025. Matt Yglesias said that this idea "really fails to put the Medicare issue in the proper context," Kevin Drum calls it "an egregiously punitive policy," and Paul Krugman says it is "an idea that’s so bad, so wrongheaded, that you’re almost grateful."
These critics are incredibly off base. In the past, we have argued that raising the Social Security retirement age is a good idea. As it turns out, when one looks at all the facts, so too is raising the Medicare age.
Critics of this policy have essentially made three arguments:
- The focus of any Medicare changes should be on slowing health care cost growth, not changing eligibility
- Raising the Medicare Age will not actually save money -- or not much money
- Raising the Medicare Age will throw many seniors into the ranks of the uninsured
Critics are wrong on all three accounts, which we will address in order.
1. We have a health care cost AND aging problem
One criticism of raising the Medicare age is that it does not focus on actually slowing per-person health care cost growth -- with cost-growth being the primary driver of growing Medicare costs. As Kevin Drum writes, "Lieberman's plan reduces the level of Medicare spending, but it does nothing to address growth rates. That's backwards. If healthcare costs keep growing at the same rate they're growing now, it swamps everything else."
Of course, controlling health care cost growth is incredibly important, and we strongly support policies which can "bend the cost curve". Senator Lieberman's plan includes a couple of these policies -- reforming cost-sharing rules and restricting Medigap plans -- but he could and should go further (for example, by supporting tort reform or changes to pay providers based on performance). But it is worth remembering that Medicare grows for two reasons -- health care growth and population aging. More than a third of the projected growth in Medicare and Medicaid is due to population aging, rather than health care cost growth.
|Drivers of Increased Medicare and Medicaid Spending|
|Aging||Health Care Cost Growth||Aging||Health Care Cost Growth|
According to CBO, even if per capital health care cost growth were limited to GDP -- a highly unlikely outcome -- federal health spending would still increase from 5.5 percent of GDP in 2010 to 8.7 percent by 2030. To be sure, this would be a major improvement over the 10.9 percent of GDP currently projected, but it would represent substantial growth none-the-less.
Given that this 3 percent of GDP increase is driven by population aging, it is quite sensible to address at least a portion of it by increasing the Medicare eligibility age.
(As for Drum's concern that raising the age only reduces the "level" of spending, we'd strongly support building on Senator Lieberman's proposal by permanently indexing the Medicare age to longevity once it hits 67).
2. Raising the Medicare age will save the government $125 billion through 2021 alone
Another criticism of raising the Medicare age is that it either won't save the federal government (much) money or it won't reduce (and in fact will increase) overall health spending. On the first count, Yglesias says that "actual savings here are kind of surprisingly low" and Drum says that the policy "might raise Medicare costs."
We don't have time to fully address the methodological flaws in the studies these two are citing, but it should be sufficient to show that the Congressional Budget Office believes Lieberman's proposal would substantially reduce the deficit. Over the next decade, in fact, CBO projects the not-fully-phased-in age increase would save $125 billion. By 2035, they project Medicare spending would be about 0.3 percent of GDP lower as a result of the two-year increase in the eligibility age.
Paul Krugman has a more nuanced criticism: that while raising the Medicare age might save the government money, it will actually increase the total cost of health care. "While it’s true that Medicare has done an inadequate job of controlling costs," he writes, "the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare."
Krugman could be right on this front. What happens to overall health care costs if the Medicare age is raised will depend on how well the new health care law works in implementing low-cost exchanges and keeping Medicaid costs down (Krugman makes it clear that he has little faith in this law, despite his support of it). Importantly, though, the purpose of raising the Medicare age isn't to reduce overall health care costs; it is to allocate limited federal dollars efficiently. We'll discuss this more later in the post.
3. Raising the Medicare age will have only a small effect on the number of uninsured people
The final criticism of raising the Medicare age is that it would leave those age 65-67 uninsured. Krugman argues that "not every 65- or 66-year-old denied Medicare would be able to get private coverage — in fact, many would find themselves uninsured." Drum is more emphatic, claiming that "it's flatly impossible for anyone that age to get private insurance, so they either keep working or they go without health insurance."
These claims show not only a failure to look at the statistics, but more importantly a failure to remember the health care reform legislation which both critics support and which will provide near-universal coverage beginning in 2014.
