A Constitutional Balanced Budget Amendment Threatens Social Security, Medicare and Medicaid

The Senate majority leadership intends to schedule a vote on a balanced budget amendment to the U.S. Constitution sometime in June.  On April 12, by a margin of 233 to 184, the House majority leadership failed to muster the 2/3 vote (290) needed to pass the proposed constitutional amendment.

The amendment to be considered in the Senate would likely require a balanced budget every year regardless of the state of the economy, unless a supermajority of both houses overrode that requirement. Previous versions of the amendment would have limited any increase to the debt ceiling unless approved by three-fifths of the whole number of the House and Senate, and prohibited any increases in revenue unless agreed to by two-thirds of Congress.

As a result, a 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 amendment’s mandate would negatively impact Social Security and Medicare Part A 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 cannot 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.

Following the recommendations of the 1983 bipartisan Social Security commission, Congress 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 2021 at $3 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 Also Preclude the Use of Reserves in the Medicare Trust Fund

The role of reserves held in the Medicare Part A Hospital Insurance trust fund is the same as Social Security.  While the current balance of Medicare trust fund reserves is about $200 billion, the constitutional amendment would prevent Medicare from drawing down those reserves to pay hospitalization costs since all federal expenditures, including Medicare payments, would have to be covered by revenue collected in the same year.

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 was enacted, it would become virtually impossible to roll it back. 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. Most sponsors of the amendment favor making permanent the tax cuts approved by Congress and signed into law by President Trump on December 22, 2017 (P.L. 115-97), including cuts for the wealthiest Americans and profitable corporations.

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 a 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 a 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.

NATIONAL COMMITTEE POSITION

The National Committee supports responsible government budgeting; however, we oppose a balanced budget amendment to the U.S. Constitution because the measure would significantly harm the economy, result in a government default and force severe cuts in Social Security, Medicare, Medicaid and other vital federal programs.  We urge all members of Congress to oppose this dangerous way to address the federal government’s long-term fiscal challenges.


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