In December, we wondered if the Fiscal Cliff would concentrate Washington on both short-term economic needs and long-term fiscal challenges.

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Rachel Rogers
5 years ago
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1 Remarks by: R. Bruce Josten, Executive Vice President, Government Affairs U.S. Chamber of Commerce U.S. Chamber s Association Committee of 100 June 22, 2013 La Costa Resort Carlsbad, Ca. In December, we wondered if the Fiscal Cliff would concentrate Washington on both short-term economic needs and long-term fiscal challenges. The January agreement, the American Taxpayer Relief Act of 2012 (ATRA), avoided destruction, and not much else. The long-term budget outlook improved by one year debt will climb to 200 percent of GDP in 27 years instead of 26 years. After four years of trillion-dollar deficits, the red ink is receding this year, but it is diminishing hopes for a budget deal. The fiscal fight will bleed into the fall, when policymakers will face another multi-pronged fiscal agenda that pairs the need for: Enacting a FY 2014 Budget, A possible replacement for the sequester and A higher debt limit. And, there isn t any sense of urgency right now. Nonetheless, the basic trends in federal finances remain the same. From 2014 to 2023, the government will spend $6 trillion more than it collects in taxes. The budget never comes close to balancing. Expanding spending on the elderly and health care will continue to strangle the rest of government. The latest deficit numbers settle nothing. They do provide an excuse for both Congress and the White House to postpone genuine discussion and decisions. Credit-rating agencies have called for a credible plan that would keep the debt-to-gdp ratios from continuing to rise as they have been for most of the past 10 years. The credit-rating agencies do not see the debt-ceiling debate as the main point; their primary focus is on the longer-term dynamic, which takes you to entitlement spending. 1

2 The Obama administration will not negotiate on the debt ceiling and that Obama will only accept a clean debt ceiling bill. But that vow is matched by congressional Republicans who are equally determined to force fiscal concessions even though there is little clarity, at this point, about what exactly House and Senate GOP leaders want from their growing list of priorities. If Obama does, in fact, demand a clean debt ceiling increase, refuses to negotiate over the debt ceiling, and Senate Democrats stay with him, the nation could go into default. This whole thing will come to a crescendo in the fall in order to delay a debt crisis. Republicans want entitlement reforms and the President refuses to consider entitlement changes without corresponding tax increases, which Republicans agreed to in January as part of the fiscal cliff deal. That sets up the risk of a high-profile, explosive fight in the fall. Ways and Means Chair Camp and Senate Finance Chair Baucus have agreed to a process that links tax reform to the debt. However, there is little sign that the leaders of either party are prodding lawmakers towards such a deal. The Obama administration has been disengaged from the tax reform effort. But if it is going to happen, it must change. One lesson from previous tax reform efforts in 1969, 1976 and 1986, all were guided into enactment by strong Treasury Department leadership, backed by the White House. House Republican leadership is considering releasing a debt ceiling plan before the August recess. It would in essence accelerate the debt ceiling debate by several months. It is hard to see how tax reform can move that quickly through both chambers. This year marks the lowest number of markups through the first five months of a congressional session for either the Ways and Means or Senate Finance Committees since Despite the push last year to return to regular order, the committee process is bogged down, frozen, or drifting. Republicans do not have a coherent strategy to consolidate Republicans, much less take on Democrats. 2

3 Congress is not only gridlocked over the budget but it s gridlocked over how to begin negotiating over the budget. Elections 2014 One other reality after the election, Washington remains split along the same lines as it was before last November s elections. Ninety-six percent of Democratic House members represent Districts carried by President Obama and 94 percent of Republican House members represent Districts won by Mitt Romney last November. Most Senators come from effectively one-party states or those where candidates of one party have a distinct advantage. In their book, The Big Sort about the clustering of like-minded America, Bill Bishop and Robert Cushing estimate that the percentage of the population that lives in what they call landslide counties where the winner s margin in presidential elections is 20 points or more encompasses more than half the population today. There are more than 3,000 counties in the U.S.; the authors note that voting patterns have hardened over time. As recently as 2004 and 2008, 382 counties changed from one party to the other in the presidential vote. Last November, that number declined to just 200 counties that switched parties. For lawmakers who come from these landslide Districts, national sentiment matters less than the prevailing sentiment at the District level; the people that they depend on for re-election back home. Not surprisingly, the number of swing districts has declined also - from 164 in 1998 down to 90 after the election, a 45 percent decline. By any measure, the House is sorted along partisan lines more than ever, reflecting the partisan divides across the country. Another example of this sorting is on display in the House leadership where the top five Republican leaders all come from blue states that voted for Obama, and their conference members are dominated by red-state Republicans. The new NBC-Wall Street Journal national poll has a question that explains the partisan rift as well as any - Respondents were asked to decide which of two statements better represented their own views. 3

