Building Abetter Future Chart Book

BUILDING A BETTER FUTURE D

AGE

C CH HART ART BO BO O OK K

EM G RA

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IN C M O

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SO C IAL SEC U RIT Y HEALT H C A RE T A X REFO RM

The Committee For A Responsible Federal Budget January 2000

About the Committee for a Responsible Federal Budget The Committee is a bipartisan, non-profit educational organization committed to educating the public regarding the budget process and issues that have significant fiscal policy impact. The Committee sponsors analysis and research, conducts educational symposia, and prepares and distributes educational materials. Goals The broad long-range goal is to educate the public on the federal budget process and on the need for discipline and order in making spending and revenue decisions. The immediate, specific goal is to point out the prospect and consequences of continuing to delay action to address the longer-term fiscal and social policy challenges facing the nation. The public must understand that such delay could lead to deficits much larger than the country faced in the last quarter century— deficits and debt so large as to threaten the very fabric of the country’s economic and political life. What We Do The Committee sponsors symposia on budget and economic issues. We provide speakers for civic, academic, and business groups, and hold Congressional breakfasts for Members of the House and Senate interested in dialogue on the budget and related issues. Committee staff and Board Members write about the budget and related issues for major media outlets, provide background information and educational materials, and help explain the budget and the budget process to many audiences. In the fall of 1982, the Committee launched an ambitious education and outreach program on the problem of the deficit. The Exercise in Hard Choices is to inform the American people of the nature and magnitude of the deficit and debt problems facing the country and the limited choices available to solve those problems. The Exercise is updated regularly to reflect the actual choices Congress and the Administration are considering to reduce the Federal deficit and reorder national priorities. The Committee provides the Exercise workbook to educational organizations and other interested parties at cost. The Committee is a 501[c][3] educational organization. All of its activities are funded through tax deductible contributions from individuals, foundations, corporations, and other interested groups. It accepts no government funding. The most recent version of The Exercise is called Building a Better Future: An Exercise in Hard Choices. In a joint effort with American Express Financial Advisors, we adapted The Exercise to address issues raised in the Fraying of America project. Over a-year-and-a-half, from materials development to completion, we held eight Exercises around the country. Thirty organizations participated and the project contributed greatly to this report. We thank everyone who played a part in this tremendous information-gathering, public education effort.

Table of Contents

Economics Demographics

1-5 6-15

Budget

16-28

Age and Incomes

29-34

Social Security

35-52

Health Care

53-58

Tax Reform

59-60

Consumer spending

Treasury collects payroll taxes and deposits them into the general fund and credits amounts not immediately required to pay benefits to the trust funds..

Outlays

Consumption

Federal Government Taxes (income, payroll, etc.)

Individuals

General Fund

Outlays (Benefits)

OASDI Trust Fund HI Trust Fund

Net personal savings takes the form of indirect investment (bank deposits, mutual funds, employersponsored retirement plans). Personal savings add to national savings.

Personal savings

Net National Savings (Financial Assets) Investment (Physical Assets)

Direct investment (e.g., homes)

Unified budget surpluses reduce outstanding public debt and add to national savings. Unified budget deficits decrease national savings. Deficits/Borrowing or Surpluses/Debt reduction

Public investment includes government spending for physical infrastructure (roads, buildings, etc).

Outlays

1

Net National Saving: 1960-1998 Net Government Saving

12.0%

Net Private Saving

Net National Saving

10.5% 10.0%

9.1%

Percent of Net Nationa Product

8.0% 6.2%

7.5%

6.5%

6.0%

4.4%

4.0% 2.0% 0.0% -2.0% -4.0% 1960-69

1970-79

* 1998 is first six months. Source: Committee for Economic Development

1981-89

1990-94

1995-96

1997-98 * 2

Savings Continue to Decline (In percentage of NNP) Govt Savings

Private Savings

Net Investment

14%

Net National Product

12% 10% 8% 6% 4% 2% -1%

1960-69

1970-79

1980-89

1990-94

1995-96

1996-97

-3%

Source: Committee for Economic Development, 1998. Committee for a Responsible Federal Budget

3

Savings Required to Achieve Desired Retirement Goals (as a percent of salary) Years to Retirement Desired Retiree Income as a Percent of Annual Salary

10

15

20

25

30

35

30%

36%

21%

13%

9%

6%

4%

40%

48%

27%

18%

12%

8%

6%

50%

60%

34%

22%

15%

10%

7%

60%

72%

41%

26%

18%

12%

9%

70%

84%

48%

31%

21%

14%

10%

Source: Committee for Economic Development, 1996.

