Congressional GOP’s Budget Hits Reality Hard
(A version of this Health Alert was published by Real Clear Policy.)
The Congressional Budget Office’s recent budget update revealed a dramatic deterioration in the federal government’s finances. The cumulative deficit over the next ten years, through 2025, is now estimated to add up to $8.5 trillion. Just last August, the number was $7 trillion.
The CBO itself notes that “about half of the $1.5 trillion increase stems from the effects of laws enacted since August.” In other words, this is the work of the 114th Congress, in which Republicans hold the majority in both chambers for the first time in the Obama presidency.
Republican apologists assert that Congress’ powers to shrink the government are limited as long as President Obama is in office. This is true. So, let’s see where Congress can go from here.
First, the increase in the deficit is almost entirely due to lower tax revenues, not increased spending. In this respect, the Republican-majority Congress has held the line. The federal government will spend about $48.9 trillion over the next ten years and take in about $40.4 trillion in revenues.
However, there is a lot of gimmickry written into the recent tax cuts — revenue will probably be even lower than the CBO’s baseline scenario suggests. (Fortunately, the CBO also estimates alternative scenarios that include these more realistic prospects.) Many of the tax breaks last only one or two years, and as a result, they have little impact on the ten-year period. However, in reality, these tax breaks tend to be repeatedly extended.
For example, Congress imposed moratoria on three Obamacare taxes: an excise fee on health insurance, an excise tax on medical devices, and the so-called “Cadillac” tax on expensive employer-based health plans. According to the letter of the law, these three moratoria will add about $40 billion to the deficit. However, if these taxes are deferred through 2025, the cumulative deficit will grow another $239 billion.
So, the question is: Will the Republican-majority Congress follow its tax cuts with spending cuts? Last April, it signaled it would, via a budget resolution passed by both the House and the Senate. Congress had not passed a budget resolution in many years, so this was an important step.
The budget resolution does not actually control any spending. But the CBO has concluded that if the resolution’s provisions were enacted as legislation, they would reduce the deficit by roughly $5 trillion through 2025 relative to the current-law baseline. Importantly, the fiscal improvement would come almost entirely from cutting spending.
The budget resolution itself was overshadowed by its focus on defining so-called “reconciliation” language for the repeal of Obamacare.
The result of that language was a bill passed in December that would have repealed Obamacare if the president had signed it. Republican leadership signaled this was a big win, even holding an “enrollment ceremony” at which Speaker Ryan signed the bill in quasi-presidential fashion.
CBO estimated that Obamacare repeal would reduce the deficit by roughly half a trillion dollars over the next ten years. Almost half that improvement is due to economic growth that would increase tax revenues. This would certainly be a positive development. However, even if it won the president’s signature, the repeal of Obamacare would achieve less than 10 percent of the cumulative deficit reduction targeted in the budget resolution.
The Republican majority in Congress has shown it can cut taxes. Whether it can cut spending in line with its promises will have to wait until the next president takes office.
So is it to late to save our country? When have the CBO projections ever been remotely close to actual costs? It’s been my experience to take CBO projections and then double them to get close to reality. if we add 8.5 trillion in debt. In 10 years we will be approaching 30 trillion. In 10 years most baby boomers will be retired and utilizing their savings.
What do you think is going to happen to the stock market and growth? When this part of our population starts pulling money out instead of putting money in?
Slow growth, aging population, massive debt, inflation,
Time to hit the reset Button on the global economy it might already be to late.
We have one Democrat who admits being a Socialist running for President and one that won’t admit it. What happens if interest rates jump 2% on $25 trillion of debt?
The relevant debt number is the debt held by the public including overseas investors which is currently about $13 trillion or so. That’s the debt on which interest must be paid in cash and for which new bonds must be sold in order to pay off maturing bonds if existing cash on hand is not sufficient to redeem them.
Debt held by the Fed and the social security, Medicare and other government trust funds are bookkeeping entries. Those supposedly unfunded liabilities can be slashed or even eliminated through legislation.
In other words people don’t worry about paying the debt off as about $6 Trillion has already been paid off and isn’t “legally” owed anymore. With a stroke of the pen or calculator $6Trillion has already been removed from future checks promised to Americans that today are forced into funding social security and Medicare.
It hasn’t been removed, at least not yet. That would require legislation to change benefit programs.
At the same time, it doesn’t affect the day to day and week to week demand for credit as the normal treasury bond, note and bill sales do. It’s the debt owed to the public that affects capital markets, demand for credit, interest rates, and the broader economy.
The debt owned by the Fed and government trust fund accounts doesn’t have that impact. It’s an important distinction.
Of course it hasn’t been removed from the books. They will remove it when someone else is in office, but the effects are the same. We have thirteen million in debt and 6 million of that debt has been paid in advance by unnamed people who will be losing $6million of benefits later on while losing part of today’s $13Billion either through taxes or a lower standard of living.
To make believe that the $6million isn’t really a debt that will never be paid is a ruse or better yet out and out theft from our children, grandchildren and beyond. We should be ashamed of ourselves for being cavalier with someone else’s money.
