Will cuts be needed to offset tax reductions?
February 1, 2018
With the tax bill signed into law, House Speaker Paul Ryan, R-Wis., has set his sights on reforming Medicare, Medicaid, Social Security and welfare in 2018. But he will have to overcome several big barriers to be successful, including reversing President Donald Trump’s repeated campaign pledge not to touch those specific federal entitlement programs for the elderly.
Senate Majority Leader Mitch McConnell, R-Ky., and Ryan are also at odds over whether to tackle entitlement reform in a mid-term election year, which traditionally favors the party out of power – in this case, the Democrats. Ryan has made no secret that he expects the national debt to skyrocket, thanks in part to the tax legislation, which lawmakers approved without a way for it to pay for itself. So Ryan wants to balance the books over the next few years by tackling Medicare and other entitlement programs.
Ryan’s ideas were greeted with some blowback from his own party. He has since appeared to narrow his expectations after several GOP leaders on both sides of the Capitol expressed reservations about the political optics of cutting the safety net for the elderly or poor when Republican majorities in the House and Senate are on the line in the 2018 midterm elections.
The tax legislation passed without a single Democratic vote in the House and the Senate. But Republicans will need Democratic support in order to get anything controversial done this year. But the reality of the narrow Republican-controlled U.S. Senate – now one vote tighter with the election of the Democrat, Doug Jones, over Roy Moore in Alabama – is that for almost anything else to pass, Republicans will need at least eight or nine Democratic votes. It takes 60 votes to avoid a filibuster.
“I don’t think,” McConnell said, “as a practical matter in the Senate, we can do entitlement reform without bipartisan agreement,” he told the Washington Post recently. “And you can fill in the blanks,” McConnell said. “I mean, it applies to entitlements in general Medicare, Social Security, welfare – they’re so doubled down on that, I’m not going to devote floor time to something that has no Democratic support.”
That won’t deter Ryan in the House, however. He seems willing to push legislation through his chamber, knowing it may never get a Senate vote. That strategy gives House Republicans a record of votes on key issues, which they can take back to the voters at home to say they tried to get things done – even if those votes don’t have any chance of becoming law.
Pushing entitlement reform has some political risks for Ryan and House Republicans. After approving a tax bill that adds $1.5 trillion to the federal deficit, is it politically smart to cite the deficit as a pretext for eroding the social safety net that poor people depend on, especially when most of the tax bill appears to preserve benefits for richer people?
Reaching an agreement on how to stabilize Medicare and other entitlements is not just a political problem for Republicans. It’s an issue for Democrats too, who want to preserve crucial investments in younger generations. To do so they’ll eventually – and perhaps begrudgingly – need to impose some limits on the rising spending for programs focused on seniors.
Entitlements, the budget, national debt and other confusions
Often, talk of entitlement reform is fact-free and appears to be a politically-loaded word salad. So it is important to be clear what “entitlements” are and what that means. It is not a dirty word. Some use it to imply that recipients of these programs’ benefits get them because they’re “entitled” to it. That’s not the case.
These are benefits that enrollees have paid for over their working lives, through the payroll tax, and in the case of Medicare, through annual premiums, deductibles and co-pays. Seniors are entitled to the benefits they’ve paid for.
Why the growing national debt matters is also a key to understanding what Congress will try to do about entitlements.
For decades, fiscal hawks have warned about the growing size of the national debt. But talking about the need to balance the budget and actually getting the federal deficit in control are two different things. Many politicians of both parties just talk the talk and are not willing to make the severe cuts needed to actually walk the walk and get the deficit in control.
When you take out a bank loan, the interest rate you get is based on the incentive the issuers of the debt have to lend you money. That works the same with the federal deficit. All $20 trillion dollars of debt currently accrued by the federal government has interest due.
So the tax bill’s adding $1.5 trillion to the federal debt means there’s additional interest owed on those dollars. Even if the debt is never paid down, the ongoing interest that accrues impacts the country’s credit rating, directly affects lending and borrowing rates and causes economic pain for almost everyone.
CBO projects that by 2047, Social Security and the major federal health-care programs, principally Medicare and Medicaid, will consume two-thirds of all federal spending (except for interest on the national debt).
