Budget Blunders

The deal to raise the caps on appropriated spending, like the bipartisan agreements of the Obama era in 2011, 2013, and 2015, was put together entirely outside of the formal budget process. The negotiation took place behind closed doors among a handful of congressional leaders and key committee chairmen and ranking members, with some input from administration officials. Neither the House nor the Senate had passed a single appropriations bill for fiscal year 2018 before the leadership negotiations began in earnest in January. There was no opportunity for House or Senate members to offer amendments to the negotiated deal or even really to debate what had been put together. Instead, they were presented with a 250-page package—take it or leave it—just hours before they were forced to vote on it. This kind of heavy-handed tactic breeds resentment and frustration, of course, but it also usually works. The budget passed easily with large numbers of votes from both parties because there was no real alternative to it.

The spectacle of Congress and the White House agreeing at the last possible minute on a mammoth budget package that received no public scrutiny has become so routine that it is now standard operating procedure. At this point, it would be startling if Congress reverted to anything resembling the formal budget process.

One reason that the “regular order” process has fallen into disuse is the intense polarization of the nation’s politics, which has made both parties more and more responsive to the demands of activists and purists. The budget process under current law calls for decisions at regular intervals throughout the year—decisions that could require compromise between the parties to keep the process moving, not to mention a level of transparency on budget estimates that might be uncomfortable for those tasked with assembling the plans.

To avoid these kinds of controversies, leaders in Congress have chosen to set aside the norms of the formal process and postpone all serious decisions on budget matters until the eleventh hour, so that the political pain they encounter for “selling out” in an inevitable year-end compromise is concentrated into a period of days or weeks rather than spread out over months. House and Senate leaders also believe they can force their members to make the compromises needed to run the government only when the alternative is unacceptable (for instance, when a government shutdown is imminent or under way).

The other important reason the regular budget process is followed less and less is that it does not facilitate the kinds of decisions that need to be made to solve the nation’s budgetary problems. Republicans, in particular, are frustrated in this regard. They know the primary reason the federal government is running large deficits today and will run even larger ones in the future is the unrelenting growth of entitlement spending. But the current budget process does not make it easy for them to address this fundamental problem.

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In 1974, when Congress passed the Congressional Budget and Impoundment Control Act and put in place the modern budget process, more than half of all federal spending (51 percent) still went to so-called discretionary spending, which requires annual funding from Congress. Just 41 percent of the budget was devoted to spending on the big entitlement programs, including Social Security, Medicare, and Medicaid. Spending on these programs occurs automatically and is not subject to annual decision-making. The remainder of the budget was spent on net interest payments owed on the national debt.

Today, spending on the major entitlement programs represents more than 60 percent of the federal budget, while discretionary spending accounts for just 27 percent of total federal spending.

The growth of entitlement spending will accelerate in the coming years, as the population ages. In 1970, spending on Social Security, Medicare, and Medicaid equaled 3.6 percent of gross domestic product. Today, spending on these programs has reached 9.8 percent of GDP, and the Congressional Budget Office projects it will grow to 13.7 percent in 2040. The CBO expects the growth in entitlement spending will push federal debt up from 77 percent of GDP today to 150 percent of GDP in three decades. Federal debt amounted to only 39 percent of GDP as recently as 2008.

The budget math is inescapable. It will not be possible to keep the federal government solvent in the future without either serious entitlement reform that lowers long-term spending commitments or a tax increase of a scale that would be unprecedented in the nation’s history.

Citing entitlements as the primary source of our budget woes does not mean everything else the government does is necessary and not wasteful. There’s plenty of waste in discretionary spending, but the amounts are much less consequential. Moreover, while Republicans have often proposed large cuts in appropriations in budget plans that were never going to be enacted into law, when they are forced to make real decisions on spending for these accounts, their zeal for cuts evaporates. Recent history is instructive in this regard.

In mid-2011, President Obama and then-House speaker John Boehner engaged in a protracted negotiation to seal a “grand bargain” on entitlements and taxes to cut long-term federal deficits. That deal fell apart under pressure from both parties’ supporters. So instead of entitlement reforms, they agreed to stringent caps on appropriated spending. These kinds of caps, with unspecified and uncertain consequences for scores of line items in appropriations bills, have always been much easier for Congress to enact than reforms that lower benefits for entitlement program participants. The 2011 deal imposed 10-year spending limits on both defense and nondefense appropriations, producing, on paper, about $1.7 trillion in deficit reduction.

