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Report: Analysis of CBO’s 2014 Budget and Economic Outlook

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Note: The paper's mention of the change in deficits from 2015 to 2024 has been corrected.

Op-Ed: Helping the Budget $150 Billion at a Time

The Hill | January 14, 2014

By all accounts, 2014 is unlikely to be the year of the grand bargain…or anything close. Neither the President nor any of the political leadership is actively trying to fix the nation’s fiscal problem; there is no immediate crisis; and the issues of major entitlement reforms and revenues are hard enough that most politicians are quite happy to just look the other way.

That said, Congress has returned to DC to find many outstanding issues including the expiration of extended unemployment benefits, an impending 25 percent cut in Medicare payments to physicians, and the expiration of various targeted tax cuts known as “tax extenders”, all of which will create a number of important fiscal litmus tests.

These policies all come with a cost, and the question is; will congress find ways to pay for them or will they resort to their old habit of charging them to the national credit card?

One of the important achievements of the Ryan-Murray budget deal passed at the end of last year was that while it lessened the constricting caps of the sequester, it not only fully paid for the changes, it banked a little extra savings.

Congress should, at the very least, hold itself to the same standard for all of the mini-fiscal moments of 2014. One way to do this would be to pursue three bite-sized $150 billion packages focused on each of these policies.

Already, discussions are underway about an extension of unemployment insurance. Given the still weak condition of the economy, it makes sense to extend unemployment benefits and to consider doing a larger package to create jobs and spur the economy. A package could extend and reform unemployment benefits, along with other measures such as infrastructure investments, job training, or targeted tax breaks aimed at promoting job growth or investment.

One option to pay for this, would be to switch to chained CPI—a more accurate way of measuring inflation—and use $150 billion of the non-Social Security portion of the savings to pay for the growth package and some deficit reduction. (The additional savings that would come from the Social Security program should be used to help shore up the program and provide enhancements to low income beneficiaries.) Such a deal would have the multiple benefits of helping the economy, the fiscal situation, and, separately, Social Security.

A second $150 billion package could pay for fixing the impending 25 percent cut in doctors’ payments, or the unsustainable “Sustainable Growth Rate” (SGR). The Congressional health committees have put forward packages which would replace the SGR with a formula that promotes quality over quantity of care and encourages participation in coordinated care models. What they have not done? Proposed how to pay for it.

Congress could pay for these reforms with a $150 billion package of structural health reforms that help slow its cost growth. Such a package could include expanding new forms of cost-controls like bundled payments and readmission penalties; restricting supplemental health plans which lead to the overconsumption of health care; reforming overly-complicated cost-sharing rules; increasing the use of generic drugs; and expanding the means testing of Medicare premiums.

Finally, a third $150 billion package could pay for a one-year extension of the “tax extenders” which expired at the end of 2013, along with a permanent extension of the low-income support from the child tax credit and earned income tax credit scheduled to expire in 2017. One payfor option would be a plan developed by myself, Dan Feenberg and Martin Feldstein of Harvard University, where the amount of tax breaks any one individual can claim are limited to a certain dollar amount, or share of one’s income. It’s not comprehensive tax reform which we need, but it’s a step in the right direction.

These packages won’t be nearly enough to solve our debt problem – much more would need to be done. Still, enacting this series of incremental $150 billion packages would be consistent with the simple principle our lawmakers need to re-learn—if something is worth doing, it’s worth paying for.

Each of these three packages would save more money than they cost, particularly over the long-term. But none would be about simply making numbers add up, they’d be about improving the way we tax and spend to better promote growth, offer certainty, improve the health system, and moving us toward more responsible budgeting.

Op-Ed: Five Facts You Should Know About Social Security

Huffington Post | January 9, 2014

The recent column by Jane White on Social Security reform mischaracterized the position of the Committee for a Responsible Federal Budget (CRFB) and ignored fiscal realities facing Social Security. CRFB is not calling for a 16.5 percent across-the-board cut in Social Security benefits as White suggests. We are, however, calling on policymakers to act sooner rather than later to address the very real financial challenges facing Social Security that White ignores.

The paper that White references compares the cost of fixing Social Security now as opposed to if we wait. It shows how much benefits would need to be reduced now, or revenues would need to be increased, to restore Social Security solvency, compared to the changes that would be required in ten or twenty years from now. The paper in no way advocates an across-the-board cut in benefits (or an across-the-board increase in the payroll tax) as the way to restore solvency, but simply provides estimates to illustrate how the magnitude of changes required will increase if we delay acting.

