April 19, 2014

Washington Budget Report: June 4, 2013

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Social Security Disability Shortfall Could Lead to Broader Reforms

The 2013 Social Security and Medicare Trustees Report released last Friday highlighted many challenges ahead for the two programs, the most urgent of which is the impending insolvency of the Disability Insurance (DI) trust fund.

In the absence of corrective legislation, the trustees said, DI benefits would need to be cut by 20 percent in 2016, when the trust fund will exhaust its supply of Treasury bonds. These bonds have enabled the program to pay full benefits since 2005, when its expenditures began to exceed its dedicated payroll tax income.

The trustees warn that “legislative action is needed as soon as possible to address the DI program’s financial imbalance.”

Such legislation could provide a vehicle for making needed, but politically difficult, changes in the broader Social Security system, which includes both DI and the larger Old Age and Survivors Insurance fund (OASI).

The trustees observed that, “In the absence of a long-term solution, lawmakers could choose to reallocate a portion of the payroll tax rate between OASI and DI, as they did in 1994.”

But diverting money from OASI to DI would be yet another temporary "fix" and would leave an even bigger hole in OASI. Lawmakers should look for a more comprehensive solution, keeping in mind that both OASI and DI are running cash deficits and drawing more heavily on general revenues to make benefit payments. In 2013, the combined general revenue OASDI subsidy is projected to be $79 billion.

The plight of the DI fund is a preview of what's ahead for OASI. The trustees have warned for many years that Social Security is on an unsustainable track. To date, the political will has been lacking to make the benefit adjustments and/or tax increases that would improve the program's outlook.

Perhaps the need to prevent a 20 percent cut in disability benefits just three years from now will provide the spark for sustainable reforms. It was, after all, the prospect of delayed or diminished checks that forced political leaders to compromise on a package of reforms in 1983.

Trustees' Numbers Highlight Need for Fiscal Sustainability Plan

This chart shows how general revenue subsidies to Social Security and Medicare are rising.

In their latest updates on Social Security and Medicare, the trustees for the programs include data that show the growing strain they will put on the rest of the federal budget unless Washington can agree on a long-term fiscal sustainability plan.

That’s why Republicans and Democrats must get beyond their current budget impasse and move forward on broad fiscal reforms through regular congressional order.

Concord Coalition Executive Director Robert L. Bixby called the trustees report “a powerful reminder that our nation’s most difficult fiscal problems have not been solved.”

Many people believe that Social Security and Medicare are self-financed, but that is not the case. The Social Security and Medicare Part A (HI) trust funds are simply a matter of internal government bookkeeping.

While the projected dates for insolvency in the trust funds receive a great deal of attention, the more relevant information for the budget is the amount of general revenue needed to make the benefit payments promised by law. That figure is rising rapidly and should not be ignored.

“As the population ages and the number of beneficiaries steadily increases,” Bixby says, “the strain on general revenues will grow, squeezing out other federal programs and putting upward pressure on taxes.”

Costly Tax Expenditures in the Spotlight

Tax reform gained renewed attention in Washington following a report on tax expenditures from the Congressional Budget Office (CBO) and a Senate subcommittee hearing that focused on Apple’s extensive use of certain breaks to lower its tax bill.

The CBO released a report on Wednesday analyzing the fiscal impact and distribution by income of the 10 largest tax expenditures in the individual income tax system. CBO estimated that these tax expenditures alone would cost the federal government nearly $12 trillion over the next decade.

Reducing or eliminating some of the major tax expenditures would be politically difficult, however, because they are so popular. Some of the tax expenditures analyzed by the CBO included the exclusion for employer-sponsored health insurance, the mortgage interest deduction, the earned income tax credit, and the preferential treatment of income from capital gains.

CBO also concluded that more than half of the revenue forgone through these tax expenditures went to the wealthiest fifth of households, with 17 percent going to the wealthiest 1 percent of Americans.

The congressional concern over Apple’s tax practices had a Casablanca feel, with the investigating lawmakers shocked, shocked to hear that the U.S. tax code had allowed a company to dramatically reduce what it would have otherwise owed the government.

The Senate panel’s investigation, however, turned up no evidence of illegal behavior. The basic problem is what is legal under the unfair, overly complex tax laws that Congress has failed to fix.

Bernanke on the Long and Short of Fiscal Reform

Although the federal deficit is now dropping, members of Congress should heed Federal Reserve Chairman Ben Bernanke’s recent warnings about the need to focus more on the country’s long-term fiscal imbalances.

“To promote economic growth and stability in the longer term, it will be essential for fiscal policymakers to put the federal budget on a sustainable long-run path,” he told the Joint Economic Committee last month. He expressed concern, however, about the “substantial drag” that current fiscal policies will exert on the economy this year.

Opponents of long-term fiscal reform frequently argue that it should be placed on the back burner until the economy is stronger. Like The Concord Coalition, however, Bernanke says that Washington can protect the economic recovery and start dealing with longer-term fiscal imbalances at the same time.

“To achieve both goals simultaneously,” he said, “ the Congress and the administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the long run.”

Aging Population Puts Rising Demands on Medicare

While Medicare trustees highlighted the fiscal challenges facing the program last week, the United Health Foundation issued a report that underscores the rising demands on Medicare as increasing numbers of older adults deal with obesity, diabetes and other chronic diseases.

Every day 10,000 baby boomers enter the Medicare rolls. They will likely live longer than their predecessors and, consequently, experience more chronic conditions. And by 2050 the number of seniors in the U.S. will rise to 88.5 million, up from 40.3 million today.

The foundation’s report, which ranks individual states on senior health issues, found that adults age 65 and older spend three to five times more on health care than adults younger than 65. Nearly 80 percent of seniors have already been diagnosed with at least one chronic condition, and half have been diagnosed with at least two.

The challenges outlined in the United Health Foundation report illustrate the importance of efforts to put Medicare on a more sustainable fiscal track as well as the need to improve the quality and efficiency of the health care system in the years to come.