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
This bill is one small step for the House of Representatives on the
return path to fiscal sanity.
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.
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
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.
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.
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.
Three modest changes are proposed for Medicaid, one of the nation's
most unsustainable health programs:
- Adjust the
complex formulas for prescription drugs, based on more realistic
drug cost estimates.
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.
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
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.
These changes would generate $6 billion in premium revenues, which
would be used to pay pension benefits.
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.
Opening up access to ANWR would result in $2.5 billion in leasing
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.
This proposal is estimated to generate nearly $1 billion in
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
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
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
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
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