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Archive for the ‘Entitlement Reform’ Category

Moving On from the Debt

There was a brief moment a few years back when concerns over the size of the budget deficit were leading to some discussions of the long-term fiscal imbalances and the potentials for a grand bargain. But with last month’s budget deal, the debt is no longer on the agenda.  As Alex Seitz-Wald notes in National Journal:

While it’s easy to miss the disappearance of something, the change is glaring if you know where to look. You can see it on the House and Senate floors where, last month, Republicans uttered the word “debt” just 225 times, down from 3,188 mentions in July 2011, according to the Sunlight Foundation. You could see it in President Obama’s latest State of the Union address, which mentioned budget deficits almost two-thirds fewer times than his 2011 speech.

None of this should be a surprise, of course. Election season will soon be upon us and one can be certain that no one wants to run on the promise to cut universal entitlements and/or raise taxes when there are all those hot button issues to exploit and so many babies to kiss.  Just don’t tell the babies about the problems they will face in adulthood.

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As you likely know, the Congress seems poised to pass a $1.012 trillion omnibus spending bill to avoid another shutdown (see coverage from the Wall Street Journal, the Washington Post, the Hill).  It appears that both the Democrats and Republicans will get things they hold dear in the spending provisions and the riders (Ed O’Keefe has a list of winners and losers). The GOP seems to have won this round–more money for the Pentagon, riders preventing NLRB e-Card Check for unions and the enforcement of the incandescent light bulb ban. There is even mention of Benghazi and “Operation Fast and Furious.” Score!

Of course, the spending bill deals with discretionary spending, and from a long-term perspective, discretionary spending is not driving the long-term budget problems. This chart, based on data from the Office of Management and Budget’s Historical Tables (table 8.4) gives a sense of the long-term trends.

Spending

Mandatory spending and interest have dominated the budget for some time, increasing from 6.2 percent of GDP in 1962 to 15 percent today, and within the mandatory programs, Social Security, Medicare and Medicaid have grown the fastest.  The Congressional Budget Office’s 2013 Long-Term Budget Outlook projects that Social Security and the major health care programs will grow from 9.5 percent of GDP (2013) to 14.2 percent of GDP (2038). Indeed, by 2038, the CBO projects spending to be at 26.2 percent of GDP, with revenues of 19.7 percent of GDP. All of this is under the extended baseline scenario. Obviously, 2038 is a long way away, and these are but projections (I can offer my own prediction: in 2038, no one will remember Operation Fast and Furious).

None of this is impacted at all by the new omnibus spending bill, which from a long-term perspective is trivial despite the heavy press coverage.

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Forgive me if I am confused.

On May 13, 2013, the Social Security Board of Trustees released its annual report on the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds. A few salient points:

  1. In 2012, the OASDI Trust Funds had $840 billion in income, including $509 billion in contributions, $27 billion from taxation of benefits, $109 billion in interest on trust fund assets, and $114 in reimbursements from the General Fund of the Treasury (a product of the payroll tax reductions that were used as a stimulus)
  2. Total expenditures were $786 billion. That leaves a surplus of $54 billion. As a result, at the end of 2012, the assets of the OASDI Trust Funds were $2.73 trillion. With an effective annual interest rate of 4.1 percent, it would appear that things are in good shape.

Indeed the Trustees report:

“The combined trust fund reserves are still growing and will continue to do so through 2020. Beginning with 2021, the cost of the program is projected to exceed income.”

“The projected point at which the combined trust fund reserves will become depleted, if Congress does not act before then, comes in 2033 – the same as projected last year. At that time, there will be sufficient income coming in to pay 77 percent of scheduled benefits.”

But now, we are told that a failure to raise the debt limit could have devastating consequences for Social Security. As the WSJ reports:

The Social Security Administration has begun warning the public it cannot guarantee full benefit payments if the debt ceiling isn’t increased.