Soon after the caps were enacted into law, both Congress and the president began working to get around them. In bipartisan deals struck in 2013 and 2015, Congress raised the caps. In this year’s deal, Congress and the president agreed to increase the caps on defense spending by $80 billion for 2018 and $85 billion for 2019 and for nondefense accounts by $63 billion in 2018 and $68 billion in 2019. Although the current deal is only for two years, it’s clear the new spending has set a floor for appropriations in 2020 and beyond. The cumulative effect of these deals has been to wipe away entirely the presumed deficit reduction from the 2011 Obama-Boehner agreement.

The solution to the nation’s budget problems will not be found by searching for $100 million, or even $1 billion, in savings in scores of appropriated accounts. That search should occur, of course, to protect taxpayers from government waste, but rooting out this kind of unnecessary spending will not make even a dent in the combined unfunded liabilities of $49 trillion for Social Security and Medicare.

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The current process is biased against a serious examination of entitlements, much less an effort at actual entitlement reform, in several ways.

First, institutionally, both the executive and legislative budget processes are built to provide detailed examinations of appropriated spending, not entitlement programs. The president’s budget provides a line-item presentation of every account in the federal government for the coming fiscal year and is geared toward providing the granular account-by-account information needed to build appropriations bills in Congress. The budget process in Congress calls for approving 12 separate appropriations bills each year. This is an all-consuming endeavor that occupies the time and attention of much of the House and Senate for months on end. These are the bills that allow House and Senate members to directly influence the operations of the agencies and the programs they care most about, such as the Department of the Interior or the Environmental Protection Agency. These are important bills and often carry important policy adjustments, but in budgetary terms they are inconsequential in comparison to entitlement spending.

Second, the current budget process has a short-term focus, which only reinforces the disposition of politicians who tend to focus on their upcoming elections. Entitlement reform is necessarily a very long-term proposition. The Budget Act of 1974 requires Congress to consider budget plans covering at least five years. The common practice is for Congress to produce budget plans covering 10 years. These projections are often derided because of course it is not easy to predict what inflation, interest rates, or economic growth will be in 10 years, all of which are important to budget projections. Nonetheless, for Social Security and Medicare, especially, but also Medi­caid to some degree, it is not possible to implement major programmatic changes in the short-term, and sometimes even 10 years is not a long enough transition for a new policy. Moreover, the savings from major adjustments to program rules will generally compound over time and grow, often well beyond a 10-year projection.

It is certainly important what the deficit and debt will be in 2018 and 2020, and Congress should work to reduce both. But it is also important what the deficit will be in 2030 and 2040. Indeed, the expectation of large and growing deficits over the medium- and long-term can have effects on economic performance now, by affecting the decisions and investment plans of businesses. While there are many uncertainties in long-term projections, there is little doubt that spending on Social Security, Medicare, and Medicaid will be much higher in 10 and 20 years if nothing is done to change the programs. Further, to slow spending growth on these programs in 2030 and 2040, it will be important to make changes soon, so that current retirees can be protected from the changes and younger workers have time to adapt to gradual and phased-in adjustments to their future benefits. Looking back, it’s clear that if Congress had implemented reforms in the major entitlements in the mid-1990s, as was recommended by two bipartisan panels, including one focused on Medicare, the nation’s budget outlook today would be much healthier than it is.

A third impediment to serious entitlement reform in the current budget process is the explicit omission of Social Security from budget-cutting legislation. Social Security is officially “off budget,” and a rule adopted in the Senate prohibits including any reductions in Social Security spending in what are called “budget reconciliation bills,” which have been the primary vehicles for deficit-cutting efforts in recent decades. Social Security has this special status because it is self-financed through payroll taxes paid into the program’s trust funds. Requiring program outlays to stay within the limits of program revenue is the presumed check against long-term deficits.

But Social Security’s financial condition cannot really be separated from that of the rest of the federal government. Social Security is the government’s largest spending program. When program spending exceeds revenue, it drives up the government’s need to borrow funds from the private markets. Further, devoting payroll taxes to Social Security limits the ability of policymakers to impose additional taxes on those same taxpayers to pay for other priorities. Reforming Social Security is central to fixing the government’s long-term fiscal problem.

