The Concord Coalition Generational Outlook: The Federal Budget Now and in the Future

P OLICY M AKING P ROCESS 1. Agenda Setting President Clinton and Obama – Health Care; Bush – Tax cuts Congress 1994 Republicans “Contract with America”Contract with America 2006 Democrats “100 hour agenda”100 hour agenda Courts Abortion; Desegregation of Schools; Judicial Activism Media Watergate Special Interests Americans with Disabilities Act Veteran groups United Cerebral Palsy Citizens

2. Policy Formation President Hilary Clinton: Health Care G.W. Bush: Iraq War, Tax Cuts Congress 2010 Health Care Bill Bureaucracy Medicare and Medicaid

3. Implementation Use of the Bureaucracy Rules and Regulations Mandates Grants Discretionary Authority

N EWSBOUND – B UDGET B REAKDOWN

T YPES OF S PENDING Mandatory Spending: Spending Required due to previously passed legislation Medicare, Medicaid, Social Security Discretionary Spending: Optimal Spending set by annual Appropriations Foreign Aid, Education, Defense, Transportation

OMB/O BAMA P ROPOSED B UDGET FY2011 Source: Budget Request 2011

T AKEN FROM : HTTP :// WWW. NYTIMES. COM / INTERACTIVE /2011/07/28/ US / CHARTING - THE - AMERICAN - DEBT - CRISIS. HTML ? HP # PANEL / HOW - THE - DEBT - ACCUMULATED HTTP :// WWW. NYTIMES. COM / INTERACTIVE /2011/07/28/ US / CHARTING - THE - AMERICAN - DEBT - CRISIS. HTML ? HP # PANEL / HOW - THE - DEBT - ACCUMULATED

The U.S. debt is divided into two categories: Intragovernmental Holdings - Just under one-third of the Federal debt is owed to about 230 other Federal agencies. How does this happen? Some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need right now. Rather than stick this cash under a giant mattress, these agencies buy U.S. Treasuries with it. Social Security - $2.72 trillion Office of Personnel Management (Federal Employees Retirement, Life Insurance, Hospital Insurance Trust Funds, including Postal Service Fund) - $1.12 trillion Dept. of Health and Human Services - $69 billion Federal Deposit Insurance Corporation - $35 billion Department of Transportation (Airport and Highway Trust Fund) - $20 billion Department of the Treasury (Exchange Stabilization Fund) - $23 billion Department of Labor (Unemployment Trust Fund) - $21 billion Debt Held by the Public - Foreign governments and investors hold 48% of the nation's public debt. The next largest part (21%) is held by other governmental entities, like the Federal Reserve and state and local governments. Foreign - $5.311 trillion Federal Reserve - $1.66 trillion State and Local Government, including their pension funds - $709.1 billion Mutual Funds - $864.9 billion Private Pension Funds - $605.2 billion Banks - $305.2 billion Insurance Companies - $259.1 billion U.S. Savings Bonds - $184.7 billion

O UTLAYS OF S ELECT M ANDATORY S PENDING P ROGRAMS (FY 2007 P ROJECTED ) Source: Congressional Budget Office, January 2007

D EFENSE D ISCRETIONARY S PENDING AS A P ERCENTAGE OF GDP Source: Congressional Budget Office, August 2007 As a Percentage of GDP

M ONETARY P OLICY

F EDERAL R ESERVE S YSTEM Run by board of governors – serve 14 year terms Chair – serves a 4 year term 12 Federal Reserve districts Can set reserve requirements and give discount rates Can control the money supply to counteract inflation or a recession. How?

T AXING AND S PENDING Fiscal Policy is the use of national govt.’s taxing and spending to influence the operation of the economy and maintain economic stability Discretionary fiscal policy – deliberate decisions by the President or Congress to run budget surpluses or deficits How can the Pres. and Congress influence the economy? Revenue Act of 1964 – Kennedy reduced taxes to help stimulate the economy Bush and Reagan attempted to repeat this success

B UDGET D EFICIT AND THE D EBT What has led to our debt? Tax cuts Defense spending Gross expansion of Social Security, Medicaid and Medicare View the deficit as a percentage of the Gross Domestic Product GDP – total market value of all goods and services produced in a country during the year 1980s – 3-5% 2006 – 3.2% Over the years, deficit reduction legislation has been proposed and passed but not on consistent basis Keynesian economics justifies more spending in times of economic recession