Statistically, as it turns out, older Americans are among the least likely to be uninsured. In 2009, 22.5 percent of adults under 65 were uninsured -- but only 14 percent of those age 55 to 64 were. And those in their early 60s are less likely to be uninsured than those in their late 50s. So even currently, claims that it is impossible to find insurance at older ages are at best exaggerated.
But all this forgets about the health care reform legislation (PPACA), which provides Medicaid coverage for those making less than 138 percent of the poverty line and progressive subsidies for those making up to 400 percent of the poverty line. Even individuals making over 400 percent of the poverty line -- where the uninsured rate for those aged 55-64 is a whopping 4 percent -- still have the ability to purchase insurance on exchanges which have "guarantee issue" (purchasers cannot be denied coverage) and limited age rating (premiums for older purchasers cannot be more than three times as big as younger purchasers).
In other words, increasing the Medicare age won't cause most people to be uninsured; instead, it will push them into the insurance exchanges.
The Benefits of Increasing the Medicare Age
Criticisms of raising the Medicare age are not only off base, but they obscure the two major benefits of such a policy. First, as suggested above, raising the age will lead to much better targeting of limited government resources.
Currently, pretty much everyone over age 65* receives the same effective insurance subsidy from the government -- regardless of age or income. But Medicare's costs are rising to unaffordable levels, and will have to be cut. Rather than reducing benefits across-the-board, raising the Medicare age does so in a very targeted way. For one, all reductions are targeted at the youngest of the Medicare population -- those who tend to be in the best health and are most able to work. And as we explain above, it is not as if they would be thrown to the dogs. The lowest income individuals would continue to receive free heath care through Medicaid. Those of more moderate income would receive subsidized health care in the health exchanges, with subsidies linked directly to income. And even those of higher incomes would still benefit from many of the coverage provisions under health reform.
In addition to better targeting Medicare, increasing the age would have positive labor market effects. Many people make their retirement decisions based upon the Medicare eligibility age, and increasing it would likely encourage longer working lives. As we've explained in the past, longer working lives would accelerate economic growth, increase revenue collection, and improve overall retirement security.
It's time to consider raising the Medicare age.
*Lower-income individuals receive additional Medicaid subsidies and much-higher income individuals pay higher Medicare premiums.
Yesterday while making comments about the Jobs and Competitiveness Council, President Obama made some remarks that qualified him to be the newest member of CRFB's Announcement Effect Club. Here's what caught our attention (from Politico):
Obama also sought Monday to link the deficit-cutting talks and the issue identified in polls by most Americas as their top concern: job creation.
"The thing I want to emphasize is that we need to solve our medium- and long-term debt and deficit issues not for abstract reasons, but because they are a concrete impediment to growth and jobs," Obama said.
"So the American people need to know that over the next month, as we focus on making sure that we have a balanced, thoughtful resolution to this problem, this isn't to the exclusion of worrying about jobs, but is actually in service of making sure businesses have enough confidence about the investment environment so that they can start getting off the sidelines and putting more money to work and hiring more people."
As we have reiterated many times, making a firm commitment to reducing our medium and long-term debt and deficits would inspire confidence today in businesses, investors, and individuals, and would have positive effects on the U.S. economy right away. Welcome to the club President Obama, we are very glad to have you!
As the bipartisan group of lawmakers being led by Vice President Biden continue to discuss the budget and ways to raise the debt ceiling, it seems the Vice President has gotten himself another fiscal policy-related task: the Campaign to Cut Waste.
In a blog on the White House's website, Vice President Biden announced his leadership role in the new group, whose responsibility would be to--you guessed it--cut wasteful spending. The Obama Administration has taken a number of steps over the past year (most recently here) to try to cut down on wasteful spending, but this seems to be a broader effort than the individual initiatives they've announced previously.
Here is Vice President Biden's take on the new group:
Most of these cuts we’re going to make are small. They won’t close our deficit or solve all of our fiscal problems. However, no amount of waste is acceptable, and these cuts will add up over time. This year alone we’ve found $33 billion in savings, but we know there’s a lot more work to be done.
Any efforts to reduce wasteful or inefficient spending that can lead to savings are worthwhile. There is no reason to continue low-priority or wasteful spending at a time of record deficits, and these types of cuts are even lower than the low-hanging fruit we recently identified.