It is obvious that the primary barrier to serious entitlement reform remains the political sensitivity of the programs. Political leaders who suggest changes are frequently subjected to misleading and unfair attacks. But it is also hard to reform these programs because of the complexity of the changes needed to make them financially sustainable over the long-term. There are a few ideas that are simple and straightforward, such as raising the eligibility ages for Social Security and Medicare benefits, but even that idea raises questions about whether the reduction in benefits would be fair across income groups and thus should be partially offset with other changes in benefits. Slowing spending growth on entitlements, however it is done, will be a very complex legislative undertaking.

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Could a revamped budget process facilitate serious reform? Given the political sensitivity of the programs, the odds will always be long for entitlement reform. Politicians seem incapable of restraining themselves when they have the opportunity to score cheap political points on this subject at the expense of their opponents. But some changes to the process might help improve the prospects for reform.

One approach would be to build into the budget proc­ess an explicit maximum debt level and the requirement of using projections covering a 25-year period. For instance, Congress could pass a law stating that it is the objective of the government to keep federal debt below 60 percent of GDP, as it had been, until recently, throughout the nation’s history except during wartime (it is now at 77 percent of GDP). It would not be necessary to reach that goal immediately, but there would be a presumption against consideration of plans that did not put the government on a path toward complying with that goal. Presidents would then be required to make projections of federal debt going out 25 years as part of their annual budget submissions to Congress and to submit recommendations for bringing debt below that level on a gradual basis should the current forecast show debt exceeding the target. CBO would then independently evaluate the president’s plan to determine whether it met this goal or not.

In Congress, the budget rules could establish procedural roadblocks against the consideration of plans that did not result in keeping federal debt below the targeted level, and there would be expedited consideration—meaning no filibuster in the Senate—of plans, including those changing Social Security, that would bring debt back below the targeted level, as estimated by CBO. Further, there could be hurdles placed in front of the consideration of any tax or entitlement legislation until CBO projections show federal debt remaining below the target over the coming 25-year period.

Within the entitlement programs themselves, the goal should be to implement reforms that allow for greater budget control through transparent and easily understood adjustments that could become more automatic over time. Reform plans presented by Republicans in Congress in recent years go very much in the right direction in this regard. Many in the GOP would like to see Social Security become more transparently personalized, so that individual workers could see and understand how much they have paid into the program and what rate of return they will get on their contributions. One could imagine building into Social Security automatic adjustments in the rate of return workers earn, based on what can be financed given demographic and productivity trends.

Departing House speaker Paul Ryan long championed moving Medicare toward a premium-support model, with beneficiaries receiving fixed levels of federal support to help them enroll in a health insurance plan. That model would make it far easier to control spending within Medicare than is the case today, because the government could make adjustments to the level of federal support payable to beneficiaries based on what can be accommodated within the constraints of the federal budget. Among other things, the premium-support payments could be adjusted based on the lifetime incomes of the beneficiaries, with lower payments made to beneficiaries who had relatively high wages when they were in the workforce. In Medicaid, most Republicans favor moving toward fixed per-capita payments to the states as a replacement for today’s open-ended system of federal payments covering a percentage of state costs. Again, moving toward transparent, per-capita payments would allow for much easier budgetary control over time.

While dismaying, the latest bipartisan budget deal wasn’t unexpected. Congress was never going to live for long within the stringent caps on appropriations set in 2011. For the military in particular, those caps were terribly counterproductive, and the only way to add money to defense was to agree to increase spending on domestic appropriations. What’s discouraging is that neither Congress nor the Trump administration made a serious effort to pay for the added spending with any offsets in entitlement programs. The agreement simply added the new spending to the amounts the government must borrow over the coming years to pay its bills.

That needs to change. A fiscal crisis is going to arrive. Federal debt is rising at a rate unprecedented in the nation’s history, and the situation will get worse in the coming years because of the growing expense of entitlement programs. The primary obstacle to reform remains the political risk associated with advocating for change. Still, the current budget process isn’t making it any easier for Congress to find its way toward a solution. Before it’s too late, Congress should rethink the budget process to draw more attention to the actual problem and to develop workable and realistic options for addressing it.