Fiscal Solutions Tour: The Challenges Ahead

presented by Robert L. Bixby, Executive Director www.concordcoalition.org

THE CONCORD COALITION

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THE CONCORD COALITION

Composition of Projected FY 2010 Federal Government Revenues and Outlays (Deficit: $1.34 Trillion)

Interest Domestic* Estate & Gift Taxes ($21 billion) Defense Other Entitlements Other Taxes Corporate Taxes Social Insurance Taxes Medicare & Medicaid Social Security Individual Income Taxes

Outlays: $3.49 trillion Revenue: $2.14 trillion

*Includes all appropriated domestic spending such as education, transportation, homeland security, housing assistance, and foreign aid. Source: CBO August 2010.

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THE CONCORD COALITION

Current Policy Trends Lead to Large Sustained Deficits Fiscal Years 2011-2020 -$6.2 Trillion Deficit -$15.2 Trillion Deficit

CBO August 2010 Baseline The Concord Coalition Plausible Baseline assumes that discretionary spending grows at the rate of nominal GDP, that war costs slow gradually, that Medicare physician payment cuts are postponed, and that all expiring tax provisions (including those from the 2009 stimulus package) are extended with AMT relief.

Source: Congressional Budget Office, August 2010 and Concord Coalition analysis.

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THE CONCORD COALITION

Federal Spending vs. Revenues as a Percent of GDP (FY 1980-2020) CBO August Baseline Compared to the President’s Budget Actual Average outlays: 21.0% Projected Average revenues: 18.3%

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CBO August 2010 Baseline



CBO’s Estimate of the President’s Budget

Source: Congressional Budget Office, August 2010..

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THE CONCORD COALITION

Percent of Debt Held by the Public Owned by Foreigners

(1987-2010)

Source: United States Treasury Department, Treasury Bulletin, September 2010.

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THE CONCORD COALITION

Interest Costs Go Through The Roof

Source: Congressional Budget Office August 2010 and CBO’s Analysis of the President’s Budget, March 2010.

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THE CONCORD COALITION

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security Percent of Growth Attributed to: Health Care Cost Growth Aging

Source: Congressional Budget Office, June 2010.

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2035 37% 63% 2080 56% 44% THE CONCORD COALITION

200 150 100 50 0 300

Debt Held by the Public as a Percent of GDP

1940-2040 Actual Projected

250 World War II 108.6% 2010 63.6%

Source: GAO Analysis, 2010 and OMB Historical Tables 2010.

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THE CONCORD COALITION

Mandatory spending is consuming a growing share of the budget

1970 1990 2010 62% 31% 7%

Mandatory

Source: Congressional Budget Office, August 2010.

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40% 45% 15%

Net Interest

39% 55% 6%

Discretionary

THE CONCORD COALITION

Outlays of Select Non-Defense Discretionary Programs (FY 2010 Projected) Education Transportation Housing, Natural Energy & Resources Nutrition Asst.

*includes ground, air, and water

Source: Congressional Budget Office, January 2010.

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Veterans Foreign Aid General Government Science, Space & Technology THE CONCORD COALITION

Non-Defense Discretionary Spending as a Percentage of GDP

Source: Congressional Budget Office, August 2010.

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THE CONCORD COALITION

Defense Discretionary Spending as a Percentage of GDP

Source: Congressional Budget Office, August 2010.

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THE CONCORD COALITION

Sources of Growth in the Federal Budget Over the Next 30 Years

Individual Income Taxes = 6.5% Current Defense Spending = 4.7%

Source: Government Accountability Office and Congressional Budget Office. 2010.

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THE CONCORD COALITION

Shortcomings of the Current System

•

There is no fiscal goal

•

PAYGO has large and confusing exemptions

•

PAYGO does not apply to automatic spending growth

•

Annual appropriations have no enforceable cap

•

Long-term costs are not accounted for

•

Inadequate oversight www.concordcoalition.org

THE CONCORD COALITION

Possible Changes

•

Set a fiscal goal such as debt-to-GDP ratio

•

Eliminate PAYGO exemptions

•

Set targets for major entitlement programs enforced by automatic triggers

•

Set multi-year enforceable spending caps

•

Require long-term cost estimates in the budget resolution and for major initiatives

•

Adopt biennial budgeting and/or “base closing” approach www.concordcoalition.org

THE CONCORD COALITION

Fiscal Solutions Tour

Fiscal Solutions Tour

Portsmouth, NH October 7, 2010

David M. Walker President and CEO The Peter G. Peterson Foundation and Former Comptroller General of the United States

2%

1800 Total Federal Spending

(As Percentage of U.S. Economy) Size of the Total Economy: $8.8 Billion (Constant 2009 Dollars) Projected Size of the Total Economy: $28.7 Trillion (Constant 2009 Dollars) SOURCES: Data from the Congressional Budget Office; Long-Term Budget Outlook: June 2010, alternative fiscal scenario. Data from Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006. Compiled by PGPF.

