1

1
2
Deficits and Disaster
Ron Haskins
The Brookings Institution
September 14, 2010
Thanks to Isabel Sawhill, Alex Gold, Daniel Moskowitz and Mary Baugh.
3
Overview
•
•
•
•
Big Picture
Polls/Public Dialogue
Why Deficits Matter
Taking Action
4
The Big Picture I: Budget Projections
400
200
Surplus/Deficit, $Billions
0
-200
-400
-600
-800
-1,000
-1,200
-1,400
Actual
CBO Baseline (August 2010)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-1,600
Adjusted Baseline
Sources: Actual is from Office of Management and Budget Historical Tables (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist01z1.xls);
CBO Baseline is from “The Budget and Economic Outlook: An Update,” August 2010 (http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf); Adjusted
Baseline is from Auerbach and Gale, “Déjà Vu All Over Again: On the Dismal Prospects for the Federal Budget,” 2010
(http://www.brookings.edu/~/media/Files/rc/papers/2010/0429_budget_outlook_gale/0429_budget_outlook_gale.pdf).
5
The Big Picture II: Spending and Debt as
Percent of GDP, 2010, 2020, 2050
30.0
2010
2020
2050
26.0
Debt as Percent of GDP
25.0
20.0
16.5
15.0
12.4
12.9
10.4
10.4
9.4
10.0
5.0
4.8 5.2
5.9
5.1
6.6
6.5
3.8
1.4
0.0
Social Security
Medicare,
Medicaid, CHIP,
and Exchange
Subsidies
All Other
Noninterest
Net Interest
Deficit
Note: The Medicare category is net of Medicare premiums and payments.
Source: Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.
6
The Big Picture III: Rising Debt/GDP Ratio
400
344
350
Debt as Percent of GDP
300
250
233
200
146
150
87
100
62
50
0
2010
2020
2030
2040
2050
Year
Source: Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.
7
The Big Picture IV:
Unsustainable Spending
70
60
Percent of GDP
50
40
Net Interest
30
20
Average Federal
Revenue, 19702009
Medicare,
Medicaid,
Exchange
Subsidies, and
CHIP
Social Security
10
0
2010
2020
2030
2040
2050
2060
2070
2080
Year
Sources: Congressional Budget Office, “Historical Budget Data” (http://www.cbo.gov/ftpdocs/108xx/doc10871/AppendixF.shtml) and
Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.
8
Percent Who Say Deficit Is Top Priority
Polls: The Deficit Is Top Priority
70
60
56
50
40
53
55
51
58
53
60
2009
2010
40
30
35
20
10
0
2002
2003
2004
2005
2006
Year
Source: Pew Research Center for the People & the Press, various years.
2007
2008
er
a
lb
Source: Gallup, March 4-7, 2010.
m
en
pl
oy
ne
m
t
8%
U
er
gy
ar
e
th
c
l
en
t
m
En
ea
l
on
ra
it
fic
11%
H
de
ge
ne
vir
in
et
12%
En
y
ud
g
Ec
on
om
Fe
d
Most Important Problem 25 Years
from Now (Percent)
9
Polls: Public Worried About Deficits
16%
14%
14%
11%
10%
8%
7%
6%
6%
4%
2%
0%
10
Polls: Public Support for Sacrifice
Willing to pay higher taxes
70%
69%
70%
Willing to decrease spending on
health care or education
Willing to decrease military
spending
70%
62%
60%
60%
60%
51%
50%
50%
40%
40%
50%
40%
45%
30%
30%
30%
20%
20%
30%
20%
18%
13%
10%
5%
10%
3%
0%
0%
No
Not sure
Source: Rasmussen, April 27-28,
2010.
2%
2%
0%
Willing
Yes
10%
Not willing
Some, but
not others
Unsure / No
answer
Source: CBS News / New York Times Poll,
February 2010.