Today, CNN Money featured a piece from the Concord Coalition's Josh Gordon, who argued against repealing the Independent Payment Advisory Board (IPAB) established in the health reform legislation. As Gordon explains:
In a country struggling mightily with unaffordable health care costs now, and destined to struggle even more in the future, IPAB is one of the institutions that gives some hope that if we figure out how to control costs, we just might be able to put that knowledge to use.
CRFB has supported IPAB since before it was enacted into law and continues to believe in its cost saving potential. At the same time, IPAB does have some serious flaws and limitations and could be improved in a number of ways to make it more effective. We'll be writing more on just how this could be done soon. In the meanwhile, see the video below for a strong defense of IPAB:
Over the past few weeks, a number of new members have been added to The Announcement Effect Club. Recently, Washington Post blogger Ezra Klein, Senator Joseph Lieberman (I-CT), and Rep. Steny Hoyer (D-MD) all joined the club. All pointed out that enacting a fiscal plan now to reduce our long-term fiscal problems would restore confidence in the market and thus bring about short-term economic benefits in addition to the long-term benefits often associated with deficit reduction.
Ezra Klein, in a Bloomberg op-ed on 6/8/11, said:
"...agreeing to deficit reduction later would also help make a stimulus more effective now. It would calm fears about federal spending, demonstrate that the government can overcome political paralysis and encourage businesses to take advantage of short-term tax incentives by confirming that Washington won’t be handing out more goodies once recovery takes hold."
Following that, Sen. Lieberman, in a Washington Post Op-Ed on 6/9/11 about reforming Medicare and reducing deficits, noted that:
"Doing so would send a powerful and necessary signal to financial markets that we are addressing our long-term fiscal challenges. It would prove to our constituents that we can still come together to fix a program that they want and need. In fact, showing that we can work across party lines to solve one of our toughest fiscal problems is probably the best thing we can do to stimulate confidence in our economy, and that will lead to more capital investment and more jobs."
Finally, Rep. Steny Hoyer, in an interview with CBS alongside Rep. Paul Ryan on 6/12/11, when talking about the national deficit and fiscal plans such as the House passed FY 2012 budget, noted that:
"If we can work together, I think that’s going to raise the confidence level here and around the world, and I think that in itself will have a very positive effect."
These three new members of the club all agree that a fiscal plan, or at least major deficit reduction, is both necessary and a way to help stimulate the economy.
Welcome to the club, and let us hope that lawmakers enact a fiscal plan sooner rather than later.
Except in Miami – The Miami Heat weren’t hot enough, but Washington saw record temperatures last week. Capitol Hill may warm things up this week as well as both chambers are in session together for the first time this month and the Biden group looks to pick up the pace of its debt limit/deficit reduction negotiations. CRFB will also add some sizzle with a big conference this week.
Biden Group Catches Fire – After only meeting once in the last two weeks, the bicameral, bipartisan group of lawmakers led by Vice President Biden plans to meet three times this week – Tuesday, Wednesday and Thursday afternoons – to make progress towards reaching a deal to raise the debt limit and reduce the deficit well ahead of a projected U.S. default in early August. Discretionary spending, entitlements, budget caps and other spending restraints are all on the agenda this week. CRFB has ideas for all these topics. We previously identified over $1 trillion in common-ground savings and offered ideas for reforming health care and Social Security. Additionally, the Peterson-Pew Commission on Budget Reform has provided recommendations for making a debt trigger work and last week unveiled a Fiscal Toolbox comparing budget process ideas like spending caps, balanced budget amendments and triggers. The group talked revenues last week (see our tax expenditure reform ideas here). In addition to picking up the pace, negotiators on both sides are also toning down the rhetoric, raising hopes that agreement can be reached relatively soon.
Gang of Six Returns to the Front Burner – Last week the bipartisan Gang of Six senators, now a group of five with Sen. Tom Coburn (R-OK) on sabbatical, returned to relevance as it shared its work with fellow senators at a meeting of about 18 colleagues split evenly by party. The group has found about $4.7 trillion in deficit reduction in its quest to devise a comprehensive, multi-year fiscal plan.