NOTE: The alternative fiscal scenario includes several changes to current law that are widely anticipated to occur (i.e. adjustments to Medicare payment rates).

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Composition of Federal Spending

(% of Total Spending) 43% 61% 34% Total Spending 1970: $900 Billion (Constant 2009 Dollars) Total Spending 2010 (estimated): $3.5 Trillion (Constant 2009 Dollars)

2

Since 1800, U.S. Debt Held by the Public has exceeded 60 percent of GDP (the maximum debt ceiling used by the European Monetary Union) only during World War II Great Depression WWI

SOURCES: Data from the Congressional Budget Office, Long-Term Budget Outlook: June 2009; the Government Accountability Office, The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update, alternative simulation using Congressional Budget Office assumptions. Compiled by PGPF.

NOTE: Debt held by the public refers to all federal debt held by individuals, corporations, state or local governments, and foreign entities.

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The following table illustrates the U.S. government’s explicit liabilities, commitments, and unfunded social insurance promises



Explicit liabilities

 Publicly held debt  Military & civilian pensions & retiree health  Other Major Fiscal Exposures 

Commitments & contingencies

 E.g., Pension Benefit Guaranty Corporation, undelivered orders

In Trillions of Dollars 2000 $6.9

3.4

2.8

0.7

0.5

2009 $14.1

7.6

5.3

1.3

2.0



Social insurance promises 13.0

45.8

  Future Social Security benefits Future Medicare benefits    Future Medicare Part A benefits Future Medicare Part B benefits Future Medicare Part D benefits 3.8

9.2

2.7

6.5

--

$20.4

7.7

38.2

13.8

17.2

7.2

$61.9

Total

SOURCE: Data from the Department of Treasury,

2009 Financial Report of the United States Government

. Compiled by PGPF. NOTE: Numbers may not add due to rounding. Estimates for Medicare and Social Security benefits are from the Social Security and Medicare Trustees reports, which are as of January 1, 2009 and show social insurance promises for the next 75 years. Future liabilities are discounted to present value based on a real interest rate of 2.9 percent and CPI growth of 2.8 percent. The totals do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included. Does not include civil service and military retirement funds, unemployment insurance, and debt held by other government accounts outside of Social Security and Medicare.

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Without reforms, by 2022, future revenues will only cover Social Security, Medicare, Medicaid, and interest on the debt. By 2046, revenues won’t even cover interest costs. 5

Future U.S. Debt Held by the Public is projected to soar if current policies remain unchanged 60 % of GDP

SOURCES: Data from the Congressional Budget Office, Long-Term Budget Outlook: June 2009; Long-Term Budget Outlook: June 2010, alternative fiscal scenario. Compiled by PGPF.

NOTE: Debt held by the public refers to all federal debt held by individuals, corporations, state or local governments, and foreign entities. The alternative fiscal scenario includes several changes to current law that are widely anticipated to occur (i.e. adjustments to Medicare payment rates).

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Current Treasury interest rates are low by historical standards 7

A rate increase of just two percent from baseline levels of 5.0 percent have a dramatic effect on interest costs

25 20 15 10 Additional Interest from Rate Increase from 5.0% to 7.0% Baseline Net Interest

5.7% of GDP 14.1% of GDP

5 0 2010 2015 2020 2025 2030 2035 2040 SOURCE: Data from the Government Accountability Office The Federal Government’s Long-term Fiscal Outlook: January 2010, alternative simulation using Congressional Budget Office assumptions. Compiled by PGPF.

NOTE: The projections use implied CBO interest rates through 2020, and an interest rate of 5.0 percent thereafter.

8

Since its inception, the Social Security program has experienced more surpluses than deficits 9

In the future, persistent cash deficits are projected for Social Security 0,0 0,0 0,0 2000 Social Security Surplus 0.9 % of GDP ($114 Billion*) In 2015, OASDI will begin operating with a permanent cash flow deficit.

0,0 0,0 0,0 2080 Deficit 1.4 % ($722 billion*) 0,0 Actual Projected 0,0 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

SOURCE: Data from the Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Compiled by PGPF.

