Other CRFB Papers
The Congressional Budget Office (CBO) today released its updated budget and economic projections for the coming decade, showing that while short-term deficits are down, the debt continues to grow unsustainably over the long term. The report focuses on a “current law” baseline, which assumes policymakers generally pay for passing any new or extended tax cuts or spending increases. Under this scenario, CBO shows the following:
- Deficits will fall to $426 billion (2.4 percent of GDP) in 2015 and $414 billion (2.2 percent of GDP) in 2016, but will grow from there with trillion-dollar deficits returning by 2025, when annual borrowing will total 3.7 percent of GDP.
- Debt held by the public will grow by nearly $8 trillion between now and 2025, from over $13 trillion today to $21 trillion by 2025. As a share of GDP, debt will remain near its post-World War II record high of 74 percent through 2021, before rising to about 77 percent of GDP by 2025.
- Spending will grow from 20.6 percent of GDP in 2015 to 22.0 percent in 2025 while revenues will remain at about 18.3 percent of GDP.
- Interest spending represents the fastest growing major part of the budget, rising from $218 billion (1.2 percent of GDP) in 2015 to $755 billion (2.8 percent of GDP) by 2025. Spending on the major health and retirement programs will grow from 10 to 12 percent of GDP.
- CBO’s projections are quite similar to those made in March, with lower interest rates improving the forecast but being largely offset by various technical changes and the recent permanent “doc fix” legislation.
- Extrapolating forward, we project debt would likely exceed the size of the economy by around 2040, and continue to grow thereafter.
- We project under the assumptions of CBO’s Alternative Fiscal Scenario, where Congress extends various expired and expiring tax provisions and eliminates ”sequestration,” debt would exceed 85 percent of GDP by 2025 and exceed the size of the economy by around 2030.
CBO shows an unsustainable fiscal outlook under current law, and an even more dangerous one if policymakers continue to act irresponsibly. Lawmakers will therefore need to strictly abide by pay-as-you-go rules and take steps to control the growth of entitlement spending, while enacting other tax and spending reforms to put debt on a downward path over the long run.
See the full document below or download it here.
In early 2015, the Committee for a Responsible Federal Budget (CRFB) warned of the upcoming Fiscal Speed Bumps, explaining “lawmakers will face a number of important budget related deadlines…that will require legislative action.”
Inaction and postponed deadlines have created a gathering storm where Congress and the President must address four remaining Fiscal Speed Bumps before the end of the year:
- The end of 2015 appropriations and return of sequester caps (October 1)
- The expiration of the highway bill and insolvency of the Highway Trust Fund (October 30)
- The exhaustion of extraordinary measures to avoid raising the Debt Ceiling (mid-Fall)
- The deadline to renew tax extenders retroactively (December 31)
Although deadlines vary, political considerations may cause lawmakers to combine these issues – leading to a double, triple, or even quadruple cliff.
An irresponsible approach could add up to $2.5 trillion to the debt by 2025 above what current law allows. Instead, lawmakers should take advantage of this gathering storm to make sensible reforms to improve policy, accelerate economic growth, and address the overall fiscal situation.
Appropriations End. Sequester-Level Caps Return (October 1)
When the government’s fiscal year ends on September 30, so too will the laws that provide discretionary dollars. In theory, Congress is supposed to pass 12 appropriations bills before October in order to fund the government for Fiscal Year 2016 (FY 2016). However, the House has passed only six so far, while the Senate has not passed any. Failure to pass appropriations bills – or a Continuing Resolution (CR) that would generally provide funding at current levels – would result in a government shutdown.
Assuming policymakers avoid a shutdown, they will still need to decide at what level to fund the government. The Ryan-Murray Bipartisan Budget Act set spending levels for only FY 2014 and FY 2015. For FY 2016, current law spending caps will be dictated by automatic spending reductions commonly referred to as the “sequester.”
Under sequestration spending levels, nominal discretionary caps will rise only $3 billion (0.3 percent) next year – and remain about $90 billion below the pre-sequester caps set in the Budget Control Act. A number of policymakers and outside analysts have called for repealing or reducing the impact of this sequester.
Permanent sequester repeal would cost nearly $1.2 trillion after interest over the next decade – although policymakers could enact a partial and/or temporary reduction of the sequester cuts. In any case, lawmakers should fully offset the costs with more thoughtful permanent savings that grow over time, without relying on gimmicks.
Legislation increasing the discretionary caps could also be accompanied by budget process reforms to strengthen their enforcement and restrict the use of gimmicks – such as the use of the Overseas Contingency Operations in the Congressional budget to effectively circumvent the defense caps. We describe such reforms in Strengthening Statutory Budget Enforcement.
