Evangelicals for Social Action’s Concrete Proposals for Intergenerational Justice And the American Debt Crisis1 Large federal budget deficits that continue year after year produce an escalating national debt that leads to economic disaster. Continuing the current pattern of deficits would mean that by 2025, all federal revenues would be needed simply to pay for Medicare, Medicaid, Social Security, and interest on the national debt. The federal government would need to borrow every cent it paid for everything else including national defense, homeland security, law enforcement, education, etc. (Domenici/Rivlin, 12). We must dramatically reduce annual deficits at least to the point where in future decades the national debt is no more than 60% of the nation’s Gross Domestic Product (That level is widely accepted as satisfactory by economists). To do that in a just way, we must both reduce our annual expenditures and also increase government income in a way that empowers rather than harms the poorer members of society. That will require: I. Cutting Some Federal Expenditures a. Agricultural programs b. Defense budget c. Symbolic but useful changes II. Controlling Medical Expenses III. Making Social Security Sustainable IV. Fundamental Tax Reform V. Maintaining and Expanding Effective Programs that Empower Poor People Here and Abroad
1
We have drawn on the provisions of the National Commission on Fiscal Responsibility and Reform (Dec. 2010), chaired by former Republican Senator Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles (hereafter Simpson/Bowles) and Restoring America’s Future (Nov. 17, 2010) chaired by former Republican Senator Pete Domenici and Clinton Office of Management and Budget Director Alice Rivlin (hereafter Domenici/Rivlin).
1
I. CUTTING SOME FEDERAL EXPENDITURES Among the next steps we support are: a. Reducing Agricultural Subsidies Reduce net spending on mandatory agricultural programs by at least $10 billion from 2012 through 2020. (Simpson/Bowles, 4.2, p. 45) Effective programs that promote conservation and environmental quality should be retained. Many existing agricultural subsidies primarily benefit the private interest of large American farmers, hurt very poor farmers in poor countries, and do not serve the public interest in a significant way. b. Reducing the Defense Budget Reduce the defense budget by at least 15%. The current US defense budget of about $700 billion per year means that the US defense budget is roughly as much as all other countries’ defense budgets combined. (Domencini/Rivlin, p. 94)2 c. Reviewing Federal Workforce Retirement Programs (civilian and military) Bring Federal Workforce Retirement Programs into line with pension benefits in the private sector. The goal with this change is to save $70 billion over 10 years. (Simpson/Bowles, 4.1, p. 44) d. Making changes that have a smaller direct effect but significant symbolic value Reduce congressional and White House budgets by 15%. (Simpson/Bowles, 1.10.1, p. 26) Impose a three year freeze on the pay of members of Congress. (Simpson/Bowles, 1.10.2, p. 26) Impose a three year pay freeze on federal workers and civilians in the Defense Department. (saves $20 billion in 2015) (Simpson/Bowles, 1.10.3, p. 26) Eliminate all congressional earmarks. (Simpson/Bowles, 1.10.7, p. 27)
II. CONTROLLING MEDICAL EXPENSES Growing health care costs throughout the U.S. health care system, which put up the cost of federal health care programs and health-related tax expenditures, presents perhaps our single largest fiscal challenge. Significant reduction in the rate of increase of both total national expenditures on health care and the federal government’s health care expenditures is necessary. The substantive reasons why health care costs are increasing show why that will be difficult. Life-giving but expensive advances in medicine continue to be developed. The population continues to age. The fact that the large Baby Boom generation is now reaching Medicare eligibility adds substantially to federal costs. We should establish the target where total societal health care costs and federal health care expenditures increase no more per year than growth in GDP plus 1 % per beneficiary and work hard in the years ahead to move us toward that goal.
2
In constant dollars a 28% defense budget reduction was achieved between 1989 and 1998 (Adams and Leatherman, Foreign Affairs, Jan-Feb 2011).
