Morning Bell: 6 Fixes to America’s Fiscal Crisis

Amy Payne /

President Obama made his first offer to congressional Republicans yesterday in negotiations over the “fiscal cliff”—an economic catastrophe of tax hikes just a few weeks away.

The White House’s proposal? $1.6 trillion in tax increases, $50 billion in new stimulus spending, and a change that would make it easier to raise the debt limit—so that all this spending could continue.

Senate Minority Leader Mitch McConnell (R-KY) couldn’t contain his laughter at these suggestions.

One congressional aide said the offer “amounts to little more than reiterating the President’s budget request—which failed to get a single vote in the House or Senate.”

Perhaps House Republicans could simply bring President Obama’s latest proposal up for another vote to see if anything has changed.

The “fiscal cliff” is man-made. Congress—primarily the liberal-led Senate—and the President built it themselves through their legislative decisions over the past four years, and then they turned away and tried not to look at it until after the election.

Elected officials in Washington keep enacting short-term patches to keep the government running, which is not a real solution. We need to reform the programs that are causing the runaway spending and deficits today and in the years to come—the large, lumbering entitlement programs of Social Security, Medicare, and Medicaid.

>>> As a candidate in 2008, Barack Obama said he’d like to reform entitlements in his first term. We’re still waiting. Watch the video.

In a new paper, Heritage’s J. D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy and Alison Acosta Fraser, director of the Thomas A. Roe Institute for Economic Policy Studies, point out that

Obama’s tax hikes would reduce the rise in federal debt over the next 10 years by 15 percent. The President is silent about the other 85 percent. The numbers confirm that President Obama’s tax hike demands are at best tangential to attaining a balanced budget.

The real issue is federal spending, and Foster and Fraser describe the bottom line this way:

When this year’s kindergarteners enter college, just 13 years away, spending on these two programs [Social Security and Medicare] plus Medicaid and interest on the debt will devour all tax revenue.

To make meaningful changes to the nation’s unsustainable budget policies, Foster and Fraser lay out four “simple, commonsense, and thoroughly vetted solutions” that already enjoy broad support across the political spectrum:

1. Raise the Social Security eligibility age to match increases in longevity. People are living longer, and entitlement programs need to be updated to reflect that fact. According to the Social Security actuaries, continuing to increase the eligibility age to 69 by the year 2034 and allowing it to rise more slowly thereafter to reflect gains in longevity could go a long way toward reducing Social Security’s funding shortfall. While this would not reduce today’s budget deficit, it would strengthen Social Security’s finances and put it on a path toward sticking around in the future.

2. Correct the cost-of-living adjustment (COLA) in Social Security. The annual COLA benefit adjustment is determined today by the Bureau of Labor Statistics’ Consumer Price Index (CPI). However, the CPI, an antiquated measure, generally overstates inflation, meaning that benefits are increased a bit too much each year to offset inflation. Again, according to the Social Security actuaries, using a more modern inflation measure would substantially reduce Social Security’s shortfall over time.

3. Raise the Medicare eligibility age to agree with Social Security. Medicare has an eligibility age problem, but unlike Social Security, the Medicare eligibility age remains stuck at 65. An obvious solution is to wait five years and then slowly raise the eligibility age to align eventually with the Social Security eligibility age. While the short-term budgetary savings would be negligible, the long-term savings in Medicare would be profound.

4. Reduce the Medicare subsidy for upper-income beneficiaries. In 2012, the average Medicare beneficiary received a subsidy of about $5,000. Subsidizing Medicare benefits for low-income seniors—and perhaps for some middle-income seniors—makes sense, but upper-income seniors do not need and should not receive a $5,000 subsidy to buy Medicare health insurance.

In addition to those reforms, Foster and Fraser list two bonus proposals that have not been considered as closely by lawmakers, but would be simple and effective:

5. Phase out Social Security benefits for upper-income retirees. As a nation, we need to ask whether today’s working families should pay payroll taxes so that upper-income retirees can continue to receive their checks. In short, Social Security should be social insurance against poverty rather than a government-run pension scheme.

6. Consolidate Medicare’s elements and collect a single higher premium. Medicare is actually three distinct components, referred to generally as Parts A, B, and D, reflecting the fact that Medicare was built up over many years. This antiquated structure is confusing and inefficient. An obvious reform is to consolidate the three distinct parts into a unified Medicare program, with a single premium, and then raise the premium to cover 35 percent of related program costs.

Continuing to raise America’s debt limit every few months is irresponsible and dangerous. And failing to address the budget deficits that give rise to this debt limit pressure every few months is equally irresponsible and dangerous. Raising taxes would weaken the economy, kill jobs, and hold down people’s wages. This is not a “solution.”

Congress and the President should instead consider these serious fixes to the drivers of out-of-control government spending. All that’s missing is for the President to take the lead, which is what Presidents are supposed to do.

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