THE CONCORD COALITION www.concordcoalition.org

The Federal Budget Now and in the Future: How the WI League of Women Voters Can Help Improve Government’s

Fiscal Policy and Engage Citizens to Help Reduce National Debt

presented by

Sara Imhof, Educational Programs Director

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90

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80

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America is on an Unsustainable Fiscal Path Debt Held by the Public, as a Percent of GDP, 1790-2050

Source: CBO’s Long Term Outlook Extended Alternative Scenario, 2013.

As

a Pe

rcen

tage

of

GD

P

Historical Projected

World War II 106%

2013 72%

Percentage of Debt Held by the Public Owned by Foreigners

Calendar Years 1987-2013

Source: United States Treasury Department, Treasury Bulletin, Table OFS-2, December 2013.

-10%

0%

10%

20%

30%

40%

50%

60%

Perc

enta

ge o

f O

wn

ersh

ip o

f P

ub

licly

-Hel

d D

ebt

$757

$948 $467

$274 $625

$217

$576

$221

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Composition of Fiscal Year 2013 Federal Budget Deficit: $680 Billion

• Includes CHIP, spending related to exchanges and subsidies

**Includes all appropriated domestic spending such as education, transportation, homeland security, housing assistance and foreign aid.

Source: Congressional Budget Office, February 2014.

Outlays: $3.45 trillion Revenues: $2.77 trillion

Interest

Domestic**

Social Security

Medicare & Medicaid*

Other Mandatory

Defense

Estate & Gift Taxes ($19 billion)

Individual Income Taxes

Social Insurance Taxes

Corporate Taxes

Other Taxes

$808

$1,316

CBO Projected Baseline

13%

15%

17%

19%

21%

23%

25%

27%

19

80

1

98

1

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82

1

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3

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84

1

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5

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86

1

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7

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1

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9

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90

1

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1

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92

1

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1

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16

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7

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18

2

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9

20

20

2

02

1

20

22

2

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3

20

24

CBO Outlays

CBO Revenues

Federal Spending vs. Revenues as a Percent of GDP CBO Baseline 2014-2024

Source: Congressional Budget Office, February 2014.

Pe

rce

nta

ge o

f G

DP

Projected

Average outlays: 20.4%

Average revenues: 17.4%

Why Deficits Matter

• Reduce national savings, raises interest rates

• That leads to lower productivity and slower economic growth

• Increase burden on future generations:

– Through rising debt service costs;

– By reducing productivity-enhancing investments

• Increase dependence on foreign lenders

• Weakened ability to meet contingencies or new challenges –

reduced flexibility

• Risk of sudden market sentiment change/disarray

51%

41%

8%

37%

14%

49% 34%

15%

60%

Mandatory Spending Discretionary Net Interest

*Projected Source: Congressional Budget Office, February 2014.

Automatic Expenditures Are Consuming a Growing Share of the Budget

1974 1994 2014*

23%

62%

7%

2024*

“Automatic”

Social Security, Medicare, & Medicaid as a Percentage of the Federal Budget

All other Federal Spending

$1.89 Trillion

55%

Social Security, Medicare and

Medicaid

$1.57 Trillion

45%

Source: Congressional Budget Office, February 2014.

Social Security, Medicare, Medicaid and Interest

Consume All Federal Revenues in Less Than 15 Years

0%

25%

50%

75%

100%

125%

2015 2020 2025

Year

Per

cen

tag

e o

f R

even

ues

Social Security, Medicare and Medicaid

Interest

Source: Government Accountability Office, March 2012.

Outlays of Select Mandatory Spending Programs Fiscal Year 2014 Projected

$846

$505

$298

$150

$87 $85 $80 $46 $31 $21 $15

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Social Security

Medicare Medicaid Federal Civilian & Military

Retirement

Earned Income & Child Tax Credits

Veterans Support

Food Stamps

Unemploy-ment

Comp.

Family Support

Child Nutrition

Agriculture

In B

illio

ns

of

Do

llars

Source: Congressional Budget Office, February 2014.

Outlays of Select Non-Defense Discretionary Spending Programs

Fiscal Year 2014 Projected

$92 $85

$64

$51

$34 $32 $29

$21 $17

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Education Transportation Veterans Forgeign Aid Environment Community Development

& Housing

Science-Space-Technology

Justice General Government

In B

illio

ns

of

Do

llars

Source: Congressional Budget Office, February 2014.