2
Among the next steps we support are: a. Malpractice Reform Current malpractice suits both increase doctor’s malpractice insurance and encourage over-utilization of diagnostic and related services (“defensive medicine”). Simpson/Bowles recommends several good concrete steps and also urges Congress to impose statutory caps on punitive and non-economic damages (we agree). This could effect a saving of $17 billion through 2020. (Simpson/Bowles, 3.3.12, p. 39) b. Reform of Medicare’s Cost-Sharing Rules Currently, cost-sharing for most services in Medicare is low and the result is over-utilization of health care. Therefore, Simpson/Bowles recommend replacing the current hodge-podge of premiums, deductibles and co-pays with a single combined annual deductible of $550 for Part A (hospital) and Part B (medical care) plus a 20% uniform co-pay on health spending above the $550 annual deductible. The commission also recommends a reduction in co-pay to 5% of costs after a person paid $5,500 and the capping of co-pay at a total of $7,500 per year. This could effect a saving of $110 billion through 2020. (Simpson/Bowles, 3.3.2, p. 37-38) We support this recommendation with one significant modification: seniors with incomes below $15,000 should have a greatly reduced copay; there should be an increasing co-pay on a sliding scale up to an annual income of $35,000 where the full co-pay could begin. c. Restrictions on Coverage in Medicare Supplemental Insurance Today, Medigap plans that piggyback on Medicare and cover most of the cost-sharing encourage overutilization of services. We support prohibiting Medigap plans from covering the first $500 of cost sharing and limit coverage to 50% of the next $5000 in cost sharing. This could effect a saving of $38 billion. (Simpson/Bowles, 3.3.3, p. 38) d. Extension of the Medicaid Drug Rebate to Dual Eligibles in Medicare’s Part D Currently, drug companies must provide substantial rebates for drugs for Medicaid beneficiaries. Medicaid beneficiaries who are also eligible for Medicare should receive the same rebate. This could effect a saving of $49 billion through 2020. (3.3.4, p. 38) e. Reduction of Excess Payments to Hospitals for Medical Education This could effect a saving through 2020 of $60 billion. (Simpson/Bowles, 3.3.3, p. 38)
III. MAKING SOCIAL SECURITY SUSTAINABLE Without Social Security, 50% of all seniors today would be poor. Because of Social Security, only 10% of seniors fall below the poverty line. 70% of Social Security’s benefits go to retired workers and their families; 30% go to disabled workers and survivors of deceased workers. Social Security is the most successful government anti-poverty program in American history. Currently, however, Social Security is unsustainable for three reasons: 1) The Baby boom generation is starting to retire in large numbers, creating a much larger number of people collecting Social Security; 2) Americans are living longer than before; 3) because of the growing gap between the income of wage earners and because today high wage earners only pay Social Security tax on the 3
first $106,800 of wages, a smaller percentage of the nations’ income is now subject to the Social Security payroll tax than earlier. (Domenici/Rivlin, 71) We will need to slowly both increase the income subject to the payroll tax and reduce benefits. Domenici/Rivlin’s suggestion to divide the burden 50-50 on these two measures is probably a wise principle. (Domenici/Rivlin, ) Among the next steps we support are: a. Increasing the allowable age for early and full retirement Under current law, the normal retirement age will be 67 in 2027. Simpson/Bowles recommend gradually increasing the normal retirement age to 68 by 2050 and 69 by 2075 and also increasing the early retirement age to 63 and 64 in lock step. (5.4, p. 50) We support these changes. b. Change to a more accurate annual cost of living adjustment --sometimes called the “Chained Consumer Price Index.” (Domenici/Bowles, 15; Simpson/Bowles, 5.7, pp. 51-52) c. Increasing the taxable maximum of the Social Security tax progressively over ten years, eventually subjecting all income to a Social Security tax. Currently, only the first $106,800 of wage and salary income is taxed for Social Security benefits. Simpson/Bowles recommend slowly increasing that amount to $190,000 by 2050. (5.6, p. 51) We favor faster change: complete the change in ten years (by 2021). In addition, link the $190,000 figure to inflation. Also tax all wages above $190,000 at a lower rate of 3%. d. Over ten years, progressively apply the Social Security tax to investment income as well as wages e. Slowly reduce the growth in benefits for approximately the top one-quarter of recipients Currently, retirees receive 90% of the first $749 of the worker’s average monthly earnings; 32% of the average monthly earning between $749 and $4517 and 15% above that. Starting in 2023, slowly reduce that top bracket from 15% to 10% over 30 years. (Domenici/Rivlin, 76) f. Including all newly hired state and local government workers in Social Security (Simpson/Bowles, 5.8, pp. 51-52; Domenici/Rivlin, 79) g. Update the special minimum benefit and protect the most vulnerable Social Security has a special minimum benefit to help the poorest, but it is not indexed to wage increases. Starting in 2012, increase the special minimum benefit to 133% of the federal poverty level for retirees with at least 30 years of creditable work. We also need a reasonable increase in SST benefits. Also, add a modest increase in benefits for very elderly folk who often outlive their savings. From ages 81-85, increase their benefits by 1% per year. (Domenici/Rivlin, 80) IV. TAXES AND TAX REFORM The current federal tax code is hopelessly confusing, complicated, and unfair. Because of thousands of exemptions for all kinds of things, people are not treated equally and the treasury loses $1.1 4