CRFB Conference Looks to Keep the Fiscal Responsibility Flame Alive – Speaking of the Gang of Six, two of its members, Sens. Mark Warner (D-VA) and Mike Crapo (R-ID), will appear at CRFB’s 2011 Annual Conference on Tuesday. The star-studded lineup also includes Federal Reserve Chair Ben Bernanke, White House National Economic Council Director Gene Sperling, House Budget Committee Chair Paul Ryan (R-OH), Fiscal Commission Co-Chair Alan Simpson, and many more. CNBC's Steve Liesman will moderate. More information can be found here. A live video stream of the event will be available on the Bottom Line Blog starting at 2:30 pm on Tuesday. You can also follow the conference on Twitter using the hashtag #debtconference. CRFB (@budgethawks) will be live-tweeting the event.
House Burning Up the Appropriations Track, Senate Not So Much – The House resumes its relatively torrid pace on FY 2012 spending bills this week, with the Military Construction-Veterans Affairs bill on the House floor today. The Agriculture bill is also expected to be considered and voted on the floor this week, with the Defense and Energy-Water bills coming before the House Appropriations Committee this week to be teed up for floor action next week. The Defense bill is the only one where spending is expected to increase. Meanwhile, there remains little action on the other side of the Capitol. Although Senate Budget Committee Chair Kent Conrad (D-ND) says he has made some progress in drafting a budget resolution that could pass his committee, no timetable for action has been set.
Will Ethanol Subsidies Get Torched? – Sen. Coburn has forced a vote on an amendment to cut the 45 cent blender tax credit for ethanol, which costs about $6 billion in lost revenues. The proposal is causing a rift among conservative groups. Americans for Tax Reform opposes repeal of the credit because the group calls it a tax increase, while the Club for Growth supports repeal. The Senate vote will occur Tuesday.
Key Upcoming Dates
- CRFB Annual Conference, with Federal Reserve Chair Ben Bernanke and many others at 2:30 pm. Information here and a live webcast will be available on our blog.
- House Oversight & Government Reform Committee hearing on "Achieving Transparency and Accountability in Federal Spending" at 9:30 am.
- Producer Price Index for May released by Labor Department.
- Senate Appropriations Committee hearing on the FY 2012 appropriations request of the Department of Defense with Defense Secretary Robert Gates and Joint Chiefs of Staff Chair Adm. Mike Mullen at 10:30 am.
- Consumer Price Index for May released by Labor Department.
- Consumer sentiment for June released by University of Michigan/ThomsonReuters.
- Leading economic indicators for May released by The Conference Board.
- Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.
We are honored that Treasury & Risk has included CRFB's president, Maya MacGuineas, on their list of The 100 Most Influential Leaders in Finance for 2011. Names on the list range from government officials to policymakers to CEOs, including Ben Bernanke, Steve Jobs, and President Obama.
Hopefully, in next year's edition we'll see a list of the people who helped push for and enact a comprehensive fiscal plan!
Update: Estimates updated
Today, Senator Joseph Lieberman (I-CT) proposed a plan to reform Medicare, but to do so working within the current system rather than through more fundamental reforms, such as a move to "premium support". As Sen. Lieberman argued, "Medicare is hurtling toward its demise... [w]e can and must work together to fix Medicare now. Doing so would send a powerful and necessary signal to financial markets that we are addressing our long-term fiscal challenges." (With this statement, the Senator joins the Announcement Effect Club)
Sen. Lieberman's plan relies on five major changes:
- Raising the Medicare Retirement age by two months every year, starting in 2014 until it reaches 67 in 2025.
- Replacing Medicare's complicated cost-sharing rules with a unified dedutible, co-pay, and catastrophic cap.
- Increasing premiums for all new enrollees, beginning in 2014, from 25% of costs to 35%.
- Reforming 'Medigap' rules to reduce overutilization.
- Raising the payroll tax by 1% on income above $250,000.