During the presidential campaign, Trump declared he would not touch Social Security, arguing that the U.S. needed to honor a deal made long ago. He suggested eliminating waste and fraud in the system might help secure its future. But most everyone involved in these issues acknowledges that just getting rid of waste and fraud won’t come close to solving the problem.
The actual issue with Social Security is one of numbers. Since it’s mostly funded by payroll taxes, interest on its reserves and income tax on benefits, right now, every retiree is supported financially by less than three workers. That’s a huge shift from the 45 workers per retiree when the program began in 1935. That number could shrink to two workers per retiree by 2030. So Social Security can be stabilized largely by changes within the program.
Medicare and Medicaid are more complex because they are tied to the higher levels of cost and spending on health care. For the past 40 years, health care spending has consistently grown faster than the economy. America’s population is aging, and older people use a larger amount of health care services. Not only are the baby boomers aging, but they are living longer, which means they will utilize more of the Medicare and Medicaid entitlement program benefits for longer periods of time.
Part of Medicare is funded by payroll taxes known as the Federal Insurance Contributions Act (FICA) as well as by premiums, deductibles and coinsurance. Medicaid is overseen by the federal government, but each state establishes its own eligibility standards and determines the scope of services. States also set the rate of payment for services and administer their own Medicaid programs. The federal government pays a matching rate of funds to what states spend for the plan, but that amount varies from state to state and is related to state per capita income. It’s usually 57 percent of the costs.
Realistically, you can’t reduce the costs of Medicare or Medicaid in a big way unless you cut the costs of services or eliminate services altogether. So it’s important to cut through the phony language when politicians lump Social Security and Medicare and Medicaid together in a fix-them-all-together solution. The policy solutions are different.
So now what?
So far, the Trump administration and Congress have yet to enact any policies that would directly cut Medicare or Medicaid. But President Trump did support proposals that would slow down the growth rate of the Medicaid program or end Obamacare’s Medicaid expansion.
The White House’s budget proposal would cut more than $610 billion from Medicaid by slowing the growth rate or reducing the amount Medicaid spending is increased per year. The White House argues it doesn’t consider slowing down Medicaid’s growth rate to be funding cuts.
Ryan has been pushing his entitlement reform ideas since he arrived on Capitol Hill in 1999. He has changed some of the details, but for the most part, his policy idea remains to convert Medicare into a “premium support” or voucher system. That way, the federal government would no longer pay directly for seniors’ health care, as it does now. Instead, it would provide a fixed sum of money for seniors to purchase private insurance. While seniors could still buy into the existing Medicare system, under Ryan’s plan, most analysts suggest it would quickly grow unaffordable to most seniors because only those with the greatest health needs would continue under Medicare.
Ryan has made another adjustment from when he originally proposed restricting Medicare, by pushing for it to only apply to Americans that were already 56 and older with a system of vouchers for anyone 55 and under. By targeting the younger generations, his plan is more popular with older, more conservative voters as long as there’s no change in what has been promised to them.
While some Democrats want to avoid any cuts to these programs and at the same time preserve discretionary spending, that leaves increasing taxes as about the only solution.
The last time anyone made a serious effort to curb deficit spending was the bipartisan National Commission on Fiscal Responsibility and Reform, headed by then Sen. Alan Simpson, R-Wyo., and former Clinton administration Chief of Staff Erskine Bowles created in 2010. Their proposed deficit solution was a three-sided agreement to raise taxes, impose some constraints on retirement programs and preserve investments in future generations.
Nearly every bipartisan effort to reduce the deficit, including several presidential commissions during the Clinton, Bush and Obama Administrations, almost always end up with some variation of the three-sided solution. As the 2010 Simpson-Bowles commission proposed—and others have as well—the only way to persuade Democrats to accept entitlement cuts is to couple them with tax increases and vice versa for Republicans.
So is it even feasible with the GOP tax bill’s huge debt increase, that Democrats would entertain the idea of changes in entitlements without significant tax hikes? And would Republicans approve of a tax increase in an election year after just approving tax cuts? Not likely.
Instead, what is likely to happen is Ryan will shift his focus to programs that largely benefit lower-income families like welfare and food assistance. Ironically, those hardest hit would be blue-collar white folks in Rust Belt states who are at the core of Trump’s Republican base.
It is setting up a fascinating legislative year to come.
Also contributing to this story were The Atlantic and Politico.