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Fiscal Solutions Tour: The Challenges Ahead
presented by
Robert L. Bixby, Executive Director
THE CONCORD COALITION
www.concordcoalition.org
www.concordcoalition.org
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 Taxes
Corporate Taxes
Other
Entitlements
Social
Insurance
Taxes
Medicare
& Medicaid
Individual
Income
Taxes
Social
Security
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.
www.concordcoalition.org
THE CONCORD
COALITION
Current Policy Trends Lead to Large Sustained Deficits
Fiscal Years 2011-2020
Billions of Dollars
-$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.
www.concordcoalition.org
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
Projected
Percentage of GDP
Average outlays: 21.0%
Average revenues: 18.3%
 CBO August 2010 Baseline

CBO’s Estimate of the President’s Budget
Source: Congressional Budget Office, August 2010..
www.concordcoalition.org
THE CONCORD
COALITION
Percent of Debt Held by the Public
Owned by Foreigners
Percentage of Ownership of Publicly-Held Debt
(1987-2010)
Source: United States Treasury Department, Treasury Bulletin, September 2010.
www.concordcoalition.org
THE CONCORD
COALITION
Billions of Dollars
Interest Costs Go Through The Roof
Source: Congressional Budget Office August 2010 and CBO’s Analysis of the President’s Budget, March 2010.
www.concordcoalition.org
THE CONCORD
COALITION
Factors Explaining Future Federal Spending on Medicare,
Medicaid, and Social Security
Percent of Growth Attributed to:
2035
2080
Health Care Cost Growth
37%
56%
Aging
63%
44%
Source: Congressional Budget Office, June 2010.
www.concordcoalition.org
THE CONCORD
COALITION
Debt Held by the Public as a Percent of GDP
1940-2040
300
Actual
Projected
As a Percentage of GDP
250
200
150
World War II
108.6%
100
2010
63.6%
50
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
0
Source: GAO Analysis, 2010 and OMB Historical Tables 2010.
www.concordcoalition.org
THE CONCORD
COALITION
Mandatory spending is consuming a
growing share of the budget
1970
62%
1990
31%
40%
45%
2010
39%
55%
7%
15%
Mandatory
Net Interest
6%
Discretionary
Source: Congressional Budget Office, August 2010.
www.concordcoalition.org
THE CONCORD
COALITION
Outlays of Select Non-Defense Discretionary Programs
(FY 2010 Projected)
Education Transportation Housing,
Natural
Energy & Resources
Nutrition Asst.
Veterans
Foreign Aid
General
Government
Science,
Space &
Technology
*includes ground, air, and water
Source: Congressional Budget Office, January 2010.
www.concordcoalition.org
THE CONCORD
COALITION
As a Percentage of GDP
Non-Defense Discretionary Spending as a
Percentage of GDP
Source: Congressional Budget Office, August 2010.
www.concordcoalition.org
THE CONCORD
COALITION
As a Percentage of GDP
Defense Discretionary Spending as a
Percentage of GDP
Source: Congressional Budget Office, August 2010.
www.concordcoalition.org
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.
www.concordcoalition.org
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
Total Federal Spending
(As Percentage of U.S. Economy)
1800
2%
Size of the Total Economy:
$8.8 Billion (Constant 2009
Projected Size of the Total
Economy: $28.7 Trillion
Dollars)
(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).
1
Composition of Federal Spending
(% of Total Spending)
34%
43%
61%
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.
3
The following table illustrates the U.S. government’s explicit
liabilities, commitments, and unfunded social insurance promises
In Trillions of Dollars
 Explicit liabilities
2009
$6.9
$14.1

Publicly held debt
3.4
7.6

Military & civilian pensions & retiree health
2.8
5.3

Other Major Fiscal Exposures
0.7
1.3
0.5
2.0
13.0
45.8
 Commitments & contingencies

E.g., Pension Benefit Guaranty Corporation, undelivered orders
 Social insurance promises
Total
2000