NOTE: CBO projections show negative cash deficits in 2010 and 2011. Excludes interest earnings.

* In 2009 Dollars.

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Key Dates and Data regarding the financial condition of the Social Security and Medicare Trust Funds Social Security Medicare 3

Current Beneficiaries Year the Trust Fund begins permanently operating with a negative cash flow Trust fund exhaustion year Discounted Present Value (PV) of unfunded promises 2 Actuarial Balance as a % of GDP 53 million 2015 1 2037 $7.9 trillion 0.71% 46.3 million 2008 (HI Trust Fund) 2029 $22.8 trillion 1.8% SOURCE: Data from the Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds; and Centers for Medicare & Medicaid Services, 2010 Medicare Trustees Report, August 2010. Compiled by PGPF.

1.Estimated to operate with a negative cash flow in 2010 and 2011, and briefly return to positive cash flow in 2012 through 2014.

2.Excludes current “assets” in the Social Security and Medicare trust funds.

3.The projected financial position of combined Medicare Trust Funds under the 2010 Trustees’ Annual Report showed substantial improvements from the new health care reform law, which are highly debatable and resulted in an adverse opinion from the Medicare’s Office of the Chief Actuary.

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The U.S. spent more on defense in 2008 than did the countries with the next 14 highest defense budgets combined 12

A Way Forward

• Federal: Implement statutory budget controls that address discretionary and mandatory spending as well as tax preferences in order to stabilize our debt/ GDP at a reasonable level • Achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented • Reduce the rate of increase in health care costs and more effectively target related taxpayer subsidies and tax preferences • Ensure that all future health care reforms adequately consider coverage, cost quality and personal responsibility • Pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues

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A Way Forward- Continued

• Review, re-prioritize and re-engineer the base of the federal government, including national security strategies, to focus on the future, eliminate waste, generate real results and ensure sustainability • Ensure that we have process that will enable us to achieve the above objectives within a reasonable period of time • • • • State and Local: Reform pension and health systems to make them reasonable, affordable and sustainable Review, re-prioritize and re-engineer the base of government.

Pursue comprehensive tax reform in coordination with the federal government.

Consider an exchange of primary roles, functions and revenue sources as part of a new federalism or devolution effort (e.g., health care, education, infrastructure)

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Illustrative Social Security Policy Options

• Make little or no changes to those who are near retirement or are already retired, and make a number of adjustments that would affect younger workers: • Phase in increases in the normal and early retirement ages, and index to life expectancy (with a modified disability access provision • Modify the current benefit formula to reduce the replacement rate for middle and upper income workers, and possibly increase it for lower income workers • Consider a modest adjustment to the COLA formula (e.g., a 0.5 reduction) so that everyone contributes something to the overall reform

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Illustrative Social Security Policy Options (cont.)

• Make little or no changes to those who are near retirement or are already retired, and make a number of adjustments that would affect younger workers: • • • Increase taxable wage base, if necessary Address equity and other considerations Consider mandatory supplemental individual savings accounts on a payroll deduction basis (e.g., a minimum 2 percent payroll contribution and a program designed much like the Federal thrift Savings Plan with a real trust fund and real investments)

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Selected DoD Transformation Related Actions

• • • • • • • • Revise the current approach to developing national military strategy (e.g. order, integration, reserve constraints) Take a longer-range and more enterprise-wide approach to program planning and budget integration (e.g. life-cycles, opportunity costs) Address the 15 systemic DoD acquisition and contracting challenges Employ a more strategic, integrated and value-based approach to business information system efforts and financial audit initiatives Employ a total force management approach to planning and execution (e.g. military, civilian, contractors) Reduce the number of layers, silos, and footprints Review and revise current military compensation policies and practices (i.e. more targeted and market-based) Create a Chief Management Officer (CMO) to drive the business transformation process

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Illustrative Policy Options to Trim Defense Spending: Sustainable Defense Task Force Report Policy Option

Reduce the US nuclear arsenal; adopt dyad, cancel Trident III Reduce troops to Europe and Asia, cut end strength by 50,000 Roll back Army & USMC growth as wars in Iraq and Afghanistan end Reduce US Navy fleet to 230 ships Retire two Navy aircraft carriers and naval air wings Military compensation reform Reform DoD’s health care system Require commensurate savings in command, support and infrastructure

