Baucus Plan Would Raid Social Security

The health legislation sponsored by Senate Finance Committee chairman Max Baucus (D., Mont.) received an apparent boost when the Congressional Budget Office stated it would reduce the budget deficit by $81 billion over the next ten years. Obama administration budget director Peter Orszag crowed that the CBO scoring "demonstrates that we can expand coverage and improve quality while being fiscally responsible."

But the CBO analysis actually leads to a very different conclusion: that in a classic "raid" on Social Security, Baucus's ostensible fiscal responsibility depends on raising Social Security taxes today to paper over new health spending, ignoring that those increased Social Security taxes imply higher benefit costs down the road. This marks yet another gimmick in a health-reform debate defined by contrivances.

Orszag recently outlined the Obama administration's standards for health-care financing, saying that "health care reform must be deficit neutral over the next decade (as well as being deficit neutral in the tenth year alone)." Balancing revenues and costs over the next ten years purportedly addresses short-term deficit concerns, while balancing in the tenth year signals that a plan won't generate longer-term shortfalls. President Obama says he will not sign legislation that fails these tests.

But the devil is in the details of the CBO memo.

Unlike other congressional proposals, the Baucus legislation appears to meet Obama's criteria. Baucus's plan purportedly would improve the budget balance by $81 billion from 2010 through 2019, and in 2019 itself would cut the deficit by $12 billion. It's no surprise the media treats Baucus's plan as if it belongs to Obama himself.

But the devil is in the details of the CBO memo. CBO breaks down the Baucus plan's budgetary effects into those occurring "on budget" (where the substantive policy changes are) and those "off budget" (meaning through the Social Security program). The Baucus plan's on-budget provisions would reduce the ten-year budget deficit by a tiny $1 billion and in 2019 would increase borrowing by $6 billion. In the real world, where entitlement costs rise faster than projected and Congress fails to implement promised cuts to Medicare spending, the Baucus plan will doubtless generate significant deficits.

Meanwhile, the Baucus plan's fiscal skullduggery takes place off-budget. Social Security revenues would increase by $80 billion over ten years, with an $18 billon increase in 2019 alone. Around 3 million individuals would leave employer-sponsored health coverage--which is exempt from taxes--to purchase insurance through a subsidized "exchange." Leaving employer-sponsored coverage would raise workers' taxable wages and thereby boost Social Security revenues. Millions more would trade a portion of their insurance benefits for higher wages to avoid a new tax on high-cost policies. By skimming the new Social Security taxes, the Baucus plan appears to significantly cut the deficit when, in truth, it balances only by the skin of its teeth.

This is perhaps the clearest example of "raiding the trust fund" on record. Democrats and Republicans have long believed that Social Security surpluses encourage the rest of the budget to run larger deficits, as borrowing from Social Security does not increase the measured budget deficit or the publicly-held national debt. But it's difficult to tell whether any particular legislation comprises a "raid," since the legislation might be passed even in the absence of Social Security surpluses.

In the case of the Baucus proposal, however, it is incontrovertible. The plan does not simply rely on existing Social Security surpluses but creates new ones to offset higher spending on health coverage. Without new Social Security revenues the plan would not balance and, if the president is to be believed, would face a presidential veto. It's that simple: no new Social Security taxes, no new spending.

A health debate that began with earnest claims that we could "bend the cost curve" to cut costs while increasing quality has devolved to a farce in which vastly increased government spending is papered over with implausible spending cuts and dubious bookkeeping.

Andrew G. Biggs is a resident scholar at AEI.

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About the Author

 

Andrew G.
Biggs
  • Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

    Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President's Commission to Strengthen Social Security. Biggs has been interviewed on radio and television as an expert on retirement issues and on public vs. private sector compensation. He has published widely in academic publications as well as in daily newspapers such as The New York Times, The Wall Street Journal, and The Washington Post. He has also testified before Congress on numerous occasions. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future.

    Biggs holds a bachelor’s degree from Queen's University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

  • Phone: 202-862-5841
    Email: andrew.biggs@aei.org
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    Name: Kelly Funderburk
    Phone: 202-862-5920
    Email: kelly.funderburk@aei.org

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