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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
On the Web
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