Sen. Lieberman claims that these changes will save "at least $200 billion in Medicare spending over the next 10 years" and extend Medicare’s solvency "by approximately 20 years." Though we don't have enough details to know for sure, we estimate that his plan could save significantly more -- perhaps close to $370 billion over ten years ($430 billion with interest). According to our estimates, in 2021 the plan would save $75 billion ($90 billion including interest), and those savings would continue to grow as the Medicare age reached 67, more new retirees were subject to the higher premiums, and the cost-sharing changes put some downward pressure on cost growth.
|2012-2016 (Billions)||2012-2021 (Billions)|
|Raise Retirement Age||$20||$125|
|Reform Cost-Sharing Rules||$15||$35|
|Payroll Tax Increase||$30||$100|
|Total With Interest||$110||$430|
Note: Numbers are rounded to the nearest five and are CRFB estimates. For the Medicare age change, we rely on CBO's Budget options. For Medigap and cost-sharing, we assume the parameters in CBO's Budget options and distribute the interaction proportionally. For premium increases, we begin with the CBO's Budget option but adjust it substantially downward to account for the fact his proposal only applies to new retirees. The payroll tax estimates are very rough, and assume the increase starts in 2014 and is no applied to investment income.
This plan doesn't go nearly far enough to solve our Medicare problems, but it does make a substantial downpayment and does so in a way that would help address both health care cost growth and population aging, while also recognizing that rising health care costs will require the public to contribute more. Sen. Lieberman should be praised for offering this approach and for taking Medicare's problems seriously. As he explains:
I offer these ideas as a starting point for discussion to show we can extend the solvency of Medicare and reduce our national deficit and debt. The truth is that we cannot save Medicare as we know it. We can save Medicare only if we change it. I realize that each of the reforms is bound to make some people unhappy and that supporting such legislation entails political risk. But unless members of Congress are willing to take risks together, the big losers will be our great country and the people who elected us to lead it.
The bicameral, bipartisan debt limit and deficit reduction negotiations chaired by Vice President Biden resumed today with the group’s fifth meeting since it first convened last month. The pace of the talks is expected to pick up next week with as many as three meetings.
Revenues and budget process reforms were on the agenda for today’s meeting. Revenues is often where a significant divide exits. Democrats want revenue increases to be part of a deal, while Republicans want increases in taxes off the table. CRFB has recommended eliminating/reducing tax expenditures, the various tax breaks that are essentially spending by another name, as a ripe area for compromise (see also here and here) and we have said that it is likely that some additional revenue is going to have to be part of a fiscal plan.
While there is general agreement on the need for budget process changes to promote deficit reduction, there is a partisan divergence in opinion over which tool to use. A new resource from the Peterson-Pew Commission on Budget Reform succinctly explains the various options and compares them. Republicans prefer a cap on federal spending while the White House wants a trigger based on the size of the debt in relation to the economy. The Peterson-Pew Commission has also provided recommendations for making a debt trigger work.
The group still has a long ways to go towards reaching an agreement by July. The members are still searching for specific spending cuts that they can agree on. CRFB recently identified over $1 trillion in common-ground savings based on recent fiscal plans from each party.
In his Senate confirmation hearing this morning to become the next Secretary of Defense, CIA Director Leon Panetta (and former CRFB chairman!) said that every element of the defense budget needs to be on the table when we discuss ways to get control of our mounting federal debt.
In his statement and in response to questions from the Senate Armed Services Committee, Mr. Panetta noted that we have to consider a whole host of specific areas where we can save, saying that "it may be appropriate to conduct a comprehensive review of the military pay and benefits structure to determine where costs can be contained" while also singling out some weapons programs. He endorsed Secretary Gates's approach to begin indentifying where an additional $400 billion in defense savings, as called for in the President's Framework, could come from, and ultimately agreed that difficult choices must be made based on their impact on national security.
No one understands the need to simultaneously address both our security and fiscal threats better than Mr. Panetta. Projections for our growing debt become worse with each passing year, and the magnitude of the problem requries us to address it with a comprehensive fiscal plan. The many years Mr. Panetta served in the House of Representatives and as chairman of the House Budget Committee, his time in the Clinton Administration as OMB Director and Chief of Staff, and his national security experience gained while serving as CIA Director for the past two years make him the ideal candidate for Secretary of Defense where he will be in the center of all debates.
We wish Mr. Panetta a speedy confirmation process, and the best of luck when he assumes his new role.
