Tag Archives: Social Security

Big Promises Bump Into Budget Realities (WashPost)

New President Won’t Have an Easy Time Paying for New Initiatives, Fiscal Experts Say

By Lori Montgomery
Washington Post Staff Writer
Saturday, June 21, 2008; A01

 

On the presidential campaign trail, Democrat Barack Obama promises to “completely eliminate” income taxes for millions of Americans, from low-income working families to senior citizens who earn less than $50,000 a year.

Republican John McCain vows to double the exemption for dependents and slash the corporate income tax.

To which the folks who monitor the nation’s financial situation can only say: Good luck. Because, back in Washington, tax collections are slowing, the budget deficit is rising, and the national debt is approaching $10 trillion. Whoever wins the White House this fall, fiscal experts say, is likely to have a tough time enacting expensive new initiatives, be they tax cuts or health care reform.

Economists expect the deficit to top $400 billion when the fiscal year ends Sept. 30, rivaling the all-time high of $413 billion set in 2004. Meanwhile, Congress recently adopted a spending plan that projects a $340 billion deficit in 2009 — a number likely to grow, lawmakers say, as the cost of the Iraq war rises, the economy weakens and the flow of revenue slows.

Against that dour financial backdrop, the next president will have to decide what to do with President Bush‘s signature tax cuts, which are due to expire at the end of 2010. Obama and McCain have both promised to keep at least some of them, but that would increase the deficit by $150 billion a year or more. Preventing the alternative minimum tax, or AMT, from expanding to the middle class would add billions more.

Meanwhile, the first baby boomers started receiving Social Security checks in January. Without major policy changes, Medicare and Medicaid are projected to devour half of all federal spending by 2050. But the more immediate problem is the depletion of excess cash in the Social Security trust fund, which has been used for years to cover a portion of the annual budget deficit. Government economists predict that the Social Security surplus will start shrinking in 2011 and dry up completely by the end of the next decade, exposing government-wide budget deficits of a magnitude not seen since Bush’s first term.

In a new paper titled “Facing the Music: The Fiscal Outlook at the End of the Bush Administration,” University of California at Berkeley economist Alan Auerbach and two co-authors from the Brookings Institution conclude that, if spending grows at historic rates, simply keeping the Bush tax cuts and halting the spread of the AMT would drive the budget deficit to $481 billion by the end of the next president’s first term, or 2.7 percent of the economy. Subtract the cash borrowed from Social Security and other retirement funds, and it would be $796 billion, or 4.4 percent of GDP.

“It’s a train wreck,” said Rep. Paul D. Ryan (R-Wis.), a member of the House Budget Committee. “The government is making promises to people right now it knows it can’t keep. And you have some candidates piling more promises on top, which are clearly unfulfillable.”

Former House Budget Committee chairman Leon Panetta, who served as President Bill Clinton‘s first budget director, said the financial situation is “much worse” than it was in 1993, when Clinton was forced to abandon promises of a middle-class tax cut before he took office. Instead, Clinton wound up devoting his first State of the Union address to a plan that aimed to tame rising deficits with one of the largest tax hikes in history.

“It’s worse because there are a huge number of crises out there that are going to confront the new president,” Panetta said, citing costly wars in Iraq and Afghanistan alongside the rising cost of Social Security and Medicare. “We’re looking at a $400 billion deficit this year with the economy in recession or near recession. The likelihood is that it’s going to get worse. And the fundamental problem has been that there’s very little willpower by Republicans or Democrats to confront the issue.”

A commitment by congressional Democrats to follow pay-as-you-go budget rules could further complicate the next president’s ability to pursue expensive initiatives.

Obama has not made balanced budgets a priority. Instead, he promises numerous tax cuts likely to make the situation worse, including subsidies for education, child care, homeownership, “savers” and people who work. Obama also vows to extend the Bush tax cuts for families who earn less than $250,000 a year. According to an analysis by the Tax Policy Center, a joint project of Brookings and the Urban Institute, his tax plans would deprive the Treasury of nearly $900 billion in his first term, and increase the national debt by $3.3 trillion by 2018.

That analysis excludes some expensive proposals, including promises to close the gap in prescription drug coverage for Medicare recipients (estimated to cost about $400 billion over 10 years); to introduce government-funded health insurance for the uninsured (which the campaign estimates would cost as much as $65 billion a year); and to make large-scale investments in energy, education and infrastructure, which Obama dubbed his “competitiveness agenda” during a speech this week in Flint, Mich.

The analysis also excludes a possible reduction in corporate tax rates, which Obama first mentioned in an interview this week with the Wall Street Journal. Campaign officials said Obama would pay for the rate reduction by closing corporate tax loopholes.

Obama economic adviser Austan Goolsbee said the senator has identified ways to cover the costs of his proposals, starting with savings of $90 billion a year from ending the Iraq war. “All of his programs are paid for and the deficit would come down” from where it is today, Goolsbee said.

