James Pethokoukis

Politics and policy from inside Washington

Cutting entitlement benefits to wealthier Americans

May 12, 2011 14:49 UTC

Good stuff on means testing from Charles Blahous over at e21:

As it happens, the two largest and fastest-growing areas of federal spending, Social Security and Medicare, are both ones for which the wealthiest Americans are fully eligible for rising benefits. Both programs are, to be sure, of extreme political sensitivity. But the financial imbalances in these two programs require correction by elected officials in any event. To the extent that spending on the wealthy is constrained within these programs, it will reduce the financial pressure for even more politically-sensitive changes to them.

1) The essence of what is required is for the two parties to agree on how many high-income individuals to affect, and on how much. Social Security provides a ready case study in how this could be done. Many Democrats, for example, have expressed sympathy with the concept of raising the current $106,800 limit on the amount of wages subject to the Social Security tax. Such a measure would affect roughly 20% of workers (the number who have wages above the current limit at some point in their careers). Legislators could therefore choose instead to slow the growth of benefits – perhaps for that same number of workers, or the top 20% of the wage spectrum.

How much should the growth of such benefits be slowed? It is not financially necessary to reduce Social Security benefits from current levels. Current Social Security proposals, for example, that employ “progressive indexing” would only impose price-indexation on less than 1% of workers, with everyone else receiving faster benefit growth. Limiting the highest-income 20% to inflation-adjusted benefits and allowing gradually faster growth for workers below that level could by itself eliminate well more than half of the entire Social Security shortfall.

2) As for Medicare, Democrats and Republicans fiercely disagree on whether cost containment is best achieved via a premium support model, or by the federal government’s imposing price controls within the program’s current design. But they do agree on the need for cost containment itself. Already certain features of federal health care law, such as the exemption from the “Cadillac plan tax” and the vouchers provided under the new health entitlement, will grow only with the Consumer Price Index (CPI), despite the fact that historically health cost inflation has exceeded economy-wide CPI. If it is politically acceptable to restrict these forms of federal health care support to CPI growth, surely Medicare direct spending on the highest-income beneficiaries could similarly be limited. (This cost containment could be achieved most neatly by changing the rate of growth for income-related Part B premiums so as to hold the growth rate for total Medicare per-capita expenditures to CPI for the highest-income beneficiaries).

3) Though these are the largest federal spending programs, and though most other direct spending is not targeted on the rich by any definition, savings from direct payments to higher-income individuals need not end there. Agriculture support payments, for example, are currently made to farmers with adjusted gross farm incomes as high as $750,000 (and allowing for an additional $500,000 in non-farm income). At a time when so many continue to struggle amid a weak economy, when federal finances are in desperate condition, and when many talk of the necessity of raising taxes on millionaires, it is difficult for taxpayers to understand why direct payments to millionaires continue. It is encouraging that reports on nascent bipartisan deficit talks indicate that such excessive farm subsidies are potentially on the chopping block.

A bipartisan effort to restrain entitlement spending on the rich will not draw unanimous praise. Some on the far left will see such reforms as part of an insidious plot to weaken popular support for cherished programs. But even objection from these quarters is potentially useful and informative. As a nation we must decide whether our loyalties attach to the programs in the abstract or to the individuals affected by them both as beneficiaries and as taxpayers. We need an informed debate over whether the costs of government should rise to unprecedented levels simply because of the political importance some might attach to buying the support of those who least need assistance.

 

Ryan plan would boost U.S. economic security

Apr 7, 2011 20:49 UTC

It’s intriguingly simple: Limit future increases in Medicare and Medicaid healthcare spending to cut debt. That’s the easy-to-understand core of House Budget Committee Chairman Paul Ryan’s budget plan, The Path to Prosperity. But the idea risks a voter backlash if medical inflation doesn’t slow, too. Otherwise, quality and service will suffer, badly fraying the social safety net. Republican Ryan thinks injecting some needed market discipline rather than sticking with President Barack Obama’s bureaucratic tinkering will do the trick. And he’s right.