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1

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1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022

Non-Defense Discretionary Spending as a Percentage of GDP

Source: Congressional Budget Office, February 2013.

As

a P

erc

en

tage

of

GD

P

Projected

2.0%

2.5%

3.0%

3.5%

4.0%

4.5% 2

01

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20

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CBO Baseline

Historical Average

Lowest Level Since 1970

Projected Non-Defense Discretionary Spending as a Percentage of GDP

Source: Congressional Budget Office, February 2014

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1

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9

10

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021

Defense Discretionary Spending as a Percentage of GDP

Source: Congressional Budget Office, February 2014.

As

a Pe

rcen

tage

of

GD

P

Projected

The Sources of Growth in Federal Spending

-4

-3

-2

-1

0

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3

4

Gro

wth

as

a Pe

rcen

tage

of

GD

P

Change in Outlays as a Percentage of GDP, 2013-2038

Source: CBO Extended Baseline (CBO, September 2013)

Medicare Medicaid, CHIP,

Exchange Subsidies

Social Security

All Other Spending

Interest

Americans Are Getting Older and Living Longer

Source: U.S. Census Bureau, 2008.

Year

Pro

ject

ed P

op

ula

tio

n O

ver

Age

65

In

Mill

ion

s

0

20

40

60

80

100

2010 2020 2030 2040 2050

Over Age 85

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2011 2016 2021 2026 2031

As a

Perc

en

tag

e o

f G

DP

Effect of Aging

Spending Without Aging and

Health Care Cost Growth

Factors Explaining Future Federal Spending on Medicare,

Medicaid, and Social Security

Source: Congressional Budget Office, June 2011.

Percent of Growth Attributed to: 2035 2080

Health Care Cost Growth 36% 56%

Aging 64% 44%

Americans are Living Longer and Having Fewer Children

Consequently, fewer workers are available

to support each Social Security and Medicare recipient

1960: 5.1 to 1 Today: 2.9 to 1 2029: 2.1 to 1

Source: Social Security and Medicare Trustees’ Report, 2012.

Medicare and Social Security Trust Funds Increasing Rely on General Revenue Subsidies

Fiscal Year 2012

Source: Medicare Trustees’ Report, Table V.F1, May 2013.

$160b

$29b

$215b

$0

$50

$100

$150

$200

$250

Social Security Medicare Part A Medicare Part B

Gen

eral

Rev

enu

e C

on

trib

uti

on

s

in B

illio

ns

of

Do

llars

Current Fiscal Policy is on an Unsustainable Path

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50% 1

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52

Per

cen

tag

e o

f G

DP

Modern Historical Tax

Average: 18% of GDP

Social Security

Medicare

Medicaid*

All Other

Spending

Interest

*Includes outlays for CHIP and exchange subsides.

Source: Government Accountability Office, Spring 2012.

Actual Projected

10 Minute Interactive Component Small Group Discussions – Large Group Vote

• Three major deficit-reduction options – Health Care

– Social Security

– Taxes

• Group discussions by table

• Large group vote

Tough Choices Ahead….

• Reform Medicare / Medicaid

– Provide seniors fixed amount to purchase private health insurance ($61 billion)

– Convert Medicaid to block grant ($450 billion)

– Tie Medicare Part B premiums to 35 % of program costs ($274 billion)

– Bundle Medicare payments to providers ($47 billion)

• Social Security: Increase Revenue and Reduce Spending

– Raise full retirement age ($58 Billion)

– Increase cap on taxable earnings for Social Security payroll tax ($460 billion)

– Progressive Price Indexing for benefits ($58 billion)

– Chained CPI inflation index for cost-of-living adjustments ($163 billion)

• Eliminate Tax Expenditures through Comprehensive Tax Reform

– Eliminate or reduce tax preferences (expenditures) and create three new brackets for revenue-neutral ($0) or revenue raising ($1,200 billion) tax reform

The National Commission on Fiscal Responsibility: Moment of Truth The Bipartisan Policy Center : Restoring America’s Future

POLICY

The National Commission on Fiscal Responsibility

Bipartisan Policy Center Task Force

Health • Medicaid: Expands managed care for dual eligibles

• Institutes tort reform

• Raises Medicare premiums

• Strengthens IPAB Provides illustrative option of premium support

• Converts FEHB program from defined-benefit to defined-contribution with support growing GDP+1

