Analysis: How will the President's FY 2008 Budget Process Proposals Affect Social Security and Medicare?

President Bush has made it clear he intends to target Social Security, Medicare and other entitlement programs, both directly through specific budget cuts and indirectly through automatic budget mechanisms that are designed to minimize Congressional input and accountability. In remarks anticipating his budget proposals, the President stated: “In the long run, the biggest challenge to our nation's economic health is the unsustainable growth in spending for entitlement programs. To solve the problem, we need to cut entitlement spending.”

The indirect budget process proposals scattered throughout the FY 2008 budget are highlighted below. It is clear from the available descriptions that cumulatively they are intended to pave the road for major spending cuts in Social Security and Medicare.

Notably, the President continues his steadfast refusal to acknowledge what many experts have accepted: that our long-term budget cannot be balanced through program cuts alone and that the revenue side of the budget equation is just as critical. The President's 2008 budget ignores this important fact, proposing significant new limitations on Social Security and Medicare in the form of various automatic cutting mechanisms, without proposing any limitations at all on new tax cuts.

The President's budget continues a lopsided approach to fiscal discipline by again proposing one-sided PAYGO rules .

Historically, PAYGO rules have been successfully used to reduce budget deficits by offsetting the costs associated with tax cuts and mandatory spending increases. The President proposes to enforce only one part of the PAYGO rule by preventing increased mandatory spending which includes both Social Security and Medicare from adding to the deficit. To achieve this goal, any legislation that increases mandatory spending would trigger an automatic sequestration (cut) of mandatory programs intended to offset the additional spending. Remarkably, revenues are not subject to a similar limitation, allowing tax cuts to be expanded unrestrained, irrespective of how much they increase the deficit. Further, the proposal prohibits improvements to mandatory programs from being financed from revenue increases. In other words, the President would create a process in which the only way to “reform” mandatory programs would be to cut them.

The Administration proposes to limit Congress' ability to make improvements to Social Security and Medicare based on imprecise and uncertain long-term projections.

Specifically, the Administration proposes two different budget-cutting mechanisms to address what it terms the “long-term unfunded obligations of entitlement programs” – terms which are not explained in the budget materials. In other sections of the budget, the President has supported the use of “infinite horizon” projections to forecast program finances beyond the traditional 75-year window and into infinity. The National Committee believes it is impossible to quantify costs over an infinite budget horizon because of the extreme difficulty of making economic projections that span centuries of time. The non-partisan American Academy of Actuaries has also criticized infinite horizon projections, stating they provide little, if any, useful information about the program's long-range finances and mislead individuals into believing that the program is in far worse financial condition than is actually indicated. The President's budget adopts the goal of reducing these highly speculative “long-term unfunded obligations”, and proposes two mechanisms for achieving that goal.

The first would establish a point-of-order against any legislation that worsens the undefined “long-term unfunded obligations” of Social Security, Medicare, Federal civilian and military retirement, veteran's disability compensation, and Supplemental Security Income. Creating a point-of-order effectively prohibits legislation from passing Congress unless it garners the votes of three-fifths of the Senate, giving a minority of forty Senators the ability to block any legislation which would improve Social Security and Medicare. Current budget rules already require a three-fifths vote of the Senate to pass legislation that would weaken the finances of the Social Security and Medicare Trust Funds in either the short-term or in the long-term (defined as the traditional 75-year period used to calculate Social Security solvency). Therefore, one could infer that this is an attempt to implement the President's “infinite horizon” timeframe. The President proposes to include programs in addition to Social Security and Medicare once actuaries are able to develop long-term estimates.

The second budget cutting mechanism is a proposal to require a report by the Administration on any enacted legislation in the previous year that worsens the unfunded obligations of the programs outlined above. The National Committee believes such a report is duplicative in the case of Social Security and Medicare because Congress already receives an annual Trustees report which shows the most recent estimates for Social Security and Medicare finances over the next 75 years, taking into account any enacted legislation.

The President proposes arbitrary and automatic cuts in the Medicare program based on a skewed 45% trigger.