TOTAL SAVINGS Estimated Savings 2011-2020

$113.5 billion $80 billion $147 billion $126.6 billion $50 billion $55 billion $60 billion $100 billion

$732.1 billion 27

Option # 400-1 250-2 600-4 600-3 700-1 400-6 500-7 270-11 400-2 300-9 300-13 400-7 400-4 300-14 270-6 15 Largest Policy Options for Nondefense Spending: CBO Estimates of Savings Description

Reduce highway funding; maintain positive balances in Highway Trust Fund Delay the human lunar missions by five years Increase payments by tenants in federally-assisted housing Base cost-of-living adjustments for federal and military pensions and veterans’ benefits on alternative measures of inflation Reduce veterans’ disability compensation to account for Social Security Disability payments Increase fees for Aviation Security Eliminate subsidized loans to graduate students Sell a portion of the Tennessee Valley Authority’s power assets Eliminate the New Starts transit program Eliminate federal grants for wastewater and drinking-water infrastructure Prohibit new enrollments in the Department of Agriculture’s Conservation Stewardship Program Eliminate or Reduce the Flood Insurance Subsidy on certain older structures Eliminate grants to large and medium-sized hub airports Prohibit Re-enrollments in the Conservation Reserve program Eliminate Department of Energy’s applied research on energy-efficiency and renewable technologies

TOTAL 10-year Savings $93.0 billion $23.6 billion $23.4 billion $22.6 billion $21.2 billion $19.5 billion $18.8 billion $16.0 billion $14.9 billion $11.1 billion $10.9 billion $10.7 billion $10.7 billion $10.5 billion $10.4 billion $317.3 billion 28

SOURCE: Congressional Budget Office, Budget Policy Options Vol. 2, June 2009.

Illustrative Tax Policy Options

• Determine what to do with the AMT and provisions of the Bush Tax Cuts • Address the “Tax Gap” • Streamline and simplify • Enhance the competitiveness of our business tax structure • Engage in a baseline review of all major spending programs and tax preferences • Ensure that the tax system generates enough revenue to pay the bills and deliver on the promises that federal government intends to keep

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• • • • • • • • • •

Basic Questions to Ask About Every Federal Program and Policy

When was it created?

What conditions existed at the time? Have those conditions changed?

Have we modified the program/policy to reflect those changes?

What are we trying to accomplish? How do we measure success based on desired outcomes?

How well are we doing in terms of goals, trends, and compared to similar nations?

Is the program/policy still a priority for today and tomorrow?

Are their other programs intended to accomplish the same goal?

Are similar programs working in a coordinated and integrated manner?

Are we using the experience of others – state and local governments, other nations, nonprofit agencies – to replicate success and avoid common mistakes?

Can we afford and sustain the program/policy in its present form?

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Fiscal Solutions: Revenues

Isabel Sawhill Senior Fellow, Economic Studies Program, Brookings October 2010

Major Options

• • • • • •

Let the Bush tax cuts expire Reform Income Taxes Tax Energy Tax Consumption Raise Payroll Taxes But revenues cannot be the entire solution; everything must be on the table

39

Let the Bush Tax Cuts Expire

• • •

May need temporary extension

»

For Everyone

»

Only for Middle Class Cost of a permanent extension: $3 T Cost of a permanent extension just for the middle class: $2.3 T

40

Reform Income Taxes

• • • • Current system is overly complex, inefficient, and discourages growth Existing deductions/preferences cost about $1 T a year; with broader base can raise revenue/lower rates Economists call these “tax expenditures” because they are the equivalent of back-door spending programs Largest are for health care, pensions, housing, state and local taxes but corporate subsidies also important 41

Tax Energy

• • •

A triple winner: new revenues, energy security, slow climate change Cap and trade with auctioning of carbon permits is a variation on this theme Would encourage more production of alternative fuels as well as less consumption of carbon-based fuels with savings on subsidies to alternatives (e.g. ethanol)

42

Tax Consumption

• • • • • Most other countries rely heavily on taxing consumption (vs. income); use VAT Encourages saving; pro-growth Major critique: regressive, money machine To fix regressivity: exemptions, rebates To address money machine: dedicate to existing health care subsidies with any savings earmarked for deficit reduction and future rates tied to health spending 43

Raise Payroll Taxes

• • •

Social Security very popular and payroll taxes the least controversial Raise earnings cap on Social Security payroll tax (currently $106,000) Tax more of the benefits as one way to move toward greater income-relating of benefits

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The Budgeting for National Priorities Project

On the Web

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www.brookings.edu/budget