When asked by the public, the agency is notifying beneficiaries that “Unlike a federal shutdown which has no impact on the payment of Social Security benefits, failure to raise the debt ceiling puts Social Security benefits at risk,” according to a person familiar with the agency directive.

The same kinds of warnings were issued in 2011. (more…)

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The Economist thinks so, and has dedicated a good deal of space to the question in the newest issue (here  and here). A few quotes:

Other states and cities should pay heed, not because they might end up like Detroit next year, but because the city is a flashing warning light on America’s fiscal dashboard. Though some of its woes are unique, a crucial one is not. Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care. Detroit shows what can happen when leaders put off reforming the public sector for too long.

The Economist sites an interesting statistic: the total pension gap for the states is $2.7 trillion (or 17 percent GDP).  In Connecticut, my adopted home state, the pension shortfall is 190 percent of annual tax revenues (Illinois is even worse, at 241 percent). Of course, this does not include the pension gap in the cities and, more importantly, the health-care benefits for state and municipal retirees.

There are some obvious fixes going forward (e.g., substituting defined-contribution pensions for existing defined-benefit pensions). But this does nothing to address the current unfunded liabilities that are largely the product of politics (e.g., to win the allegiance of public sector workers, promise glorious benefits at some time in the future when someone else will have to foot the bill). As recent events have revealed, efforts to force reform can carry high political costs.

When one considers the huge unfunded liabilities at the federal level, the additional problems in the states and municipalities may prove even more difficult to address. It is hard to imagine the federal government providing much in the way of assistance when it is being forced to draw increasingly on general revenues to cover its own obligations.

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President Obama’s budget proposal supports entitlement reform, in part, through the introduction of the chained CPI (rather than the current CPI-W) for calculating cost-of-living adjustments. This change has been part of various reform proposals over the years, although it has often been discussed as part of progressive indexing (i.e., maintaining the CPI-W for low wage workers, thereby increasing their Social Security payments relative to those with higher incomes).  This proposal has usually attracted the ire of those on the left, who view it as a cut in Social Security rather than a reduction in the trajectory of growth.

You would think that the President’s proposal would attract the unified support of the GOP. After all, many Republicans have made this proposal before, seeing it as one of several reforms that could address the long-term entitlement problem. But with the 2014 midterm elections quickly approaching, some Republicans may see the short-term political benefits of blocking reform to be irresistible.  Consider National Republican Congressional Committee Chairman Greg Walden (R-OR), who has presented the chained CPI as Obama “trying to balance this budget on the backs of seniors.”   A piece by Alex Roarty (National Journal provides an extended quote from Walden’s interview on CNN:

“When you’re going after seniors the way he’s already done on Obamacare, taken $700 billion out of Medicare to put into Obamacare and now coming back at seniors again, I think you’re crossing that line very quickly here in terms of denying access to seniors for health care in districts like mine certainly and around the country,” Walden said. “I think he’s going to have a lot of pushback from some of the major senior organizations on this and Republicans as well.”

Although the Club for Growth is not pleased with Walden’s critique, at least he has gained the support of the AFL-CIO, as the National Journal reports.

“Walden’s quote underscores what we knew,” said Mike Podhorzer, the AFL-CIO’s political director. “Obama’s chained CPI proposal is terrible policy that only makes political sense to Washington insiders who don’t get outside the Beltway often enough. Obama beat Romney because working people care more about jobs and fairness than the deficit, and Democrats risk losing their political edge on the issue if they stick with this Beltway gambit.”

The GOP leadership may discipline Walden. But if Walden’s comments signal the GOP’s intention of opposing reform in hopes of winning some additional seats in 2014 and undermining the Democratic Party’s claim of protecting seniors, one can predict that entitlement reform will be kicked down the road once again.

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The Inaugural

There was little that I found surprising in President Obama’s second inaugural address (if you didn’t watch it or have a chance to read it, you can find it here). He clearly articulated—however vaguely—a center left agenda, much as one might have predicted.  Unless the Democrats capture the House in the 2014 midterms, I don’t see a set of circumstances that would result in major progress on any of the big-ticket items.