Yesterday, Fitch became the latest credit rating agency, following S&P and Moody’s in recent weeks, to warn the U.S. of a credit rating downgrade if we fail to raise the debt ceiling by August 2nd. David Riley, head of Fitch’s sovereign rating says, “Failure to raise the debt ceiling in a timely manner would imply a crisis of governance that could imperil the US’s triple-A status”.
Also be sure to follow Treasury's use of extraordinary measures to delay a default this summer here.
In the last few weeks there has been an incredible amount of talk about using targets, triggers, caps, and failsafes to help set us on a sustainable course. Many different approaches can be taken to solve the broken budget problem, and CRFB hopes the new Fiscal Toolbox from the Peterson-Pew Commission (PPC) will offer guidance in choosing the right approach to repair the budget.
According to CRFB President, Maya MacGuineas, “We have lots of tools to choose from here – everything from spending limits to balanced budget rules to debt targets.” In a time of uncertainty, when no plan has emerged as the frontrunner to control debt, MacGuineas goes on to say, “What we need to do is take the best parts of each plan to design the tool that will best help policymakers to bring the debt under control."
The fiscal toolbox looks at proposals put forth by the PPC, Fiscal Commission, President's Framework, Corker-McCaskill, Bipartisan Policy Center, and balanced budget amendments, comparing the overall goals and specifics of each proposal.
Yesterday, according to Congressional Quarterly (subscription required), Reps. Jim Cooper (D-TN) and Frank Wolf (R-VA) sent around a “Dear Colleague” letter, pledging their support for the Gang of Six’s efforts to create a comprehensive bipartisan deficit reduction plan based on the Fiscal Commission recommendations. This letter comes in response to an op-ed from CRFB board members and Fiscal Commission co-chairs Erskine Bowles and Alan Simpson, who declared that “[m]embers of both parties and both houses must publicly support the work of the Gang of Six.”
As Cooper and Wolf write:
The Gang of Six has based their work off of the Bowles-Simpson plan, which is why it is important their discussions not only continue, but they have our bipartisan support…Never has there been a more important time in our nation’s history to come together to rein in our wasteful spending, stop playing favorites with the tax code, and put everything on the table…It is common political posturing for Democrats and Republicans to blame each other for acquiring this debt, but neither side can cast stones. Both are guilty of making new promises we can’t pay for, and tax breaks we can’t afford. It is time to stop using the deficit as a political weapon, and come together to find bipartisan solutions. The Bowles-Simpson plan is bitter medicine, and while not perfect could restore our fiscal health. There is never a convenient time to make tough decisions, but the longer we put off fixing the problem, the worse the medicine will be.
We are thrilled to see this bipartisan team in the House of Representatives coming out in support of the Gang’s efforts. And we hope more members from both parties and both houses will join them. As Bowles and Simpson write, “This is the time for heroes. The country is ready for leaders in Washington to put politics aside, pull together — not apart — put national interest ahead of political interests and put the next generation over the next election.”
We congratulate Reps. Cooper and Wolf for their leadership and courage, and encourage others to join them in providing bipartisan support for the work of the Gang of Six.
Pawlenty of Ideas – GOP presidential candidate Tim Pawlenty gave a speech in Chicago on Tuesday where he laid out his fiscal and economic policy agenda. Among his proposals are reforming the tax code by eliminating many tax breaks (see our ideas for tax expenditures) while reducing tax rates. He also called for a balanced budget amendment to the U.S. Constitution that caps federal spending at 18% of GDP. In addition, he mentioned raising the Social Security retirement age (see our ideas for Social Security reform), block granting Medicaid (see our ideas for controlling health care costs), and limiting the growth of defense spending. His plan also assumes a very optimistic 5 percent annual GDP growth rate to help reduce the deficit.
Biden Band Gets Back Together – The talks led by Vice President Biden resume Thursday after a week-long hiatus with a meeting of the bicameral, bipartisan group that is trying to negotiate a deal to raise the statutory debt limit and achieve $4 trillion in deficit reduction. Getting the group to sing the same tune will be difficult. One of the items on the meeting agenda is to discuss possible revenue increases, but Republicans have been adamant that taxes should be off the table. The group reportedly will also discuss capping spending as a percentage of GDP, along the lines of legislation proposed by Senators Claire McCaskill (D-MO) and Bob Corker (R-TN). Conveniently, the Peterson-Pew Commission today unveiled a new Fiscal Toolbox explaining and comparing various budget process tools like spending caps and debt targets that can help set the nation on a sustainable fiscal path.