Federal government healthcare expenditure for those two programs could more than double over the next four decades to nearly 14 percent of GDP, according to the Congressional Budget Office. The CBO says the new plan devised by House Budget Committee Chairman Paul Ryan would keep spending at around 5 percent of output.

ryan

Or to put it another way, without the Ryan plan, Medicare and Medicaid are a $58 trillion (net present value through 2085) unfunded liability. These two programs are the main reason the CBO sees America’s debt-to-GDP ratio hitting 344 percent (assuming the economy doesn’t collapse first) in 2050 vs. 62 percent in 2010. But with the Ryan plan, the entire federal debt is just 10 percent of GDP in 2050 before disappearing later that decade. Problem solved.

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There’s no fiscal miracle here. Ryan accomplishes this feat through simple math. He would increase revamped subsidies to seniors and the poor at rates far below the predicted pace of healthcare inflation. That has led the CBO to raise an eyebrow, wondering if such effective reductions would be politically sustainable. Oldsters would, for instance, eventually bear a far larger share of personal healthcare costs than under the current Medicare program.

But what the CBO misses is that Ryan bets he can square the circle by slowing medical inflation through increased competition. Instead of Medicare providing insurance, retirees would pick their own government-certified private plan, helped by a fixed subsidy from Washington. Fancier coverage would cost more. And in exchange for some protection from big bills, seniors would pay a greater share of small ones. Both features might encourage bargain hunting among competing plans. Republicans also want to lessen the role of middlemen in medical billing. Economists think heavy intermediation makes people less aware of the costs and therefore allows healthcare prices to rise faster than they should.

Competition generally works in the other five-sixths of the U.S. economy. And it should also in healthcare if government loosens its grip. Prices for laser eye surgery, a procedure commonly paid directly out of pocket, have fallen sharply over the past two decades. Then there’s the Swiss example. There citizens choose, aided by subsidies, among competing private insurers who must provide a basic benefits package. Ryan’s Medicare reform proposals bear more than a passing resemblance to that system. Costs have risen more slowly in Switzerland than the United States. The Swiss also devote just 11 percent of their economy to healthcare, counting both government and private spending. While that’s a lot compared to the UK and Scandinavia, it’s thriftier than America’s 17 percent and rising.

The only real differences between Ryan’s new plan and the one he co-authored with Clinton administration economist Alice Rivlin, is that it’s a bit stingier on increasing the subsidies and it doesn’t have a public option. That, along with the Swiss feel to it, is evidence that what Ryan has proposed is a rather centrist plan that Democrats should flock to if they want to preserve economic security for all Americans.

COMMENT

There is nothing in Ryan’s “Path To Penury” that has not been circulated in policy circles for decades. Almost everything in the plan has been tried and has failed. The plan ignores obvious economic realities, such as the bubble-induced recession that has left 25 million people unemployed or underemployed. It gives all the benfits the rich and powerful, while destroying the limited economic security enjoyed by tens of millions of middle class families.

He wants to lower the top tax rate from the 39.6 percent in current law to 25 percent. This will means billions of dollars a year in additional spending money for Wall Street bankers, CEOs of major corporations and other major campaign contributors.

At the same time, he wants to abolish Medicare and replace it with a voucher program that will rapidly fall behind the rising costs of health insurance and health services. Medical bankruptcies will skyrocket.

Oh, and he does propose cutting the $7.8 trillion in defense spending projected for the next decade by 1 percent. Apparently Paul Ryan believes in a strong safety hammock for the defense industry.

I’ll say this. The fawning coverage of America’s corporate media of it’s new rising star does jump-start
the debate over how to rebalance the government budget. But this plan falls apart under the most basic analysis.

The Heritage Foundation, who helped Ryan craft the Path To Penury, scrubbed its website as soon as real budget analysts started pointing out the impossible numbers in the projections. It’s not economic policy. It’s economic ideology. Which is why we will see daily articles by Mr Pethokoukis telling us how great it is.

Posted by GetpIaning | Report as abusive

Can America grow its way out of its debt problems? No

Mar 9, 2011 14:39 UTC

That’s the question CNBC’s Larry Kudlow asked House Budget Chairman Paul Ryan yesterday, which resulted in a fascinating exchange:

KUDLOW:  But what do you say to supply siders and others who argue–regarding Social Security, not health care–if you grow the economy in the next 50 years at 3 1/2 percent per year, which is the long-term growth since World War II, then Social Security will fix itself?