My biggest concerns came in the President’s discussion of entitlements.  The relevant passages:

We, the people, still believe that every citizen deserves a basic measure of security and dignity.  We must make the hard choices to reduce the cost of health care and the size of our deficit.  But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.  (Applause.)  For we remember the lessons of our past, when twilight years were spent in poverty and parents of a child with a disability had nowhere to turn.

We do not believe that in this country freedom is reserved for the lucky, or happiness for the few.  We recognize that no matter how responsibly we live our lives, any one of us at any time may face a job loss, or a sudden illness, or a home swept away in a terrible storm.  The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us.  (Applause.)  They do not make us a nation of takers; they free us to take the risks that make this country great.  (Applause.)

As I have noted in many past postings, the challenges posed by our entitlements is nothing short of daunting. The dates for the insolvency of the various trust funds have been moved up in recent years (with the disability trust fund slated for insolvency by 2016, the last year of President Obama’s second term). The passages above reinforce my existing concerns that there will be little if any progress on entitlement reform in the next few years. The President’s rejection of a tradeoff between “caring for the generation that built this country and investing in the generation that will build its future” ignores an important fact. The status quo guarantees that the “generation that will build the future” will also have to bear an enormous tax burden to cover the costs of the baby boomers’ pensions and health care. These costs and the costs of servicing the debt will squeeze out much of the discretionary spending for the very programs that the President finds so attractive.

Of course, the President may believe that the trust funds could be made solvent if only the rich paid their fair share. If this is the case, the President’s claim that we need to “revamp our tax code” may be shorthand for significant increases in marginal rates.

More likely, the President believes (like his predecessor) that entitlement reform is best left to a future administration that will have no choice but to face the tradeoffs that he rejected in his inaugural address.

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The Fiscal Cliff has been averted postponed, if not made worse.

Big takeaways:

  1. Senate Majority Leader Harry Reid has once again proven himself to be incapable of leading the Senate.  Is there any stronger rebuke than McConnell’s appeal to Biden as he searched in vain for a negotiating partner in the Senate?
  2. The Democrats have done what was once unimaginable: they made permanent the much-decried Bush tax cuts for all but the wealthiest households. The talking heads spent much of the last few months noting that if Obama had any mandate from the 2012 elections, it was the mandate to raise taxes on those making about $250k. So much for mandates.
  3. A Republican controlled House is not much of a counterweight. Let us assume that McConnell was successful in getting the best deal he could out of this Senate (recall the tax cuts). The GOP-controlled House could have responded with a bill that combined the tax cuts with significant spending cuts, thereby forcing a compromise. But Boehner et al blinked (and Ryan, once believed to be a force for fiscal stability, no longer has a claim to this title). Ah yes, but they lived to fight another day. Of course, is there any real evidence that their capacity to fight will improve with a reduced majority?
  4. In terms of long-term fiscal sustainability, the Congress arrived at the worst possible solutions: tax cuts and increased spending. Although there were early discussions of entitlement reforms—ranging from means testing Medicare to changing the calculation of the cost of living adjustment for future benefits—in the end, Congress made matters worse by preventing scheduled reductions in rates paid to doctors under Medicare. And although there were early discussions of cutting tax expenditures, a series of existing expenditures were extended.
  5. By placing a two-month hold on forced sequestration, Congress not only made things worse but also assured that the winter and early spring will look remarkably like the past few months. I am somewhat surprised that Biden negotiated, and Obama accepted, this decision.  Whatever chances the President had to make some significant policy changes in the early days of his second term seem diminished greatly. Immigration reform, assault weapon bans, etc., will be difficult to achieve when all attention is focused on the next fiscal cliff and the debt ceiling. Moreover, if there were any belief that this would somehow help the economy, it is ill founded. There is little to suggest that the credit rating agencies, investors, or firms looking for regime stability will find anything resembling a silver lining in this deal. Quite the opposite.

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