To the Letter – Washington hasn’t yet produced much in the way of legislation dealing with our fiscal challenges, but lawmakers sure are churning out a lot of letters.
- Members of the House Republican Study Committee (103 in all) sent a letter to Speaker of the House John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) calling for “cut, cap and balance” to gain their support for a debt limit increase. Specifically, they suggest about $380 billion in spending cuts in 2012 to cut the deficit in half; capping spending at 18% of GDP; and a balanced budget amendment like the one supported by all Senate Republicans, S.J. Res. 10.
- Five Democratic senators forwarded a letter to Vice President Biden asking his group that is negotiating a debt limit increase and deficit reduction agreement not to accept the plan to reform Medicare included in the House-passed budget. They say “[w]e hope to identify delivery system reforms and other sources of savings that can extend the life of Medicare in its current form. But we will never allow any effort to dismantle the program and force benefit cuts upon seniors under the guise of deficit reduction.”
- A group of House GOP freshmen (76) penned a letter to President Obama demanding he put forth “a detailed plan that reduces the national debt and addresses entitlement reform.”
- More than half of House Democrats (109) wrote to Speaker Boehner demanding that revenues be put “on the table” in debt talks.
- Congressmen Frank Wolf (R-VA) and Jim Cooper (D-TN) wrote a “Dear Colleague” letter asking for support for the Gang of Six. They write “[t]here is never a convenient time to make tough decisions, but the longer we put off fixing the problem, the worse the medicine will be.”
Gang of Six Continues – Speaking of the Gang of Six, the bipartisan group met on Tuesday, absent Sen. Tom Coburn (R-OK), who has taken a break from the group. The rest of the gang continues to work towards a comprehensive fiscal plan that all members, including Coburn, can agree to. Two members, Senators Saxby Chambliss (R-GA) and Mark Warner (D-VA) spoke to the Economic Club of Washington Wednesday about their work on deficit and debt reduction.
Panetta Hints at Pentagon Penny-Pinching – In his responses to a questionnaire from a Senate committee overseeing his confirmation process, Secretary of Defense-designate Leon Panetta implied that the Pentagon would see significant budget cutting under his watch. Although he didn't offer much in the way of specifics, he did caution that "it must be understood that a smaller budget means difficult choices will have to be made." Senators may try to get the CIA director, and former OMB chief and CRFB co-chair, to elaborate more during his confirmation hearing before the Senate Armed Services Committee tomorrow. The DoD belt tightening has already begun under departing Secretary Bill Gates, who is looking for $400 billion in defense savings over 12 years. Gates, who is stepping down at the end of the month, recently suggested that military pay and retirement benefits be looked at for savings.
Washington Starts to Address the Process – Lawmakers are seriously looking at budget process reforms as a part of efforts to improve the fiscal outlook. The House Judiciary Committee is set to approve a constitutional amendment requiring a balanced federal budget each year next week when it returns from its recess. The bill, H.J. Res. 1, was amended in the committee last week to change the spending cap from 20 percent of GDP to 18 percent and to increase the congressional majority required to raise revenues from a three-fifths vote to a two-thirds vote, putting it in line with the Senate bill supported by all GOP senators. House Republicans are also reportedly considering including biennial budgeting in any deal to raise the debt limit. Under such a measure the annual budget process would be replaced by one where budgets are approved for two years at a time, with the off year used for closer oversight of federal spending. The Peterson-Pew Commission on Budget Reform, a project of CRFB, has spent over two years examining budget process reforms to make the process more functional, transparent and effective in putting the country on a sustainable fiscal course. It offered a suite of reforms in the report, Getting Back in the Black. It also released today a new Fiscal Toolbox that summarizes and compares ideas like spending caps and balanced budget amendments.
Tax Cuts Turn Ten – The tax cuts first enacted in 2001 had their ten year anniversary on Tuesday. CRFB observed the occasion by saying that if they are to see their teenage years, they need to be paid for. The tax cuts are set to expire in 2012 and will cost over $2 trillion by that point.