4 The first statement was that government should do more to solve problems and help meet the needs of people. The second was government is doing too many things better left to business and individuals. Forty-eight percent of people agreed with the first statement. Forty-eight percent of people agreed with the second one. President Obama wants to flip the Republican-held House back to Democratic control to allow him to push forward with his progressive agenda. This marks a shift and a first for this administration campaigning to change its composition. It marks an evolution for a President consumed by the independence of his political brand. The President views Organizing for America (OFA) as a way of extending beyond the traditional two years of a second term and gives him the political framework for the midterm congressional campaign. In his inaugural address the President outlined an activist, expansive government. Fiscal issues received only a passing reference in his remarks and they threaten to crowd out other issues. The word DEBT didn t even appear in the speech. It s an under-appreciated fact that a significant contributor to the ballooning debt is... the debt itself. As fast as costs are accelerating for entitlement spending, federal interest payments are projected to grow faster over the next decade than any other broad category of expenditures, outpacing spending on Medicare, Medicaid, and Social Security. A small, sudden shift in the interest rate on government debt could inflate deficits by trillions of dollars over the next decade - - and, would eradicate most of the savings from the $1.2 trillion in sequester spending cuts. The question of when interest rate rise is not question of if, but when. The CBO projects that by 2023, annual interest payments on the country s debt alone will nearly quadruple, to $823 billion. Annual spending by the federal government now exceeds the 2007 level by about $1 trillion. Treasury must raise $4 trillion this year alone. The debt burden will explode when interest rates return to normal. 4

5 And, it will take a lot more than raising tax rates on the rich, or dipping a toe in entitlement reform to reduce debt. The administration and Congress have done the easy stuff spending caps that don t require specifics while counting on future Congresses to follow through. What s left and what s needed is the harder policy changes entitlement and tax reform. Lawmakers must go to entitlement spending that is busting the budget, but which, for the most part is immune from the sequester. That immunity has to end. Social Security, Medicare, Medicaid and other entitlements are strangling the federal budget. Those three programs alone account for some 45 percent of the federal budget. Policymakers need to acknowledge that limits on spending growth need to include, not exclude entitlements. What s missing in all this is leadership leadership to help make the case for entitlement reform and why we have to make needed changes to control healthcare costs and adjust the nation s retirement system for growing life expectancies. By 2016, Social Security Disability Insurance will exhaust the assets in its trust fund, prompting a 20 percent across-the-board cut in disability benefits under current law. The Medicare Part A trust fund will follow in 2024, and the Social Security old age program in 2035 (2033 if money is reallocated between the old age and disability funds). Ideally, policymakers in Washington need to agree to a single comprehensive piece of legislation, which not only increases the debt ceiling and addresses the sequester on a permanent basis, but also makes specific legislative changes to reduce spending, slow entitlement costgrowth, and reform the tax code. Class warfare rhetoric hurts the chances for change. Will Marshall, head of the centrist Democratic think-tank Progressive Policy Institute, said publicly in April, We can t keep pretending loading taxes on the rich is going to fill the funding gap on Medicare, Medicaid and Social Security. Many liberal politicians and their allies oppose the idea that entitlements must be trimmed to make them more affordable. These groups believe entitlement reform surrenders what is their most potent class-conflict. 5