In September, CRFB will release a plan to replace a portion of the sequester cuts over the next two years and on a permanent basis with savings elsewhere in the budget.
To learn more, read Everything You Should Know About Government Shutdowns, Appropriations 101, and Understanding the Sequester.
Highway Bill Expires and Trust Fund Runs Low (October 30)
At the end of October when the current highway bill expires, no new funds may be obligated to transportation projects without additional legislation. Within a few months of this deadline, the Highway Trust Fund (HTF) will exhaust its reserves.
Ultimately, policymakers should close the structural gap between dedicated tax revenue (e.g., the gas tax) and highway spending, which is projected to total about $13 billion this year and $175 billion through 2025. Preferably, this gap would be closed permanently with structural changes to revenue and/or spending, although a fully-offset general revenue transfer could be used to buy time, as it was this July.
CRFB released an illustrative plan in May: The Road to Sustainable Highway Spending, which included a fully-offset, short-term cash infusion into the trust fund, a process for tax and transportation reform, a scheduled 9-cent per gallon gas tax increase if alternatives were not identified, and a spending limit to keep future highway costs in line with revenue.
For more background, see our paper Trust or Bust: Fixing the Highway Trust Fund.
Federal Debt Ceiling is Reinstated (Mid-Fall)
The federal debt ceiling – which was suspended in February 2014 – was reinstated this March, limiting gross federal debt to its current level of $18.15 trillion. Through “extraordinary measures,” the Department of Treasury has been able to delay the need to address the debt ceiling even as the federal government continues to borrow. However, those measures are estimated to run out sometime after the end of October.
Policymakers must increase or suspend the debt ceiling to avoid a potentially disastrous government default, and should do so in a timely manner because waiting until the 11th hour could have negative economic consequences. At the same time, the debt ceiling can be – and in the past has been – an opportunity to take stock of the nation’s unsustainable fiscal situation and make fiscal reforms. An increase would ideally be accompanied with improvements to reduce the long-term debt.
Reforms to the debt ceiling itself should also be considered. Through our Better Budget Process Initiative, CRFB has presented a number of ideas for Improving the Debt Limit to better promote fiscal responsibility without generating as much economic risk.
To learn more about the debt ceiling, read Q&A: Everything You Should Know About the Debt Ceiling and Understanding the Debt Limit.
“Tax Extenders” Reach Reinstatement Deadline (December 31, 2015)
At the end of last year, over 50 temporary “tax extenders” expired. These include individual and business tax breaks for research and experimentation, wind energy, state and local sales tax, and many others.
Most are renewed regularly and can be reinstated retroactively through the end of 2015, and possibly later. Doing so for 2015 would cost over $40 billion before interest, and extending them into 2016 would cost about $95 billion. Many of these provisions have been enacted temporarily to hide their costs, but the price mounts if they are continued year after year. A permanent extension would cost roughly $500 billion through 2025 for traditional extenders, $245 billion for bonus depreciation, and $200 billion for expiring refundable credits – about $940 billion total.
Rather than add to the debt, lawmakers should use this deadline as an opportunity for comprehensive, pro-growth tax reform that simplifies the tax code, reduces tax rates and deficits, broadens the tax base, promotes growth, and makes thoughtful choices about how to address each tax extender. Last year, CRFB proposed the PREP Plan, which combined a temporary extension with a fast-track process for tax reform and offset the cost with tax compliance measures.
To read more about the tax extenders, see The Tax Break-Down: Tax Extenders.
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The gathering fiscal storm facing our country this fall will require legislation to address the important budgetary issues mentioned above. We hope Congress and the President use this as an opportunity to improve, rather than worsen, the nation’s unsustainable fiscal situation.
August 14 marks the 80th birthday of the Social Security program, which was established in the Social Security Act of 1935. Over the past 80 years, Social Security has provided important cash benefits and income security to seniors, survivors, individuals with disabilities, and their families – including to nearly 60 million people today.
Yet Social Security is on a financially unsustainable course – and is not on track to be able to pay full benefits through its 100th birthday. Last year, the program paid $73 billion more in benefits than it raised from taxes. As the more of the baby boom population retires and Americans continue living longer, that gap is projected to grow – depleting the trust fund reserves of the disability program late next year and the old age program in the early- to mid-2030s. Failure to address the gap between spending and revenue could result in an immediate 19 percent cut to all workers with disabilities, and a 20 to 30 percent across-the-board cut to retirees.