McCain has proposed even bigger tax reductions, including an extension of all the Bush tax cuts, permanent limits on the AMT and a 10 percent reduction in the corporate tax rate. All told, McCain’s tax plans would cost the Treasury more than $1.1 trillion during his first term, and would increase the national debt by $4.3 trillion by 2018, according to the Tax Policy Center analysis.

McCain does vow to balance the budget, but he proposes to do it by slashing spending projections for troops abroad, domestic programs and health care — reductions unlikely to pass muster with a Democratic Congress.

“They’re promising the world with ways to pay for it that are really suspect,” Bob Williams, one of the authors of the Tax Policy Center study, said of both candidates.

Despite his promises of tax cuts, fiscal analysts note that McCain has a reputation as a budget-cutter. He voted against the Bush tax cuts he now proposes to extend and refuses to request funding for local programs known as earmarks. He has been talking about the need to reform Social Security, Medicare and Medicaid since the race began more than a year ago.

“I suspect that McCain will be more constrained and will have a veto power over the Democratic Congress,” said Alice M. Rivlin, who served as the first director of the Congressional Budget Office, as well as one of Clinton’s budget directors. “If it’s Obama, the Democratic Congress is going to be pushing for spending and it’s awfully hard to rein in your own folks. No Democrat is going to want to go to war with Congress.”

Budget experts also note that progress on the deficit has often come with divided government because both parties can shoulder blame equally. And there is likely to be plenty of blame to go around if the candidates make good on their promise to tackle long-term deficits in the retirement programs. Few options are likely to be popular with voters: Obama has discussed raising the cap on the Social Security payroll tax, hitting higher-income families with another tax hike. McCain has proposed charging wealthy seniors higher premiums for Medicare prescription-drug benefits.

G. William Hoagland, who worked for years as a budget adviser to top Senate Republicans, predicted that the nation’s money troubles will be a painful and persistent headache for whoever next occupies the White House. “The platter is so full for the next president,” Hoagland said, “I think at some point the reality will start to set in that there have been a lot of promises made that aren’t going to be addressed very quickly.”

McCain v. Obama: Partisan differences on economy (CNNMoney.com)

Saturday June 7, 8:47 am ET
By Jeanne Sahadi, CNNMoney.com senior writer

 

Barack Obama’s emergence as the presumptive Democratic nominee on Tuesday sets the stage for a sharp partisan debate over the issue weighing most heavily on voters: the economy.Over the past several months, as concern grew about the nation’s struggling economy, few major differences surfaced between the proposals of Obama and Democratic rival Hillary Clinton.But that’s not the case between Obama and John McCain, the presumptive Republican nominee. The two senators part company on taxes, health care, entitlement benefits and other key economic issues that the next resident of 1600 Pennsylvania Ave. will need to tackle.

At the root of their differences: their views on tax policy and the roles of government and the markets in achieving economic and social goals.

Changing taxes

In the name of economic growth, McCain says he would keep the tax cuts of 2001 and 2003 in place and reduce the corporate tax rate.

He has also said that he’d eliminate the Alternative Minimum Tax and would introduce an alternative two-rate income tax code that would be simpler than the regular one. Taxpayers, he said, could choose which code to use.

Tax expert and Yale professor Michael Graetz doubts it will be simpler for taxpayers to have to figure out their tax liability twice to see which code they prefer to file under. “But if the option is sufficiently appealing, you can phase out the old system,” he said.

Obama has pledged to keep the tax cuts in place for everyone except those making roughly $250,000 and up. He also has pledged to cut taxes further for the middle class.

“The tax code has been written on behalf of the well-connected,” he said in April during a debate in Philadelphia. “Our trade laws have – the same thing has happened. And part of how we’re going to be able to deliver on middle-class tax relief is to change how business is done in Washington.”

“He seems more focused on redistribution of the tax burden,” Graetz said.

Obama has also indicated he would raise the capital gains tax to somewhere between 20% and 28%. Graetz doesn’t think he’d raise it much above 20%. “The truth is you can’t go above 25% without losing a lot of money. People won’t sell,” he said.

Fixing Social Security

When it comes to shoring up Social Security’s long-term shortfall, McCain has said he’d prefer to cut benefits than raise taxes, but he recognizes there will need to be bipartisan consensus.

McCain has expressed support for individual investment accounts as a way to augment Social Security benefits. But his campaign has indicated he no longer favors diverting payroll taxes from Social Security to fund those accounts.

Obama has said he opposes individual accounts and doesn’t favor increasing the retirement age or cutting benefits. But he has called for increasing the amount of payroll tax that very high-income workers pay by subjecting more of their income to the payroll tax.

What he hasn’t clarified yet is whether or not their Social Security benefits would also go up as a result of paying more into the system.

Curing health care

When it comes to reforming health care, McCain would rely more on individual efforts and market forces to drive down costs. Obama would rely more on government and establish health insurance mandates for companies and individuals to make coverage more affordable.

