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WebMemo #911 on Federal Budget

November 9, 2005

The Deficit Reduction Act: One Small Step for the House

By and

The House's Deficit Reduction Act contains $53.9 billion in budget savings over the next five years aimed at reducing the deficit. Among other things, reconciliation bills are a way for Congress to reduce spending on mandatory programs such as Medicare and Medicaid that normally are allowed to grow on autopilot every year. These budget savings are a key feature of the House leadership's four-point plan to pay for new hurricane relief and recovery and to reduce overall spending.[1] This bill is one small step for the House of Representatives on the return path to fiscal sanity.

Reducing Growth

Despite the "sky is falling" rhetoric warning of the dismantling of government, the budget reconciliation savings are exceedingly modest. The House's $54 billion of reconciliation savings represents just half of 1 percent of the $7.8 trillion entitlement spending planned over the next five years. The challenge is no greater than that facing a family of four making $50,000 a year and suddenly faced with the need to pay off a $250 emergency room bill over a five-year period.

The table below illustrates these savings in a different way. Rather than imposing massive cuts in spending, these savings only slow the growth in spending, and even this is very modest. Following a 28 percent increase since 2000, the reconciliation bill would reduce the mandatory spending growth rate from 39 percent down to 38 percent over the next five years. Medicaid's growth rate would drop from 41 percent to 39 percent. Food stamps would barely be affected at all. The steep spending increases since 2000 would still be followed by additional spending increases.

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Not only is this $53.9 billion in savings extremely modest, but over $18 billion of the savings actually comes from new or additional revenues from pension insurance premiums, proceeds from spectrum auctions, and new lease revenues for oil and gas to increase our supplies of energy.

Past Reconciliation Bills

Historically, reconciliation bills have been substantially larger than the 2005 legislation. The three reconciliation laws enacted since 1990 reduced five-year projected spending by an average of $238 billion ($308 billion adjusted for inflation)-seven times more than the current legislation.

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Good Steps to Controlling Program Growth

Some of these savings, most notably the changes in Medicaid and food stamps, have been maligned as devastating to the poor. In fact, these reforms are good first steps that lay important groundwork for future reform efforts and are designed to ensure that our most vulnerable still have a safety net.

Food Stamps: This bill would eliminate a quirk in the law that allows people who would not otherwise be eligible for food stamps to automatically qualify for benefits. These are people whose incomes are too high to qualify for food stamps, but because they receive other forms of TANF benefits such as job referral services, they are deemed eligible for food stamps. These automatic benefits would be ended. The bill would also extend the residency requirement for legal immigrants from five to seven years before they could be eligible for food stamp benefits. Legal immigrants are required to have sponsors who sign an oath that they will be responsible for them should they need assistance so that they will not be a burden on taxpayers.[2]

Medicaid: Three modest changes are proposed for Medicaid, one of the nation's most unsustainable health programs:[3]

  • Adjust the complex formulas for prescription drugs, based on more realistic drug cost estimates.
  • Eliminate gimmicks, such as transferring or hiding assets, that middle-class families use to qualify for Medicaid long-term care.
  • Provide states flexibility for benefit and cost-sharing. States could provide different benefits to specific populations that have varying health care needs. With states expanding Medicaid coverage higher up the income scale, cost-sharing allows them to differentiate between the truly indigent and those with some financial means.

Other Important Reforms

Several other important policy changes included in the Deficit Reduction Act would result in new or additional revenues. While these are not cost-saving measures, they are nonetheless important changes that merit consideration.

Pension Benefit Guarantee Corporation (PBGC): PBGC insures the pensions of millions of American workers by guaranteeing that it will pay some portion of the pensions for companies that go bankrupt. Many of these plans are vastly underfunded and thus have huge liabilities. Bankruptcies in the steel and airline industries have already passed huge pension obligations on to PBGC. According to the CBO, PBGC's current $23 billion liability could grow to $142 billion. PBGC income covers pension plans' payment of a $19-per-worker annual insurance premium. This premium has not been increased since 1991. This bill would increase these premiums to $30 per participant (representing wage growth since 1991) and establish a $1,250 per retiree premium for three years for companies that terminate their plans, ensuring that companies maintain a financial responsibility for their plans once they emerge from bankruptcy.[4] These changes would generate $6 billion in premium revenues, which would be used to pay pension benefits.

Increase America's Access to Energy Supplies: As gasoline prices soared after the hurricanes, and given concerns over the skyrocketing price of natural gas as winter approaches, it is clear that other sources of domestic energy supplies must be developed. This bill would open up access to a very small portion of ANWR (Arctic National Wildlife Refuge) and would show that Congress is serious about increasing our supplies of domestic energy.