The Medicare Modernization Act of 2003 (MMA) required Medicare's trustees to project the point at which general revenues will finance at least 45 percent of Medicare's outlays. If the trustees project in two consecutive reports that the 45 percent cap will be reached within the subsequent six years, they are required to issue a “warning” which is designed to trigger Presidential action and Congressional review. At that time, the President is required to submit proposals to reduce the contribution of general revenues below the 45 percent “trigger”, which would then be subject to procedures that fast-track legislative consideration in Congress. The 45 percent threshold was an arbitrary limit included in the MMA without hearings or public review. Any legislative proposals that reduce or eliminate the arbitrary 45 percent limit must be considered under normal standing rules and cannot receive expedited consideration. This leaves only legislation implementing benefit cuts or reductions in provider payments eligible for expedited review, making it much more likely to be enacted. Medicare's Trustees are expected to issue the second funding warning in their 2007 Report.

The President's 2008 budget builds on this flawed budget cutting mechanism by proposing an automatic reduction in the rate of Medicare growth if the 45 percent cap is exceeded. The reduction would begin as four-tenths of a percent reduction to all payments to providers in the year the threshold is exceeded, and would grow by four-tenths of a percent every year the shortfall continues to occur. The National Committee opposed the establishment of the 45 percent cap because it represents an arbitrary measure of the program's health and prohibits the consideration of all solutions to the program's long-term shortfall. Further, it ignores Medicare's financing structure and prohibits the use of increased revenues to address problems facing both the Medicare program and the U.S. health care system. The additional proposals to make the cap more effective merely compound its problems.

The President proposes another arbitrary funding limit for the Social Security disability program.

The budget creates what it terms a “DI Funding Warning” if the Trustees project that DI trust fund has a negative cash flow that is more than 10 percent of program cost for four consecutive years in the upcoming 10 years. Once the funding warning is triggered, the President would propose legislation to respond to the warning within 15 days after the date of the next Budget submission; the Congress would then consider this legislation.

The Administration proposes to set discretionary spending limits from FY 2008 until 2012 at unrealistically low levels. 

These limits reflect spending well below expected inflation and, in the case of programs providing benefits to older Americans, are not proposed at levels that would keep pace with the additional needs of an aging society. Any legislation that exceeds these unrealistic discretionary caps would trigger a sequester (automatic spending cuts) of all nonexempt discretionary programs.

The President proposes that Congress give him line-item authority. 

Under the President's proposal, the President could propose legislation to rescind spending, and the Congress would be obligated to vote quickly on that package of spending cuts, without amendment. The National Committee has opposed past legislation on the line-item veto for the following reasons:

• The 1983 amendments to extend Social Security's solvency included a number of carefully crafted compromises involving both revenue enhancements and benefit cuts. Giving the President the power to unravel such compromises by later vetoing revenue or potential benefit enhancements would make finding future concessions virtually impossible, and would poison the bipartisan atmosphere needed to enact meaningful reform.

• Rushed consideration of the President's proposed spending cuts would undermine current Senate rules designed to protect Social Security by requiring extended debate on any legislation making changes to the program.
  

• Giving the President expansive authority to veto spending, but preventing him from vetoing tax provisions is another example of one-sided budget discipline.

The President proposes a new mechanism for continuing resolutions that would likely lead to spending cuts and give the President much more power in the appropriations process.

If an appropriations bill is not signed by October 1 st of the new fiscal year, funding would be automatically provided at the lower of the President's Budget or the prior year's funding level. Under this proposal, Congress could pass an appropriations bill that the President refuses to sign. Instead of vetoing the bill, the President could just wait until October 1 st and have his original request or last year's appropriation become law.

The President proposes to establish bipartisan Results Commissions and a Sunset Commission with broad powers to cut funding to the programs serving our nation's seniors.

The Results Commissions would consider and revise administration proposals to restructure or consolidate programs or agencies to improve their performance. The Sunset Commission would consider Presidential proposals to retain, restructure, or terminate agencies and programs according to a schedule set by the Congress. Agencies and programs would automatically terminate according to the schedule unless reauthorized by the Congress. The National Committee was actively involved in opposing similar commissions proposed last year. These commissions are often given broad authority to make recommendations to Congress to consolidate and terminate virtually every federal agency and program. Under similar proposals, Congress is under severe time constraints to evaluate the recommendations, and is limited to an up-or-down vote on the final report. Furthermore, we are particularly concerned that these commissions could be used as a vehicle to pass legislation that privatizes Social Security and drastically cuts Medicare, Medicaid, veterans' benefits, and Older Americans Act programs.

Government Relations and Policy, February 2007