V I E W P O I N T

A Constitutional Balanced Budget Amendment Threatens Social Security

The House Committee on the Judiciary recently reported out H.J. Res. 1, a proposal to write a balanced budget amendment into the Constitution. H.J. Res. 1 would require a balanced budget every year regardless of the state of the economy, unless a supermajority of both houses overrode that requirement. Unlike past versions of a balance budget amendment, H.J. Res 1 would also impose an arbitrary and unrealistic spending cap of 18 percent of Gross Domestic Product (GDP), a level not seen since 1965. The government would be allowed to exceed this cap only if approved by two-thirds of the full Congress. The proposed amendment would also limit any increase to the debt ceiling unless approved by three-fifths of the whole number of the House and Senate, and prohibit any increases in revenue unless agreed to by two-thirds of Congress.

As a result, this version of the balanced budget amendment would require draconian spending cuts of such a magnitude as to force policymakers to severely slash Medicare, Medicaid, and many other programs while opening the door to massive new tax cuts. At the same time, it would make it very difficult to achieve balance through revenue raisers such as tax increases or to raise the debt ceiling. Furthermore, the amendments mandate would negatively impact Social Security by diminishing the safeguards of the trust fund surpluses and burdening future generations.

Amendment Would Negatively Impact Social Security

The balanced budget amendment's mandate that total government expenditures in any year can not exceed total revenues collected in the same year poses far reaching implications for Social Security. This would mean the budget would be considered balanced when the deficit outside Social Security exactly offset the surplus inside Social Security. Therefore, the objective of accumulating a Social Security surplus to help the nation to pay for future retiree benefits would be stymied. Moreover, the benefits of current retirees would likely have to be financed in full by the taxes of those currently working.

The 1983 bipartisan Social Security commission moved Social Security from a pure "pay-as-you-go" system to one under which the baby boomers would contribute more toward their own retirement. As a result, Social Security has built up sizable surpluses that will peak in 2022 at $3.7 trillion. The balanced budget amendment, however, would undermine this approach to protecting Social Security and promoting generational equity. Under a balanced budget amendment, total government expenditures in any year - including expenditures for Social Security benefits - could not exceed total revenues collected in the same year, including revenues from Social Security payroll taxes.

Therefore, even though the Social Security trust funds have accumulated large balances, drawing down any part of those balances would mean the trust funds were spending more in benefits in those years than they were receiving in taxes. That would result in impermissible deficit spending. Such deficit spending could be offset by a corresponding surplus in the rest of the budget; however, achieving a sizable surplus in the rest of the budget would be a daunting and almost unachievable task, especially given the sharp increase in Medicare and Medicaid costs. The requirement that the constitutional amendment would impose in this area is akin to requiring a family to pay for a child's college tuition for a given year entirely out of that same year's earnings, rather than allowing the family to save money for this purpose in prior years or to borrow money for college that is paid back after the child graduates.

Amendment Would Favor the Wealthy Over Middle and Lower Income Americans

While the balanced budget amendment does not dictate any particular approach to deficit reduction, by altering established Congressional voting procedures it increases the likelihood that the fiscal policies adopted in coming decades will favor the well-off at the expense of middle and low income Americans. The amendment would require a two-thirds vote of the full membership of the House and Senate to raise taxes. Spending cuts, by contrast, would continue to require only a majority of those present and voting and could be passed on a voice vote.

Not only would this essentially rule out any revenue contribution to deficit reduction, it also would mean that once a new tax cut opened up, it would become virtually impossible to close. Wealthy individuals and large corporations receive most of their government benefits through tax subsidies. By contrast, low- and middle-income families receive most of their benefits through government programs. A constitutional amendment that makes it harder to reduce tax subsidies than to cut programs tends to favor the affluent over Americans of lesser means.

Furthermore, this balanced budget amendment would pave the way for significant new tax cuts. Because this amendment would cap federal spending at 18 percent of GDP, revenues could be reduced to that level as well. Most sponsors of the amendment favor making permanent all of President Bush's tax cuts of 2001 and 2003, including those for the wealthiest Americans. Those tax cuts give people with incomes of more than $1 million tax reductions that average more than $125,000 a year.

Amendment would Impose Arbitrary and Unrealistic Spending Cap

H.J. Res. 1 would limit annual federal spending to 18 percent of GDP. By writing an arbitrary and unrealistic cap on federal spending into the Constitution, H.J. Res. 1 would force draconian cuts in programs like Medicare and Social Security. The last time federal spending averaged 18 percent of GDP was in 1965. Coincidentally, that was the same year that the Medicaid and Medicare programs were established. Even during President Ronald Regan's administration, federal expenditures averaged 22 percent of GDP. Moreover, that spending level occurred at a time when no members of the baby boom generation had yet retired and total healthcare spending was one-third lower a share of GDP than today. Even if spending and revenues were in balance, a spending cap would limit the government's ability to address the needs of its citizens or respond to economic downturns and emergencies.

Amendment Could Increase the Risk of Government Default

Adding to these problems, the amendment would heighten the risk of a federal government default by requiring three-fifths vote of both the House and the Senate to raise the debt limit. Currently, only a simple majority is required to raise the debt ceiling, yet Congress has still found it increasingly difficult to secure the votes needed.

Consider the scenario where budgets thought to be balanced at the start of a fiscal year fall out of balance during the year as a result of factors such as slower-than-expected economic growth or natural disaster. If sizable deficits emerged with only part of the year remaining, Congress and the President may be unable to agree on a package of budget cuts needed to restore balance in the remaining months of the year. As a result, Congress may be unable to amass three-fifths majorities in both chambers to raise the debt limit and allow a deficit. The President may be bound, at the point at which the "government runs out of money," to stop issuing checks.

Government Relations and Policy, July 2011