6 Today, I want to elaborate on this challenge because it impacts every single citizen, the health of our economy, and our country s ability to maintain its leadership role in the world. That challenge is the urgent need to reform and modernize our entitlement programs primarily Social Security, Medicare, and Medicaid. We need to fix these programs so that seniors and other beneficiaries, now or in the future, will not have to question whether they can get the health care they need or the retirement benefits they have earned. We need to fix these programs because, if we don t, they will consume every dollar the government collects. There will be no money left to improve our schools, defend our country from its enemies, clean our environment, or repair our roads and bridges. We need to fix them so that we don t have to keep adding trillions to our national debt or pay ever-increasing amounts of interest on that debt. Without federal spending reform driven primarily by entitlement costs interest payments on our national debt will reach almost $1 trillion per year by 2023, and explode well beyond that again, not if, but when, interest rates get back to normal levels. The simple fact is Americans are living much longer than they used to, which means they are drawing more total benefits over their lifetimes than the systems were ever designed to pay for. Americans are having fewer children, which means relatively speaking, there are fewer workers paying into the system compared to the number of beneficiaries. We must have a vigorous debate about how to fix these programs, but before we can do that, Americans must first recognize that there is a problem. Evidence clearly shows that the programs as we know them today cannot survive without reform and modernization. Yet according to public opinion, most Americans are not prepared to accept this reality. I want to share with you 10 truths about entitlements that we all must recognize, and then act upon. Truth #1: Entitlement programs are huge, expensive, and reach into every corner of American life. Social Security, Medicare, and Medicaid already cost $1.6 trillion last year. 6

7 Social Security alone sends checks to 58 million retired Americans as well as widowed spouses and minor children of deceased workers. It costs $809 billion last year. Medicare now covers nearly 51 million people at a cost of $586 billion. Medicaid provides health care for 62 million poorer Americans. It costs $265 billion. And there is the Social Security Disability program which provides aid to 8.8 million people classified as disabled. Truth #2: Entitlement programs are not self-funding and are a main driver of deficits. Medicare, for example, has had a cash shortfall every year since its creation except two: 1966 and Medicare s annual cash shortfall in 2011 was $288 billion. The program is responsible for more than 25% of all federal debt since Social Security had a cash flow deficit of $58 billion in Many resist changes in entitlement programs because they believe they are just getting out what they put in. The fact is retirees are collecting far more in benefits than they contributed - for each dollar that Americans pay for Medicare, they ultimately draw about $3 in benefits. Truth #3: Entitlement costs are growing at an alarming rate. In ten years time, the total price for these programs will soar from $1.6 trillion to an astounding $3 trillion a year. As Social Security provides benefits to millions of retiring baby boomers, its costs will balloon to $1.4 trillion. Medicare s costs will double from $586 billion to $1.1 trillion. Medicaid which could receive an influx of 17 million new clients courtesy of Obamacare will see its costs more than double from $265 billion to $554 billion. Truth #4: Longer life expectancies, changing demographics, and soaring costs explain why entitlements as we know them today are unsustainable. It won t be long before one-third of Americans will be retired and will spend one-third of their lives in retirement. If people were to live in retirement for the same number of years as they did when benefits were first paid in 1940, a person would retire at age 76 today. 7

8 In addition to longer life spans, a change in demographics has caused the ratio of workers to retirees to fall dramatically. Over the next few decades, the ratio of workers to retired beneficiaries is projected to drop to less than 2-to-1. During this decade and the next, the number of Americans over the age of 65 will jump by 75% while those of working age will nudge up by just 7%. In fact, during the next 17 years 77 million workers will retire that s 10,000 people a day. Social Security and Medicare as currently structured and financed can t come close to meeting the demand. Truth #5: Not a single major entitlement program is projected to be financially solvent 20 years from now. Some have pointed to the recent reports by Medicare and Social Security Trustees extending the solvency of Medicare by two years as proof that we were out of the woods on entitlements and no action is needed. The truth is the reports prove nothing of the kind. The trust fund for the Social Security Disability Insurance program will be exhausted in just three years. The trust fund for Part A of Medicare that pays for hospital services will go bankrupt in 13 years. That projection is based on a rosy scenario where Congress will do something it has refused to do time and time again cut payments to doctors. Social Security will be unable to pay full benefits beginning in That may seem far off into the future, but it really isn t. Tomorrow will be here before we know it. Absent legislative action, all Social Security beneficiaries would face an immediate 23% benefit cut at that time. Truth #6: The cost to make these programs financially solvent for the next 75 years is almost $40 trillion. Does anyone here have an extra $40 trillion lying around? 8