Rep. RYAN: No, it doesn’t.

KUDLOW: Now that doesn’t mean we shouldn’t have a personal account option and so forth, but that’s what they argue. If you grow the economy, growth, growth, growth, then we don’t have to slash benefits and the Republican Party will look better, not worse.

Rep. RYAN: Except, first of all, nobody is talking about slashing benefits. We’re not even talking about touching benefits for people in and near retirement. But we’ve run those numbers on growth and Social Security and they don’t catch up, because when you have more growth and you have more Social Security contributions, you have more expenses. The more you pay in, the more you get out. So growth, you cannot grow yourself out of our Social Security solvency problem. I’ve run those numbers with the actuaries. You do need to make some changes in Social Security benefit for the future generations to make this program solvent.

KUDLOW: But the actuaries say you can only grow at 2 percent for the next 50 years.

Rep. RYAN: No. But even if you run bigger growth numbers through the system, you still don’t fix the problem. I’ve run those numbers. I’ve run the 3 and 3 1/2 percent growth numbers through the system. We are kidding ourselves if we think we can simply grow ourselves out of our entitlement problems. We can’t. We have an $88.6 trillion unfunded liability with our entitlement programs, according to the GAO. Last year that was a $76.4 trillion problem. Every year we delay fixing these entitlement programs. We go about $10 trillion deeper into our unfunded liabilities.

Me:  This is actually a tricky issue.  As the CBO forecasts it, America’s debt-to-GDP ratio could top 700 percent by 2080. But drill down into that prediction and you find that the CBO has plugged in a rather dismal long-term forecast of U.S. economic growth, just 2 percent or so. That’s only two-thirds of the average U.S. growth rate since 1970. But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent.

Under those conditions, according to a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So Kudlow is correct — if you could find a way to meet those conditions.

But here is the problem with that math:

1) It, as Ryan alludes to, ignores that Social Security benefits are linked to income growth.  So higher growth equals higher benefits, though a quirk in how benefits are figured means faster growth could reduce the program’s short-fall by 25 percent or so.

2) Healthcare costs continue to increase at a rate faster than GDP growth. So you have to find a way to bring down spending, or healthcare will consume an ever bigger part of the pie and continually boost government spending (unless you reduce Uncle Sam’s role). This chart from the CBO tells is all:

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COMMENT

Your logic is faulty re: averaging GDP growth since 1970. It would be like saying that a baseball player’s average batting average over 20 years was .300 when the reality is that his average was robust in his first 10 years and weak in his second 10 years:

First five years average: .340
Second five years average: .320
Third five years average: .290
Fourth five years average: .260

No major league baseball team would view this player as a .300 hitter in his last 10 years and if his agent was pedaling him as such he would be laughed out of every General Manager’s office in the league. The US economy is no different. The more robust 1970s, 1980s and even 1990s have nothing to do with today’s economy. And that history cannot be pulled forward to make today’s economy look better than it really is.

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What Paul Ryan hopes to do

Jan 5, 2011 15:04 UTC

In honor of the Congress, the good folks over at e21 have republished a column by Rep. Paul Ryan on what he wants to accomplish. This is good stuff:

Let me be specific: I propose to modernize Medicare, Medicaid and Social Security so these critical programs can meet their mission in the 21st century; secure access to universal health coverage where patients and doctors – not government or insurance company bureaucrats – are the nucleus of the system; restructure Federal job training programs of the past century to better prepare our workforce for the challenges in today’s global economy. There are dozens of additional policy reforms in the Roadmap consistent with the mutually reinforcing goals of individual opportunity and income security.

Those who claim the mantle of compassion and concern for the working class should consider this: The greatest threat to our social insurance programs today is the icy indifference shown by those unwilling to have an adult conversation on how to avert their looming collapse. Not only are the major health and retirement security programs approaching bankruptcy; the looming debt crisis will hit hardest those most reliant on the safety net the Federal government helps provide.