4

Standards of Living More Than Doubled Between 1966-1996

$4,688 in 1996

Personal Consumption per capita (1996$)

$5,000 $4,500 $4,000 $3,500 $3,000 $2,500

$1,902 in 1966

$2,000 $1,500 $1,000 1965

1970

1975

1980

1985

1990

1995

Source: Economic Report of the President, February 1997. Committee for a Responsible Federal Budget

5

Decline in Working Age Population 1940 to 2050 Projections

400

Total Population (millions)

350 300 250 200 150 100 50 0 1940

1950

1960

1970

1980

Under 20

Source: Bureau of the Census.

1990 20 to 64

2000

2010

2020

2030

2050

65 & Over 6

Labor Force Participation: 1950-2050* 90% 87% 84% 81%

80%

78%

77%

75%

73% 70%

70% 67%

67%

64%

60%

60%

60%

67%

66%

65%

67%

59%

59%

52%

51%

62%

61% 58%

59%

57% 54%

52%

50%

67%

52%

43%

40%

38% 34%

30% 1950

1960

1970

1980

1990 Overall

2000 Men

2010

2020

2030

2040

2050

Women

* Using midrange SSA actuarial projection from Annual Statistical Supplement, 1996.

7

Longer Life Expectancies, Shorter Working Lives Age in Years 0

1940

10

20

14

30

40

50

55

60

70

80

90

8

Men 1995

18

Pre-School/School

1940

14

45

Active Work Years 54

17

Retirement 12

Women 1995

19

Source: Bureau of the Census, 1997.

45

21

8

Ratio of Workers per Beenficiary

Number of Workers per Beneficiary is Falling 5

Projections

1960: 5.1 workers per beneficiary 2000: 3.3 workers per beneficiary

4

2030: 2.0 workers per beneficiary

3

2

1 1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Source: Board of Trustees of the Federal OASDI Trust Funds (1998). Committee for a Responsible Federal Budget

9

Median Age of the U.S. Population (in years) Projections

40 35 30 36

37

38

39

39

38

33

25

29 23

24

25

27

30

30

28

30

20 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Source: Bureau of the Census, 1997.

10

Projected Population Trends U. S. Population: Race, Ethnicity and Age Under 65 by Race and Ethnicity

Total Population by Age

15%

28%

1995

Under 65

87%

13%

65 and Older

72%

85%

25%

43% Under 65

2030

80% 20%

65 and Older

57%

75%

34%

51%

2050

65 and older by Race and Ethnicity

Under 65 49% White, non-Hispanic Non-White or Hispanic

80%

20%

65 and Older 66%

White, non-Hispanic Non-White or Hispanic

Source; U. S. Bureau of the Census, 1998

11

25%

20%

Percentage of Americans Over the Age of 65 Projections

20%

20%

2030

2040

Percentage of Floridians age 65 and over today: 19%

17% 15% 13%

13%

13%

1990

2000

2010

11% 10%

8%

9%

10%

7% 5%

0% 1940

1950

1960

Source: Bureau of the Census.

1970

1980

2020

12

Life Expectancy at Age 65 Projections

22

Males

Females

Number of Years

20

18

16

14

12

10 1940

1950

1960

1970

1980

1990

2000

Source: Historical Data: Board of Trustees of the Federal OASDI Trust Funds (1997). Bureau of the Census intermediate assumptions, (September 1996).

2010

2020

2030

13

Life Expectancy at Birth 85 80 75 70 65 Total Male Total Female White Male White Female Black Male Black Female

60 55 50 1950

1960

1970

1980

Source: Bureau of the Census, 1997.