While CRFB has not endorsed a specific Social Security reform plan, we have commented favorably on a variety of plans which rely on a mix of reductions in promised benefits, increased revenues and targeted benefit enhancements. We have also developed an online tool, the Social Security Reformer, which allows individuals to view the options for changes in benefits and revenues and design their own plan to restore solvency.

Despite acknowledging that she is not knowledgeable on Social Security's finances and needs to research options for fixing Social Security, she pre-emptively rules out any reductions in promised benefits and speaks favorably about proposals to increase benefits. Taking any reduction in promised benefits off the table will jeopardize the ability of policymakers to take action to ensure Social Security is financially sound for future generations and the government is able to meet other priorities. If White were to begin her research into options for fixing Social Security with an open mind, she would learn several facts which might cause her to reconsider her knee-jerk reaction to any reductions in scheduled Social Security benefits:

1. Benefits will be cut by over 23% within the next twenty years if no changes are made. The Social Security system is already running cash shortfalls, which are projected to exhaust the trust fund by 2031 (according to the Congressional Budget Office) or 2033 (according to the Social Security Trustees). At that point, the benefits Social Security would be legally able to pay would be limited to the revenues coming into the program, which would only be sufficient to pay approximately 77 percent of promised benefits. The 23% cut in benefits would apply to all beneficiaries, including those already receiving benefits and low income seniors with benefits at or below the poverty level.

2. Social Security benefits will increase in real terms for future retirees even with changes in benefits to restore solvency Social Security benefits are indexed to wage growth, which increases faster than inflation. As a result, initial Social Security benefits for future retirees will be higher than they are for current beneficiaries even after adjusting for inflation. In addition, increasing life expectancy means future retirees will receive benefits for more years, resulting in much greater lifetime benefits. Under current law, the average lifetime benefit would double in real terms over the next 75 years. Social Security reform plans which include "cuts" in Social Security benefits to restore solvency simply scale back part of this increase and still result in future retirees receiving higher initial benefits and total lifetime benefits than current retirees.

3. The Social Security shortfall cannot be closed solely through increased taxes on upper income taxpayers. Contrary to the assertion being made by some progressives that the problems facing Social Security can be solved simply by eliminating the cap on taxable wages, the Social Security actuaries estimate that eliminating the cap would close about 70 percent of the program's 75-year shortfall and only about 33 percent of the gap in the 75th year. A proposal from Senator Tom Harkin that would also increase benefits across-the-board would solve even less: closing only half of the 75-year shortfall and 20 percent of the gap in the 75th year.

Under the current structure of the system, a portion of the increased revenues raised from wealthier taxpayers by eliminating the wage cap would go to finance higher benefits for these same wealthy individuals when they retire. The amount of the shortfall that would be closed would be somewhat greater - roughly 86% -- if the wages above the current cap were not credited toward benefits. However, breaking any link between higher contributions and higher benefits would represent a fundamental change in the social insurance nature of the program that causes concern among many supporters of social insurance who believe that the link between contributions and benefits is a key feature of the program.

Eliminating the taxable maximum entirely would also make it harder economically and politically to enact further tax increases on upper income taxpayers to meet other needs. Relying on elimination of the taxable maximum to restore Social Security solvency represents a judgment that preserving 100% of promised benefits under Social Security for everyone, including wealthy retirees, is a greater priority than other possible uses of the additional revenues from upper income taxpayers that would be generated by eliminating the taxable maximum.

4. Delaying action will make the options for restoring solvency more painful Not only does waiting to act mean any tax increases or benefit cuts will be steeper, it literally means they will need to be bigger. A shortfall which could be solved with a 16.5 percent across-the-board benefit cut or 2.7 percentage point increase in the payroll tax today would require a 19 percent cut in benefits or 3.3 percentage point increase in payroll tax if we wait a decade to act. This is true for at least two reasons. First, waiting will mean that there are fewer total people to share in the tax increases or spending cuts - that means more increases/cuts per person. Secondly, the longer we wait, the less money is in the trust fund and the less interest it will generate. Ironically, the actions of those who resist efforts to reform Social Security by downplaying the magnitude of the problem and the need for action to address the shortfalls now will actually lead to deeper cuts in benefits for all beneficiaries and/or greater increases in payroll taxes for workers than would otherwise be the case.

5. The major Social Security plans that rely on a combination of benefit changes and increased revenues to restore solvency include targeted benefit enhancements for vulnerable populations at greatest risk of poverty. The Social Security reform proposals in the Simpson-Bowles and Domenici-Rivlin plans include an increase in the minimum benefit that would enhance benefits for low-income workers and a progressive benefit bump up in benefits for the very old and long-term disabled most at risk of outliving their retirement savings. These provisions would provide greater poverty protections than current law.