As the budget’s ominous trajectory makes clear, by asking government to do everything, it will, in the end, barely be able to do anything. Who, then, will have set us on a path back to the future, to the days when there were no effective federal safety net programs in place? Those who offer modernizing reforms to strengthen these programs? Or those who stand on the sideline, tearing ideas down rather than proposing credible alternatives – all while the programs themselves drown in debt?

The issue is not whether we ought to “zero out the state” or whether “all government action is automatically dismissed as quasi-socialist.” The issue is rather more subtle and sophisticated than that. The real debate is about whether and how government ought to create the foundations for growth and prosperity, securing a safety net for those who need it most; about how government can act now to avert a catastrophe later.

The truth is that there are two stark, competing philosophies over this matter. I know better than most that the debate will at times be uncomfortable and unpleasant. In ordinary times, political debate concerns the means, not the ends, of government. But we do not live in ordinary times; we live in a time when the first principles of governing are on the table. Nor did we seek this debate; bipartisan failures of the past and our current leaders’ acceleration of their agenda have forced America to make this choice. So we cannot advance to the “day after tomorrow” until we decide today what kind of government we want our nation to have after tomorrow. And that is, right now, an open question.

The coming fiscal war between the old and the young

Jun 2, 2010 18:13 UTC

In the London Times, Anatole Kaletsky outlines a soon-to-escalate generational conflict between seniors and younger voters :

The politics of the next decade will be dominated by a battle over public spending and taxes between the generations. Young people will realise that different categories of public spending are in direct conflict — if they want more spending on schools, universities and environmental improvements they must vote for cuts in health and pensions.

Schools and universities are more important for a society’s future than pensions. Yet every democracy around the world has made the opposite judgment. While many politicians claim to be obsessed with education — recall Tony Blair’s three priorities were “education, education and education” — in reality they support health and pensions to the point of national bankruptcy, while squeezing universities. The same applies to the many fiscal benefits heaped on pensioners over the years. Is it, for example, better for society to offer free bus travel to wealthy 80-year olds rather than students or impoverished youngsters looking for their first job?

He half-seriously tosses out this interesting solution:

Here is a modest proposal to avert this awful outcome. Since children under 18 are not allowed to vote, perhaps pensioners could be deprived of the right to vote after 75 or 80. An equally effective alternative would be to give mothers an extra vote for every child under voting age.

Me: I dunno. Every entitlement reform plan I have seen basically excludes cuts on seniors currently getting benefits. And healthcare reform was passed despite projected cuts in Medicare. So it can happen. And changes can linked to income so they don’t bite middle-class folks. Here is a bit of insight from Andrew Biggs of AEI:

Social Security reform involves raising taxes or cutting benefits in ways that people can easily understand, and dislike. But a sensible Social Security program is easy to imagine: solid protections for the truly old and the truly poor, coupled with universal retirement savings accounts for everyone else. There’s no free lunch, but neither is it an impossible task.

Will seniors nix spending cuts to fix deficit?

May 24, 2010 17:08 UTC

My pal Bruce Bartlett says U.S. demographics support his position that America will need massive tax increases rather than massive entitlement cuts to get its fiscal house in order:

In short, what we see is that over the next ten years the percentage of the population that benefits from Social Security and Medicare is going to rise significantly and that this group of the population votes in higher percentages than those that pay for these programs. And those that will, over their lifetimes, bear the heaviest burden of paying for entitlement programs–the young–vote at the lowest rate of any age group.

Me: He might well be correct. Then again, most of the reform plans I have seen pretty much leave the current system in place for those who are, says over 50 or 55. I also don’t understand why a broad-based tax increase would be any more palatable to people than getting their expected benefits cuts. Not to mention that getting spending under control is a better way to restore solvency than tax hikes.

