The Big Fix
By: Source: AARP Bulletin Today Date Posted: 2004-12-01 16:13:00-05:00
During his campaign President George W. Bush advanced an ambitious agenda for his second term—an agenda that, if enacted, could change the federal tax structure that’s been in place since the days of Woodrow Wilson; overhaul Social Security, one of the underpinnings of the New Deal; transform the way many Americans obtain health insurance; and continue his first-term initiative of modernizing Medicare.
Whether President Bush can achieve his goal of creating what he calls an "ownership society" depends on two unknowns—the ballooning federal budget deficit and the support of Congress—and one certainty: the wave of baby boomers about to reach retirement age.
"On his watch, the first boomers will become seniors," says Robert Bixby, executive director of the Concord Coalition, a nonpartisan organization that advocates fiscal responsibility. The arrival of an estimated 77 million new beneficiaries on the government’s doorstep—starting, in some cases, as they turn 62—will dramatically and unavoidably increase federal spending at the same time their payroll contributions are shrinking.
Here’s a look at some of the president’s chief legislative and policy goals—those, in particular, that directly affect older Americans—and the hurdles the administration faces in putting them in place.
Social Security
"I’ve earned capital in this election and I’m going to spend it for what I’ve told the people I’d spend it on," Bush promised the day after the election. Overhauling the Social Security system is high on his list.
Although the president has not laid out specifics, he favors the creation of individual accounts that would, for instance, allow employees to divert from 2 to 4 percent of their payroll taxes (up to $1,000 annually), currently invested in government-guaranteed securities, to private investment accounts. While corporate bonds and equities have higher expected returns than government securities, they also carry a higher degree of risk, which troubles some experts.
"You’re placing a significant amount of retirement income at the mercy of the stock market," says Robert Greenstein, the founder and executive director of the Center on Budget and Policy Priorities, a Washington-based research organization. While some Americans could reap windfalls, he says, "you’d likely also have a significant number of losers, and they could well be the people who could least afford it."
As now proposed, the use of individual accounts would be voluntary and involve only a portion of overall payroll tax deductions. But some critics worry that the proposal could be a foot in the door, with the ultimate goal of replacing Social Security entirely.
Risk is just one concern. The price tag is another. Some experts estimate that the transition to a system of private accounts could cost the Social Security trust funds as much as $2 trillion or more in lost revenue. The nonpartisan Congressional Budget Office has projected that, even without this loss of revenue, Social Security payouts will exceed revenues by the year 2019, though because of accumulated surpluses the system is expected to remain solvent at least through 2042.
To pay for these changes in Social Security, President Bush has vowed not to raise taxes but instead to impose "spending discipline." Budget experts like Greenstein are skeptical. "Unless we think we will start to cut defense and antiterrorism spending," he says, "it’s hard to believe we can get the extra money without cutting into Medicare."
Taxes
"We must reform our complicated and outdated tax code," Bush has said. "I don’t believe we need to raise taxes. I’ve said that to the American people. And so, the simplification [of the tax code] would be the goal."
As with his plans for Social Security, Bush has not laid out specifics for this priority item but has hinted that he is willing to close special-interest loopholes and might even support a national sales tax, which he’s called "the kind of interesting idea that we ought to explore seriously." A national sales tax or another proposal—a so-called flat tax (which taxes all income at a single rate and eliminates most deductions)—would replace the progressive income tax, in which higher levels of income are taxed at higher rates. The president has promised to name a bipartisan commission to study the various proposals and make recommendations next year.
A more immediate goal of the Bush administration is to make permanent the 2001 and 2003 tax cuts that are currently set to expire in 2010. The president has already called on Congress to do that. Here again, the projected tab is hefty. The Brookings Institution has estimated that the loss of tax revenue could amount to $1.7 trillion through 2014.