1990

1995

2000

2010

2020

2030 14

Baby Boom -- Baby Bust 4500

1957 = 4,308

Projections

4000

Total Births (000's)

3500 3000 2500 2000 1500 1000 500 0 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

15 Source: Bureau of the Census and Office of National Health Statistics, 1997.

Federal Budget as a Percentage of GDP 30% 36.9%

Percent of GDP

25%

Projected Revenues: 19.8% 20.1%

20%

25.8%

4.0%

4.0%

4.0% 0.4%

5.6%

3.0%

15% 10%

3.4%

5%

2.5%

3.0%

3.0%

3.1%

2.6%

6.0%

6.0% 1.2%

4.3%

6.0%

7.0%

2030

2050

0%

1997 Social Security

Medicare

Medicaid

Defense

Net Interest

All Other Spending

Source: GAO, January 1999 Committee for a Responsible Federal Budget

16

Federal Revenues (Percentage of GDP)

Other Social Insurance Corporate Individual

Projections 1998-2008

10%

Source: CBO January 1999

Pres. 1999 Budget

CBO

1990-1997

1980-1989

1970-1979

1960-1969

0% 1950-1959

Percent of GDP

20%

Post-World War II Average: 18% of GDP

17

CBO Unified Deficit/Surplus Projections Continue to Improve

Deficits(-)/Surpluses(+) in $ bllions

300

January 1999

100

-100

Actuals January 1997

-300

January 1995 -500

January 1993 -700 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Fiscal Years 18 Source: CBO, The Economic and Budget Outlooks for January 1993, January 1995, January 1997 and January 1999.

Changes in CBO Deficit Projections by Source: January 1997-January 1999 700 Policy Change

Economic Changes

Technical Changes

Amount of change in $ billions

600 500

234 209 202

400 185 168

300 200

156

163

168

129

-20

-16

10

16

1998

1999

2000

2001

0

270

191

146

169

82

64

76

92

115

107

2002

2003

2004

2005

2006

2007

134

115

73

247 216

131 100

178

-100 Fiscal Years

Source: CBO, The Economic and Budget Outlooks: January 1997, March 1997, September1997, January 1998, March 1998, July 1998, and January 1999.

19

Federal Budget Deficits: 1930 to 2050 Improved, but Still Unsustainable, Outlook

10% 5%

Percent of GDP

0% Feb. 1998 est.

-5%

Projections under Current Policies

Actual Deficits

-10% -15% -20%

Oct. 1997 est.

-25% -30% -35% 1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Fiscal Years Source: CRFB based on OMB historical data (1998), CBO projections (July 1998), and GAO projections (October 1997 and February 1998).

20

Recent Improvements Delay, but Do Not Fix, Projected Deterioration in Long-Term National Debt Situation 1998

250%

Projections

150%

World War II 100%

Oct. 1997 est. January 1999 50%

Civil War

World War I

Source: Historical Data: OMB, 1997. Projections: GAO estimates, 1998 and Congressional Budget Office January 1999.

60

40

20

20

00 20

50 19

00 19

50 18

00

0% 18

Percent of GDP

200%

21

Budget Scenarios Under Alternate Assumptions in 2030 (as a Percentage of GDP) 30

Percent of GDP

25

Revenue (19%)

5.5 2.3

2.6

20

6.9

2 .1 2 .4

1.6

2.2

15

4.3

0.5 0.5

10

4.6

5.1

2 .0

5.7

5.0

2.0

2.6 1.0

5.7

5.2

4.7

6.4

6.8

6.8

6.8

6.8

23% of GDP Balance

23% of GDP Deficit

26% of GDP

27% of GDP

4.9

5 5.2

0 19% of GDP

Social Security Defense Source: GAO, 1997.

Medicare Non-Defense Disc.

Net Interest Total Discretionary

Other Entitlements 22

Continued Fiscal Discipline Would Produce Significant Long-Term Economic Benefits

GDP/Person in Constant 1997 Dollars

$60,000

$55,000

Run Surpluses, then Permanent Budget Balance

$50,000

Current Policies (run Surpluses, then Run Deficits)

$45,000

$40,000

Spend the Surplus

$35,000

$30,000

$25,000 $0

2000

2015

Source: GAO, February 1998. Committee for a Responsible Federal Budget

2030

2045

23

Federal Outlays: Major Program Categories 1965-2007 Projections $800

Nominal $ in billions

$700 $600

Defense Social Security Health Care Net Interest

$500 $400 $300 $200 CBO Baseline Projection

$100 $0 1965

1970

1975

1980

1985

1990

1995

2000

Source: Office of Management and Budget, Historical Tables: Budget o f the United States Government, Fiscal Year 1998, February 1997; Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1998-2007, January 1997.