Balancing the U.S. budget

Dec 15, 2009 14:06 UTC

The always insightful Pete Davis opines on the Pew-Peterson debt report at the must-read Capital Gains and Games blog:

It makes a lot of sense to adopt a deficit reduction program now, but to wait to implement it until 2012 to make sure the recovery is well underway. It also makes a lot of sense to avoid specifics that Congress will change anyway. By putting everything on the table and by focusing on the key economic variable, public debt as a percentage of GDP, it would hopefully enlist enough public support to hold political leaders accountable, so our kids don’t end up paying for our fiscal mess.
The Peterson-Pew Commission is composed of those who have long labored for deficit reduction. It is co-chaired by Former Representatives Bill Frenzel, Tim Penny, and Charlie Stenholm. They know first hand how difficult it is to craft deficit reduction legislation. They also know how important it is to tackle this problem now, before we end up struggling to maintain our standard of living as we pay enormous interest expense to China with dollars that are worth less and less. Former House Budget Chair Jim Nussle noted, “You don’t want a market-based event to force [a solution].” Former Congressional Budget Office Director Doug Holtz-Eakin noted the entitlement crisis is upon us on top of a weak economy: “What was a three-decade problem is now a one-decade problem” before Medicare and Social Security become insolvent.

When I’m asked how long it may take to restore a balanced federal budget, I note that we started trying to restore balance after the 1980 recession and the 1981 Reagan Tax Cuts in 1982, and it only took us 17 years to reach balance in FY98. That was when the deficit peaked at 6% of GDP. Now it’s at 10% of GDP. We’ll be lucky to reach balance in the next 30 years. Hopefully, I’ll live to see it.

Krugman: U.S. budget is fine if nothing goes wrong. What?

Aug 28, 2009 16:28 UTC

What a weird column from Paul Krugman. He says Americans shouldn’t worry about the ten-year budget forecasts ($9tr debt,  70 percent of GDP) because a) plenty of other nations have had far higher ratios, b) other countries continue to lend to the US, and c) it’s the longer-term liabilities that are the problem.

But at what point do interest rates rise — especially since huge current deficits give markets scant confidence that America is serious about fiscal soundness? And the current deficits make the fixes to entitlements harder to do. Clearly Krugman wants a Stimulus 2.0 program. He should take a look at my plan to create fiscal space in the present by dealing with entitlements now. And heaven help us if we get another financial crisis within the next generation …

COMMENT

I understand your criticisms of his article, but you should look at it two ways.

First, he was emphasizing that we should not reign in various stimuli too quickly, since this could further damage the economic recovery. Second, while US debt will be a high ratio, it must be perceived from a relative perspective. Countries like Japan and Italy, have not collapsed under the weight of massive debt, yet….

I believe Krugman does not want the spectre of future debt to cloud present judgment. While he does endorse addressing long term entitlements in other articles, I think he is not yet comfortable with the current economic rebound, and is still in “staring into the abyss” mode.

He often has many good insights and opinions, but I will admit that lately he has been off his game. Its almost as if since Obama became president, he no longer has a Bush administration to eviscerate. This makes some of his arguments seems contradictory and aimless, like he is just thinking out loud.

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Study: U.S. budget deficit could average $1.4 trillion a year for a decade

Aug 26, 2009 19:44 UTC

Change a few assumptions and those government budget forecasts start to look scary. The Concord Coalition makes a few tweaks to the Congressional Budget Office model:

1) The Concord Coalition takes the CBO baseline and adjusts it to assume appropriations increase at the same rate as the economy (GDP growth). This increase is closer to the historical average rate of increase.

2) We also assume that supplemental appropriations do not continue indefinitely. For recent appropriations for the wars in Iraq and Afghanistan, we include realistic estimates from CBO about how much will be spent under a scenario where troop levels slowly decrease to about one-third of their level at the time of the estimate.

3) For taxes, we assume that all of the major tax cuts will be extended beyond 2010.

4) We also assume the one-year patches to the Alternative Minimum Tax will continue to be enacted, holding the level of taxpayers hit by the tax roughly constant throughout the baseline period.

5) Finally, we include a calculation for the increased debt service (interest payments) that these policies would cause by their increasing the deficit. We do not make any changes to CBO’s economic assumptions.

And here is what all that looks like as a pretty picture:

082609deficit

COMMENT

Maybe, the deficits could be raised from 1.4 to 14 trillion a decade, so that the Americans sustain their living standards without any need to work. This path is also suggested by the fact that the year 2010 in the graph has been upgraded to 20010. :-)

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