ANWR is estimated to contain between 5.7 billion and 16 billion barrels of oil, which could translate to nearly a million barrels of oil per day for several decades. Further, experience elsewhere in Alaska, such as in Prudhoe Bay, has shown that this drilling can be done without harming the environment.[5] Opening up access to ANWR would result in $2.5 billion in leasing revenues.

The bill would also allow states to states to have discretion over whether to allow new leasing for oil or natural gas within 125 miles of their coastlines. This is another important step toward opening up access to vast reserves of oil and gas and allows states a lead role in making these decisions. Technology has vastly improved in recent years, making exploration much safer and more environmentally friendly. Indeed, despite the devastation that Hurricanes Katrina and Rita brought to the Gulf Coast, they did not cause any major spills of oil or gas.[6] This proposal is estimated to generate nearly $1 billion in revenues.

Lawmakers Must Go Further
The modesty of the current reconciliation bill illustrates how much further Congress and the President must go to rein in runaway spending. Federal spending has surged 33 percent since 2001 to a peacetime record of $22,000 per household. Lawmakers face the following challenges:

  • Medicare expanding by 9 percent annually, with an unaffordable prescription drug entitlement scheduled for implementation on January 1, 2006. This entitlement is projected to cost $724 billion over the next decade and as much as $2 trillion the following decade.
  • Medicaid growing by 8 percent annually.
  • Social Security increasing by 6 percent annually as the first of 77 million baby boomers move within two years of early retirement.
  • Important defense and homeland priorities.
  • Gulf Coast hurricane rebuilding.
  • Other congressional priorities such as education, veterans benefits, health research, highways, and pork-barrel projects.

In the absence of reform, these costs will drive federal spending to a point where, within a decade, a $7,000-per-household tax increase would be needed just to balance the budget. The only way to avoid a future of high taxes, fewer jobs, and anemic economic growth is by finally setting priorities and reining in spending, including fundamental entitlement reform. If lawmakers cannot even reduce the five-year growth rate of entitlements from 39 percent to 38 percent, there is little reason to expect they will make those difficult decisions next year and thereafter.

Congress should also consider eliminating all earmark spending from the bloated transportation bill, redirecting these funds to pay for hurricane relief and recovery, and should postpone the Medicare Prescription Drug bill for at least one year to evaluate how to pay for it without raising taxes or whether it should be substantially reworked.[7]

Conclusion

The savings proposed in the Deficit Reduction Act are small, both in real and in comparative terms, shaving just one half of 1 percent from all mandatory spending over the next five years. Watering down the bill to make it more politically palatable is the wrong thing to do. The federal budget is on a path that cannot be sustained and Congress must address the key causes of this spending even if it means making tough decisions. Though small, these measures are a good and necessary first step to show Americans that the House is serious about returning to fiscal sanity.

Alison Acosta Fraser is Director of, and Brian M. Riedl is the Grover M. Hermann Fellow in Federal Budgetary Affairs in, the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Show references in this report

[1]See Michelle Muccio and Alison Acosta Fraser, "House Leadership Reacts to Calls for Fiscal Responsibility," Heritage Foundation WebMemo No. 879, October 7, 2005, at

http://www.heritage.org/Research/Budget/wm779.cfm.

[3]See Nina Owcharenko "Baby Steps: Congressional Action on Medicaid Reform," Heritage Foundation WebMemo No. 898, October 27, 2005, at http://www.heritage.org/Research/
HealthCare/wm898.cfm
.

[4]See David C. John and Rea S. Hederman, Jr., "The House Pension Reform Bill: A Good, But Not Perfect, Start," Heritage Foundation WebMemo No. 867, July 28, 2005, at

http://www.heritage.org/Research/Social
Security/wm867.cfm
.

[5]See Ben Lieberman,"Opening ANWR: Long Overdue," Heritage Foundation WebMemo No. 692, March 17, 2005, at http://www.heritage.org/Research/Energy
andEnvironment/wm692.cfm
.

[6]See Ben Lieberman,"The Environmental Disaster That Wasn't," Heritage Foundation WebMemo No. 907, November 2, 2005, at

http://www.heritage.org/Research/Energya
ndEnvironment/wm907.cfm
.

[7]See Edwin J. Feulner, Ph.D., and Alison Acosta Fraser, "A Line in the Sand for Fiscally Responsible Lawmakers," Heritage Foundation WebMemo No. 874, October 6, 2005, at

http://www.heritage.org/Research/Budget/wm874.cfm.

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