I didn’t say that the trust fund debt will never be paid. I said that it doesn’t present a default risk in the same way that debt owned by the public does. Changes to entitlement programs can be legislated just as social security reforms were legislated in 1983. The retirement age was raised in stages ultimately to 67 but that retirement age won’t take effect until 2027, 44 years after the legislation passed. That means that the full year two year increase in the retirement age needed to be eligible for so-called normal social security benefits only affected people just entering the workforce and there was no change at all for anyone older than 55 in 1983.
The federal government implemented a new less generous pension plan for employees hired after July 1, 1984 and supplemented it with a Thrift Savings Plan that federal employees could contribute to and get a government match. As a last resort, taxes could be raised.
Resources could also be freed up if healthcare costs grow more slowly than expected as they have since 2009. Indeed, Medicare spending is already $125 billion per year lower than CBO’s 2009 projection estimated it would be by now. Even by current federal standards, that’s a lot of money. I say over and over again that our system is more resilient than you give it credit for being.
Barry, it is inconceivable that the US will default in today’s environment. It would be as catastrophic economically as a world war. What is conceivable is that the US could continue to print money and steal from its citizens on its way to becoming a third world nation state. Thus what I take from your statement “I didn’t say that the trust fund debt will never be paid. I said that it doesn’t present a default risk in the same way that debt owned by the public does.” is that we are, with complicity of those in power and those that support the status quo, on our way to third world nation status.
Yes, we can change retirement age and probably need to, but that only returns a fixed amount to government that continues to spend it while doing little to cut the growth of government which is the problem that you seem to not be aware of. All we have to do is look at how fast our debt is increasing. Take note that growing the economy requires money and that money is not spent on a growing economy rather is spent on more government and more debt along with higher interest rates and payment on the debt. This is not a problem where one sit around twidiling one’s thumbs while the debt climbs. It is a time to cut spending not to depend upon possible decreases in healthcare spending that could just as easily go through the roof.
We both think our economy is resilient, but what you neglect to think about is a resilient economy (like we had in the past) where the entire economy was working and government was spending on a limited number of needs in a world where we prevented starvation and provided the industry to prop up the rest of the world. Today our resiliency is not as strong and is getting weaker. Much of the population doesn’t work and relies upon government sibsidies. The working population is beset by rules and regulations that make production more difficult and force many products to be produced abroad. Retirement is earlier and the aged population is rapidly growing. I think you ought to rethink your stance on how resilient this economy is because the type of thinking I am hearing from you presents a tremendous risk to our future generations.
Ah, the convenience of running up bills that the next party in line will have to either figure out how to pay (and take the blame for the cost) – or run up more debt and pass it on to whoever follows them. the problem with Keynesian economics as practiced by Washington is that the government feeds money into a slow economy to compensate for the reduction in the private sector of the “virtual money” cash flow due to private use of credit, but continues to spend during a boom instead of paying down national debt and accumulating equity to prepare for the next slump.
Barry
The fact trust fund debt does not effect default risk as does the public debt means the government legally does not have to consider these payments as liabilities other than for the current year
Maybe if the task was taken more seriously the retirement and medical trust funds would have been left intact instead of raided
Imagine an insurer acting in such a way
I am confident most Americans consider future trust fund payments as much of a liability as public debt
Imagine the civil disruption if the government reneged or lowered those benefits
My accounting jargon is a bit rusty, but I am aware that President Lyndon Johnson raided the Trust Funds for cash to pay for the Viet Nam war, off the books. Its all a bit fuzzy to me. As a gesture to greater government transparency, I am hopeful that a Constitutional Convention occurs to adopt a Balanced Budget Amendment for our Constitution. And, I hope the Amendment requires the use of accrual accounting standards with understandable budgeting processes.
Don – I too view the trust fund liabilities as liabilities and the trust fund assets as assets. However, both the social security and Medicare programs were changed by legislation any number of times. Many of those times, benefits were expanded including the addition of Part D in 2006. Other times, taxes were increased to beef up the funding, For example, Medicare’s IRMAA Part B surcharge only affects 2%-3% of beneficiaries with higher incomes but that provision only came into existence in 2007 and was tweaked again last year as part of the doc fix legislation.
The social security reforms passed in 1983 increased the retirement age but the effective date was phased in over a long period. The FICA payroll tax rate as well as the wage base was raised four times over the next eight years. In 1993, the wage based to which the Medicare portion of the tax applied was increased to $135,000 and it then applied to all wages starting the following year. In 2013, an additional 0.9% tax to support the Medicare trust fund took effect that applied to wages above $250K for joint filers and $200K for single filers and a new 3.8% tax applied to investment income (for the first time) above the same thresholds.
We may also save money over time as new more conservative medical practice patterns evolve especially around end of life care. Most hospitals have palliative care programs now. That wasn’t the case until relatively recently. Many more seniors now have executed living wills and advance directives and more people are choosing hospice care as the end of life approaches.