Willing
Not Willing
Some, but Unsure / No
not others
answer
Source: CBS News / New York Times Poll,
February 2010.
11
Polls: Willingness to Cut Specific Programs
Foreign Aid
71
The Environment
29
Housing
27
Agriculture
27
Mass Transit
27
National Defense
22
Science and Technology
22
Unemployment Benefits
19
Aid to the Poor
17
Health Research
13
Highw ays
12
Education
12
None of the Above
12
Medicaid
11
Medicare
7
Social Security
7
Veterans' Benefits
6
0
10
20
30
40
50
60
Percent Supporting Specific Cuts
Source: The Economist / YouGov Poll, April 3-6, 2010.
70
80
12
Polls: Support for Specific Solutions
Raise income taxes on wealthy (individuals making
$500,000; households>$1 million)
66
57
Cut discretionary federal programs
Raise taxes on the middle-class as well as the wealthy
26
Cut spending growth on entitlement programs
23
New federal consumption tax
20
0
Source: Bloomberg Poll, December 2009.
10
20
30
40
50
60
Perecent Supporting Specific Solutions
70
13
Good News: Attitudes
Change in Response to Dialogue
• Dialogues with public on Social Security,
Medicare, and taxes
• Conducted by Viewpoint Learning in
collaboration with other organizations
• 12 day-long dialogues all over the country
• Representative sample of 35-45 participants
14
Dialogues with the Public: Medicare
– 68% support gradually raising the age of
eligibility from 65 to 67
– 68% support progressive scaling of
premiums to income
– 79% support raising taxes to maintain
benefit levels
– 75% support a 2-3% national sales tax
– 63% support raising the payroll tax rate
15
Dialogues with the Public: Taxes
• Participants are willing to pay higher taxes if
they are sure that their tax dollars are well
spent for reducing deficit or for earmarked
purposes they consider important.
• 57% support raising taxes to reduce the deficit
• 67% support investment in education and
transportation even if taxes increase
16
Why Deficits Matter
•
•
•
•
•
Dependence on foreign lenders
Rapidly rising interest costs
Burden on future generations
Limited ability to invest in children
Limited ability to address emergencies
17
Dependence on Foreigners
8
7
Foreign Holdings of Treasury Securities
Domestic Holdings of Treasury Securities
Trillions of Current Dollars
6
5
4
3
49%
2
47%
44%
1
30%
32%
41%
42%
41%
2004
2005
2006
36%
0
2001
2002
2003
Source: U.S. Treasury Department and U.S. Bureau of Public Debt (though June 2009).
2007
2008
2009
18
Rapidly Rising Interest Costs
778
800
726
676
700
Billions of Current Dollars
623
600
564
492
500
410
400
326
300
200
259
187
202
2009
2010
225
100
0
2011
2012
2013
2014
2015
2016
2017
2018
Year
Source: Congressional Budget Office, “The Budget and Economic Outlook: An Update,” August 2010, Table 1-2,
(http://www.cbo.gov/ftpdocs/117xx/doc11705/BudgetProjections.xls).
2019
2020
19
Burden on Future Generations
20
Spending On Children and The Elderly
$25,000
$21,904
$21,144
$20,000
Spending Per Child
$15,000
$10,000
Spending Per Person 65
and Older
$8,942
$5,000
$2,895
$0
Public Spending
Federal Spending
Source: Julia B. Isaacs, How Much Do We Spend on Children and the Elderly (Washington, D.C.: Brookings, 2009).