PowerPoint to the People – CRFB has created a new PowerPoint presentation, Averting a Fiscal Crisis, that clearly and succinctly outlines the scope of our nation’s fiscal challenges as well as some possible solutions. It is designed to offer an objective view of the situation in an accessible format to help foster open discussion about the issue. It is a great resource for community groups, town halls, classrooms, etc. Check it out.
For today's 10-year anniversary of the 2001 tax cuts (EGTRRA), CRFB issued a release this morning calling for any extensions of the 2001/2003/2010 tax cuts to be fully paid for. The 2001 tax cuts, along with the expansions and extensions in 2003 and 2010, will have cost the Treasury well over $2 trillion by 2012 when they are scheduled to expire.
Simply paying for any extensions in the tax cuts, whether through spending cuts or revenue increases elsewhere in the budget, could almost stabilize the debt this decade - which would be a great start on getting control of our longer-term challenges. Without patching the AMT the tax cuts would cost roughly $2.4 trillion over the next ten years, and nearly $3.2 trillion including interactions with the AMT. As you can see, the tax cuts are quite costly. Lawmakers should not extend them unless they're paid for.
In this blog we wanted to go a bit further than we did in our earlier release, and show you the costs of the main pieces of the tax cuts both with and without the interaction effects with Alternative Minimum Tax (AMT) patches.
|Numbers in Billions||
|Extend Tax Cuts on Income Below $200,000/$250,000||$1,285||$2,085|
Extend Ordinary Income Rate Reductions
Extend Child Tax Credit Expansion
Extend Preferential Capital Gains and Dividends Rates
Extend Marriage Penalty Relief
|Extend Tax Cuts On Income Above $200,00/$250,000||$710||$790|
|Extend Estate Tax at 2011 Levels||$365||$345*|
|Costs of Tax Cuts||$2,360||$3,215|
|Total Costs of Tax Cuts (Including AMT and Interest)||$4,705||$4,705|
Note: Numbers combine extensions supported by President Obama and House Republicans. All numbers rounded to the nearest $5 billion.
The AMT was enacted in the late 1960s, well before the Bush tax cuts were passed. The AMT was designed to ensure that high-income earners who qualified for many tax deductions, credits, and exclusions paid at least a minimum amount of taxes. . However, the AMT was not indexed to inflation. In addition it was not adjusted to take into account the 2001/2003 tax cuts, which pushed tax burdens low enough to subject more people to the AMT. To account for the lack of indexing and the failure to adjust the AMT in 2001, lawmakers indexed the AMT thresholds to inflation to help prevent more people becoming subject to the tax. Since then, Congress has repeatedly enacted AMT "patches" to prevent millions of Americans from facing higher taxes.
Making these patches permanent would cost about $700 billion over the next 10 years--however, the interaction with all the tax cuts would more than double those costs. If you attribute the interaction to the tax cuts, their cost increases from $2.4 trillion to $3.2 trillion, and the middle-income tax cuts increase from $1.3 trillion to $2.1 trillion (excluding the estate tax).
In our release we call on policymakers to fully pay for any extensions in the tax cuts, including making the tax code simpler, more efficient, and fairer. In addition, they should consider fixing this AMT problem once and for all.
There seems to be no lack of commentary and analysis from the media and think tank community on our fiscal challenges in both this decade and beyond. Much of this, however, can seem a little wonky and esoteric for those who have not been following the debate inside the beltway.
To remedy this situation, CRFB has recently released a PowerPoint backgrounder on our fiscal challenges, which we encourage policymakers and concerned citizens alike to read over and share. This Powerpoint is meant to offer an objective, non-partisan view of our country's fiscal situation as an educational tool meant to help foster open and honest debate about these issues.
In order to avert a fiscal crisis, policymakers must immediately address our rising public debt by enacting a comprehensive fiscal plan. Our long-term debt drivers—mainly, rapidly growing health care costs and an aging population—are placing a greater and greater strain on our budget. As our debt continues to grow, the U.S. will face less and less budget flexibility as interest payments on our enormous debt will squeeze out other available resources and joepardize strong economic growth over the long-term. Everything needs to be on the table, including spending cuts, tax reform, and budget process reforms. We need a fiscal plan.
Be sure to check out our Powerpoint, which outlines these challenges and some of the solutions offered.