March
16, 2006
PROPOSED CAP WOULD REQUIRE DEEP CUTS
IN ENTITLEMENT PROGRAMS
By Richard Kogan and Bob Greenstein
The Republican Study Committee, a group of
conservative members of the House of Representatives, has proposed to establish
an “entitlement cap” that limits total expenditures for entitlement programs
other than Social Security and requires projected expenditures for such programs
to be cut $1.8 trillion over the next ten years. This proposal is part of its
“Contract with America Renewed,” issued March 8, 2006.[1]
The proposed entitlement cap could become part of budget-process legislation
being discussed by the House Budget Committee majority and the House majority
leadership, or it could be offered as an amendment to that legislation.
Under the RSC entitlement cap proposal, a cap
would be set each year on allowable expenditures for entitlement programs other
than Social Security. The cap would be set at a level well below what
entitlement programs would cost under current law, necessitating deep cuts to
reduce costs to the level of the caps. In any year in which Congress and the
President did not cut entitlements enough to fit within the cap, automatic cuts
in entitlement programs would be triggered.
The Congressional Budget Office issues
entitlement-cost projections and related data that enable analysts to compute
where the entitlement caps would be set under the RSC proposal. The CBO
projections and data indicate that over the next ten years, the entitlement caps
would be a total of $1.8 trillion below what the entitlement programs will cost
under current law. As a result, the proposed entitlement cap would mandate $1.8
trillion in entitlement cuts over the coming decade.[2]
Broad-based
Opposition to Entitlement Cap Proposal
When a nearly identical version of this
proposal was debated in 2004, a broad array of organizations expressed
strong opposition to entitlement cap proposals. For example, in a
letter to Speaker Dennis Hastert on June 22, 2004, the American Legion
stated, “The American Legion opposes any and all entitlement cap
proposals. Although we fully support deficit reduction, we consider
an entitlement cap in any form to be the wrong approach, and a potential
breach of national trust.”
Similarly, the Paralyzed Veterans of
America wrote in a letter to Members of Congress on June 22, 2004, “PVA
would also like to urge you to oppose any proposed amendment that would
enact caps on entitlement spending.” In a strong letter sent on June
21, 2004, the AARP stated, “AARP urges you to reject any entitlement caps
because they would jeopardize the health and economic security of millions
of vulnerable Americans.” |
The required entitlement cuts would not be
especially deep in the first year, but their severity would grow rapidly
thereafter. By 2011, entitlements other than Social Security would have to be
cut almost 14 percent on average and the cuts would cumulate to $408 billion
over the five-year period 2007-2011. The depth of the cuts would continue to
grow forever. By 2016, the entitlement cuts would average more than 24
percent — reaching $416 billion in that year alone — and would total $1.8
trillion over the ten-year period.
The RSC entitlement cap requires cuts of this
magnitude primarily because of its treatment of Medicare and Medicaid. Under
the proposal, the entitlement cap for each year would be set at a level equal
to the sum of the costs in the prior fiscal year of all entitlement programs
except Social Security, with two adjustments. One adjustment would be made
for projected increases or decreases in the number of people eligible for each
entitlement program. The second adjustment would incorporate cost-of-living
adjustments required by statute. If a program has no statutory COLA or only a
partial inflation adjustment, an adjustment would be made equal to the
projected increase in the Consumer Price Index.
The costs of Medicare and Medicaid rise with
increases in the cost of health care. As is well known, health care costs are
rising rapidly in the private and public sectors alike. The RSC entitlement
cap, however, assumes that Medicare and Medicaid costs per beneficiary will
rise an average of only 2.2 percent per year over the coming decade, the
projected rate of increase in the Consumer Price Index.
Hardly any employer in America can hold
increases in health insurance premium costs to 2.2 percent per beneficiary per
year; basic health care costs are climbing much faster than that. Mostly for
this reason, the RSC entitlement cap would be set $1.8 trillion below
projected entitlement costs. As a consequence, not only Medicare and Medicaid
but all entitlements other than Social Security would be at risk of deep cuts.
The RSC proposal also includes interest
payments on the debt as an entitlement program. This means that whenever
interest payments rise faster than inflation, the entitlement cap would be
breached by a larger amount, necessitating still deeper program cuts. This is
significant because interest payments are indeed projected to rise over the
coming decade, both because interest rates will rise from their current low
levels as the economy recovers more fully and because the amount of debt on
which interest will be paid will continue to increase as the government racks
up continued large deficits. Of particular note, every additional tax cut
increases projected deficits and debt — and hence interest payments on the
debt — and thus would require even deeper cuts in entitlement programs.