McCain’s plan would not require anyone to have insurance, but he would change the tax incentives for getting it.

Currently, most people get their insurance through their employer. Companies pay 70% to 85% of the premiums, and workers don’t have to pay income tax on that subsidy. Under McCain’s plan, workers would pay income tax on that subsidy but would also receive a tax credit (a dollar-for-dollar reduction of their tax bills) worth $5,000 for family coverage and $2,500 for single coverage.

The rationale: Under the current system, people have no incentive to be cost-conscious about their health care, and a limited tax break will give all parties – workers, insurers and doctors – a reason to keep costs down. Converting the tax-free income subsidy to a tax credit also allows those who buy insurance on their own to get a tax break. Currently, they get none.

McCain would also let individuals buy insurance plans across state lines to further boost competition in pricing.

For the uninsured, he would create a state-level Guaranteed Access Plan that could receive federal funds and provide subsidies to low-income Americans.

Obama would make coverage mandatory for children, and he would create a National Health Insurance Exchange of public and private plans for the uninsured, for those who aren’t eligible for other public programs and for small businesses. All plans would have to meet standards in terms of benefits, quality and efficiency.

Obama would keep the tax-free subsidy for those covered at work. But he would also create a federal subsidy – based on income – for people who don’t qualify for government plans such as Medicaid.

Obama would require all employers to offer a plan or contribute money to employee’s health costs. Companies that do neither would be required to contribute a percentage of payroll to the health exchange.

(Here’s a more in-depth look at how their health care plans differ and what critics of both candidates’ proposals say.)

Helping homeowners

It’s not clear what role the next president will have in shaping the government’s response to the foreclosure crisis, because it’s unclear what the housing situation will be and what Congress will have accomplished by Jan. 20, 2009.

Each candidate, however, has expressed views on what lawmakers and lenders should do.

Although initially opposed to additional government aid in the mortgage mess, McCain has joined Obama in supporting the idea of the Federal Housing Administration backing loans that lenders have written down to affordable levels for borrowers.

But the plans they support differ somewhat.

Obama backs a proposal from House Financial Services Chairman Barney Frank, D-Mass., and Senate Banking Chairman Christopher Dodd, D-Conn., that would require borrowers to share equity with the FHA when they sell or refinance their home. (Here’s how the plan would work.)

McCain has proposed the “HOME Plan,” which blends elements of the Frank/Dodd plan with proposals from the Bush administration and the Office of Thrift Supervision. Under McCain’s proposal, if a borrower sells his with a gain, the lender and the federal government each would receive a portion of the equity.

Beyond more help from the FHA, Obama has called for a $10 billion foreclosure prevention fund to help victims of mortgage fraud sell their homes or modify their loans so they can avoid foreclosure and bankruptcy.

McCain has called for the creation of a Department of Justice task force to investigate mortgage crimes involving lending and securitizing home loans.

Getting a grip on energy

As gas prices climbed toward $4 a gallon this spring, McCain supported a summertime gas tax holiday, which he proposed paying for by using money from the Highway Trust fund.

Obama opposed such a tax break, contending it would not amount to significant savings for drivers nor help lower gas prices.

To combat the rising price of oil, McCain has also called on the government to temporarily suspend buying oil for the country’s Strategic Petroleum Reserve.

Both candidates are calling for less reliance on oil as a fuel staple and reductions in greenhouse gas emissions. Obama and McCain support some form of a cap-and-trade system, whereby companies would pay for the right to emit carbon dioxide in a market-based auction.

Obama has also proposed investing $150 billion over 10 years to promote alternative energy and conservation.

(Here’s a closer look at McCain’s and Obama’s energy proposals.)

Keeping spending in check

When it comes to addressing the federal budget deficit, McCain’s preferred solution is cutting government spending. He has called for a one-year freeze on discretionary spending to assess which programs should stay and which should go. He has also said he would demand that Congress eliminate earmarks.

Obama too has said he wants to restore fiscal discipline by cutting earmarks to levels no greater than they were in 2001 and reinstating so-called pay-go rules. Under pay-go, lawmakers may not pass any spending measures or tax cuts with paying for them by making cuts to other programs or raise an equal amount of money.

Despite the candidates’ promises, experts are skeptical that either candidates’ economic proposals when taken as a whole could be fiscally sound.

Social Security Reform

I have a good idea: why don’t we let the people [individually] decide whether they want to contribute to Social Security for their respective retirements? If so, then the government can invest the money for them. If not, they can invest it themselves and everybody gets private accounts so the balances are kept in order and there is accountability.

Liberals won’t go for that idea because SS is not really about retirement, but a grab bag of money for politicians, a bribe for the constituents and a ponzi scheme of redistribution for the lazy numbskulls.

Conservatives will go for it all the way, of course, because we really don’t need the people’s money. We just want limited government.