Sadly, instead of identifying solutions to prevent depletion of the trust funds, many commenters have relied on myths and half-truths to avoid having a conversation about the necessary choices. In this paper, we identify eight such myths – though there are many more:
- Myth #1: Social Security does not face a large funding shortfall
- Myth #2: Today’s workers will not receive Social Security benefits
- Myth #3: Social Security would be fine if we hadn’t “raided the trust fund”
- Myth #4: Social Security cannot run a deficit
- Myth #5: Social Security has nothing to do with the rest of the budget
- Myth #6: We don’t need to worry about Social Security for 20 years
- Myth #7: Social Security reform is code for slashing benefits, especially for the poor
- Myth #8: Social Security is too hard to fix
Below, we debunk these myths in the hopes that an honest discussion of the facts will lead policymakers to come together and put Social Security on a sustainable path for the next 80 years.
See the full document below or download it here.
Update 8/17/2015: The original version of this paper described the changes needed to fix Social Security as “modest” while describing the changes that could gradually take place over time. We've updated the language to “incremental” for clarity.
Update: The original version of this paper had a mathematical typo, saying that Medicare beneficiaries get, on average, 350% more out of the program than they paid in. The average beneficiary actually receives 250% more than they paid in, which is 350% of the taxes paid.
Today, the Social Security and Medicare Trustees released their annual reports on the financial health of the programs. Although these projections show some improvements relative to last year, they nonetheless show both programs continue to face large shortfalls that will grow over time. With regards to Social Security, the Trustees show that:
- The Social Security Disability Insurance (DI) trust fund is on the brink of depletion, and is projected to be exhausted in late 2016 – just over a year from today. Absent legislation, beneficiaries in that program would face an immediate 19 percent across-the-board benefit cut.
- On a combined basis, or assuming reallocation or interfund borrowing, the Old Age, Survivors, and Disability Insurance (OASDI) trust funds are projected to be exhausted in 2034. At that point, all beneficiaries would face an immediate 21 percent across-the-board benefit cut, which would grow to more than 27 percent by 2090.
- Over 75 years, Social Security’s actuarial imbalance totals 2.68 percent of taxable payroll, or about 0.96 percent of GDP.
- The gap between Social Security spending and revenues is projected to grow from 1.3 percent of payroll (0.46 percent of GDP) this year to 3.5 percent of payroll (1.26 percent of GDP) by 2040 and 4.7 percent of payroll (1.62 percent of GDP) by 2090.
- Overall, this year’s report represents an improvement over last year’s, which showed a combined trust fund exhaustion date of 2033 (one year sooner) and a 75-year actuarial imbalance of 2.88 percent of payroll (0.20 percentage points higher).
Although the projections have slightly improved, Social Security’s long-term outlook is fundamentally unchanged. The SSDI trust fund will be depleted next year, and the combined trust funds by the time today’s 48-year-olds reach the normal retirement age – or when today’s newest retirees turn 81.
Policymakers must act quickly to put Social Security on a path toward solvency. As time goes on, it will be more difficult to secure the Social Security programs for current and future generations with thoughtful changes instead of abrupt benefit cuts or tax increases.
Read the full report below, or at this link (pdf).
For additional budget process resources including specific options for reform, visit our Better Budget Process Initiative home page.
A previous version of this chartbook is available at Chartbook: Avoiding Budget Gimmicks and explanations of the previous charts are included on the blog Everything You Need to Know About Budget Gimmicks, in 8 Charts.
As Congress begins the appropriations process, maneuvers through this year’s Fiscal Speed Bumps, and looks to pay for the costs of new legislation, they may be tempted to rely on budgetary slights-of-hand in order to avoid hard choices. With debt already at record-high levels, these budget gimmicks will both worsen the fiscal situation and undermine Congress’ credibility.
Here are four gimmicks to watch out for. See illustrations of these and other gimmicks in our chartbook:
- Pension Smoothing: Some policies would save money in the near-term by shifting revenues from the future, taking advantage of the ten-year Congressional budget window. One specific policy called “pension smoothing” would reduce employer pension contribution requirements (increasing taxable profit) initially and increase them (reducing taxable profit) later. The policy would raise revenue in the first decade but lose that same revenue afterwards, and thus should not be used as a pay-for.
- OCO Defense Slush Fund: Non-war defense spending is capped under current law and limited by “sequestration.” But the caps can be circumvented by designating some non-war defense spending as “Overseas Contingency Operations” (OCO) funds, which are exempt from spending limits. The current budget resolution allows appropriators to spend $96 billion on OCO, even though the Pentagon only requested $58 billion, using the account as a slush fund. Any significant divergence from the Pentagon request would represent a gimmick meant to inflate defense spending.
