Third Way Perspectives
December 6th, 2013
by Jim Kessler
In a recent blog post, Paul Krugman writes of Third Way’s “fact-free denunciations of progressives for not being willing to cut entitlements.” In response, I offer three points.
First, Mr. Krugman says the “[Social Security] system might possibly have to pay lower benefits in the future.” If you believe the Congressional Budget Office or the Social Security Actuaries, there is no “might possibly” about it. Without changes to either benefits or revenue, the Social Security Trust Fund will be insolvent. The only question is whether that occurs in 2031 (CBO) or 2033 (the actuaries).
Second, our support for balanced fixes to Social Security and Medicare is not to reach some magic budget number, but based on the fact that over the past five decades the balance of federal spending has shifted. At the dawn of the Great Society in the 1960s, federal investments (as defined by the Office of Management and Budget) outstripped federal entitlement spending three-to-one. While that balance obviously needed to change to address poverty and elderly health care, by last year the ratio flipped to one-to-three. In ten years, the ratio will be five dollars for the three major entitlement programs for every one dollar in federal investments. As we’ve seen with the recent budget deals and sequestration, investment programs are the first on the chopping block and entitlements are treated as sacrosanct.
Third, Mr. Krugman says that it is his “strong guess” that Third Way means “raising the retirement age” to address Medicare cost containment. That is incorrect. We do not support raising the retirement age for Medicare eligibility. He also says that we do not offer any ideas to reduce Medicare spending, but on our website are several ideas to do so. They include means testing Medicare premiums for high income seniors, dealing with end of life care, bundled payments to improve care and reduce duplicative treatment, and medical homes. And of course, we fought alongside other progressive groups in Washington to pass the Affordable Care Act.
To be sure, Republicans have been intransigent in their refusal to consider new taxes and their opposition to the Medicare cost saving measures in the ACA. But we believe that Democrats must also be willing to take on some sacred cows if we are going to be able to invest in the future and meet our obligations to our seniors and our poor.
December 3rd, 2013
If you talk to leading progressives these days, you’ll be sure to hear this message: The Democratic Party should embrace the economic populism of New York Mayor-elect Bill de Blasio and Massachusetts Sen. Elizabeth Warren. Such economic populism, they argue, should be the guiding star for Democrats heading into 2016. Nothing would be more disastrous for Democrats.
While New Yorkers think of their city as the center of the universe, the last time its mayor won a race for governor or senator—let alone president—was 1869. For the past 144 years, what has happened in the Big Apple stayed in the Big Apple. Some liberals believe Sen. Warren would be the Democratic Party’s strongest presidential candidate in 2016. But what works in midnight-blue Massachusetts—a state that has had a Republican senator for a total of 152 weeks since 1979—hasn’t sold on a national level since 1960.
The political problems of liberal populism are bad enough. Worse are the actual policies proposed by left-wing populists. The movement relies on a potent “we can have it all” fantasy that goes something like this: If we force the wealthy to pay higher taxes (there are 300,000 tax filers who earn more than $1 million), close a few corporate tax loopholes, and break up some big banks then—presto!—we can pay for, and even expand, existing entitlements. Meanwhile, we can invest more deeply in K-12 education, infrastructure, health research, clean energy and more.
Social Security is exhibit A of this populist political and economic fantasy. A growing cascade of baby boomers will be retiring in the coming years, and the Social Security formula increases their initial benefits faster than inflation. The problem is that since 2010 Social Security payouts to seniors have exceeded payroll taxes collected from workers. This imbalance widens inexorably until it devours the entire Social Security Trust Fund in 2031, according to the Congressional Budget Office. At that point, benefits would have to be slashed by about 23%.
Undeterred by this undebatable solvency crisis, Sen. Warren wants to increase benefits to all seniors, including billionaires, and to pay for them by increasing taxes on working people and their employers. Her approach requires a $750 billion tax hike over the next 10 years that hits mostly Millennials and Gen Xers, plus another $750 billion tax on the businesses that employ them.
