Other CRFB Papers
Arizona Capitol Times | June 10, 2013
Our federal budget is on a destructive and dangerous path. It is vital for our leaders to find a solution to our $17 trillion national debt, or the next generation of Americans will inherit a country in a deeply dysfunctional state.
If we continue down this path, America will be unable to act on promises made in the past or to invest in our future, and those in the millennial generation will be stuck with more debt, higher taxes, fewer jobs and a lower standard of living. Lawmakers need to muster political courage and begin to rebuild our fiscal house.
A comprehensive approach will be necessary to lower our federal deficit, and our leaders in Washington should take note. Such an approach means tackling the real drivers of the debt, protecting high-value investments, and asking for shared sacrifice from every American.
Non-defense discretionary spending — a category that includes funding for education, infrastructure and research — has taken the brunt of the cuts so far through measures like the sequester. All the while, programs like Medicare and Social Security — which account for nearly all the growth in future federal spending — remain untouched. Any meaningful measure will tackle both the spending and revenue sides of the equation, but we all must accept that everything will have to be on the table for broad, bipartisan compromise to take place.
We need to achieve, at the minimum, $2.4 trillion in additional deficit reduction over the next decade to ensure our debt is on a downward path relative to the economy, and this can only be done by reforming our tax system and entitlement programs.
The first step is to understand the actual size and future impact of our fiscal imbalance and how policy changes distribute the benefits and burdens not only on one generation but among all generations. Congress can do this by passing a proposal put forth by The Can Kicks Back to instate generational accounting analysis, which would show the effect of policy changes to members of different age groups.
Many of the proposals that come out of Washington do not affect middle-aged Americans since reforms are phased in. Although such proposals are politically more favorable to an influential voting bloc, lawmakers cannot ignore the burden facing the next generation. Indeed, they must not only consider this constituency’s concerns, but also invite its leaders to testify before relevant committees. Young people deserve to have their voices heard on this critical issue, as they truly have the most to lose.
If we wait much longer to address these problems, the solutions we’ll be forced to enact will only be more disruptive and more visible, as the damage will have already been done. According to the Congressional Budget Office, over the next decade, the United States will spend $5.4 trillion on interest payments on the national debt, and $847 billion in 2023 alone.
Republicans and Democrats alike share the responsibility of addressing our fiscal problems now to ensure future generations of Americans do not inherit them. Kicking the can down the road for the next generation shows that our political leaders are unwilling to take political responsibility, and we urge Arizona Sens. John McCain and Jeff Flake to lead on this critical issue.
Both of us — a member of the Arizona chapter of The Can Kicks Back and a former member of Congress from Arizona and member of the Congressional Fiscal Leadership Council at the Campaign to Fix the Debt — want to leave a legacy of prosperous fiscal stewardship for the next generation. We strive to ensure that today’s leaders seriously understand the consequences of their fiscal decisions and that tomorrow’s leaders are given a chance to weigh in on issues that will affect them in the decades to come. We urge you to learn more about The Can Kicks Back (www.thecankicksback.org) and the Campaign to Fix the Debt (www.fixthedebt.org).
The Hill | June 4, 2014
The latest Social Security Trustees report, released last week, shows a program in peril. Within three years, the Social Security disability trust fund will run out of money, at which point the program will only be able to pay 80 percent of benefits to disabled workers. Assuming policymakers decide to allow the disability fund to take money from the old-age fund, the whole program will become insolvent in 2033.
The good news from the trustees report is that the program is in no worse shape than last year. But that should be of little comfort to anyone on the program two decades from now, who will face an immediate 23 percent benefit cut regardless of age or income.
Fortunately, this tremendously unfair and indiscriminate cut can be avoided. And if we act today, it can be averted through a number of modest and gradual changes that mostly slow and speed growth and give workers plenty of time to plan.
There is no shortage of policy ideas to fix Social Security, and as far as government programs go, Social Security is a relatively simple one. Most of the goals of reform can be met by adjusting a few levers — the initial benefit formula, the retirement age, the cost-of-living adjustment, the payroll tax rate and the maximum income subject to the payroll tax.
Indeed, with an online program called The Reformer: An Interactive Tool to Fix Social Security, anyone with a computer and an Internet connection can design his or her own reform. The tool lets users identify the tax and benefit changes they like in order to make the system sustainably solvent for the next 75 years and beyond.
Want to close the shortfall mainly on the spending side? Start by slowing benefit growth for the top 70 percent of beneficiaries and indexing the retirement age to growing life expectancy. Those two changes alone will get you three-quarters of the way toward solvency.