2005

24

Entitlement Programs are Taking Over the Budget Projections

45% 40%

Percent of GDP

35% 30% 25% 20% 15% 10% 5% 0%

1970

1980

1990

Entitlements

2000

2010

Net Interest

2020

2030

Discretionary

Source: Historical Data: OMB, 1998. Projections: GAO estimates, February 1998.

2040

2050

Revenue

25

14%

Discretionary Spending: Five Year Averages

Percent of GDP

12%

6.3 % in 2004

10%

President’s Request

8% 6% 4% 2% 0% 1965-1969

1970-1978

1975-1979

Defense

1980-1984

1985-1989

Non-Defense

1990-1994

1995-1999

2000-2004

2004 Spending Level

Sources: President’s Budget for FY 2000 (February 1999). Committee for a Responsible Federal Budget, February 1999.

26

Major Non-Defense Discretionary Activities: 1998 All Other NonDefense 16% Justice Admin 13% Educ, Training, Employmt & Soc Svcs 15%

Science & Space 6% International Affairs 6% Natural Resources & Environment 8% Health Research & Public Health 9%

Source: CBO projections, January 1999.

Transportation 14% Housing & Income Security 13%

27

Federal Aid to State and Local Governments (in 1994 dollars) 100% 90%

25%

24%

23%

80% 70%

3% 3% 11%

4% 4% 8%

60% 50%

3% 6%

16%

15%

4% 4%

7% 3%

9%

8%

9% 14%

12%

14%

16%

11%

16%

Transportation Education, Training, Soc Svcs Medicaid

17%

40% 25%

24%

16%

30% 20% 10%

34% 22%

22%

27%

1980

1985

Other Agriculture, State Child Nutrition HUD Family Support

40%

0% 1975

Source: Health Care Financing Administration, 1996.

1990

1994 28

Official Poverty Rates: 1960-1997 35%

In 1974, for the first time, the poverty rate of children exceeded that of the elderly.

30%

25%

Children under 18

20%

Adults 65 and above

15%

10%

Adults 18 to 64 5% 1960

1965

1970

1975

1980

1985

1990

1995

Source: Bureau of the Census, September 1996 and web site October 1998. Committee for a Responsible Federal Budget

29

Poverty Rates by Selected Characteristics 1980 & 1997 All Races 45%

White

African American

Hispanic Origin

42%

40%

37% 37%

38%

33%

35%

31%

30% 25%

21% 22%

20%

20% 15%

18% 16% 14%

16% 14% 11%

10%

9%

5% 0%

1980

1997

Children under 18

1980

1997

Adults 65 and older

Source: Bureau of the Census, 1998. Committee for a Responsible Federal Budget

30

Sources of Income of the Older Population: 1997 100%

2%

3% 2%

90%

17%

2% 5%

2%

25%

80% 70%

20%

60% 50%

27% 20% 88%

40% 25%

30% 20%

Other Assets Earnings Pensions/Annuities OASDI

41% 21%

10% 0%

Total Source: EBRI, April 1999. Committee for a Responsible Federal Budget

Lowest fifth (under $6,323)

Highest fifth (over $22,798) 31

Composition of Average Elderly Income: 1994 Earnings 18%

Pensions 19%

Asset Income 18% Other 3%

Soc. Sec. 42%

Asset Income

Soc. Sec.

Other

Pensions

Source: SSA, Annual Statistical Supplement to the Social Security Bulletin, 1996.

Earnings 32

Composition of Elderly Income Highest Quintile: 1994 Pension 21%

Earnings 28%

Asset Income 24%

Public Assistance 1% Other 3%

Asset Income

Soc. Sec.

Other

Soc. Sec. 23%

Public Assistance

Source: SSA, Annual Statistical Supplement to the Social Security Bulletin, 1996.

Earnings

Pension 33

Composition of Elderly Income Lowest Quintile: 1994

Public Assistance Other 11% Earnings 2% 0% Pension 3% Asset Income 3%

Soc. Sec. 81%

Asset Income

Soc. Sec.

