The Concord Coalition www.concordcoalition.org

Generational Outlook: The Federal Budget Now and in the Future

2010-2011

POLICY MAKING PROCESS 1. Agenda Setting

President Clinton and Obama – Health Care; Bush – Tax cuts

Congress 1994 Republicans “Contract with America” 2006 Democrats “100 hour agenda”

Courts Abortion; Desegregation of Schools; Judicial Activism

Media Watergate

Special Interests Americans with Disabilities Act

Veteran groups United Cerebral Palsy

Citizens http://www.nytimes.com/2010/04/13/us/13tank.html

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

NEWSBOUND – BUDGET BREAKDOWN

http://www.youtube.com/watch?v=fWu8o-ZzUNs

TYPES OF SPENDING

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/OBAMA PROPOSED BUDGET FY2011

Source: http://www.whitehouse.gov/omb/budget/Overview/

http://www.youtube.com/watch?v=DH9U42vptzw

Budget Request 2011

TAKEN FROM: 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

OUTLAYS OF SELECT MANDATORY SPENDING PROGRAMS

(FY 2007 PROJECTED)

$0

$100

$200

$300

$400

$500

$600

$ B

illio

ns

SocialSecurity

Medicare Medicaid FederalRetirement& Disability

Unemploy-ment

Comp.

EarnedIncome &Child TaxCredits

FoodStamps

FamilySupport

ChildNutrition

Source: Congressional Budget Office, January 2007

DEFENSE DISCRETIONARY SPENDING AS A PERCENTAGE OF GDP

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Source: Congressional Budget Office, August 2007

As

a P

erc

en

tag

e o

f G

DP

MONETARY POLICY

FEDERAL RESERVE SYSTEM

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?

TAXING AND SPENDING 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

BUDGET DEFICIT AND THE DEBT 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

1980S - REAGAN

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

BUSH SR.

“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?

CLINTON

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

SOCIAL SECURITY 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

SOCIAL SECURITY TRUST FUND

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)

PROBLEMS

Baby Boomers

Living longer

Fewer childbirths

1945 42 workers/1 retiree

2010 3 workers/1 retiree

AMERICA’S POPULATION IS AGINGPOPULATION AGE 65 AND OVER

Source: Social Security and Medicare Trustees’ Report, April 2007

0%

5%

10%

15%

20%

25%

2007 2012 2017 2022 2027 2032 2037 2042 2047

Year

Per

cen

tage

of

Pop

ula

tion

Age

d 6

5 an

d O

ver

AMERICANS 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 1 2040: 2.1 to 1

Source: Social Security Administration, April 2007

PROBLEM

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

SOCIAL SECURITY AND MEDICARE PART A CUMULATIVE CASH SURPLUSES AND DEFICITS

IN CONSTANT 2007 DOLLARS—2007 THROUGH 2080

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

In B

illion

s o

f C

on

sta

nt

20

07

D

ollars

2007 2010 2020 2030 2040 2050 2060 2070 2080

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

-72.3 Trillion: Cumulative Social Security and Medicare Part A Cash Deficits

MEDICARE COSTS SOAR IN THE COMING DECADES

0

5

10

15

2006 2010 2020 2030 2040 2050 2060 2070 2080

Calendar Year

As a

Perc

en

tag

e o

f G

DP

General Revenues required to fund the program

Income from dedicated taxes, premiums, and state transfers

Source: Medicare Trustees’ Report, 2007

HEALTH CARE COSTS ARE RISING FASTER

THAN THE ECONOMY

Source: Congressional Budget Office, December 2005.

0

5

10

15

20

25

2007 2012 2017 2022 2027 2032 2037 2042 2047

Year

Per

cen

tage

of

GD

P

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 RevenuesIn Fiscal Year 2006

All Federal SpendingIn Fiscal Year 2006

PROPOSED SOLUTIONS Raise Max level from $90,000 to $140,000

Lower shortfall by 43%

Raise tax by ½% Lower shortfall by 24%

Raise age 67-70 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%

TOPICS TO STUDY Policy Making Process

Budget Policy

Tax Policy

Monetary Policy

Social Security Policy