trillion every year. We agree strongly with Simpson/Bowles that “those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable and eliminate tax loopholes favoring those who need help least.” We should “maintain or increase progressivity in the tax code.” (p. 28) Among the next steps we support are: a. Eliminating most of the special exemptions (“Tax expenditures” is the technical phrase) in the tax code. The result would be a much more fair, less complicated tax code that would bring in hundreds of billions of additional dollars. Some propose eliminating all exemptions, but Simpson/Bowles rightly recommend retaining the following: i. Support for low-income workers and families (e.g. the child tax credit and earned income tax credit) ii. Mortgage interest only for principal residences (we would narrows this to only one house and only on the first $400,000). A house of one’s own encourages family stability. iii. Employer provided health insurance iv. Charitable giving (to encourage the flourishing of civil society) v. Retirement savings and pensions. (Simpson/Bowles, 2.1 and 2.1.3, pp. 29-30) b. Taxing capital gains and dividends at ordinary income rates In 2010, the top rate for capital gains and dividends was 15% instead of the significantly higher income tax rate. The change would demand that those more able to pay should pay more. (Simpson/Bowles, 2.1.3, p. 31) c. Removing special subsidies for different industries (Simpson/Bowles, 2.2.2, p. 33) d. Retaining the current tax brackets There are currently six income tax brackets: 10%, 15%, 25%, 28%, 33%, 35%. Simpson/Bowles favors lowering the upper limit and having just these brackets: 12%, 22%, 28%. (p. 31) That would slightly increase the bottom rate and reduce the top two rates. That seems to ignore Simpson/Bowles’ principle that those who are best off should contribute the most. We favor retaining the current six tax brackets. We also favor a seventh tax bracket of 45% for persons with income over five million dollars. e. Retaining the estate tax We would support an exemption of the first $2-4 million (and up to $6 million for family farms and small family businesses) and a rate of 45%. A substantial estate tax encourages charitable donations, strengthens civil society, recognizes that society has helped make it possible for some to acquire great wealth and, by reducing inherited wealth, encourages each generation to engage in productive labor. f. Modestly increasing the amount of Social Security income subject to the federal income tax for seniors with substantial additional income. Currently, individuals with combined income of $25,000 – $34,000 pay income tax on up to 50% of their benefits and those with combined income over $34,000 pay income tax on up to 85% of 5
benefits. For couples filing jointly, the levels are $32,000 - $44,000 (50% of benefits are subject to income tax) and above $44,000, 85% may be taxable. At a total income of $44,000 and above, the amount of Social Security tax should be increased progressively. g. Carbon tax Introduce a carbon tax (on oil, gas, coal) and use at least half of this income to protect the bottom half of the population.3 VI. MAINTAINING AND EXPANDING EFFECTIVE PROGRAMS THAT EMPOWER POOR PEOPLE AND PROVIDE EDUCATION AND INFRASTRUCTURE FOR A BETTER FUTURE 1. Domestic Programs a. Investment in education Providing quality education to the next generation is one of the most fundamental aspects of intergenerational justice. It would be fundamentally immoral to spend so much on defense, tax cuts and special-interest tax breaks (especially for affluent Americans) and Medicare and Social Security for seniors that we deprive our grandchildren of the quality education that will help them to thrive and enjoy productive lives. b. Pell grants We should slowly increase the number and amount of the Pell Grants that enable lower income students to afford a college education. c. Earned Income Tax Credit (EITC) This refundable tax credit encourages and rewards work and lifts millions of low income workers out of poverty. d. Unemployment insurance e. Food stamps Food stamps (the SNAP program) currently serve 44 million people per month, protecting them from hunger. Especially at a time of economic crisis when more people lose jobs, we must expand not reduce the funds available for food stamps. f. Women, Infants and Children (WIC) This program which provides healthy foods, nutrition counseling and health care referrals to lower income pregnant women currently serves 9.2 million people. Studies have shown that for every dollar spent, $1.77 to $3.77 is saved in medical costs – during the first 30 days of the child’s life! g. Infrastructure We must rebuild our decaying highways, bridges, etc. if our economy is to thrive in the future. 3
Domenici/Rivlin propose a very different set of proposals for tax reform. They are too complicated to discuss here, but merit consideration as an alternative (see Domenici/Rivlin, 29-43).
6
h. Head Start and Early Head Start These programs help 1.1 million disadvantaged children get an improved chance to do well in school.
2. International Assistance Foreign aid is less than 1% of the total federal budget although according to national polls Americans wrongly say that foreign aid is 25%! When asked what would be an “appropriate� percent, they typically say 10%. In the last several decades, effective American foreign assistance has saved tens of millions of lives and helped improve the educational and economic opportunities for millions more. President George Bush’s PEPFAR program alone has saved millions of lives. On Sept. 30, 2010, 3.2 million people worldwide were being kept alive because the US directly funded life-saving anti-retroviral treatment. Since 2006, 19 million people in 15 countries have received insecticide treated bed nets and 40 million people have received anti-malarial treatment. (US cost: $500 million). We do not face a debt crisis because the U.S. spends $500 million on mosquito nets and treatment that helps save the lives of tens of millions of people.
April 13, 2011
7