1980 S - R EAGAN Tax and budget cuts led to huge deficit Gramm-Rudman – had to agree to declining deficit number, if not – cuts “across the board” in discretionary spending Why did some members of Congress not like this? 1986 – Tax Reform Act of 1986 Dropped number of tax brackets from 15-3 By 1988, $1 trillion had tripled to $3 trillion

B USH S R. “Read my lips, no new taxes” Recession in early 1990, had to tax To avoid the across the board cuts, Bush: Created new top 31% tax bracket for upper class Increased the federal tax on gasoline Cut defense spending Budget Enforcement Act – created the “pay as you go” system. What is this?

C LINTON New 39% tax bracket Increase in federal gasoline tax Cutback in Medicare spending Balanced Budget Act Limited govt. spending “Phantom surplus”

BUSH $1.35 trillion in cuts over 10 years Top tax bracket from 39%-35% Gradual elimination of “death tax” Attempted to fix the marriage penalty

S OCIAL S ECURITY Origins: New Deal Contributors Employee: 6.2% Employer: 6.2% Taxable Maximum: $90,000 Contribute for 10 years to receive benefits HOW DOES IT WORK? “Pay as you go” system

WHO GETS IT? Recipients: 62.8% Retired 18.4% Survivor Benefits 13% Disabled 5.8% Non working spouses

S OCIAL S ECURITY T RUST F UND Surplus goes into the trust fund 2005: 1.7 trillion in trust fund 155 billion added in 2005 Government borrows 150 billion a year (IOUs in fund)

P ROBLEMS Baby Boomers Living longer Fewer childbirths workers/1 retiree workers/1 retiree

A MERICA ’ S P OPULATION IS A GING P OPULATION AGE 65 AND O VER Source: Social Security and Medicare Trustees’ Report, April 2007 Year Percentage of Population Aged 65 and Over

A MERICANS ARE LIVING LONGER AND HAVING FEWER CHILDREN Consequently, fewer workers are available to support each Social Security recipient 1960: 5.1 to 1 Today: 3.3 to : 2.1 to 1 Source: Social Security Administration, April 2007

P ROBLEM 2015 Payouts exceed income Need to tap into the trust fund Govt. borrows $150 billion a year 2037/2052: Trust Fund depleted Annual collections only pay for 74% of benefits

S OCIAL S ECURITY AND M EDICARE P ART A C UMULATIVE C ASH S URPLUSES AND D EFICITS I N C ONSTANT 2007 D OLLARS —2007 THROUGH 2080 In Billions of Constant 2007 Dollars Calendar Year Source: Social Security Trustees’ Report—April 2007 (Intermediate Projections) $708 Billion: Cumulative Social Security Cash Surplus -$26 Trillion: Cumulative Social Security Cash Deficits -$46 Trillion: Cumulative Medicare Part A Cash Deficits Trillion: Cumulative Social Security and Medicare Part A Cash Deficits

M EDICARE C OSTS S OAR IN THE C OMING D ECADES Calendar Year As a Percentage of GDP General Revenues required to fund the program Income from dedicated taxes, premiums, and state transfers Source: Medicare Trustees’ Report, 2007

H EALTH C ARE C OSTS ARE R ISING F ASTER T HAN THE E CONOMY Source: Congressional Budget Office, December Year Percentage of GDP Assumes that health care cost growth continues at the average rate for the past 40 years (2.5 percentage points greater than GDP growth.) Assumes that health care cost growth rate declines to 1.0 percentage point greater than GDP growth—consistent with the assumption used by the Medicare Trustees. All Federal Revenues In Fiscal Year 2006 All Federal Spending In Fiscal Year 2006

P ROPOSED S OLUTIONS Raise Max level from $90,000 to $140,000 Lower shortfall by 43% Raise tax by ½% Lower shortfall by 24% Raise age Lower shortfall by 38% Reduce benefits by 5% Lowers shortfall by 26% Lower benefits for high wage workers Lowers shortfall by 14% Put estate tax into Social Security Fund Lowers shortfall by 75%

T OPICS TO STUDY Policy Making Process Budget Policy Tax Policy Monetary Policy Social Security Policy