1. The Budget Squeeze C. Eugene Steuerle The Urban Institute September 10 Stanford Institute for Economic Policy Research

2. OUTLINE WHERE WE WERE IN 2000 WHERE WE WERE IN 2000 Sources of Pressure: Revenues, Health, Retirement Programs, Future Labor Force Growth Slowdown Sources of Pressure: Revenues, Health, Retirement Programs, Future Labor Force Growth Slowdown Retirement & Health: Not Well Targeted Retirement & Health: Not Well Targeted Everything Else in Budget Squeezed Everything Else in Budget Squeezed Impact on Democracy: Dead Men Ruling Impact on Democracy: Dead Men Ruling TRENDS SINCE 2000 TRENDS SINCE 2000 Tax Cuts, Drug Benefits, Defense & International, Other Revenue Shortfall Tax Cuts, Drug Benefits, Defense & International, Other Revenue Shortfall  $800 Billion Annual Shift from Surplus to Deficit The Squeeze Tightens The Squeeze Tightens THE IMPLICATIONS THE IMPLICATIONS Private: Restructuring of Labor Market Private: Restructuring of Labor Market Public: Fundamental (Trillion Dollar) Shifts in Policy Public: Fundamental (Trillion Dollar) Shifts in Policy

4. Social Security, Medicare, and Medicaid Outlays as a Percentage of GDP, Fiscal Years 1950-2075

5. Pressures from Elderly Programs People have been retiring earlier People have been retiring earlier People are living longer People are living longer Birth rates have fallen Birth rates have fallen Annual/lifetime benefits continue to rise Annual/lifetime benefits continue to rise Health services grow & expand (quantity) Health services grow & expand (quantity) Healthcare insurance system reduces downward price pressures normal for a growing industry (price) Healthcare insurance system reduces downward price pressures normal for a growing industry (price)

6. Social vs. Legal Pressures Only the change in birth rates indicates a growing need in society. Only the change in birth rates indicates a growing need in society. The other five are signs of increased well- being or legal promises to pay out more. The other five are signs of increased well- being or legal promises to pay out more.

10. Quantity Indices Over Time: Medical Care vs. Other Consumption Categories

11. Price Indices Over Time: Medical Care vs. Other Consumption Categories

12. Social Security and Expected* Medicare Benefits for Average-Wage, Two-Earner Couple

14. Labor Force Projections (Annual Growth Rates) Labor Force Projections (Annual Growth Rates)

16. Example of Shift in Resources Upon Retirement

17. One Possible Reprieve Despite debates over capital (individual accounts), the main problem is labor Despite debates over capital (individual accounts), the main problem is labor Many so-called elderly are middle-aged Many so-called elderly are middle-aged They still want to be productive They still want to be productive Government estimates may seriously understate potential labor demand for these workers Government estimates may seriously understate potential labor demand for these workers

18. Labor Force Participation: Males Aged 55 and Older vs. the Adult Population,1948-99

19. Multiple Gains if Work Expands Fewer beneficiaries Fewer beneficiaries More national output, divided into: More national output, divided into:  More taxes for elderly programs  More taxes for children’s and other programs  More private wealth & income to be spread over fewer retirement years.

21. Constricted Choices Among Elderly Programs Locked-in guarantees and growth rates prevent Locked-in guarantees and growth rates prevent  taking better care of truly old  removing inequities among beneficiaries  switching money toward long-term care  removing elderly from poverty

22. Proportion of Social Security Benefits for Males Going to Those with More Than 10 Years of Life Expectancy

23. Some Inequities Current system discriminates: Current system discriminates:  single heads of household receive less than married persons who contribute no more to systemreceive less than married persons who contribute no more to system  two-earner couples receive fewer benefits for the same levels of contribution when their earnings are splitreceive fewer benefits for the same levels of contribution when their earnings are split  some divorced persons receive no share of their spouses’ benefits if married fewer than 10 yearsreceive no share of their spouses’ benefits if married fewer than 10 years

24. Long-term “Long-term” Care There does remain a serious long-term care issue for the very old There does remain a serious long-term care issue for the very old By providing increasing amounts to those relatively younger, current system actually makes problem harder to solve By providing increasing amounts to those relatively younger, current system actually makes problem harder to solve

27. Federal Outlays as a Percentage of GDP, 1962-2002

28. Other Domestic Outlays as a Percentage of GDP, 1962-2002

29. Reduction in Outlay Category as a Percentage of GDP, 1961-2002

30. Dead Men ( yes, they were men) Rule  Priorities set yesterday for the needs of tomorrow  Voters left with fewer choices  Unable to switch priorities (defense, education, homeland security, children)

31. Source: Steuerle, Carasso, Bishop, based on data from Gale, Orszag, and the Tax Policy Center..

32. 3.3% Source: Steuerle, Carasso, Bishop, based on data from Gale, Orszag, and the Tax Policy Center..

33. Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.

37. SOON…VERY SOON ANY spending ANY spending on education, environment, welfare, community development and most domestic programs must be paid for out of:  Deficits (but this can only be temporary)  Rescinding of tax cuts or tax increases  Pared growth in retirement and health spending  A very small international and defense presence

38. CONCLUSION  Dead Men Rule by locking in future changes  Rest of government squeezed between lower taxes and higher retirement/health spending  Education/environment/discretionary programs get leftovers, if any  Automatic government (spending tomorrow’s money today) restricts choices among  programs in general  elderly programs as well  Fundamental restructuring of public budgets and private labor markets almost inevitable  Will it be done well?