Future Social Security benefits
3.8
7.7

Future Medicare benefits
9.2
38.2

Future Medicare Part A benefits
2.7
13.8

Future Medicare Part B benefits
6.5
17.2

Future Medicare Part D benefits
--
7.2
$20.4
$61.9
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.
4
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).
6
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
Additional Interest from
Rate Increase from 5.0% to
7.0%
Baseline Net Interest
Percentage of GDP
20
5.7%
of
GDP
15
10
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
Social Security Surpluses /Deficits In Percent of GDP
In the future, persistent cash deficits are projected for
Social Security
0.0
2000 Social Security Surplus
0.9 % of GDP ($114 Billion*)
0.0
In 2015, OASDI will begin operating
with a permanent cash flow deficit.
0.0
0.0
2080
Deficit
1.4 %
($722
billion*)
0.0
0.0
0.0
Actual
0.0
1970
1980
1990
2000
Projected
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.
10
Key Dates and Data regarding the financial condition of
the Social Security and Medicare Trust Funds
Medicare 3
Social Security
Current Beneficiaries
53 million
46.3 million
Year the Trust Fund begins
permanently operating with a
negative cash flow
20151
2008 (HI Trust Fund)
Trust fund exhaustion year
2037
2029
Discounted Present Value (PV)
of unfunded promises2
$7.9 trillion
$22.8 trillion
Actuarial Balance as a % of GDP
0.71%
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.
11
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
22
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)
23
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
24
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)
25
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
26
Illustrative Policy Options to Trim Defense Spending:
Sustainable Defense Task Force Report
Policy Option
Estimated Savings
2011-2020
Reduce the US nuclear arsenal; adopt dyad, cancel
Trident III
$113.5 billion
Reduce troops to Europe and Asia, cut end strength by $80 billion
50,000
Roll back Army & USMC growth as wars in Iraq and
Afghanistan end
$147 billion
Reduce US Navy fleet to 230 ships
$126.6 billion
Retire two Navy aircraft carriers and naval air wings
$50 billion
Military compensation reform
$55 billion
Reform DoD’s health care system
$60 billion
Require commensurate savings in command, support
and infrastructure
$100 billion
TOTAL SAVINGS
$732.1 billion
27
15 Largest Policy Options for Nondefense Spending:
CBO Estimates of Savings
Option #
Description
10-year Savings
400-1
Reduce highway funding; maintain positive balances in Highway Trust Fund
$93.0 billion
250-2
Delay the human lunar missions by five years
$23.6 billion
600-4
Increase payments by tenants in federally-assisted housing
$23.4 billion
Base cost-of-living adjustments for federal and military pensions and veterans’ benefits on alternative
measures of inflation
$22.6 billion
700-1
Reduce veterans’ disability compensation to account for Social Security Disability payments
$21.2 billion
400-6
Increase fees for Aviation Security
$19.5 billion
500-7
Eliminate subsidized loans to graduate students
$18.8 billion
270-11
Sell a portion of the Tennessee Valley Authority’s power assets
$16.0 billion
400-2
Eliminate the New Starts transit program
$14.9 billion
300-9
Eliminate federal grants for wastewater and drinking-water infrastructure
$11.1 billion
300-13
Prohibit new enrollments in the Department of Agriculture’s Conservation Stewardship Program
$10.9 billion
400-7
Eliminate or Reduce the Flood Insurance Subsidy on certain older structures
$10.7 billion
400-4
Eliminate grants to large and medium-sized hub airports
$10.7 billion
300-14
Prohibit Re-enrollments in the Conservation Reserve program
$10.5 billion
270-6
Eliminate Department of Energy’s applied research on energy-efficiency and renewable technologies
$10.4 billion
600-3
TOTAL
SOURCE: Congressional Budget Office, Budget Policy Options Vol. 2, June 2009.
$317.3 billion
28
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
29
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?
30
Fiscal Solutions: Revenues
Isabel Sawhill
Senior Fellow, Economic Studies Program, Brookings
October 2010
39
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
40
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
41
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
42
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)
43
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
44
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
45
The Budgeting for National
Priorities Project
On the Web
www.brookings.edu/budget