Other

Public Assistance

Source: SSA, Annual Statistical Supplement to the Social Security Bulletin, 1996.

Earnings

Pension 34

Average Social Security Retirement Age: 1940-1995 74 73 72 Men

Average Age of Retirement

71

Women

Women

70 69 68 Men

67 66 65 64 63 62 1940

1945

1950

1955

1960

1965

1970

Source: Social Security Bulletin, Annual Statistical Supplement, 1996.

1975

1980

1985

1990 35

1995

Social Security Income & Cost Rates: 1950-2050 20%

Projections

Percent of Taxable Payroll

Cost 15%

Income (payroll taxes only, does not include interest income)

10%

5%

0% 1950

1960

1970

1980

1990

2000

Income Source: Social Security Trustees Annual Report, 1997.

2010

2020

2030

2040

2050

Cost 36

Social Security Retirement Benefits Payable at Normal Retirement Age $30,000

Projections

1996 Constant Dollars

$25,000

$20,000

Maximum Wage Earner $15,000

$10,000

Average Wage Earner

$5,000

Low Wage Earner

$0 1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

37 Source: SSA unpublished tables and Board of Trustees of the OASDI Trust Funds, 1996.

Example 1a. Archer-Shaw Social Security Guarantee (SSG) Plan: Private SSGAs New Future Outlays: SSGA funded OASDI benefits OASDI payroll taxes: 12.4%

Individuals

Outlays: OASDI benefits, 2% refundable payroll tax credit, and additional interest expense

Federal Government General Fund

When an individual is eligible for benefits, SSGA payments are transferred to the Social National Security Trust Fund and “topped up” to equal Savings current OASI benefit.

SSGA balances go to the estate of a deceased worker only if there are no qualified survivors.

SSGAs Personal Savings: 2% refundable payroll tax credit Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

Borrowing National Surpluses, then deficits and new public borrowing Savings (through 2053) would finance tax credits

Investment (Physical Assets)

Benefits 12.4%

OASDI Trust Fund

Future Receipts

SSA estimates SSGA balances would exceed increased public borrowing by 2005. In 2030, SSGA balances estimated to reach $13.7 trillion and estimated additional public debt would be $9.4 trillion.

38

Example 1b. Archer-Shaw Social Security Guarantee (SSG) Plan: Public SSGAs

Federal Government Benefits

OASDI payroll taxes: 12.4%

Individuals

General Fund

Outlays: OASDI benefits and additional interest expense

12.4%

New Future Outlays: SSGA funded OASDI benefits

OASDI Trust Fund Benefits

2%

SSGAs

Public borrowing Surpluses, then deficits and new National public borrowing (through 2053) Savings would finance tax credits used to (Financial Assets) purchase stock/bonds.

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings

Future Receipts: Stock/bond sales when needed to pay benefits

Outlays: Stock/bond fund purchases

Investment (Physical Assets) 39

Example 1c. Archer-Shaw Social Security Guarantee (SSG) Plan: Public SSGAs, Credit Reform Scoring

Federal Government Benefits

OASDI payroll taxes: 12.4%

Individuals

General Fund

Outlays: OASDI benefits and additional interest expense

12.4%

New Future Outlays: SSGA funded OASDI benefits

OASDI Trust Fund Benefits

2%

SSGAs

Public borrowing Surpluses, then deficits and new National public borrowing (through 2053) Savings would finance tax credits used to (Financial Assets) purchase stock/bonds.

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings (Financial Assets)

Stock/bond fund purchases treated as non-budgetary. Cash exchanged for financial assets. No outlays.

Investment (Physical Assets) 40

Example 2a. Aaron-Reischauer Social Security Reserve Investment Plan

Federal Government Individuals

Benefits

OASDI payroll taxes: 12.4% Outlays: OASDI benefits, adjusted for changes, and additional interest expense.

Stock and bond fund purchases would be financed with unified budget surpluses. Publicly held debt would be higher than if surpluses were used to reduce public debt.

