The main focus of CBO's long-term budget outlook is rightly on the unified budget numbers regarding spending, revenue, deficits, and debt. But it is also important to look at trust funds, both in what CBO estimates for their insolvency date and how CBO's assumptions about trust funds can affect debt.
CBO's ten-year projections also project insolvency dates for three trust funds: the Highway Trust Fund (later this summer), the Social Security Disability Insurance (SSDI) trust fund (FY 2017), and the Pension Benefit Guaranty Corporation's (PBGC) multiemployer pension fund (FY 2024). The PBGC's trust fund exhaustion is reflected in the budget numbers, meaning that spending is automatically limited to incoming revenue, but the other two much larger trust funds are assumed to continue spending at scheduled levels despite not having the resources to do so.
The same goes for the two trust funds whose exhaustion dates will come after ten years and thus are only discussed in the long-term outlook: the Medicare Hospital Insurance (HI) trust fund and the Social Security Old Age and Survivors' Insurance (OASI) trust fund. CBO does not specifically project an insolvency date for HI, which finances Part A of Medicare, because it doesn't do long-term projections for each part of Medicare. It does say that exhaustion would likely come shortly after ten years, and by the looks of the ten-year projections, that date would likely be around 2027.
As for OASI, CBO projects the trust fund to run out in 2031, the same as it projected last year. But on a combined basis, the Social Security trust funds would be depleted in 2029, one year earlier than CBO projected last year.
Former Arkansas Governor and Republican presidential candidate Mike Huckabee has criticized other candidates who are calling for entitlement reform, but the promises he makes simply don’t add up. Yesterday at a campaign event in Florida, Governor Huckabee suggested that Social Security and Medicare should not change for anyone currently paying into the program, after he has already pledged to oppose any increase in taxes.
When it comes to Social Security, the Huckabee plan is mathematically impossible if he intends to keep the program as self-financing. The program is scheduled to run out of funds on a combined basis by 2033, which is more than 20 years before those newly entering the workforce begin to retire. Even eliminating all benefits for new workers would have no impact on the date of insolvency. That means the Huckabee plan for Social Security would effectively call for cutting benefits across-the-board by 23 percent in the early 2030s.
The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.
Consensus on the Gas Tax
Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.
No One Likes the Sequester
The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.
With the Social Security trust funds facing a significant shortfall over the next 75 years and expected to run out of money within 20 years, Alicia Munnell of the Center for Retirement Research at Boston College highlights two loopholes that could be closed to improve the program's solvency in a small but meaningful way.
Noting that creative ways to maximize Social Security benefits have been gaining popularity in recent years, Munnell focuses on two strategies to exploit loopholes she and her colleagues discussed in 2009 policy briefs, which have yet to be closed (the third loophole she highlighted has since been shut down through a new Social Security Administration regulation).
The first allows married beneficiaries reaching the normal retirement age (NRA, currently 66) to choose either to claim their own worker or spousal benefits (which is equal to one-half of your spouse's benefit), and the option to switch their choice later. This gives them the option of claiming a spousal benefit at age 66 and then switching over to their own unaffected retirement benefit when it maxes out at age 70, effectively giving the individual up to four years of the spousal benefit entirely on top of their own earned benefit. This loophole achieves no policy goal, and appears the result of a historical accident.
What we failed to mention is that our readers could analyze this and other plans themselves through CRFB's interactive Social Security Reformer tool. The Social Security Reformer allows users to simulate an existing plan or create their own. Although the Social Security Reformer does not have every permutation of every Social Security policy out there, it has enough capability to understand the broad financial impact of most Social Security plans, as well as the impact in each year.
This morning, Governor Chris Christie (R-NJ) delivered an important speech in New Hampshire on the need for entitlement reform. The speech not only focused on the need to address the rapid growth of Social Security, Medicare, and Medicaid but actually put forward a plan to begin addressing these issues. By our rough estimate -- and depending on many of the details -- this plan would save over $1 trillion in the next decade alone while significantly improving the solvency of Social Security and Medicare.
Below is a short summary of Governor Christie's plan.
Social Security Reform
In his speech, Governor Christie called for Social Security reform, explaining that the program "is slowly working its way to insolvency – which the actuaries say will come in the early 2030s, less than 20 years from now... as the number of workers relative to the number of beneficiaries continues to shrink."
To address Social Security's looming insolvency, Christie proposes a number of changes. The most significant policy, in terms of savings, would be to raise the normal retirement age by two months per year from age 67 in 2022 (as under current law) to age 69, and then index it for life expectancy. At the same time, his plan would raise the earliest eligibility age from 62 to 64.
In addition, Christie proposes to calculate COLAs based on the more accurate chained CPI (with a benefit bump-up for 85 year olds), to phase out Social Security benefits for the highest earning seniors (phased out between $80,000 and $200,000 of non-Social Security income), and to eliminate the payroll tax for senior workers.
The bipartisan duo of Reps. John Delaney (D-MD) and Tom Cole (R-OK) have reprised a bill from last year to create a Social Security Commission. The bipartisan and bicameral commission would be required to come up with a plan to make Social Security solvent for 75 years.
The commission would involve 13 members, with 3 each appointed by the party leaders in the House and Senate and a Chair appointed by the President. It would have to report its recommendations within one year of its first meeting, and it would take 9 votes for the report to be sent to Congress. At that point, the legislation would get expedited consideration and an up-or-down vote in Congress.
Both Congressmen stressed the need to make changes to Social Security to avoid a large across-the-board cut in benefits when the program goes insolvent, currently projected to happen in 2033 according to the Social Security Trustees. Both also noted the need to move quickly, a smart move because the needed changes get larger the longer we wait.
Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, testified Wednesday in front of the Ways and Means Social Security Subcommittee on maintaining the solvency of the Social Security Disability Insurance Trust Fund.
Without congressional action, the trust fund reserves will be depleted next year. The exhaustion of the DI fund, one of the upcoming fiscal speedbumps, would result in a roughly 20 percent across-the-board benefit cut. The President has proposed reallocating money from the Old Age fund to bolster the DI fund. This measure, known as a reallocation, has sparked much debate after a new House rule was adopted requiring legislation implementing such a transfer to also include reforms.
Proponents argue that reallocation is a routine measure, enacted numerous times in the past, and is therefore adequate in the current situation. In his testimony, Lorenzen explained that previous reallocations have often been accompanied by reforms, a precedent that's particularly important to follow this time.
After a thorough review of past reallocations, Lorenzen reaches four major conclusions:
Jim Kolbe and Charlie Stenholm are former members of Congress and members of the Committee for a Responsible Federal Budget. Jim Kolbe (R-AZ) served from 1985 to 2007, while Charlie Stenholm (D-TX) served from 1979 to 2005. They wrote a commentary that appeared in Roll Call, which appears below.