Even more reckless is the populists’ staunch refusal to address the coming Medicare crisis. In 2030, a typical couple reaching the eligibility age of 65 will have paid $180,000 in lifetime Medicare taxes but will get back $664,000 in benefits. Given that this disparity will be completely unaffordable, Sen. Warren and her acolytes are irresponsibly pushing off budget decisions that will guarantee huge benefit cuts and further tax hikes for Gen Xers and Millennials in a few decades.
As for the promise that unrestrained entitlements won’t harm kids and public investments like infrastructure, public schools and college financial aid, haven’t we seen this movie before? In the 1960s, the federal government spent $3 on such investments for every $1 on entitlements.
Today, the ratio is flipped. In 10 years, we will spend $5 on the three major entitlement programs (Social Security, Medicare and Medicaid) for every $1 on public investments. And that is without the new expansion of entitlement benefits that the Warren wing of the Democratic Party is proposing. Liberal populists do not even attempt to address this collision course between the Great Society safety net and the New Frontier investments.
On the same day that Bill de Blasio won in New York City, a referendum to raise taxes on high-income Coloradans to fund public education and universal pre-K failed in a landslide. This is the type of state that Democrats captured in 2008 to realign the national electoral map, and they did so through offering a vision of pragmatic progressive government, not fantasy-based blue-state populism. Before Democrats follow Sen. Warren and Mayor-elect de Blasio over the populist cliff, they should consider Colorado as the true 2013 Election Day harbinger of American liberalism.
This piece was originally published via The Wall Street Journal.
October 23rd, 2013
Starting this year, seniors new to Social Security can expect to be pickpocketed. While Congress was fighting over default, the Congressional Budget Office quietly moved up its projected date for Social Security insolvency to 2031. In that year, without a fix to the program, recipients will take an immediate and draconian 23 percent cut in benefits. So a majority of new retirees today will face a meaningful cut in payments in their lifetime.
We need to fix this, and the newly created budget conference appointed at the conclusion of the debt ceiling crisis is the place to do it. It may seem impossible for a dysfunctional Congress to touch the “third rail” of politics given its disappointing performance in all areas. But a deal on Social Security may not be as far-fetched as it seems.
First, there is more agreement on Social Security solutions among Democrats and Republicans than meets the eye. And second, a deal to fix Social Security may be the only way to make progress on every fiscal issue that concerns Democrats and Republicans—from sequester to the debt ceiling—providing an incentive for both parties to act.
October 21st, 2013
Perhaps we underestimate ourselves. Five years after the Lehman collapse triggered the deepest recession in eight decades, the middle class may be solving the vexing problems of income inequality and stalled wages on its own.
Faced with unemployment and dim job prospects, Americans made one significant change that should alter their fortunes and those of the middle class for decades: they went back to school. During the recession, there has been a sharp surge in the number of Americans who are getting a college degree. Read the rest of this entry »
July 3rd, 2013
In response to Jonathan Chait’s critique of our memo on the Four Fiscal Fantasies, let’s begin with two articles from this week. The first, in The Washington Post, shows that America today is spending less to stop the spread of AIDS in Africa than we did under President Bush. The second is a piece from Elizabeth Rosenthal of The New York Times showing the outrageous prices U.S. hospitals charge to deliver babies—charges far out of line with any other country and symbolic of the epidemic of high costs throughout our health care system.
The main point in our memo is that these problems are related.
- We have an entitlement system that provides critical economic security and stability to Americans, but it is rife with bloated health care costs that are slowly devouring everything else that government does.
- The main entitlement programs for the elderly—Social Security and Medicare—are on a path to insolvency.
- Raising new taxes on the wealthy—though necessary—won’t solve our problems.
- Acting now to fix entitlements is better and easier than waiting.
Our memo lays out these cases pretty explicitly, so let’s touch on just a few things.
June 28th, 2013
This piece was originally published in the Washington Post.