General Fund

12.4%

OASDI Trust Fund

Social Security Reserve Board

Surpluses/debt reduction foregone

Outlays: Stock/ bond fund purchases Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings Investment (Physical Assets)

Future Receipts: Stock/bond sales when needed to pay benefits

41

Example 2b. Aaron-Reischauer Social Security Reserve Investment Plan, Credit Reform Scoring

Federal Government Individuals

Benefits

OASDI payroll taxes: 12.4% Outlays: OASDI benefits, adjusted for changes, and additional interest expense.

Stock and bond fund purchases would be financed with unified budget surpluses. Publicly held debt would be higher than if surpluses were used to reduce public debt. Investment earnings expected to exceed incremental interest cost.

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings (Financial Assets) Investment (Physical Assets)

General Fund

12.4%

OASDI Trust Fund

Social Security Reserve Board Surpluses/debt reduction foregone

Stock/bond fund purchases treated as non-budgetary. Cash exchanged for financial assets. No outlays.

42

Example 3a. Porter Individual Social Security Retirement Account Plan: Private ISSRAs Outlays: OASDI Benefits

OASDI payroll taxes: 12.4%

Federal Government

Individuals

Benefits

(OASDI) New Outlays: Add’l interest expense

Individuals (ISSRAs)

Employee/Employer Contributions: 10% of payroll

OASDI payroll taxes: 2% (0% after 10 yrs.)

National Savings (Financial Assets) National Savings (Financial Assets)

Future ISSRA retirement benefits

ISSRAs New Outlays: Annuitized Transition Bond Payments

Investment (Physical Assets)

12.4%

General Fund

OASDI Trust Fund

2% (0% after 10 yrs.)

Public borrowing Transition bonds Surpluses, then deficits and new public borrowing would finance transition costs (loss of payroll tax revenue and issuance of transition bonds). Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

43

Example 3b. Porter Individual Social Security Retirement Account Plan: Public ISSRAs Outlays: OASDI Benefits

OASDI payroll taxes: 12.4%

Federal Government

Individuals

Benefits

(OASDI)

12.4%

General Fund

New Outlays: Add’l interest expense

Individuals (ISSRAs)

OASDI Trust Fund

2% (0% after 10 yrs.)

Payroll taxes: 12.4% (10% after 10 yrs.)

ISSRAs 10%

New Future Outlays: Annuitized Transition Bond Payments & Retirement benefit payments

National Savings Public borrowing (Financial Assets)

Transition bonds

National Savings (Financial Assets)

Outlays: purchases of stocks/bonds Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

Investment (Physical Assets)

Future receipts: sale of investments to pay benefits

Surpluses, then deficits and new public borrowing would finance transition costs (loss of payroll tax revenue and issuance of transition bonds).

44

Example 3c. Porter Individual Social Security Retirement Account Plan: Public ISSRAs, Credit Reform Scoring Outlays: OASDI Benefits

OASDI payroll taxes: 12.4%

Individuals

Federal Government Benefits

(OASDI) New Outlays: Add’l interest expense

Individuals (ISSRAs)

Payroll taxes: 12.4% (10% after 10 yrs.)

New Future Outlays: Annuitized Transition Bond Payments & Retirement benefit payments

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

12.4%

General Fund

OASDI Trust Fund

2.4%(0% after 10 yrs.)

10%

ISSRAs

National Savings Public borrowing (Financial Assets) Transition bonds National Savings (Financial Assets)

Investment (Physical Assets)

Surpluses, then deficits and new public borrowing would finance transition costs (loss of payroll tax revenue and issuance of transition bonds).

45

Example 4a. President’s Plan, Private USAs

Federal Government Benefits

OASDI payroll taxes: 12.4%

Individuals

Outlays: OASDI benefits, USA tax credits, USA matching payments, and additional interest.

Future retirement benefits

12.4%

Surpluses/debt reduction foregone USAs

Personal savings: Contributions to USAs: Tax credit, matching payments, and individual contributions.

General Fund

OASDI Trust Fund

National Savings (Financial Assets)

Investment (Physical Assets)

Stock and bond fund purchases would be financed with unified budget surpluses. Publicly held debt would be higher than if surpluses were used to reduce public debt. Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

46

Example 4b. President’s Plan, Public USAs

Federal Government Individuals

Benefits

OASDI payroll taxes: 12.4% Outlays: OASDI benefits and additional interest expense

General Fund

12.4%

OASDI Trust Fund

Tax credits, matching pmts.