Bush has not addressed another tax issue: the alternative minimum tax (AMT), established more than three decades ago to ensure that the nation’s wealthiest pay at least some income tax. For most of its existence, the AMT has affected few taxpayers. But because it is not indexed for inflation, its impact is expected to grow rapidly in coming years and affect about a third of all taxpayers in 2010, not all of them wealthy, offsetting benefits of the Bush tax cuts. Brookings economists estimate that the 2001 tax cut will more than double the number of people subject to the AMT by 2010, from 14 million to 33 million.
In the past, Congress has made temporary adjustments in the AMT, but pressure is mounting for a thorough overhaul, which could further affect revenue projections.
"There are huge fiscal consequences if you talk about making the tax cuts permanent and funding personal [Social Security] accounts," argues the Concord Coalition’s Robert Bixby. Conservative economist Bruce Bartlett, a senior fellow with the Dallas-based National Center for Policy Analysis, says Bush ultimately can’t hope to overhaul both Social Security and the federal tax code during his second term. Given that reality, Bartlett argues, tax reform is a higher priority.
Health Insurance
"In an ownership society, more people will own their health plans," President Bush declared in his acceptance speech to the Republican National Convention in September. Reforming the current system, he says, will enable many uninsured Americans to obtain coverage for themselves and their families.
As with individual Social Security accounts, the president proposes a system of individual health savings accounts, gradually phasing out employer-provided insurance. (Some 60 percent of Americans currently obtain health insurance through their employers, though that percentage has been declining.) In its place would be a tax credit that could be applied either to the purchase of conventional insurance or to the purchase of a low-premium, high-deductible health plan with a health savings account to offset expenses of the deductible.
Proponents of such proposals say that the goal is to encourage health consumers to spend more wisely. Increased competition will ultimately drive down the cost of health services, they say. The Bush administration also favors the creation of health plans by trade, industry, professional and charitable organizations to expand purchasing power for members.
The administration estimates the cost of the health savings account tax credit to be $70 billion in lost revenue over 10 years. But the White House also believes the program will drive down health care costs, which in 2002 (the most recent year for which figures are available) totaled $1.6 trillion, up 9.3 percent over the previous year. The federal Centers for Medicare & Medicaid Services projects that all spending on health care will rise, on average, about 7 percent a year over the next decade, compared with an expected growth in gross domestic product of about 3 percent a year.
Critics of the president’s plan argue that it would have several negative effects. By encouraging employers to stop providing coverage for their employees (or at least for newly hired workers), they say, it could boost the number of uninsured Americans—by as many as 1.4 million people, by one estimate. Another concern is that health savings accounts and tax credits would appeal to young, healthy workers who would opt out of employer-provided insurance programs, leaving behind in those programs older, sicker workers. That in turn would drive up costs for employers. Critics also argue that the tax credit wouldn’t be large enough to allow many low- and moderate-income families to buy insurance coverage, forcing them to spend more money out of pocket. Finally, they say, those who would benefit most from the tax credit are likely to already have insurance.
Medicare
"When I came to office [in 2001] we had a problem in Medicare," the president told a Florida audience before the election. "Medicine was changing; Medicare was not." During his first term, Bush signed the Medicare Modernization Act of 2003, providing prescription drug coverage for Medicare recipients beginning in 2006. The Congressional Budget Office estimated the cost of the new law to be at least $395 billion over the next decade, a figure, it later turned out, that Medicare’s chief actuary had figured was $140 billion too low.
That number pales, however, in comparison with costs projected for the second decade, when the price tag may soar to as much as $2 trillion, thanks to the addition of baby boomers to the Medicare rolls.
As with Social Security and health insurance, the Medicare Modernization Act also encourages older Americans to enroll in private plans. In an assessment of the new law, health care analysts at the accounting firm PricewaterhouseCoopers raised the specter that as the deficit worsens Medicare may become the target of budget cutting, leading providers to drop out of the program.
Robert Greenstein of the Center on Budget and Policy Priorities sees a showdown coming as early as spring.
"If you try to take action to deal with the deficit, while making the tax cuts permanent and adding new tax cuts, then the only way that you can make significant progress on the deficit is by starting down the path of increasingly large cuts in domestic programs," he says. "I expect to see in the first six months of 2005 major proposals that would put Medicare and Medicaid, in particular, in jeopardy of large cuts."