Want to close the shortfall mainly on the revenue side? You can close that same three-quarters of the gap by increasing the payroll tax from 12.4 to 13.5 percent and raising the maximum amount of income subject to the payroll tax from $114,000 to roughly twice that (though this plan would do far less in the 75th year).
Reforms ranging from measuring inflation more accurately to altering disability benefits to applying the payroll tax more broadly can close the remaining gap and even leave room to enhance benefits for some populations.
As a matter of policy, reforming Social Security just isn’t that hard. And changes can be made in ways that encourage work, exempt current retirees from benefit reductions, protect or enhance benefits for the most vulnerable and keep future benefits at least as generous as today’s for almost everyone else.
Unfortunately, politics has gotten in the way, and politics could be the program’s undoing. Benefit changes as sensible as measuring inflation more accurately have become an anathema to the AARP and to many on the left. And revenue changes as modest as gradually increasing the percentage of wages taxed to the levels seen in the mid-1980s are opposed by Grover Norquist and many on the right.
As a result, inaction may be good politics today, but it is incredibly myopic.
While both sides may prefer to wait until they are in a position to enact a solution on their own terms, the choices necessary to close the shortfall will be much more painful for both sides if we wait. As the baby boomers retire and benefits continue to grow, policymakers will soon lose the ability to phase changes in gradually and allow benefits continue to grow for new beneficiaries in real terms. And not too many years in the future, it will become impossible to exempt current retirees from changes or avoid broad benefit changes that affect even the lowest income beneficiaries.
At the same time, waiting will lead to larger and more broad-based tax increases as fewer generations will be able to share in the burden and benefit change simply won’t be able to phase in fast enough.
In the end, waiting to act will lead to unfair and unnecessarily abrupt changes that would rob today’s workers of the ability to plan and adjust.
Luckily, we have an opportunity to fix Social Security now — the easy way — if both parties are willing to come together and negotiate in good faith. But time is running out.
Note: The FY 2013 post-sequester numbers in Figure 1 have been corrected from the original version of this paper.
Politico | May 13, 2013
It seems the debt deniers are back.
If recent news reports are any indication, there is a growing sentiment that after enacting the nearly across-the-board “sequestration” spending cuts, Washington has already done enough to reduce the deficit and should avoid further deficit reduction that could disrupt the fragile recovery.
However, this rhetoric is based on the false notion that deficit reduction and economic growth are mutually exclusive. While we definitely should avoid immediate austerity, starting by reversing the austerity now in effect via the sequester, we must replace these less-than-intelligent, across-the-board cuts with a long-term fiscal plan — one that protects the recovery and promotes economic growth.
The austerity we currently face is precisely the result of our inability to deal with long-term deficits. Instead of reforming our Tax Code and entitlement programs, we’ve slashed important investments in the worst possible way.
Supporters of the status quo accuse those of us who want to fix the debt of supporting sharp austerity. Yet the civic leaders, small-business owners, current and former public officials and hundreds of thousands of average Americans who have joined me in supporting the Campaign to Fix the Debt believe exactly the opposite: We believe in ridding ourselves from the austerity already in effect. More important, we believe in growth. The key to unlocking this country’s economic potential isn’t to give up on smart deficit reduction; it is to enact a responsible plan to replace the mindless cuts that are currently the law of the land. Simply put, the only way out of this foolish austerity is to enact comprehensive deficit reduction.
Policymakers may pretend the current situation is sustainable, but in reality everyone loses.
By resisting continuing efforts to reach a responsible deficit-reduction deal that could replace the sequester, those in my party concerned about protecting programs that provide support for low-income people, enhancing public investments and ensuring the economic recovery is the tide that lifts all boats may very well be, unintentionally, thwarting all three goals. Indeed, by taking the view that we’ve done enough to control the debt, they may be condemning us to the sequester’s continued austerity and to the foolish across-the-board cuts they correctly deplore.
Our current situation is the worst of both worlds. Excessive, mindless deficit reduction in the short term when it will harm the economy, and rapidly growing debt over the long term when that debt will start slowing down economic growth. What’s more, the recent political maneuvering in which Congress acted swiftly to eliminate the sequester’s furloughs of air traffic controllers — while efforts to cancel the sequester as a whole went nowhere — underscores the political reality that the mindless cuts may be here to stay. Unless Congress replaces the sequester with a comprehensive deficit-reduction plan, 4 million meals for seniors will be eliminated, 70,000 children will be kicked out of of Head Start, and 125,000 American families will be at immediate risk of losing rental assistance and, along with it, their homes. The only way to avoid allowing a few powerful interest groups to get their own carve-outs from the budget cuts while leaving everyone else in the cold is to come to an agreement on a responsible deficit-reduction plan to replace the sequester.