Earlier plans to restore Social Security solvency such as the plan proposed by CRFB President Maya MacGuineas along with Jeff Liebman and Andrew Samwick and the legislation introduced by CRFB board members Charlie Stenholm and Jim Kolbe had similar benefit enhancements for low-income populations. Providing benefit enhancements targeted at those most at risk of poverty is a much better use of limited resources than an across-the-board increase in benefits for all retirees, including wealthy seniors, as the legislation introduced by Senator Tom Harkin would do.

The future of the Social Security program is a serious issue that deserves a serious debate that honestly acknowledges the challenges facing the program and trade-offs involved in addressing the problem. Absolutist positions ruling out options before even considering them does a disservice to the debate.

Op-Ed: Don't Be So Quick To Dismiss The Paul Ryan-Patty Murray Budget Deal

Forbes | December 18, 2013

The Congressional Budget Conference Agreement is a paradox. On its face it is underwhelming. It ignores the pressing long-term problems. It “kicks the budget can” for another 2 years. Its savings are not all clean-cut. There is no way to guarantee the out-year savings. Measured against the need, it fell far short.

On the other hand, compared to the fiscal squabbling of the past several years, it was a major reversal, a surprising bipartisan compromise from a Congress which had made that phrase oxymoronic. There has been no budget resolution for years. There has been precious little agreement on anything. Suddenly, it appears that the warring parties have decided that government closings and potential defaults may not be the best policies.

The budget agreement actually did some good things. It cancelled some of the most objectionable parts of the sequester which were threatening immediate harm, especially in defense spending. It replaced those lost savings with small reductions in mandatory spending and small increases in fees.

Even better, it was a two-year agreement. To move from no budget to a 2-year budget is nearly miraculous. The debt ceiling problem aside, government closures seem to be out of the picture for 2 years. It probably does not signal a sea change in Congressional comity, but it does give the Appropriations Committees a chance perform as they are intended, both in FY ’14 and is FY ’15.

Sen. Murray and Rep. Ryan took the Congress as far as it could possibly go. They gave no important help to the debt and deficit problems, but they did make important changes in the way that the parties and the houses have been dealing with one another. There is no assurance that the Congress has done an about face on its fiscal fisticuffs, but the budget agreement is a welcome change from the unrelenting warfare of the past 5 years.

The debt ceiling hurdle still looms ahead, probably in March. Other policy issues, including trade, immigration, and energy remain untouched. There is hope that Ryan-Murray will be infectious, but 2014 is an election year. Good things seldom happen in election years. But, perhaps, 2014 may be a bit more peaceful than 2013.

What now seems certain is that hope for Grand Budget Bargain is gone, probably until after the next presidential election in 2016. Until then, budget improvements will be incremental at best. At worst, there may be back-sliding. Both parties will cling to their standards. Democrats will defend the big entitlements to the death. Ditto for Republicans in defense against all tax increases.

So, one on hand, the paradoxical Budget Agreement gives reason to celebrate, and, on the other, reason to mourn. Optimists can cheer the first bipartisan budget compromise in years, and the strong House vote. Pessimists can bemoan the unsolved deficit/debt problems, and the expected weak Senate vote.

Op-Ed: Budget Deal is Just a Start

Los Angeles Times | December 16, 2013

The budget agreement reached by the House and Senate this week is a small step forward in restoring some sanity and order to the process. By putting in place a bipartisan plan for the next two years, the agreement represents a much-needed improvement over the uncertainty of governing by crisis that has dominated fiscal policy the last several years.
But the fundamental fiscal challenges we identified in the 2010 report of the National Commission on Fiscal Responsibility and Reform, and the need for reforms of entitlement programs and the tax code, go unaddressed.

The agreement will put in place a slightly more rational fiscal policy — by replacing a portion of the abrupt, mindless across-the-board cuts in discretionary spending resulting from sequestration with smarter and somewhat more permanent cuts, and with reforms to mandatory programs.

The deal also takes some modest steps in addressing long-term fiscal liabilities by adopting scaled-back versions of policies we recommended, such as reforming civilian and military retirement benefits and reducing the unfunded liability facing the federal Pension Benefit Guaranty Corp.

Perhaps most important, this agreement demonstrates that leaders in Washington can actually work together to reach some agreement on fiscal policy. The sad lack of trust between the two parties has been perhaps a greater obstacle to a "grand bargain" than the policy details themselves. We hope that this agreement can serve as a confidence-building measure that will lead to compromise on significant deficit reduction, as other lawmakers follow the good example set by House Budget Committee Chairman Rep. Paul D. Ryan (R-Wis.) and Senate Budget Committee Chairwoman Patty Murray (D-Wash.).