USAs

Individual Contributions New Future Outlays: USA retirement benefits Surpluses/debt reduction foregone Stock and bond fund purchases would be financed with unified budget surpluses. Publicly held debt would be higher than if surpluses were used to reduce public debt.

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings (Financial Assets) Investment (Physical Assets)

New Outlays for stock/bond purchase New Future Receipts: Sale of assets as needed for benefits

47

Example 4c. President’s Plan, Public USAs, Credit Reform Scoring

Federal Government Individuals

Benefits

OASDI payroll taxes: 12.4% Outlays: OASDI benefits and additional interest expense

General Fund

12.4%

OASDI Trust Fund

Tax credits, matching pmts. Individual Contributions

USAs

New Future Outlays: USA retirement benefits Surpluses/debt reduction foregone Stock and bond fund purchases would be financed with unified budget surpluses. Publicly held debt would be higher than if surpluses were used to reduce public debt.

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings (Financial Assets) Investment (Physical Assets)

Stock/bond fund purchases treated as non-budgetary. Cash exchanged for financial assets. No outlays.

48

Example 5a. Kolbe-Stenholm Plan, Private ISAs

Federal Government Benefits

OASDI payroll taxes: 12.4%

Individuals

Outlays: OASDI benefits, adjusted for benefit changes, and additional interest.

Future retirement benefits

ISAs Personal savings: voluntary ISA contributions

National Savings (Financial Assets)

Investment (Physical Assets)

General Fund

10.4%

OASDI Trust Fund

OASDI benefit costs would be partially financed with unified budget surpluses and new borrowing through 2014. After 2014, proposal would generate net surpluses. New Outlays: 2% of payroll transferred to ISAs for stock/bond/Treasury mutual fund purchases Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

49

Example 5b. Kolbe-Stenholm Plan, Public ISAs

Federal Government Individuals

Benefits

OASDI payroll taxes: 12.4% Outlays: OASDI benefits, adjusted for benefit changes, and additional interest.

General Fund

10.4%

OASDI Trust Fund

2% Voluntary ISA Contributions

New Future Outlays: ISA retirement benefits

National Savings (Financial Assets)

ISAs

OASDI benefit costs would be partially financed with unified budget surpluses and new borrowing through 2014. After 2014, proposal would generate net surpluses. New Outlays for stock/bond purchase

Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

Investment (Physical Assets) 50

Example 5c. Kolbe-Stenholm Plan, Public ISAs, Credit Reform Scoring

Federal Government Individuals

Benefits

OASDI payroll taxes: 12.4% Outlays: OASDI benefits, adjusted for benefit changes, and additional interest.

General Fund

10.4%

OASDI Trust Fund

2% Voluntary ISA Contributions

ISAs

New Future Outlays: ISA retirement benefits Stock and bond fund purchases would be financed with unified budget surpluses. Publicly held debt would be higher than if surpluses were used to reduce public debt. Note: Solid lines indicate ongoing flows. Dotted lines indicate future flows once benefit payments begin.

National Savings (Financial Assets) Investment (Physical Assets)

OASDI benefit costs would be partially financed with unified budget surpluses and new borrowing through 2014. After 2014, proposal would generate net surpluses. Stock/bond fund purchases treated as non-budgetary. Cash exchanged for financial assets. No outlays.

51

Social Security & Medicare Costs (as a Percentage of Taxable Payroll) Projections 30%

25%

20%

15%

10%

5%

0% 1950

1960

1970

1980

1990

2000

Social Security

2010

2020

2030

2040

2050

Hospital Insurance

Source: SSA, Annual Statistical Supplement to the Social Security Bulletin, 1996.

52

National Health Care Expenditures

2007 = 16% Projections

1996 = 14%

Percent of GDP

15%

10% 1965 = 6%

5%

0% 1960

1965

1970

Source: CBO, January 1997.