Fortunately, there is a better way forward. The recent deficit-reduction plan put forward by Erskine Bowles and Alan Simpson, for example, would replace immediate austerity with a comprehensive plan that is smarter, larger and more gradual. Such a plan would help restore this country’s economic credibility. The markets must be reassured that the government is willing to control its debt over the long term. Enacting a plan now allows us to gradually phase in changes , allowing Americans time to adjust. Moreover, gradual changes would help the economy avoid the kind disruptions that are sure to occur if our elected leaders wait until market forces leave them with no choice other than through dramatic, sudden policy changes.
Rep. Chris Van Hollen (D-Md.) made this point at a recent Bloomberg forum when emphasizing the need to “take actions today that kick in over a phased period of time in the long term to address the out-year deficit and debt” in order to avoid a “‘squeezing out’ effect … that will put the brakes on the economy.”
Only by reducing our overly heavy debt burden can we be sure we’re putting our economy in an environment most conducive to sustained growth. Designed properly, a comprehensive deficit-reduction framework can promote short- and long-term economic growth. Such a deal would avoid the effects of the sequestration and reduce uncertainty; improve confidence in future economic growth; promote work, savings and investment over the long term; and reduce the likelihood of a debt-fueled fiscal crisis in the future. Only a comprehensive approach, one that reverses today’s austerity but enacts intelligent deficit reduction over time, will truly fix our debt.
The Hill | May 9, 2013
Over the last few days, politically driven critics have called on the president to abandon his support for changing the way the government indexes provisions in the budget to inflation by switching to “chained CPI.” Looking beyond politics, we’re here to say that these critics’ arguments are wrong on their merits.
As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy — and policymakers should not delay any further in making this improvement.
From a technical sense, the current CPI — or consumer price index — that is used to index many parts of the budget and tax code is widely understood to overstate inflation. This is because it fails to account for so-called “substitution bias,” in which consumers reallocate their purchases depending on the relative prices of similar goods. For example, if the price of apples goes up, consumers will buy more oranges. However, this behavior is not accounted for in standard CPI measurements.
The Bureau of Labor Statistics, which calculates the CPI, is very aware of this shortcoming, which is why it has developed and refined the chained CPI for more than a decade. The nonpartisan Congressional Budget Office states that the chained CPI “provides an unbiased estimate of changes in the cost of living from one month to the next.”
Some argue that using the chained CPI to index Social Security benefits is inappropriate because it does not reflect inflation for retirees, which critics suggest is higher than it is for working-age adults because of the elderly’s higher rate of spending on healthcare. However, the CBO has said that based on the available research, it is unclear whether the cost of living actually grows at a faster rate for the elderly than for younger people, and that the CPI-E —“E” for “experimental” — which was intended to provide a more accurate measure of inflation for seniors, has several methodological flaws that overstate inflation, including underestimating the rate of improvement in healthcare.
Beyond the technical case for the chained CPI, there is a strong fiscal case. Because current measures currently overstate inflation by about 0.25 percent per year, moving to a more accurate measure would result in real deficit reduction. Measuring inflation more accurately would generate savings from throughout government: about $390 billion in the first decade alone. Roughly one-third of those savings would come from slower growth in Social Security benefits, another third from revenue increases (as certain tax provisions such as the cutoff points of income tax brackets are indexed to inflation) and the remaining savings from a combination of other spending programs and lower interest payments on the debt. Given the very real need to begin to put our debt on a sustainable path, this would be a small but important contribution. The savings would be gradual, with only a small amount in the near term, thus protecting our fragile recovery from immediate austerity.
Finally, switching to chained CPI is the right retirement policy — or rather, a small piece of it. The Social Security program is on a path to exhaust its trust fund. Current projections indicate that this will occur in 2033, threatening cuts for all beneficiaries, including the very rich and the very poor, the very young and the very old, veterans, disabled workers and others. Improving the way we measure inflation won’t prevent the program’s looming insolvency, but it will eliminate a full fifth of the long-term funding gap.
To the extent that the overpayments under the current formula offset the shortcomings of our current retirement system for the lowest-income and most-elderly beneficiaries, a switch to chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations, rather than providing higher-than-justified inflation adjustments for all beneficiaries.
The federal government should not knowingly continue to measure inflation inaccurately, especially given the costs to the budget and to the Social Security program. Changes that cut Social Security benefits are a tough sell for Democrats, and changes that increase revenue are a tough sell for Republicans. But if they cannot even agree to a technical correction to those areas of the budget, how will they be able to make the hard choices to control our debt and reform our government over the long term?