There is a rising chorus on the left, most recently articulated in an op-ed Monday by Neera Tanden and Michael Linden [“Deficits are not destiny”] of the Center for American Progress, that our fiscal conversation should be declared over and plans for meaningful entitlement reforms mothballed. These voices argue that we can have substantial new spending on public investments, a secure safety net, no middle-class tax increase — all without addressing entitlement spending.
Lo, if it were so. But the left’s reasoning is predicated on four fiscal fantasies that Democrats must see through if they hope to expand the economy, help the middle class and keep the safety net solvent.
Fantasy No. 1 is that taxing the rich solves our problems. Let’s say the top income tax rate were raised a whopping 10 points, to 49.6 percent — a level higher than anything under serious consideration. Tack on the “Buffett rule,” with its 30 percent minimum tax on millionaires to squash loopholes. And let’s take a whack at wealthy inheritances, cutting the estate tax exemption by about one-third and setting the rate on large estates at 45 percent.
If we leave entitlements be, our annual budget deficit in 2030 would still be $1.3 trillion in today’s dollars, not much different from the $1.6 trillion deficit we’d have if income tax rates for the wealthy are kept the same. Sure, raising some additional taxes on the wealthy is necessary, but it is not nearly sufficient.
Fantasy No. 2 is that “we can have it all” — a bigger safety net and more investments that spur growth and opportunity. Events of the past 50 years say the opposite.
In the mid-1960s, the federal government spent $3 on public investments for every $1 on the major entitlement programs. By the early 1970s, the ratio was one to one. Last year, it flipped. The federal government spent $3 on Social Security, Medicare and Medicaid for every $1 on federal investments, according to our analysis of data from the Office of Management and Budget. By 2022, the ratio will be one to five. In other words, entitlement programs are drowning out public investments just as international competition and technology demand that we need these investments the most.
That is a 50-year trend, but what is most mind-boggling is that some on the left still cling to a belief — bordering on faith — that if a spending program is worthy, voters will support it without trade-offs. Yet the evidence is clear that as Democrats have sought to increase spending beyond a certain point, voters have taken them to the woodshed. Recall 2010: The health-care bill (which our organization vigorously endorsed) exceeded the limits of what voters were willing to spend after the 2009 stimulus, auto rescue and bank bailout. That November, Democrats lost the House, Republicans controlled 29governorships and the tea party became dominant.
Fantasy No. 3 is that a delay on entitlement fixes is benign for the middle class. As evidence, some liberals point to this year’s Medicare trustee report, in which the program’s fiscal outlook — mercifully — improved. In truth, it improved from horrid to awful. We can’t make even that boast about Social Security, where the outlook is plain wretched. Over the past 10 years, the Social Security insolvency date had leapt forward from 2042 to 2033. The hope was that an improving economy would push the date farther out. It did not, and every indicator of Social Security health worsened between the 2012 and 2013 trustee reports.
If there is one message from the trustee reports, it is that every year we wait, the inevitable fixes to Social Security and Medicare get harder. Here is one example: Several years ago, proponents of an all-tax solution to Social Security solvency called for eliminating the cap on payroll taxes to solve the entire problem. Now they say it solves most of the problem. That’s because we waited too long. Eliminating the FICA cap — a step that we do not support — solves 79 percent of the problem. Now, supporters of a tax-only solution also call for adding a point to the payroll tax rate for all workers. That one point means a tax increase of $650 a year for a typical working family. Over the course of their working lives, it will come out to more than $20,000. Waiting is anything but benign.
Fantasy No. 4 is that the politics to fix entitlements will get better. In fact, the politics will get worse every election cycle. In 2012, one out of six voters was a senior citizen. By 2024, one in four will be, based on the Census Bureau’s Statistical Abstract. How will we possibly fix safety-net programs for the elderly then? The answer: on the backs of the working-age middle class.
The country and Democrats face real fiscal choices. Avoiding them in favor of fantasies is not the answer.