But the agreement also represents another missed opportunity to address our long-term fiscal problems. Doug Elmendorf, director of the Congressional Budget Office, recently warned that despite some improvement in the budget outlook, "the fundamental federal budgetary challenge has hardly been addressed." There is nothing in this agreement that would change that assessment.

The small reforms in this agreement do not address the real long-term drivers of our debt, including the growth of healthcare entitlement programs and Social Security's funding shortfall. We still desperately need to reform the tax code, which is riddled with trillions of dollars in economy-distorting loopholes. The agreement also leaves in place sequester cuts that could have adverse effects on economic productivity and military readiness.

With this agreement, Congress has exhausted nearly all of the easy choices available. That leaves only tough choices for future deficit reduction or sequester replacement, which are critically necessary to keep entitlement programs affordable and the economy vibrant.

Reforms to entitlements and the tax code need not wait for the next election.

Policymakers should take advantage of the need for legislation to fix the flawed Medicare payment formula — which is scheduled to cut physician payments by almost one-quarter — by enacting changes that make Medicare more cost-effective. In avoiding this cut, we must start paying doctors based on quality rather than quantity of care, and we must fully offset the costs of this "doc fix" with structural reforms that slow the rate of growth in federal healthcare spending.

At the same time, Congress should follow the lead of Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Chairman Dave Camp (R-Mich.) to enact comprehensive tax reform that promotes growth and makes the U.S. more globally competitive globally. With $1.3 trillion of annual "tax preferences" in the tax code, there is plenty of money that can be raised from eliminating or scaling them back to reduce rates and deficits.

Policymakers should also go further in paring back the sequestration cuts. They should pay for that additional relief by eliminating unwarranted subsidies and low-priority spending, further reducing Medicare costs and improving the way we measure inflation in the federal budget and tax code.

Finally, we must reform Social Security to make the program financially sound for future generations.

We are pleased the two sides have proved they can find common ground on a small agreement. Now they have to "get crackin'" and come to grips with difficult challenges to solve our nation's grave long-term fiscal problems and put the budget on a fiscally sustainable course.

Op-Ed: Avoid Budget Gimmicks

zpolitics | December 9, 2013

As the Congressional budget conference committee nears its December 13 deadline for producing a budget agreement, it is very unlikely that the conferees will come up with the “grand bargain” needed to slow the unsustainable upward trajectory of our national debt.

It is likely they will put forward a small deal that replaces some of the damaging sequester cuts with smarter, long-term deficit reduction.  As frustrating as this may be, in today’s divided Washington, even a small deal would reflect progress.

Beyond paving the way for larger compromises, the conference resolution should also satisfy some important criteria for credibly reducing the deficit. In a recent paper, we outlined several of these goals. Any budget deal should begin to account for the long-term fiscal outlook and set responsible spending limits even if it doesn’t fill in all the specifics. It should also put in place a process for the next step, to deal with the major budget challenges of health care, retirement and tax reform. It should also include a separate track to strengthen and reform Social Security. And the immediate deal should refrain from using any budget gimmicks.

What is a budget gimmick?  Simply put, it’s an accounting trick that allows lawmakers to artificially create or inflate budgetary savings.  Imagine if you make some tough choices one month and are able to put away $100. When planning your budget for the next month, you decide to use those savings to pay your $100 heating bill and buy a $100 cell phone.  It doesn’t take an economist to realize that budget isn’t going to work.

Congress has considered doing the same thing, but on a much larger scale. Lawmakers have proposed using every trick in the book in order to justify more spending or congratulate themselves on phantom deficit reduction.

For instance, the Congressional Budget Office only scores legislation based on its budget impact over 10 years, so Congress will often make sure that provisions that will increase the deficit don’t take effect until the second decade after a bill is passed.  Projected war and emergency spending, including Superstorm Sandy relief, grows with inflation.  If lawmakers rein that spending in by applying budgetary caps, they can claim bogus savings for unspent money. Lawmakers have also considered willfully disregarding the inevitable, like counting savings from expiring provisions — the Child Tax Credit or Pell Grants — that will almost certainly be renewed. Talk about counting your chickens before they hatch.

The scary thing is that Congress could get away with these tricks because so few people will call them on it. So encourage your Members of Congress to oppose any resolution that includes budget gimmicks. Tell them that you expect them to work with their colleagues on a budget compromise to put the debt on a downward trajectory as a share of the economy over the long term.

Our elected officials are smart enough to know that this issue is too important for tricks. The conference committee has an opportunity to stop the games and get serious about the debt before it is too late. We are counting on them to do just that.

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