Choosing the Nation's Fiscal Future (2010) / Chapter Skim
Currently Skimming:
9 Multiple Paths to Sustainability
9 Multiple Paths to Sustainability
Pages 173-186
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From page 173... ...
Two intermediate paths illustrate a possible tradeoff between new spending on public investments and spending for elderly oriented entitlement programs. These four paths do not by any means exhaust the panoply of potential policy solutions to the fiscal challenge, but they do provide some sense of the lower and upper bounds of the available choices and embody a range of philosophical values and views on government.
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From page 174... ...
LOW SPENDING AND REVENUES PATH The low path illustrates how revenue needs could be held close to their historic levels by adopting the low spending options for each of the three policy areas: see Figure 9-4 and (for the difference in spending and revenue levels between the low scenario and the study baseline) Figure 9-5.
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From page 175... ...
Fig9-3.eps growth of federal health spending, although systemic reforms that improve incentives, information, and efficiency might allow these painful and distortionary restrictions to be loosened eventually. Social Security growth would be reduced to a level that would allow payroll taxes to be maintained at current rates while putting the program on a course to solvency; benefit changes would be designed to have least effect on people with lowest earnings.
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From page 176... ...
would stay below the current average of advanced economies belonging to the Organisation for Economic Co-operation and Development. HIGH SPENDING AND REVENUES PATH At the other end of the spectrum, the substantial revenue increases assumed in the high path allow a smaller (though, in the longer term, still
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From page 177... ...
. Medicare and Medicaid spending would increase at a decreasing rate, eventually achieving zero percent excess cost growth.
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From page 178... ...
economy -- a share about as large as that in the Scandinavian countries or France today.1 Such comparisons are subject to the caveat that other countries may find themselves on a higher future spending trajectory as well, given that they are subject to similar pressures both from an aging population and the pressures of excess cost growth in the health care sector. The high revenues and spending path will appeal to those who want to preserve current program benefits wherever possible, and those who do not believe that it is possible to curtail health spending growth substantially without harm to health outcomes.
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From page 179... ...
. The intermediate-1 scenario, in other words, does more to constrain spending on the elderly to allow the federal government to take on some new responsibilities, make selective public investments for the future, and maintain defense spending at the baseline level.
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From page 180... ...
Medicare and Medicaid begin to escalate, this gap becomes progressively smaller and disappears by 2035. Thereafter, the revenue requirements for the intermediate-2 path are higher than those for intermediate-1.
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From page 181... ...
The lesson may be that a responsible fiscal policy can reassure financial markets and create room for the Federal Reserve to lower interest rates, helping to offset the contractionary effect of tighter fiscal policy. It is important to note, as mentioned in Chapter 2, that in estimating these scenarios we have made no effort to estimate how different mixes of spending and tax policies could alter future economic growth.
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From page 182... ...
Putting the federal budget on a fiscally sustainable path is not just an accounting exercise; distributional implications are also important. Although it would be useful to estimate how the four illustrative scenarios vary in their impact on people at different income levels, options for health, defense, and other domestic programs do not lend themselves to distributive analysis: the Medicare and Medicaid spending trajectories are not tied to fixed combinations of specific reforms; defense is a public good whose distributive implications are all but impossible to estimate; and the components of the aggregate-level options for other domestic programs are explicitly illustrative and, by definition, incomplete.
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From page 183... ...
A doubled delay to attain a sustainable debt-to-GDP ratio would thus require more than twice as large an increase in revenue, even with everything else unchanged. Second, during those 10 years the number of Social Security, Medicare, and elderly Medicaid beneficiaries would have been increased by retirement of additional baby boomers.
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From page 184... ...
Second, delaying increases in payroll taxation raises less revenue than needed for program solvency, particularly because of the slower growth of the labor force that is projected. Overall, our analysis shows that to achieve budget sustainability with delay, reforms would have to be tougher -- deeper spending reductions or higher tax increases or both -- which would make delayed reform more politically difficult than more immediate reform.
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From page 185... ...
4. Part of the added budget cost arises from additional health and Social Security benefits.
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