• In 2020, global cap on all federal health spending and limit growth GDP+1%

• Reduces provider payments

• Medicaid: Expands managed care for dual eligibles

• Institutes tort reform

• Raises Medicare premiums

• In 2018, transforms Medicare to premium-support model, but maintains traditional Medicare as default option. Limits federal support per beneficiary to GDP+1%

• Limit Medicaid growth: end federal matching payments in Medicaid by decoupling the system

• Accommodates a permanent fix to the SGR mechanism

• Excise tax and import tax on manufacture and importation of sweetened beverages

Social Security

• Raises retirement ages slowly over time

• Switches to Chained CPI

• Includes state and local workers

• Raises the minimum benefit and creates old age bump

• Raises the cap on payroll taxes to the 90% level

• Makes benefit adjustment, protecting the bottom 50% of beneficiaries

• Adjusts benefit formula to account for increases in longevity (but does not raise the retirement age)

• Switches to Chained CPI

• Includes state and local workers

• Raises the minimum benefit and creates old-age bump

• Raises the cap on payroll taxes to the 90% level

• Makes a modest benefit adjustment, protecting the bottom 75% of beneficiaries

Source: Bipartisan Policy Center, G. William Hoagland 2010.

The National Commission on Fiscal Responsibility: Moment of Truth The Bipartisan Policy Center : Restoring America’s Future

POLICY

The National Commission on Fiscal Responsibility

Bipartisan Policy Center Task Force

Consensus

Fiscal Measures

• ~ 11 of the 18-member supported plan

• In 2020 – 65.5% Debt to GDP

• In 2020 – spending 21.8% GDP

• In 2020 – revenues 20.6% GDP

• In 2020 – deficit 1.2% GDP

• Consensus plan of a 19-member bipartisan Task Force

• In 2020 -- 60% Debt to GDP

• In 2020 – spending 23.0% GDP

• In 2020 – revenues 21.4% GDP

• In 2020 – deficit 1.6% GDP

Economic Recovery

• Recommends consideration of small payroll tax relief in 2011 -- $50 to $60 billion.

• Starts policies in 2012

• Provides 1-year payroll tax holiday for approximately 125 million workers in 2011. Cost: $640 billion.

• Starts policies in 2012.

Tax Expenditures

• Retains current law EITC and Child Tax Credit

• Maintains current law standard deduction

• Eliminates all itemized deductions

• 12% non-refundable tax credit mortgage & charitable contributions

• Beginning in 2018 phases out employer provided health insurance exclusion by 2038

• Eliminates almost all tax expenditures.

• Eliminates most tax deductions, credits and expenditures – turns EITC, child credit, charitable, mortgage, and retirement savings deductions into refundable credits

• Beginning in 2018 phases out employer provided health insurance exclusion by 2028

Revenues • Cuts individual income tax rates; creates 3 brackets 12%, 22% and 28%

• Cuts corporate rate to 28%

• Proposes to cap revenues at 21% of GDP

• Raises federal gas tax by 15 cents

• Eliminates AMT, PEP and Pease

• Cuts individual income tax rates; creates just 2 brackets of 15% and 27%

• Cuts corporate rate to 27% (OECD average)

• Imposes Debt Reduction Sales Tax of 6.5%

• Eliminates the AMT

Domestic Discretionary

• Proposes 4 years of cuts, then 5 years held to growth at inflation

• Freezes domestic discretionary spending for 4 years, then limits growth to GDP growth

Defense • Proposes 4 years of cuts, then 5 years held to growth at inflation

• Reduces weapon systems, reforms compensation, cuts force structure cuts, and applies Gates’ savings

• Freezes defense discretionary spending for 5 years, then limits growth to GDP growth

• Reduces weapon systems, reforms compensation, cuts force structure, and applies Gates’ savings

Policy Areas That Need to Be Addressed

• Discretionary spending restraint (including defense spending)

• Health care cost control and Medicare reform

• Social Security sustainability

• Reducing other entitlements (including some that are funneled through the tax code)

• Budget enforcement process to improve accountability

Questions for the Candidates

• Themes:

– ID opportunities for bipartisan cooperation on significant fiscal reform?

– ID programs that are clearly wasteful?

– Support for comprehensive tax reform? Should it be revenue-neutral or should it raise revenue to reduce the deficit?

– Cost-containment in our health care system?

– Solvency for the Social Security program (both older age and disability portions): how?

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