July 29, 2014

Washington Budget Report: June 18, 2013

« Back to WBR Issue List

Sign Up to receive the Washington Budget Report »


Delay Will Make Social Security Reform More Difficult

Looking into the details of the recent Social Security Trustees report shows that waiting to reform the program onto a sustainable path will make the job more difficult than if we take action now.

An analysis by one of Social Security’s two public trustees, Charles Blahous, puts numbers to the choices policymakers face.

If they were to act now, they would need to increase the payroll tax rate to 15.06 percent, up from the 12.4 percent workers face today, to avoid benefit cuts. On the other hand, to avoid tax increases, benefits for current and future beneficiaries would have to be cut by 16.5 percent.

If policymakers wanted to avoid cutting current recipients’ checks and only reduce benefits for future beneficiaries, the cut would be 19.8 percent of promised benefits.

The choices are much worse if we wait until 2033 -- the year in which Social Security is projected to become insolvent. Then payroll taxes would have to be increased by roughly a third, to 16.5 percent. If efforts were only focused on the benefit side, current and future beneficiaries would face cuts of 23 percent.

Combining tax increases with benefit cuts would help avoid such large changes in taxes or spending. There is a precedent for such a reform effort. In 1983, Social Security faced a funding crisis that was solved on a bipartisan basis with a combination of benefit cuts and tax increases. Blahous cautions, however, that the current shortfall in Social Security is nearly twice as large as during the 1983 crisis.

Rising Interest Rates Could Add to Budget Pressures

CBO projects sharply rising interest costs under current law

After a long period of abnormally low interest rates, their recent uptick has led to considerable volatility in the credit markets and has renewed concerns about an increase in borrowing costs for the federal government.

The good news is that rising rates signal a strengthening economy. In Washington, however, low borrowing costs have given elected officials a cushion that has allowed them to put off difficult choices about long-term fiscal priorities.

As interest rates increase, projected borrowing costs will swallow up budgetary resources -- growing more rapidly than any other budget line-item over the next decade.

In updating its budget projections last month, the Congressional Budget Office (CBO) assumed “an anticipated substantial rise in interest rates as the economy strengths.” The budget office said this, together with continued growth in the federal debt, will “sharply boost interest payments.”

Under current law, CBO projects, “the government’s net interest spending will more than double as a share of GDP in the coming decade – from 1.4 percent in 2014 to 3.2 percent in 2023, a percentage that has been exceeded only once in the past 50 years.”

But such projections involve considerable uncertainty, and a variety of factors – including future government borrowing -- could lead to even higher interest rates than anticipated. Last year the CBO calculated that if interest rates were one percentage point higher than it assumed for a decade, it would cost taxpayers an additional $117 billion.

On the positive side: Washington has the ability to rein in future borrowing costs through fiscal reforms that reduce its deficits and eventually stabilize the federal debt. As interest rates continue to rise, however, procrastination will become more and more expensive.

 

CBO’s Warning on the Debt Limit

A new Congressional Budget Office (CBO) report warns of grave difficulties if Washington can’t agree on a new federal debt limit by October or November.

As in the past, the Treasury is buying more time on the debt limit with what it calls “extraordinary measures.” While CBO says these measures could last until sometime in October or November, it cautions that precision on this is difficult.

Once the extraordinary measures run out, the Treasury would only be able to borrow to replace maturing debt. “That restriction,” CBO says, “would severely strain the Treasury’s ability to manage its cash and could lead to delays of payments for government activities and possibly a default on the government’s debt obligations.”

As the government neared the debt ceiling in 2011, Democrats and Republicans reached a last-minute deal. But the political brinksmanship sent the stock market into a tailspin and caused Standard and Poor’s to lower the federal government's credit rating. The deal also postponed many tough decisions.

Two years later, Congress continues to delay decisions on spending cuts, revenue increases and the debt ceiling. The No Budget, No Pay Act of 2013 suspended the ceiling from Feb. 4 through May 18, which CBO says effectively raised it to nearly $17 trillion, up from $16.7 trillion.

There is no question that the debt limit must be raised. This is true under the House budget, the Senate budget, the President’s budget or the status quo. With an uncertain deadline and potentially dire economic consequences for failure, Congress should begin working now towards a compromise that raises the debt ceiling and reduces future deficits.

Concord Coalition, Fix the Debt Co-Sponsor Florida Forum

A panel of experts discussed solutions to the federal debt last week in West Palm Beach, Fla.

As demographic challenges and health care costs continue to cloud the federal budget outlook, a panel of experts called for substantive fiscal reform at a forum in West Palm Beach, Fla. last week.

It was the latest in a series of public programs around the country that are co-sponsored by The Concord Coalition and the Campaign to Fix the Debt.

Paul Stebbins, CEO of World Fuel Services; Julio Fuentes, president of the Florida State Hispanic Chamber of Commerce, and Concord Coalition Executive Director Robert L. Bixby agreed that national leaders must better inform and engage the public -- and that citizens should help build coalitions to support a sound fiscal plan.

Stebbins encouraged citizens to grill their elected officials and candidates for office on fiscal issues. He said that he and other CEOs had previously assumed that Washington leaders would “eventually get into a room and fix these problems, but unfortunately the political process in Washington is broken and we all need to step up in order to fix it.”

Stebbins described how "strong employment and a great economy could be unleashed if we would fix these problems."

Fuentes said that if “national leaders would actually work together to assemble a plan, then small- and medium-sized businesses around the country would be much better off.” Like Stebbins, he said companies could plan much better if they knew the government had its house in order.

Bixby pointed to projections of rising deficits later in the decade and unsustainable entitlement programs. Within the next decade, the federal government’s interest payments alone could near $800 billion a year. While this year’s projected deficit has come down, Bixby said it was not because of any tough political decisions.

“In fact,” he added, “we still don’t have a plan to deal with these challenges.”