Under the proposed RSC entitlement cap, the exact
size of the cutbacks in each program would depend on decisions that Congress and
the President would make. In theory, Congress and the President could initially
decline to enact any legislation cutting entitlement programs and let automatic
entitlement cuts do all the “dirty work.” Under the rules for automatic cuts
contained in the RSC proposal, a few programs (such as Medicare Hospital
Insurance) would be exempt from the automatic cuts, and some other programs
(such as veterans’ programs, Medicare physicians’ coverage, the Medicare drug
benefit, and Medicaid) could be cut no more than two percent per year through an
automatic cut. (It should be noted that these programs would be cut an
additional two percent each time an automatic cut occurred, so the automatic
cuts in these programs could mount to substantial levels over time. If
automatic cuts occurred each year, these programs could be cut 18 percent by
2016.)
Deep Cuts in RSC Budget
Would be Insufficient to
Comply with the Cap
The budget plan released by the Republican
Study Committee on March 8 contains cuts in a number of entitlement
programs. These include Medicare cuts of $218 billion over five years,
which the RSC says could be achieved through some combination of such
options as doubling the Medicare Part B premium, raising Medicare
deductibles and co-payments, and setting payments to hospitals, home
health agencies, and skilled nursing facilities at levels that fall
farther behind health care inflation with each passing year.
The RSC budget also would
replace Medicaid with a block grant that does not keep pace with health
care costs and that would lower projected federal Medicaid payments to
states by $92 billion over five years. Some of the other entitlement
reduction proposals in the RSC budget would eliminate student loans for
graduate students, eliminate the trade adjustment assistance programs, and
cut farm programs substantially.
The RSC budget includes
painful and highly controversial proposals that would cut projected
entitlement expenditures by a total of $359 billion over five years. Yet
if every one of these controversial proposals were enacted, these cuts
would still fall $50 billion short of the entitlement reductions that
would be required over the next five years under the RSC’s entitlement cap
proposal. |
It is unthinkable, however, that the bulk of the
cuts would occur through automatic cuts; the automatic cuts are designed to be
so unpalatable that Congress and the President would be compelled to enact
legislation cutting entitlements in order to avert or minimize the automatic
cuts. Indeed, if all of the reductions needed to comply with the RSC
entitlement cap were made through the automatic cuts, then the programs that
would be fully subject to the automatic cuts — including farm-price supports,
crop insurance, extended unemployment benefits, trade adjustment assistance, the
Earned Income Tax Credit, vocational rehabilitation, child care payments to
states, and the Social Services Block Grant (Title XX) — as well as the salaries
of Member of Congress and Senators — would be entirely eliminated by 2013.
It is inconceivable that Congress would sit idly
by and allow these programs — and Members’ own salaries — to be eliminated.
Congress clearly would seek to spread the pain more broadly, by enacting
legislation that cut more heavily into entitlement programs that have some
protection from the automatic cuts, such as Medicare and Medicaid.
The bottom line is that all entitlement programs
except Social Security would be at serious risk of being subject to large
cutbacks, since $1.8 trillion in program reductions over ten years would be
mandated by law. The table on page one shows the ten-year cuts that would be
made in each entitlement program if all entitlements other than Social Security
were cut by the same percent.
End notes:
[1] See
http://www.house.gov/pence/rsc/doc/RSC_2007_BUDGET.pdf.
[2] The proposal treats interest payments
on the federal debt as an entitlement, and therefore subject to the proposed
entitlement caps. CBO data show that the combined cost of entitlements and
interest would be $2.1 trillion over the caps in the ten-year period through
2016. By cutting entitlements $1.8 trillion, the deficits and debt would be
lower than projected, and $0.3 trillion in interest payments would be saved,
producing the required total savings of $2.1 trillion. This explains why
entitlements themselves would have to be cut $1.8 trillion to adhere to the
caps. Our analysis is based on the legislative text of HR 2290, which Rep.
Hensarling (the chairman of the RSC task force on budget and spending)
introduced in 2005. The RSC has not introduced legislative text to accompany
the new “Contract” but their document refers to HR 2290. |