October 20, 2014

The President's Budget: Political Expediency Threatens Fiscal Reforms

As we await the full release of the President’s Fiscal Year 2015 Budget, some important specifics have been slowly made public. It looks like this budget, as is usually the case, will contain a mixture of sensible reforms and politically expedient omissions.

The first bit of news is that this year’s budget will not contain a proposal -- included last year -- to switch the government-wide formula for measuring inflation to a more accurate index called the “Chained CPI.” 

Switching would save money in numerous spending programs, including Social Security, that provide cost-of-living increases. That’s because the government’s current formula, according to most economists, overstates inflation. The Chained CPI addresses this problem while ensuring that the value of federal benefits still keep up with citizens’ purchasing power.

Because tax brackets are indexed to inflation, switching to the Chained CPI would also increase revenue.

The President’s budget does not have the force of law and does not normally form the basis for the congressional budget resolution. It is a stylized world in which the administration proffers a multi-faceted policy course and projects where that would lead the nation fiscally.

In that world last year, the administration rightly identified that the country has a serious long-term fiscal problem and that rising costs in the major entitlement programs were the primary drivers, along with revenue levels that are not projected to keep up. As one part of its attack on the problem, the administration recommended the switch to Chained CPI.

This year’s budget is almost certain to again identify the nation’s fiscal challenges and their causes. Yet a sensible reform from last year has now been jettisoned for what appears to be political expediency. 

Administration officials claim their intention in suggesting the Chained CPI reform last year was to demonstrate they were serious in putting entitlement reforms on the table in the search for a “grand bargain” with congressional Republicans. Yet presidential budgets should be viewed as more than just “offers” in a negotiation -- after all, they involve a great deal of thought and include more details than would be necessary if they were simply “starting points.” 

In reality, the left wing of the Democratic Party saw an opportunity to “fight” for Social Security and the administration decided to help them by dropping Chained CPI. That might make sense politically, given that the proposal -- like all proposals for a “grand bargain” between the two parties -- appears to be going nowhere. The problem is that by giving in to those who label the government-wide inflation measurement reform a simple “Social Security cut,” the administration appears to be validating the label. This will make the policy even harder to include in future fiscal policy negotiations, which everyone agrees will ultimately be necessary to ensure fiscal sustainability.

This risk is also present in a different policy embedded in the President’s budget -- the administration’s continuing effort to reduce overpayments to Medicare Advantage plans. These plans, in which Medicare beneficiaries can enroll in private insurance, have historically been paid more money per Medicare beneficiary than traditional fee-for-service Medicare would allow. One of the Affordable Care Act’s main cost-savers was reducing these overpayments. The administration has been incessantly criticized for this sensible policy correction, even as Republicans have included the same cuts in their budget proposals. 

As the ACA’s reductions continue being phased in, there now appears to be a pattern of annual battles over whether Congress should step in and reverse the cuts. Congressional Republicans and advocates for insurers have had small victories over the last few years as some cuts have been postponed, a number of plans have been exempted from cuts, and there have even been some payment increases.

To its credit, the administration seems determined to let the cuts hit this year. The White House argues that as health care cost growth has slowed, Medicare Advantage should see reductions on par with what has naturally occurred in per-beneficiary spending in traditional Medicare -- that these aren't "cuts in benefits" but natural adjustments.

Like the suggested CPI change, this is a sensible yet politically perilous reform. But for now at least, the administration appears to be coming down on the right side of the question. Were the President to reverse course, there would be a danger -- as with Chained CPI -- that backing down would seem to validate the criticism from opponents. That would make long-term fiscal sustainability even harder to achieve.