Download Restoring Fiscal Sanity: Meeting the Long

Restoring Fiscal Sanity:
Meeting the Long-Run Challenge
April 14, 2005
Alice M. Rivlin and Isabel Sawhill, editors
Henry J. Aaron, William G. Gale, Ron Haskins, Jack
Meyer, Peter R. Orszag, Rudolph Penner, John B.
Shoven, and C. Eugene Steuerle, authors
http://www.brookings.edu/budget
1
Big Choices Must Be Made
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2
The population is aging and medical care costs are
rising fast
Combination will drive federal spending to
unprecedented levels
By 2030, huge gap opens between projected
spending and historic revenue levels
Should taxes be raised to European levels? Should
other federal activities be slashed? Should promises
to the elderly be adjusted?
Federal Spending, 2004
Interest on the
National Debt 7%
Defense 20%
Social Security,
Medicare, and
Medicaid 42%
Other Domestic
Spending 31%
3
Source: See figure 2-1, page 36 of Restoring Fiscal Sanity 2005
Federal Revenue and Outlays
(as percentage of GDP, 1962 to 2015)
26.00
Actual
Predicted
24.00
Percent of GDP
22.00
Outlays
20.00
18.00
16.00
Revenue
14.00
12.00
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
10.00
Year
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Source: See figure 1-2, page 22 of Restoring Fiscal Sanity 2005
CBO Projection of Social Security,
Medicare, and Medicaid
30.0
2.5 Percent Excess Cost Growth
Percent of GDP
25.0
20.0
18 percent
15.0
Medicaid
10.0
Medicare
5.0
Social Security
20
49
20
47
20
45
20
43
20
41
20
39
20
37
20
35
20
33
20
31
20
29
20
27
20
25
20
23
20
21
20
19
20
17
20
15
20
13
20
11
20
09
20
07
20
05
20
03
0.0
Fiscal Year
5
Source: See figure 1, page 2 of Restoring Fiscal Sanity 2005
Historical and Projected Components of
Federal Spending, 1962 – 2050
45.0
2.5 Percent Excess Cost Growth
(Simulation 1)
Actual
Predicted
40.0
Long-term Revenue 18.4%
35.0
Percent of GDP
30.0
25.0
20.0
15.0
Social Security,
Medicare, Medicaid
10.0
Interest
Other Federal
Spending
5.0
Defense
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
20
16
20
19
20
22
20
25
20
28
20
31
20
34
20
37
20
40
20
43
20
46
20
49
0.0
Year
Source: Congressional Budget Office
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The Choices
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Keep revenues at or below current level with
wholesale reductions in spending (the
smaller government scenario)
Maintain current commitments and fund
some new priorities (the larger government
scenario)
Do some combination of the two, but still
need to decide where to cut spending, and
whether to fund any new initiatives
Smaller Government Scenario
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
8
Social Security benefits indexed to prices, not
wages
Medical costs held to growth rate of economy
Eliminate most commercial and agricultural
subsidies, most education, housing, job
training, environmental, and crime programs
Selected cuts in other domestic programs
deemed wasteful or ineffective
Defense spending held below $400 billion
Consequences of Smaller Government
Scenario


Federal taxes reduced slightly
Elderly responsible for much bigger share of costs of
retirement
–
–
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
9
Social security benefits fall by 18% in 2030, more steeply
thereafter
Portion of health outlays paid by elderly would rise from
about 40% to about 70% by 2030, more thereafter
Non-defense spending cut by about $400 billion a
year by end of decade (about 10%)
No room to meet unforeseen contingencies (e.g.,
terrorism) or fund new initiatives
Larger Government Scenario
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
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10
Social Security, Medicare, Medicaid
unchanged
Added spending for new initiatives equal to
1.5% of GDP (e.g., health care, education,
global poverty)
Defense allowed to grow in line with
Pentagon’s future years defense plan
through 2022
Consequences of Larger Government
Scenario
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
11
Total spending rises from 20% of GDP in
2005 to about 28% in 2030
Big tax increase
But tax burdens still lower than in 17 other
advanced countries
After-Tax Real Income for
Average Household
Mean
Income
(2005 $)
$120,000
$100,000
$80,000
Taxes
After-tax Income
$60,000
$40,000
$20,000
$0
Smaller
Government
2005
Larger
Government
2030
12
Source: Author’s calculations
The Politics of Deficit Reduction:
Lessons from the Past

Past efforts to reduce deficit or make major changes in taxes
and entitlements have sometimes succeeded
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Six lessons from history and literature
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–
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1983 Social Security reforms
1986 tax reform
1990s budget agreements (1990, 1993, 1997)
The public must demand action
Presidential leadership is important
Bipartisanship works best
Everything should be on the table
Unorthodox methods of legislating can help
Rules matter
The Politics of Deficit Reduction: What
Washington Insiders Say
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Our interviews suggest considerable pessimism that
past success can be replicated in current
environment
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Most important for success, according to insiders
–
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–
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Only 1 out of 20 thought spending could be cut by as much
as 5 percent
15 out of 20 thought it would be cut by less than 1%
Only 3 out of 20 thought even a minority of Republicans
would agree to a tax increase in the next few years
External factors that create public concern
Presidential leadership
Bipartisan compromise, spreading the pain
Conclusions
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15
Current deficits threaten economic well-being
Even if they decline in short-run, they will balloon in
longer-run
Social Security is a problem; Medicare is a much
bigger problem
Fiscal imbalances present an opportunity to rethink
what government does and how we pay for it
Eventually, taxes must be raised and spending cut
The sooner this is done, the less costly and painful it
will be
Presidential leadership and bipartisan compromise
will be required