21
Productive Investments in Children
•
•
•
•
•
•
•
Preschool Education
Home Visiting
Teen Pregnancy Prevention
Career Academies
K-12 Education, Especially KIPP Schools
Second Chance Programs for Teens
Community and Family-based Programs for
Delinquents
• Community College Interventions
• Small Schools of Choice
22
Limited Ability to Address Emergencies
• Wars and Terrorists Attacks
• Natural Disasters
• Recessions
23
Taking Action: Preconditions
• Public recognition that deficits are a problem
• Public willingness to pay new taxes and accept
spending cutbacks
• Everything on the table
• Bipartisanship
• Presidential Leadership
24
Taking Action: General Rules
• Recognition of short-term vs. long-term impacts
• Combination of spending cuts and revenue
incentives
• No implementation until economy is in recovery
• Implement cuts gradually over a period of years
• Savings must come from big three
entitlements: Medicare, Medicaid, and Social
Security
25
Average Number of Years Spent in
Retirement: 1950 and 2006
Source: Isabel V. Sawhill, “Paying for Investments in Children,” in Big Ideas for Children: Investing in Our Nation’s Future, edited by First Focus (Washington,
D.C.: First Focus, 2008).
26
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 Nation’s Future, edited by First Focus (Washington,
D.C.: First Focus, 2008); updated with data for 2007 where available.
27
Taking Action: Social Security Reforms
Reduce COLA by 0.5 percentage points
30
Raise the Full Retirement Age to 70
30
Index Earnings in the AIME and Bend Points in the PIA
Formula to Prices
60
50
Lower Initial Benefits to Top 70 percent of Earners
Reduce PIA Factors to Index Initial Benefits to Prices Rather
Than Earnings
Tax Covered Earnings Above the Taxable Maximum; Do Not
Increase Benefits
Increase the Payroll Tax Rate by 3 Percentage Points Over 20
Years
100
90
50
30
Increase the Payroll Tax Rate By 1 Percentage Point in 2012
0
20
40
60
80
100
Percentage Impact on Actuarial Balance
Source: Congressional Budget Office, “Summary Figure 1,” in Social Security Policy Options, summary (2010).
120
28
Taking Action: Health Care Reform
•
•
•
•
•
Is Obama reform the solution or part of the problem?
New costs
– Guaranteed access to a basic package
– Subsidies related to income; Medicaid expansion
– The Class Act
Offsets to costs
– Taxation of high-end plans
– Medicare cuts
– Employer and individual fees for not participating
– “Bending the curve” (e.g., IT, evidence-based medicine, more
coordination, Medicare Commission)
But very unlikely that we can restrain costs enough to prevent growth of
government or reduce current projected deficits
Two possible choices
– Caps on spending (implicit rationing)
– A new source of revenue to cover cost; e.g., VAT
29
Taking Action: Four Revenue Options
• Increase income tax rates
• Broaden the income tax base (reduce tax
expenditures)
• Increase energy taxes
• Impose consumption taxes
Source: William Gale, Brookings Institution, 2010.
30
Cost of Selected Tax Expenditures:
Average Annual Cost (2009-2013)
Tax Expenditure
Average Cost
(billions)
Deduction for mortgage interest
$114.58
Exclusion of employer contributions for health care
$113.64
Reduced rates of tax on dividends and long-term capital gains
$83.76
Credit for children under age 17
$32.06
Exclusion of capital gains at death
$31.88
Exclusion of investment income on life insurance and annuity contracts for insurance companies
$31.78
Deduction for property taxes on real property
$25.14
Exclusion of Medicare supplementary medical insurance (Part B)
$23.94
Exclusion on capital gains on sales of principal residences
$17.32
Credit for alcohol fuels
$8.38
Exclusion of Medicare prescription drug insurance (Part D)
$5.76
Exclusion of employer-paid transportation benefits
$4.30
Source: Joint Committee on Taxation, “Table 1: Tax Expenditure Estimates By Budget Function, Fiscal Years 2009-2013,” in Estimates of Federal Tax
Expenditures for Fiscal Years 2009-2013 (Washington, D.C.: Author, 2010).
31
Class Act
• Long-term care insurance
• Short-term savings (2010-2019): $57.8 billion
• Long-term costs:
– Adverse selection
– CBO: “The program would add to future
federal budget deficits in a large
and growing fashion.”
32