The Washington Post November 11, 2013
Slowing the growth of U.S. debt By Martin Feldstein
The recently established House-Senate budget negotiating committee presents
the opportunity to solve two major national problems: preventing the future
explosion of the national debt and increasing current growth and
employment.
These problems have to be solved together. Because monetary policy can do
very little to stimulate demand, to have faster growth and more jobs, we
need a program of infrastructure spending and pro- investment tax changes.
But it would be irresponsible to add to the near-term deficit without
limiting the future growth of the national debt, which otherwise threatens
the long-term health of the U.S. economy.
Although the increased revenue resulting from the 2012 tax law and the
sequester-driven spending cuts have together reduced the near-term budget
deficit, the national debt remains above 70 percent of gross domestic
product, double its pre-recession level. The debt ratio will stay at that
level for the next few years but begin rising rapidly as the aging
population drives up the cost of Social Security and Medicare. The
Congressional Budget Office (CBO) estimates that absent changes to spending
or taxes, the U.S. budget deficit will exceed 100 percent of gross domestic
product (GDP) by 2038 and continue rising. Under the CBOs more realistic
alternative fiscal scenario, it could be nearly twice as high by 2038.
Preventing an explosion of the national debt requires slowing the growth of
the benefits of middle-class retirees. All other forms of government
spending on defense and non-defense programs have been cut to the lowest
share of GDP in four decades.
There is no shortage of ideas on how to slow the growth of Social Security
outlays. My preference would be to repeat the strategy enacted in 1983:
gradually raising the age at which individuals can receive full benefits.
In the 30 years since that compromise, life expectancy at age 67 has
increased by three years. Gradually raising the retirement age for full
benefits by three years would achieve substantial savings. Individuals
could, of course, continue to retire earlier with benefits adjusted.
Medicare costs are rising even more rapidly than Social Security benefits
because of the relative increase in the number of older old Americans who
consume more health services and because of desirable but cost-increasing
improvements in medical technology. Options to slow that growth include
increasing patients co-payments, which would encourage better decisions by
patients and doctors; raising the eligibility age to match Social Security;
or shifting to a premium-support system. Any of these would be better than
raising premiums for high-income retirees, which would be the equivalent of
an income-tax increase.
Negotiators face a potential impasse. Congressional Democrats and the White
House have indicated they would agree to reductions in Social Security and
Medicare only if Republicans agree to raise tax revenue. Republicans have
said that they would not accept higher tax rates on top of the rate
increases enacted in 2012.
*The key to a political compromise is to recognize that raising revenue
does not require increasing tax rates. Substantial revenue could be raised
by limiting the government spending built into the tax code. *
Current tax rules provide a wide range of subsidies that are equivalent to
government spending. The tax credits for buying a hybrid car or solar
panels, the deduction of mortgage interest expenses and the exclusion of
employer payments for health insurance are all indirect forms of government
spending. Republicans who would oppose direct outlays on these programs
should favor limiting the subsidies through the tax code. If Republicans
agree to raise revenue in this way, Democrats should recognize that this
meets their requirement for slowing the growth of Social Security and
Medicare.
It would be politically difficult to repeal any of these popular tax
subsidies. Better, then, to allow taxpayers to keep all of them but to
limit the amount that any taxpayer can save through these tax expenditures.
Limiting the resulting tax savings to 2 percent of the taxpayers total
income would reduce the 2013 federal deficit by $140 billion, nearly 1
percent of GDP, even if the deduction for charitable contributions is fully
retained. Of course, it would be better to start with a higher limit,
raising less revenue in the near term but gradually adjusting to the lower
rate.
A combination of changes in Social Security, Medicare and tax expenditures
that limits future budget deficits to 2 percent of GDP would cause the
national debt to grow more slowly than GDP until the ratio of debt to GDP
is again down to 50 percent. Annual deficits of just 1 percent of GDP would
put us on a path to a debt ratio of just 25 percent.
With these long-term debt improvements locked in by changes in tax rules
and in Social Security and Medicare, it would be desirable and responsible
to enact a very large five-year infrastructure program and changes in tax
rates that would stimulate immediate investments by corporations and
unincorporated businesses.
Martin Feldstein, a professor of economics at Harvard University and
president emeritus of the nonprofit National Bureau of Economic Research,
was chairman of the Council of Economic Advisers from 1982 to 1984.
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Received on Tue Nov 12 2013 - 08:50:21 EST
