Tag: Social Security

John Boehner’s Spending and Debt Promise

House Speaker John Boehner has promised to tie substantial spending cuts to upcoming debt-limit legislation. He said spending cuts will have to be at least as large as the dollar value of the allowed debt increase. Thus, if the legislation increased the legal debt limit by $2 trillion, then Congress would have to cut spending over time by at least $2 trillion.

How can we be sure that spending cuts are real?

There are only two types of solid and tough-to-reverse spending cuts—legislated changes to reduce entitlement benefit levels and complete termination of discretionary programs. Republicans will have to define what time period they are talking about, but let’s assume it’s the standard 10-year budget window.

  • Entitlements: The legislation, for example, could change the indexing formula for initial Social Security benefits from wages to prices. The Congressional Budget Office says that change would reduce spending by $137 billion over 10 years (2012-2021). Other options include raising the retirement age for Social Security and raising deductibles for Medicare.
  • Discretionary: Each session of Congress decides the following year’s discretionary spending. Promises of discretionary spending cuts beyond one year are meaningless. Thus, the various promises in Republican and Democratic budget plans to freeze various parts of discretionary spending through 2021 or reduce spending to 2008 levels over the long term have no weight. Those are not real cuts.

The only way to get real cuts in discretionary spending—cuts that would be tough to reverse out in later years—is complete program termination and repeal of the program’s authorization. That way, policymakers in future years would generally need at least 60 votes in the Senate to reinstate the spending.

Thus, if the GOP promises to save $50 billion over 10 years by reducing the levels of Title 1 grants to the states for K-12 schools, that is not a real and solid cut. However, if they pass a law to repeal Title 1 spending altogether, that cut may well be sustained over the long term.

To make spending cuts even more secure, the GOP should also insist on a statutory cap on overall outlays with a supermajority requirement to break, as I’ve outlined here. For program termination ideas, see www.DownsizingGovernment.org.

In sum, the GOP needs to ensure that spending cuts tied to the debt-limit vote are either:

  1. Changes to entitlement laws to reduce benefit levels, or
  2. Discretionary program terminations.

    Promises to hold down future discretionary spending levels and partial program trims are not real spending cuts.

    Monday Links

    • “Sadly, in Egypt’s case, a freely elected civilian government may prove powerless in the face of the deeply entrenched and well-organized military.”
    • “Washington politicians from both parties, and bureaucrats, have for decades successfully decreased our freedom and liberties as they have regulated more and more of our lives, including our retirement.”
    • “The Ryan proposal correctly focuses on achieving debt reduction through spending cuts, but this very gradual debt reduction schedule is a weakness that could lead to its downfall.”
    • “Nearly two years ago Sen. McCain, along with Senators Graham and Lieberman, was supping with Qaddafi in Tripoli, discussing the possibility of Washington providing military aid.”
    • Cato media fellow Radley Balko joined FOX Business Network’s Stossel recently to discuss your right to make video recordings of police, and why exercising that right frequently is vital to liberty:

    Taxing the Rich Is the Cure for Everything!

    Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.

    For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.

    It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the program’s giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.

    For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine:

    Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year.

    …Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners.

    …[M]ost of the increase could be paid by the middle class or modestly affluent — i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.

    Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.

    After the jump is a video from the Center for Freedom and Prosperity, narrated by yours truly, that elaborates on why this is the wrong approach.

    Thursday Links

    Why Should Social Insurance Reform Not Affect Those Over Age 54?

    House Budget Committee Chairman Paul Ryan’s budget plan is ostensibly for FY 2012, but it contains reforms with far-reaching implications for the nation’s fiscal condition.

    Most of the action in his plan is on the spending side and mainly on health care entitlements: Medicare and Medicaid.  Many pundits on the left are claiming it is a political document rather than a serious budget proposal, especially because it lacks details on many of its proposed policy changes. 

    One thing that stands out, as pointed out by David Leonhardt in the NYT, is that Ryan’s plan exempts people older than age 55 from bearing any share of the adjustment costs.  They should, instead, be called upon to share some of the burden, Leonhardt argues — a point that I agree with.  If seniors are receiving tens of thousands of dollars more than what they paid in for Medicare, then they should not be allowed to hide behind the tired old argument of being too old to bear any adjustment cost.  Indeed, seniors hold most of the nation’s assets and a progressive-minded reform would ask them to fork over a small share to relieve the financial burden that must otherwise be imposed on young workers and future generations.

