Friday, May 23, 2008

GAO: Long-term still unsustainable

The Government Accountability Office released an update to their long-term fiscal outlook. GAO illustrates taxes and spending under two baselines:

The first is “Baseline Extended,” which follows the CBO’s January baseline estimates for the first 10 years and then simply holds revenue and spending other than large entitlement programs constant as a share of gross domestic product (GDP). The second is the “Alternative simulation” based on historical trends and recent policy preferences. Under these alternative assumptions, discretionary spending grows with the economy rather than inflation during the first 10 years, Medicare physician payments are not reduced as in current law, and revenues are brought down to their historical level.
The following table summarizes the fiscal gap under the two baselines.

So we have a choice between a 17% increase in federal taxes or reduction in spending under the optimistic baseline, or a 36% increase in taxes or reduction in spending in the other. As with other analyses, most of this is driven by cost growth in health care, with smaller contributions from Social Security and other programs. Sobering stuff.

3 comments:

JG said...

Hi:

The past week's CBO projection I found more interesting is the letter that projects the shorter term -- that to keep even with entitlement costs income tax rates will have to rise 50% by 2030 and 90% by 2050. Alternatively, if taxes aren't increased GDP starts falling by 2050 and "projection ends" circa 2060. Nobody makes it to 2082.

Also absent tax increases, Moodys and S&P both project the US govt's credit rating will start falling in 2017, with S&P projecting a fall to "junk" by 2027.

For some perspective, I compared the credit-rating-saving tax increase needed just by 2030 in GDP % terms, as per CBO, to tax increases of the past. It appears to be 25 times larger than the 1983 tax increase to save Social Security then that paralyzed Washington until the last minute, 7 times larger than the 1993 Clinton tax increase that passed the Democratic house by one vote and Democratic senate on a VP tie-breaker, and 90% of the size of all the tax increases enacted post-Pearl Harbor to fight World War II. (And taxes only go up from there, of course).

Those aren't pretty comparisons. And 2030 is only two thirds of a home-mortgage length away -- 2017 is only nine years, that ain't long at all.

So here's a thought: We see reams of long-term "75-year" and "infinite horizon" fiscal analysis but, to paraphrase Butch and Sundance, maybe people shouldn't be so concerned about the 75 years to 2082 because the 2030s are going to kill us.

By that I mean, politics has got to make these programs change by the 2030s,it seems. If that's so, then all projections parsed by points of payroll over 75 year to reach a balance in 2082 and beyond are meaningless, and the heavy intellectual -- and political motivation -- work should be focused instead on highlighting the "coming soon in your working life" problems and finding ways to stabilize these programs by 2030 or so.

Take just Social Security, the small, simple part of things. CBO says it accounts for 30% of the needed income tax increase by 2030 to cover 2 points of GDP, a 15% or so increase in tax rates.

By precedent, when Congress faced the much smaller cash flow shortfall for Social Security in 1983, the political-bargain solution it reached was to close it with half tax-increase and half benefit cuts -- including the first means testing (though disguised: progressive income tax on benefits remitted to the SSA, not to general revenue with other income tax) plus delayed retirement age, etc.

Is there any reason to think Congress won't do the same exact thing with benefits again? Only on a larger, prorportionate to the larger problem scale? (Especially given the even huger simultaneous cost dropping on it for Medicare.)

If not, then parsing the SSTF balance until 2082 is not merely meaningless, it is actually bad for budget and entitlement reform because it distracts an awful lot of attention and analysis from what is the real problem.

That problem would be addressed by the same analysts writing now:

"Look, if you are in your 30s today, your SS benefits stand to be slashed only 20 years from now, long before you retire ... And if you are in your 50s now, you are on course to enjoy a surprise 50% income tax increase on all your fixed-income in your retirement years from your pension, IRA, Social Security benefits(!) etc... So what do you want to do about this now to mitigate this situation by 2030? Here are some options... "

That would get the message across, at least for SS, the simple problem people can grasp.

I mean, I did graduate finance but when I look at all the long-term SSTF proposals parsed all different ways for 2082 or to the infinite horizon, I just worry: "How does this help save my benefits in 2030?", and I don't see any answer.

One person's opinion, FWIW.

Regards.

Andrew G. Biggs said...

JG: All good thoughts I'll have to mull. Thanks v much.

Andrew

Anonymous said...

all very soberling

but apparently not enough to make us put down the bottle and actually think about what we are talking about.

i have to assume... because of what else i think i know.. that that 80 or 90% increse in "income taxes"
is really in increse in payroll taxes... at least if we choose to pay for medical costs and longevity costs that way.... which we should.

this would increase payroll taxes from about 15% to about 30%... as indicated by the Trustees Report showing combinded OASDIHI tax "shortfall" in about 2080.

looks like a lot of money... and does suggest some serious thought... but in fact it is only about a third of the projected wage increase over that time.

so at the worst we would be looking at a choice between spending our money on new lexuses or trips to las vegas every year, or paying for our groceries and medical costs over a much longer life expectancy.

or as I, at least, learned from Econ 101, you can't have everything.

i don't know what you are mulling there, but when the dt's set in... well, maybe you should get out more.