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The Budget Squeeze

The Budget Squeeze. C. Eugene Steuerle The Urban Institute September 10 Stanford Institute for Economic Policy Research. OUTLINE. WHERE WE WERE IN 2000 Sources of Pressure: Revenues, Health, Retirement Programs, Future Labor Force Growth Slowdown Retirement & Health: Not Well Targeted

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The Budget Squeeze

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  1. The Budget Squeeze C. Eugene Steuerle The Urban Institute September 10 Stanford Institute for Economic Policy Research

  2. OUTLINE • WHERE WE WERE IN 2000 • Sources of Pressure: Revenues, Health, Retirement Programs, Future Labor Force Growth Slowdown • Retirement & Health: Not Well Targeted • Everything Else in Budget Squeezed • Impact on Democracy: Dead Men Ruling • TRENDS SINCE 2000 • Tax Cuts, Drug Benefits, Defense & International, Other Revenue Shortfall • $800 Billion Annual Shift from Surplus to Deficit • The Squeeze Tightens • THE IMPLICATIONS • Private: Restructuring of Labor Market • Public: Fundamental (Trillion Dollar) Shifts in Policy

  3. Social Security, Medicare, and Medicaid Outlays as a Percentage of GDP, Fiscal Years 1950-2075

  4. Pressures from Elderly Programs • People have been retiring earlier • People are living longer • Birth rates have fallen • Annual/lifetime benefits continue to rise • Health services grow & expand (quantity) • Healthcare insurance system reduces downward price pressures normal for a growing industry (price)

  5. Social vs. Legal Pressures • Only the change in birth rates indicates a growing need in society. • The other five are signs of increased well-being or legal promises to pay out more.

  6. Quantity Indices Over Time: Medical Care vs. Other Consumption Categories

  7. Price Indices Over Time: Medical Care vs. Other Consumption Categories

  8. Social Security and Expected* Medicare Benefits for Average-Wage, Two-Earner Couple

  9. Labor Force Projections(Annual Growth Rates) Labor Force Projections (Annual Growth Rates)

  10. Example of Shift in Resources Upon Retirement

  11. One Possible Reprieve • Despite debates over capital (individual accounts), the main problem is labor • Many so-called elderly are middle-aged • They still want to be productive • Government estimates may seriously understate potential labor demand for these workers

  12. Labor Force Participation: Males Aged 55 and Older vs. the Adult Population,1948-99

  13. Multiple Gains if Work Expands • Fewer beneficiaries • More national output, divided into: • More taxes for elderly programs • More taxes for children’s and other programs • More private wealth & income to be spread over fewer retirement years.

  14. Constricted Choices Among Elderly Programs • Locked-in guarantees and growth rates prevent • taking better care of truly old • removing inequities among beneficiaries • switching money toward long-term care • removing elderly from poverty

  15. Proportion of Social Security Benefits for Males Going to Those with More Than 10 Years of Life Expectancy

  16. Some Inequities • Current system discriminates: • single heads of household • receive less than married persons who contribute no more to system • two-earner couples • receive fewer benefits for the same levels of contribution when their earnings are split • some divorced persons • receive no share of their spouses’ benefits if married fewer than 10 years

  17. Long-term “Long-term” Care • There does remain a serious long-term care issue for the very old • By providing increasing amounts to those relatively younger, current system actually makes problem harder to solve

  18. Federal Outlays as a Percentage of GDP, 1962-2002

  19. Other Domestic Outlays as a Percentage of GDP, 1962-2002

  20. Reduction in Outlay Category as a Percentage of GDP, 1961-2002

  21. Dead Men (yes, they were men) Rule • Priorities set yesterday for the needs of tomorrow • Voters left with fewer choices • Unable to switch priorities (defense, education, homeland security, children)

  22. Source: Steuerle, Carasso, Bishop, based on data from Gale, Orszag, and the Tax Policy Center..

  23. 3.3% Source: Steuerle, Carasso, Bishop, based on data from Gale, Orszag, and the Tax Policy Center..

  24. Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.

  25. Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.

  26. Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.

  27. Source: Steuerle, Carasso, Bishop based on data from Reischauer, OMB, CBO.

  28. SOON…VERY SOON • ANY spending on education, environment, welfare, community development and most domestic programs must be paid for out of: • Deficits (but this can only be temporary) • Rescinding of tax cuts or tax increases • Pared growth in retirement and health spending • A very small international and defense presence

  29. CONCLUSION • Dead Men Rule by locking in future changes • Rest of government squeezed between lower taxes and higher retirement/health spending • Education/environment/discretionary programs get leftovers, if any • Automatic government (spending tomorrow’s money today) restricts choices among • programs in general • elderly programs as well • Fundamental restructuring of public budgets and private labor markets almost inevitable • Will it be done well?

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