The bottom line is that we’re not going to just tell people who are entitled to Medicare and social security benefits to go pound sand. We will find ways to make good on those promises that will include raising taxes if necessary but other solutions we’ll evolve as well. Conservatives won’t like raising taxes even a little bit but it won’t be the end of the world. There are issues that I worry about regarding our economy and our politics. This issue is not one of them.
It sounds like your answer to our economic problems is to tax more and raid the entitlement funds. It also sounds as if you believe that we will be saving more money at end of life with living wills where people sign away their end of life whenever that might be and if they don’t it sounds like to you believe we can always force them to do what is right (what you think is right) no matter how they feel.
Solving the problem largely with tax increases is not my preference. I’m just suggesting that it’s most likely to be a big part of the eventual solution.
As for end of life care, I think the fact that if more people execute living wills and advance directives, more family members will know exactly what care their loved one wants and doesn’t want. To the extent that the document calls for no heroics, the adult children will find it easier to let go because they won’t have to guess at what their loved one might have wanted. I also think it’s likely that more people who express their wishes don’t want the heroics than do. Articles written about how doctors die suggest that most of them don’t want the full court press for themselves because they know how much suffering is likely to come with it.
It is a good idea but my research suggests tough to enforce. The healthy adult children of the dying elderly parent intervene, driven by deep psychological impulses, and override the directives in many cases.
John, I believe you to be correct, but I had patients that didn’t want life prolonged write out living wills with reasons so that when the children let them go they wouldn’t feel guilty.
How the children feel is very important.
Utterly agree. It is a “soft skill.” That is, it is not just signing your POA and living will and filing it. It is a continuing discussion with your adult children that is finalized in paperwork. I do not have it at hand, but I believe there is research indicating that when you do the living will in this way, the adult children are more likely to adhere to your wishes.
In that case, it is not the lawyer who is critical to the successful living will but the clergyman, social worker, trusted neighbor, etc.
That is the primary reason I am skeptical of Medicare paying for the living will. It would turn it into a bureaucratic “checking the box” exercise.
Hurray! Common sense.
“I’m just suggesting that it’s most likely to be a big part of the eventual solution.”
How about solving the problem now before it gets any bigger.
Your calculations as to how advanced directives will impact us is nothing more than guess work without an adequate foundation.
The annual deficit problem will not be solved without a structural change in the paradigm paralysis characterizing our nation’s healthcare industry. Arguably, 60% of our nation’s annual deficit represents the excessive cost of our nation’s healthcare. For 2015, I estimate that the excessive cost of our nation’s health care was $800 Billion out of a total cost of $3.3 Trillion. Of this excess cost, the Federal government paid 40% or $300 Billion. A recent estimate for last years deficit was @ $500 Billion. Sure, there was some fraud, some excess profits, there was some poor medical care, and there was the usual administrative inefficiency. But, all of this probably represented only 25% of the $800 Billion excess cost. We can tinker with the actuarial processes, we can move to a risk-sharing engagement with provider groups, we can make hospitals safer, et cetera, et cetera. But, nothing we are doing now will solve the incredible boondoggle represented by our nation’s healthcare industry.
.
The Design Principles proposed by Nobel Prize winner Elinor Ostrom should be applied to managing the common-pool resource represented by our annual GDP. We need to empower our nation’s healthcare industry to focus on the Basic Healthcare Needs of each citizen, community by community. This strategy must prevent hospital admissions and also this strategy, for any hospital admission, would reduce a person’s hospital stay by 25%.
.
I participated for more than ten years as a PCP with a capitated, risk-sharing HMO. As compared to the community hospitalization rates at that time, we maintained a rate that was 25% lower. This was our experience for more than 10 years. In addition, our nation needs a community by community means to solve the HEALTH adversities that affect many people. We have a long tradition of volunteerism. Why not harness this tradition based on local needs as determined community by community? It is known that that the cost of healthcare for high-risk homeless citizens can fall from $80,000 a year to $6,000 annually with entry into permanent supportive housing. The list could go on and on.
You might have been in one of the better HMO’s or there may be another side of the story.
Ware told it correct in his study “Differences in 4-Year Health Outcomes for Elderly and Poor, Chronically Ill Patients Treated in HMO and Fee-for-Service Systems”
“During the study period, elderly and poor chronically ill patients had worse physical health outcomes in HMOs than in FFS systems” It appears that the longer the time frame the more noticeable the problem.
Thank you. I agree that, especially when it comes to the poor, a more holistic approach is needed. That is why I recommended bundling Paul Ryan’s Opportunity Grants with Medicaid as one lump sum (http://www.ncpathinktank.org/pub/ib155).
Dr. Graham, Al just said that HMOs are not as good as FFS systems and you want to put the poor in HMOs. You want to give all Federal Medicaid money to the incompetent State politicians instead of millions of citizens in the Free and Open Market. Here in America we already had our revolution for FREEDOM.
Trump says these politicians are incompetent and I agree. These corrupt politicians take bribes from insurance companies for managed care contracts. Don’t add fuel to the fire.
You should want age-based tax credits for national healthcare reform which will dry up the need for much of medicaid and strip these politicians of opportunities to sell government contracts.