1975

1980

1985

1990

1995

2000

2005 53

Per Capita Health Care Expenditures by Age, 1977 & 1987 $10,000

$9,178

Constant 1987 Dollars

$8,000

$6,000

$5,360

1977 1987 $4,000

$2,000

$3,481

$1,776 $1,234 $505

$745

$1,535 $1,221

$0 All Ages

Under 19

19 to 64

65 & over

85 & over

Source: CRFB based upon Health Care Financing Administration data reported in 65+ in the United States, U.S. Government Printing Office, Washington DC 20402. (This is the most recently published data available.)

54

Medicare Benefits By Sources of Financing 350

300

Total Benefits ($ billions)

Payroll Taxes

Premiums

Tax on Soc. Sec. Benefits

General Revenues

250

200

150

100

50

0 1970

1975

1980

1985

1990

1995

Source: CRFB based upon HCFA Office of the Actuary published data, March 1999.

2000

2005

Projected

55

Medicare Hospital Insurance Expenditures 1965 Estimates versus Actual Expenditures $70,000

$66,239

$60,000 $47,580

$50,000 $40,000 $30,000

1965 est. Actuals $25,064

$20,000 $11,315

$10,000 $987 $891

$5,124 $2,860

1966

1970

$4,047

$5,307

$6,860

$8,797

$0 1975

1980

Source: O’Sullivan and Graves, Congressional Research Service (1993).

1985

1990

56

Percent of Uninsured Population

35%

Population without Health Insurance by Age: 1995

30%

25%

National Average = 17%

20% 33% 15% 24%

23%

10% 17%

15%

14%

14%

5% 1% 0% Under 18

18-20

21-24

25-34

35-44

45-54

Source: Employee Benefit Research Institute Analysis of the March 1995 Current Population Survey.

55-64

65+

57

The Heads of Most Uninsured Families Are Full-time Workers Uninsured Population By Work Status of Family Head

Other Worker 10.6 million 25%

Non-worker 6.2 million 15%

41.4 million uninsured (1996)

Full-time Worker 24.6 million 60%

Source: Employee Benefit Research Institute estimates of the March 1997 Current Population Survey.

58

Percent of Total Federal Taxes Paid Compared to Distribution of Tax Returns by Income Classes 100% 90%

1.2% 4.5% 6.0%

80%

13.5%

70%

9.3%

60%

12.7%

19.1%

$200,000 and over $100,000 to $200,000 $75,000 to $100,000 $50,000 to $75,000 $40,000 to $50,000 $30,000 to $40,000 $20,000 to $30,000 $10,000 to $20,000 Less than $10,000

16.7%

14.2%

50% 15.8%

40% 30%

20.7% 19.7%

9.6%

20% 9.1%

10%

17.4%

6.6%

3.3% 0.7%

0% Tax Returns

Source: Joint Tax Committee, US Congress, 1997.

Tax Liability

59

Federal Revenues (Percentage of GDP)

Other Social Insurance Corporate Individual

Percent of GDP

20%

Post-World War II Average: 18% of GDP

Projections (1999 & 2009)

10%

Source: CBO January 1999

2009 (Proj)

1999 (Act)

1990-1997

1980-1989

1970-1979

1960-1969

1950-1959

0%

60

Co-Chairmen Timothy Penny

Bill Frenzel

Directors Thomas L. Ashley James Cooper James Exon William H. Gray, III Jim Hones James T. McIntyre, Jr. Leon Panetta Alice M. Rivlin Charles Schultze James Slattery

Henry Bellmon Robert Giaimo Robert Strauss Senior Advixors

Roy L Ash Nancy Kassebaum Baker Willis Gradison James T. Lynn W. Henson Moore June O’Neill Peter G. Peterson John J. Rhodes David A. Stockman Joseph R. Wright, Jr. Charles Bowsher Robert S. Kerr, Jr. Marne Obernauer Rudolph g. Penner Robert Reischauer John W. Snow Elmer Staats Paul A. Volcker Carol Cox Wait Carol Cox Wait President

Additional copies of this report in CD-ROM format may be obtained for $25.00 from: Committee for a Responsible Federal Budget 220½ “E” Street, NE Washington, DC 20002 202-547-4484 (phone) 202-547-4476 (fax) [email protected] The Committee for a Responsible Federal Budget expresses our continuing gratitude to the Hewlett-Packard Company. We could not do our work without all of the equipment they so generously donate to us.