    The numbers presented by Leonhardt are computed by analysts at the Urban Institute.  However, those numbers aren’t quite as one-sided as Leonhardt and Urban scholars suggest, because they only compare Medicare payroll taxes by age group to Medicare benefits.  A large part of Medicare benefits (Medicare’s outpatient care, physicians’ fees, and federal premium support for prescription drugs) are financed out of general tax revenues, not just Medicare taxes. General tax revenues, of course, include revenues from income taxes, indirect taxes, and other non-social-insurance taxes and fees.  Seniors pay some of those taxes as well — especially by way of capital income and capital gains taxes — but the Urban calculations fail to account for this.  That means that the net benefit to seniors from Medicare is smaller than Leonhardt claims in his column.  I don’t know whether it would bring the per-person Medicare taxes and benefits as close to each other as they are for Social Security, however. (See Leonhardt’s column for more on this point.)

    Leonhardt also notes that Chairman Ryan’s proposal leaves out revenue increases as a potential solution to the growing debt problem.  Leonhardt argues that wealthy individuals (mostly large and small entrepreneurs) received high returns on assets during the last few years (pre-recession) and could afford to pay more in taxes.

    But it would be poor policy to raise these entrepreneurs’ income taxes — that would distort incentives to work, invest, innovate, and hire in their businesses.  Instead, policymakers should consider reducing high-earners’ Medicare and Social Security benefits (premium supports under the Ryan plan) in a progressive manner, including allowing them to opt out of Medicare and Social Security completely if they wish to.

    During recent business trips to a few Midwestern towns, I met several investors and professionals in real estate, financial planning, and manufacturing concerns, most of whom expressed their willingness to forego social insurance benefits during retirement.  So there seems to be some public support for such a reform of social insurance programs.

    Federal Spending: Ryan vs. Obama

    House Budget Committee Chairman, Paul Ryan, introduced his budget resolution for fiscal 2012 and beyond today entitled “The Path to Prosperity.” The plan would cut some spending programs, reduce top income tax rates, and reform Medicare and Medicaid. The following two charts compare spending levels under Chairman Ryan’s plan and President Obama’s recent budget (as scored by the Congressional Budget Office).

    Figure 1 shows that spending rises more slowly over the next decade under Ryan’s plan than Obama’s plan. But spending rises substantially under both plans—between 2012 and 2021, spending rises 34 percent under Ryan and 55 percent under Obama.

    Figure 2 compares Ryan’s and Obama’s proposed spending levels at the end of the 10-year budget window in 2021. The figure indicates where Ryan finds his budget savings. Going from the largest spending category to the smallest:

    • Ryan doesn’t provide specific Social Security cuts, instead proposing a budget mechanism to force Congress to take action on the program. It is disappointing that his plan doesn’t include common sense reforms such raising the retirement age.
    • Ryan finds modest Medicare savings in the short term, but the big savings occur beyond 10 years when his “premium support” reform is fully implemented. I would rather see Ryan’s Medicare reforms kick in sooner, which after all are designed to improve quality and efficiency in the health care system.
    • Ryan adopts Obama’s proposed defense (security) savings, but larger cuts are called for. After all, defense spending has doubled over the last decade, even excluding the costs of wars in Iraq and Afghanistan.
    • Ryan includes modest cuts to nonsecurity discretionary spending. Larger cuts are needed, including termination of entire agencies. See DownsizingGovernment.org.
    • Ryan makes substantial cuts to other entitlements, such as farm subsidies. Bravo!
    • Ryan would turn Medicaid and food stamps into block grants. That is an excellent direction for reform, and it would allow Congress to steadily reduce spending and ultimately devolve these programs to the states.
    • Ryan would repeal the costly 2010 health care law. Bravo!

    To summarize, Ryan’s budget plan would make crucial reforms to federal health care programs, and it would limit the size of the federal government over the long term. However, his plan would be improved by adopting more cuts and eliminations of agencies in short term, such as those proposed by Senator Rand Paul.

    Friday Links

    • When is an entitlement not an entitlement, but a command? When a federal judge contradicts herself, of course.
    • As the Arab League’s influence over its own member states wanes, of course they support the creation of an international no-fly zone over Libya.
    • Of course, there’s really no such thing as a “Social Security trust fund.”
    • Should the United States and Saudi Arabia remain allies? Of course—but Washington should probably re-think the terms of the partnership.
    • Of course, when George W. Bush was president, you couldn’t go anywhere in Washington without seeing an anti-war protest. Where have they all gone?