social security reform: putting it in perspective (isabel sawhill)

8/6/2019 Social Security Reform: Putting it in Perspective (Isabel Sawhill)

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Why We Need to ReformEntitlementsIsabel SawhillSenior Fellow, Economic Studies ProgramJune 2011


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The Current Picture (2011) 2011

Spending $3.7 T

Revenues $2.2 T

Deficit $1.5 T

Deficit-financed spending 40%

Deficit/GDP 10%

Debt/GDP 69%

Source:CBO,SummaryTable1,inTheEconomicandBudgetOutlook:AnUpdate(August2010).


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What the Outlook Depends On The economic recovery

Policy choices (to deal w. $12 T 10-yr def)

Ability to borrow at reasonable rates

Source: CBO, Table 1-1: Comparison of Projected Revenues, Outlays, and Deficits in CBOs March 2010 Baseline and CBOs Estimate of the Presidents Budget, inAn Analysis of the PresidentsBudgetary Proposals for Fiscal Year 2011 (March 2010).


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Why Deficits Matter Dependence on foreign

lenders

Rapidly rising debtservice costs

Burden on futuregenerations

Weakened ability tomeet contingenciesor invest in future

Fiscal crisis or lessgrowth


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Wolves vs. Termites Wolf is at the door: could have crisis at any

time;

Termites in the woodwork: slower growth;no flexibility to invest, meetcontingencies


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Elements of A Budget Compromise

9Cut discretionary

spending

Reform entitlements

Raise tax rates

Close loopholes

New taxes (energy,consumption)

Revenue IncreasesSpending Cuts


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Social Security Reform Options Adjust age of retirement or index to

longevity

Encourage people to work longer Reduce future benefits for better-off while

maintaining for less well-off

Mandate additionalsavings for retirementin personal accounts

Raise payroll tax cap


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Health Care Reform Current system is broken; primary driver of long-term deficits

Is Affordable Care Act the problem or the solution?

Guaranteed access to a basic package

Subsidies related to income; Medicaid expansion

Offsets to costs

Taxation of high-end plans; higher taxes on the wealthy

Medicare cuts

Employer and individual fees for not participating

Bending the curve (e.g., IT, evidence-based medicine,more coordination, Medicare Commission)

But can we restrain costs enough to reduce current projecteddeficits? (CBO says maybe; others disagree)


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Health Care Reform (contd) Possible Next Steps

Link subsidies or payments to

providers to evidence ofeffectiveness

Caps on spending; shift from definedbenefit to a defined contribution

A new source of revenue to covercost (e.g., VAT)


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Tax Reform Options

Higher taxes on wealthy but can 2% oftaxpayers bear the full burden?

Eliminate or reform existing deductions,credits, and other preferences (apx $1trillion/year)

Enact new taxes

Energy (cap and trade, carbox tax)

Consumption (VAT)


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Why Taxes Cant Be the Entire Solution for

the Longer Term Assume taxes bore the entire brunt of the projected

increase in spending

Under a reasonable scenario the tax rate for: Those in the 10 percent bracket would

increase to 26 percent by 2050.

Those in the 25 percent bracket to 66 percent

Those in the 35 percent bracket to 92 percent

Corporations would increase from 35 to 92percent

Source: CBO, Financing Projected Spending in the Long Run (letter to Senator Judd Gregg), July 9, 2007; assumes excess health care cost growth of 2.5 percentagepoints (which is close to the historical average).


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Defense Cuts

Annual spending in Iraq and Afghanistan iscurrently about $200 billion; more than $1 Tsince 2001.

There are other ways to decrease military

spending:

Reigning in procurement of new weaponssystems could save $15 to $20 billion peryear

Continuing reforms like those Secretary Gateshas begun could save $10 to $15 billion ayear

Changes to the personnel structure andbenefit structure could save $10 to $20billion a year

Barney-Frank Commission: overall savings ofSource: CBO, The Budget and Economic Outlook: An Update, Box 1-3, August 2010 and Mike OHanlon, Defense Cut Proposals Deserve Thought, Politico, September 3, 2010.


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The Contract between the Generations

Investing inkids increases

productivity

Enablespeople to earn

and savemore

Better able

to save topay for ownretirement


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Selected Statistics for the Elderly and

Non-Elderly

Source: Isabel V. Sawhill, Paying for Investments in Children, in Big Ideas for Children: Investing in Our Nations Future, ed. First Focus (Washington, D.C.: First Focus, 2008); updated with data for 2007 where available.


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Source: Isabel V. Sawhill, Paying for Investments in Children, in Big Ideas for Children: Investing in Our Nations Future, ed. First Focus (Washington, D.C.: First Focus, 2008).

Average Number of Years Spent in

Retirement: 1950 and 2006


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TheReal

Problem: Politics Republicans dont want to raise taxes

Democrats dont want to curb

entitlements

The President does not want to getout in front of the Congress

The public is in denial about whatneeds to happen


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The Republicans View A no new taxes strategy works

Most members have signed pledges

Starve the beast may work if a crisisdoesnt occur first

A few Rs are willing to compromise

But without more compromise, Dswont come to table on entitlements


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The Democrats View Social Security and Medicare are not

the problem and provide much-needed security to vulnerablegroups

Health costs are rising in private andpublic sectors and ACA has

addressed Social Security is solvent until 2037

We need to raise revenue and cut

defense


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President Obama Has talked about not kicking can

down road; appointed Commission

But hasnt used power of WH to movethe country forward or backed hisown Commission

Why not? A) timidity, B) smart politics

His April framework a response toRyan


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The Public: In Denial Polls show the public wants more

govt than theyre willing to pay for.

Oppose tax increases but alsooppose cuts in SS or Medicare byvery large margins

May be changing; President couldplay a role here


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Public Willingness to Cut Spending

12%

29%

27%

27%

22%

19%

71%

27%

12%

12%

13%

6%

11%

17%

7%

22%

7%

0% 10% 20% 30% 40% 50% 60% 70% 80%

None of the Above

The Environment

Housing

Agriculture

Science and Technology

Unemployment Benefits

Foreign Aid

Mass Transit

Highways

Education

Health Research

Veterans' Benefits

Medicaid

Aid to the Poor

Medicare

National Defense

Social Security

If government spending is reduced in order to balance the budget, which of the followinggovernment programs should receive lower federal funding than they currently do?

Source: The Economist/ YouGov Poll, April 3-6, 2010


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Current Political Battles The debt ceiling

The 2012 election

The Gang of 6 (or 5) and Bidensgang

The big stumbling block: the House


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What Needs to Happen The public must:

Recognize that

deficits are aproblem

Be willing toforgo tax cutsand acceptspendingcutbacks

Politicians must:

Use

bipartisanship to findsolutions

Make rules to

stay fiscallyresponsible


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The Budgeting for NationalPriorities Project

www.brookings.edu/budget

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