9 Absent reform, the situation will soon require either economy-crushing new taxes or painful benefit cuts in the programs or both. That outcome should be unacceptable to all Americans. Truth #7: Mandatory spending entitlement programs and interest on the debt are already squeezing out important investments in other essential programs. In fact, mandatory spending already exceeds all federal income tax revenues collected. We have to borrow money and increase debt to pay for everything else. In 1970, mandatory spending represented about 40% of the budget. Last year, it was about 65%. By 2040, it will be almost 80%. In the mid-1960s, federal spending for discretionary programs such as national defense, education, infrastructure, and science and research outpaced entitlements by 3-to-1. Last year, it was flipped one dollar for investments for every three in entitlements. In 10 years, the ratio will be 1-to-5. Truth #8: We have nothing to fear from carefully-crafted, phased-in adjustments to our entitlement programs. America s entitlement programs have been adjusted and modernized many times over the years to keep up with changes in the economy and society. Automatic cost-of-living increases were added to Social Security in An increase in the retirement age was enacted in 1983 and is being given 44 years to fully take effect. A prescription drug benefit was made added to Medicare in Strengthening and improving entitlements in the face of compelling financial and demographic realities is reasonable and achievable. Truth #9: We can reform entitlements without baseline cuts and without breaking our commitment to the nation s seniors, disabled, and poor. All that s being discussed are ways to restrain explosive rate of growth before it drives the nation into insolvency, squeezes out funding for every other important national priority, or forces massive tax hikes or benefit cuts on the American people. There many reform options available for consideration adjustments in payments, benefits, eligibility, administration and overhead, coverage options, and program efficiencies. 9

10 We can achieve large savings over time while having a very small impact on individual beneficiaries. The sooner we make these changes, the less severe they will have to be. Truth #10: The biggest threat imaginable to Medicare or Social Security as we know them will be if we do nothing at all. To do nothing will set into motion the most harsh, extreme, and burdensome entitlement changes of the them all the massive benefit cuts and tax hikes that would have to be imposed when the programs funding just flat runs out Those are the 10 key truths on entitlement programs. We must come together as a nation to act on them. Real reform must include adjustments, fixes, and efficiencies in these programs since they cannot remain exactly as they are. There s no getting around that. In addition, any solution must address three critical challenges that underpin everything we must do to strengthen and secure America s entitlement programs. First, we must do a better job containing health care costs, whether they are paid for by government programs, private insurance, or patients themselves. This means a much bigger focus on preventative care, wellness, and vastly improved management of chronic conditions like obesity, diabetes, and high blood pressure. And, it means building more incentives into the system so that providers and patients alike focus on and are awarded for good health outcomes. Second, we must preserve and enhance the role of private savings in America so that individuals and families can do what most want to do, which is to make their own choices. With Americans living literally one-third of their lives in retirement, we must take more of the responsibility in our own hands. And our tax, medical insurance, and entitlement policies should be geared towards offering more choices and more incentives for private retirement and health care savings. Third, we must understand the critical role that economic growth plays in supporting the nation s social safety net. 10

11 Growth alone is not a fix for entitlements. But, without faster, stronger, and sustained economic growth and job creation, none of the fixes could ever work. Seen in this larger context, a vigorous growth agenda to lift the American economy out of the doldrums is needed with aggressive action on: Energy development, Trade expansion, Education and infrastructure investments, An immigration overhaul, and Tax and regulatory reform is essential to the sound maintenance of America s social safety net. Entitlement reform will not succeed as long as the conversation is dominated by the overbearing voices of denial and distortion. We must change that conversation by telling the American people the truth. The real challenges surrounding entitlements is an ill-informed public, organizations that have existed for decades that oppose entitlement reforms, and the absence of real national leadership. We need a comprehensive communications and outreach campaign underscoring the compelling need for entitlement reform. We need your help. We need your support. We need your involvement. We need you to be a voice in your organizations on the need to reform and strengthen entitlement programs. We ll provide a comprehensive online toolkit with all the information needed to make the case. We need a national conversation, not a filibuster a conversation that leads to understanding and drives us toward swift action. But reform is not going to happen until we agree on these 10 truths. Let s start the debate. Let s find the right solutions. We need an echo chamber. 11

12 The best time to act is right now. Thank you. 12

10 Truths About America s Entitlement Programs. Address by R. Bruce Josten Executive Vice President of Government Affairs U.S. Chamber of Commerce

Remarks As Prepared for Delivery 10 Truths About America s Entitlement Programs Address by R. Bruce Josten Executive Vice President of Government Affairs U.S. Chamber of Commerce U.S. Chamber of Commerce