- Phony CHIMPs: Just as policymakers may use the OCO designation to exceed defense spending caps, they may use savings from CHIMPs – or Changes in Mandatory Programs – to thwart the non-defense caps. CHIMPs allow policymakers to offset discretionary spending over current limits with mandatory spending cuts. While the principle is sensible, in reality most of the mandatory cuts either reduce spending that would have never occurred or count one-year spending delays as if they are spending cuts. The use of this gimmick has increased since 2011 and should ultimately be discontinued.
- Double Counting Tax Reform Revenue: The same money cannot be used twice, but complicated budget conventions sometimes allow policymakers to claim it can. For example, they may use the same revenue to simultaneously pay for rate reduction and finance spending from the Highway Trust Fund. Revenue raised should only be used for one purpose or the other.
For additional budget process resources including specific options for reform, visit our Better Budget Process Initiative home page.
RealClearPolicy | May 21, 2015
Congress faces yet another deadline, and yet again is set to stall. This time, there literally could be a bumpy road ahead.
The current legislation authorizing highway and mass-transit spending is scheduled to expire at the end of the month. Not long after that, the Highway Trust Fund (HTF) will run out of reserves, which will cause road-improvement projects across the country to grind to a halt. Legislative action is required to avoid delaying critical infrastructure projects and the jobs they produce.
A two-month extension of highway funding has already been passed by the House and is likely to be enacted soon. Lawmakers should use the extra time to end the cycle of temporary fixes and produce a long-term solution that is free of gimmicks and is fiscally responsible.
Another short-term extension is in keeping with Washington's recent track record in dealing with similar circumstances. Time after time, deadlines have been nearly missed or even outright disregarded when it comes to important budget and fiscal matters. Lawmakers have often kicked the can down the road with short-term patches, only to be forced to address the same issue again and again. Steering haphazardly over these "fiscal speed bumps" has imperiled the nation's finances and caused voters to question the ability of Congress to function.
In the relatively few instances when an issue was actually resolved, it was done in a way that worsened the already unsustainable long-term national debt outlook. This was the case with the recent "doc fix" that permanently replaced the Sustainable Growth Rate (SGR) formula for Medicare payments to physicians. By our calculations, the "fix" will add over $500 billion to the long-term debt.
Now, Congress faces a highway-funding shortfall of about $175 billion over the next decade. That's the equivalent of a 14-cent-per-gallon gas-tax increase, or more than a 35 percent cut in future spending.
After multiple temporary patches, lawmakers want to kick the can yet again, this time in the hopes that tax reform can be enacted later this year and can provide revenue for the Highway Trust Fund.
With our infrastructure spending underfunded and our tax code badly in need of reform, marrying tax and highway policy offers a rare two-for. But passing tax reform is also very hard — which is why it hasn't happened in almost 30 years — and counting on its passage to fund current highway projects puts those and future projects at risk.
Legislators must come up with a plan that charts a course for stable highway funding while avoiding potholes and wrong turns without driving up the debt.
My colleagues at the Committee for a Responsible Federal Budget and I have written a new paper, "The Road to Sustainable Highway Spending," that lays out such a plan — one that would encourage the passage of tax reform to fund highway spending, but not count on it to keep the program solvent.
The proposal has three components:
- Get the trust fund up to speed by paying off $25 billion of "legacy costs" from past highway commitments by reducing unnecessary farm subsidies and extending certain spending cuts from the Ryan-Murray budget deal.
- Bridge the financing gap by ensuring that revenue and spending remain closely in line through a default policy that schedules a 9-cent gas-tax increase one year in the future and limits annual highway spending to revenue collection and interest income.
- Create a fast lane to tax and transportation reform that uses a special process to give Congress the opportunity to utilize tax reform to find alternative revenue to replace some or all of the scheduled gas-tax increase, pay for higher infrastructure spending, or both.
The plan described above gives Congress both the power and the responsibility to decide how we should finance our infrastructure spending and how large the federal investment should be. But it ensures that every dollar of highway spending is fully paid for, and puts an end to the process of temporary gimmick-ridden patches that pave over the real problem.
We face a rocky road for highway funding because policymakers refuse to work together and make the decisions necessary to move forward. There are lots of options available; Congress must build on those ideas. In "The Road to Sustainable Highway Spending," we illustrate one potential route.
We can't afford any more "my way or the highway" attitude from lawmakers. We need collaboration and leadership. It's time to get to work.
Marc Goldwein is the Senior Vice President and Senior Policy Director of the Committee for a Responsible Federal Budget.