Those cuts, Greenstein predicts, could come in the form of reconciliation rules attached to budget bills. Such rules set specific reductions in entitlement programs. Social Security is exempt; Medicare is not.
Congress could also impose a cap on total federal spending for entitlement programs other than Social Security. Such a cap could rise annually at a rate not to exceed the general inflation rate, according to Greenstein. But that, he says, "is well below the rate at which health care costs are growing. … Medicare and Medicaid will no longer be allowed to keep pace." Such cutbacks could be felt as early as next year, he says.
The Economy and the Deficit
"The key to making sure that the deficit is reduced is for there to be, on the one hand, spending discipline," President Bush said on Nov. 4. "Secondly, the other way to make sure that the deficit decreases is to grow the economy."
The federal budget deficit remains the elephant in Washington’s living room—something most know about but are loath to deal with. Bush has vowed to halve the deficit, now estimated by the Congressional Budget Office to be $422 billion, by 2009.
Although annual deficits are expected to decline over the next decade in relation to the percentage of gross domestic product, the cumulative 10-year deficit by 2014 is projected to be $2.3 trillion.
But those numbers are suspect, says Robert Bixby of the Concord Coalition. "The president’s budget greatly understates likely expenses and greatly overstates revenues," he says. A major expenditure not factored in is the ongoing war in Iraq and Afghanistan. The president’s budget also assumes a freeze on nondefense appropriations, which Bixby thinks is "very unlikely."
"Even the Republicans in Congress would find that hard to sustain," he says. "You might be able to do it for a year, but not much longer."
Bixby criticizes the Bush administration for playing down the budget deficits. "Our concern is if we get used to deficits, they’ll get bigger," he says. "It becomes a generational transfer where the consequences of these debts will be visited upon our children and our grandchildren."
Stem Cell Research
"Embryonic stem cell research requires the destruction of life to create a stem cell," Bush said during the second presidential debate. "I think we’ve got to be very careful in balancing the ethics and the science. … Because science is important. But so’s ethics, so’s balancing life. To destroy life to save life is one of the real ethical dilemmas that we face."
In 2001 Bush signed an executive order limiting federal research funding for stem cell research to the 60 embryonic stem cell lines, or colonies, then in existence. "My position on these issues is shaped by deeply held beliefs," he said at the time.
Embryos are destroyed to harvest the stem cells. Bush has increased federal funding for research on adult stem cells, but experts believe embryonic cells hold greater promise for medical breakthroughs.
Since his decision three years ago, only 15 of those lines remain available, and they have become contaminated, rendering their use in human experiments risky. Because of the lack of additional lines of embryonic cells, many scientists argue, research into spinal cord injury and such diseases as Alzheimer’s, Parkinson’s, juvenile diabetes and heart disease has been slowed.
Without public funding, embryonic stem cell research has not attracted much private investment. But the funding drought may be over. On Nov. 2, 60 percent of California voters supported a ballot initiative that will create and fund an Institute of Regenerative Medicine to conduct embryonic stem cell research. The state will contribute up to $350 million a year over the next decade for research.
California’s decision may impel other states to take similar action. New Jersey, for example, has authorized funding for the Stem Cell Institute of New Jersey, and Wisconsin has similar plans.
Bush’s Blueprint
By all accounts, Bush has set forth an ambitious blueprint for his second term. Time works for and against him. As a lame duck, he can focus on building a legacy and, if he chooses to do so, ignore political expediency. At the same time, however, members of his own party in Congress worry that some of his more controversial proposals, including the major changes in Social Security and Medicare that he has proposed, could cause a voter backlash in the 2006 midterm elections.
Bush addressed that issue at his first news conference after the election: "I’ve talked to a lot of members of Congress who are wondering whether or not we’ll have the will to confront entitlements, to make sure that there is entitlement reform that helps us maintain fiscal discipline. And the answer is yes."
Susan Q. Stranahan is a freelance journalist in Wynnewood, Pa.
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