April 24, 2014

Strengths and Weaknesses in Obama's Deficit Reduction Plan

President Obama deserves credit for putting Medicare and Medicaid on the table for deficit-reduction efforts and for encouraging the new super committee to exceed its assigned goal. But the President’s  new proposals to that panel, released today, fall short of comprehensive structural reform in health care and tax policy, and his decision to leave Social Security out of the plan is disappointing as well.

Amid growing concerns about a double-dip recession, the administration has focused this month largely on short-term measures to support the economy. These measures should not preclude putting long-term deficit reduction plans in place, and in fact such plans can dramatically boost the effectiveness of the short-term initiatives.

So Obama’s suggestion that Washington proceed on both the short- and long-term fronts is welcome.  So is his willingness to discuss changes in Medicare and Medicaid, two of the federal government’s largest and most rapidly growing programs. Significant changes will be needed in those programs  if the nation is to have any hope of eventually putting itself on a more responsible and sustainable fiscal course.

The proposals to change other mandatory spending programs, such as cutting agriculture subsidies and increased cost-sharing in the military health care program of TRICARE, also send a message to the super committee that policymakers must tackle the smaller mandatory spending programs that have strong support among politically influential groups. Congress cannot focus only on further restraint in discretionary appropriations.

The administration estimates that its proposals will temporarily stabilize deficits by the end of the 10-year budget window. In 2021 the deficit would total 2.3 percent of GDP.  At that point Debt Held by the Public would be 73 percent of GDP. While that level of public debt is lower than it would be under current policy projections, it is still a higher level of debt than we have today (67 percent), higher than the President’s bipartisan fiscal commission recommended, and higher than would be produced by hitting the spending and revenues levels of the current-law baseline (61 percent).

In putting Medicare and Medicaid on the table, Obama has sent an important message to lawmakers in his own party, and given them some political cover to consider reforms in the big federal entitlement programs.  At the same time, Obama’s approach puts pressure on Republicans in Congress to at least be willing to discuss deficit-reducing tax reforms as well. The idea of a “grand bargain” has always recognized that entitlement spending reductions and higher revenues would both need to be part of the mix.

While today’s health care recommendations are incremental and would not produce huge savings within the 10-year window, many of them are worth pursuing. It is particularly noteworthy that today’s proposals go beyond provider cutbacks and include higher payments for premiums and some services for those who can afford a reduction in their federal health care subsidies. Additional savings could easily be achieved by moving these changes forward from their 2017 starting date in the President’s plan.

That said, the proposals would not make any structural changes in the health care delivery system or impose some sort of budgetary cap to help bring about incentives for efficiency. Moreover, Washington has often promised cutbacks in reimbursements for health care providers, and often backed away from those cutbacks when the time came to actually make them.  So large promises in this area, on top of the cutbacks already enacted, may prove unrealistic.

Similarly, it is good that Obama has called for changes that could increase the fairness and reduce the complexity of the tax system.  But the President really needs to champion the sort of sweeping tax reforms that were proposed last year by his fiscal commission and the Bipartisan Policy Center’s Debt Reduction Task Force – reforms that would broaden the tax base, lower tax rates, boost economic efficiency and help to close the gap between government revenue and spending.

It’s certainly legitimate to ask the wealthy to pay more than they have in recent years, but true tax reform will require far more than that.  In addition, the administration’s proposed tax hike on millionaires (the “Buffett Rule”) is, at this stage, a guideline for reform and not a specific proposal. Turning it into legislative language could prove to be quite a challenge and a step away from tax simplification.

Social Security reform should also have been in the President’s new plan. As he acknowledged in his remarks today, the system is clearly on an unsustainable track. Reasonable reforms could change that, and the impact on workers and beneficiaries would be considerably less dramatic if we start now rather than continue procrastinating.  Social Security has already begun running cash deficits and is thus boosting federal borrowing. Public misconceptions about Social Security abound, so presidential leadership on this issue is badly needed. By taking Social Security off the table for now, the President has taken a step backward from what he was willing to consider just a few months ago.

Furthermore, the primary change for Social Security that appeared to be on the table before the President released his plan -- adjusting how benefits are indexed for inflation -- is supported by budget experts across the ideological spectrum because it would improve how all government spending and tax policy changes in response to inflation.

As The Concord Coalition has repeatedly noted, real progress on fiscal reform will require bipartisan cooperation and compromise. With the recommendations of the President as well as numerous bipartisan commissions in hand, Democrats and Republicans on the super committee must now move quickly to begin forging a comprehensive reform plan that can put the country on a more responsible fiscal course, calm the financial markets and help restore public confidence in our economic future.