Deficits and Disaster

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2 2 Deficits and Disaster Ron Haskins The Brookings Institution September 14, 2010 Thanks to Isabel Sawhill, Alex Gold, Daniel Moskowitz and Mary Baugh.

3 3 Big Picture Polls/Public Dialogue Why Deficits Matter Taking Action Overview

4 4 The Big Picture I: Budget Projections ,000-1,200-1,400-1, Surplus/Deficit, $Billions Actual CBO Baseline (August 2010) Adjusted Baseline Sources: Actual is from Office of Management and Budget Historical Tables ( CBO Baseline is from The Budget and Economic Outlook: An Update, August 2010 ( Adjusted Baseline is from Auerbach and Gale, Déjà Vu All Over Again: On the Dismal Prospects for the Federal Budget, 2010 (

5 The Big Picture II: Spending and Debt as Percent of GDP, 2010, 2020, Debt as Percent of GDP 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 6 The Big Picture III: Rising Debt/GDP Ratio Debt as Percent of GDP Year Source: Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.

7 7 70 The Big Picture IV: Unsustainable Spending Percent of GDP Average Federal Revenue, Net Interest Medicare, Medicaid, Exchange Subsidies, and CHIP Social Security Year Sources: Congressional Budget Office, Historical Budget Data ( and Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.

8 8 Percent Who Say Deficit Is Top Priority Polls: The Deficit Is Top Priority Year Source: Pew Research Center for the People & the Press, various years.

9 9 Polls: Public Worried About Deficits Most Important Problem 25 Years from Now (Percent) 16% 14% 12% 10% 8% 6% 4% 2% 0% 14% 11% 11% 8% 7% 6% Federal budget deficit Economy in general Environment Healthcare Energy Unemployment Source: Gallup, March 4-7, 2010.

10 10 Polls: Public Support for Sacrifice Willing to pay higher taxes Willing to decrease spending on health care or education Willing to decrease military spending 70% 69% 70% 62% 70% 60% 50% 60% 50% 60% 50% 45% 51% 40% 30% 40% 30% 30% 40% 30% 20% 10% 0% 18% 13% Yes No Not sure 20% 10% 0% 5% Willing Not willing Some, but not others 3% Unsure / No answer 20% 10% 0% Willing Not Willing Some, but not others 2% 2% Unsure / No answer Source: Rasmussen, April 27-28, Source: CBS News / New York Times Poll, February Source: CBS News / New York Times Poll, February 2010.

11 11 Polls: Willingness to Cut Specific Programs Foreign Aid The Environment Housing Agriculture Mass Transit National Defense Science and Technology Unemployment Benefits Aid to the Poor Health Research Highw ays Education None of the Above Medicaid Medicare Social Security Veterans' Benefits Percent Supporting Specific Cuts Source: The Economist / YouGov Poll, April 3-6, 2010.

12 12 Polls: Support for Specific Solutions Raise income taxes on wealthy (individuals making $500,000; households>$1 million) 66 Cut discretionary federal programs 57 Raise taxes on the middle-class as well as the wealthy 26 Cut spending growth on entitlement programs 23 New federal consumption tax 20 Source: Bloomberg Poll, December Perecent Supporting Specific Solutions

13 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 participants

14 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 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 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 17 Dependence on Foreigners Foreign Holdings of Treasury Securities Domestic Holdings of Treasury Securities Trillions of Current Dollars % 49% 47% 1 30% 32% 36% 41% 42% 41% Source: U.S. Treasury Department and U.S. Bureau of Public Debt (though June 2009).

18 18 Rapidly Rising Interest Costs Billions of Current Dollars Year Source: Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2010, Table 1-2, (

19 Burden on Future Generations 19

20 20 Spending On Children and The Elderly $25,000 $20,000 $21,904 $21,144 $15,000 $10,000 $8,942 Spending Per Child Spending Per Person 65 and Older $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 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 22 Limited Ability to Address Emergencies Wars and Terrorists Attacks Natural Disasters Recessions

23 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 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 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 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. 26 Selected Statistics for the Elderly and Non-Elderly

27 27 Taking Action: Social Security Reforms Reduce COLA by 0.5 percentage points 30 Raise the Full Retirement Age to 70 Index Earnings in the AIME and Bend Points in the PIA Formula to Prices 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 Increase the Payroll Tax Rate By 1 Percentage Point in Percentage Impact on Actuarial Balance Source: Congressional Budget Office, Summary Figure 1, in Social Security Policy Options, summary (2010).

28 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 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 30 Cost of Selected Tax Expenditures: Average Annual Cost ( ) Tax Expenditure Average Cost (billions) Deduction for mortgage interest $ Exclusion of employer contributions for health care $ 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 , in Estimates of Federal Tax Expenditures for Fiscal Years (Washington, D.C.: Author, 2010).

31 31 Class Act Long-term care insurance Short-term savings ( ): $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 32