Senior Advisor for Federal Fiscal Policy
The legislation that Senators Claire McCaskill (D-MO) and Bob Corker (R-TN) introduced this week to limit total federal spending to 20.6 percent of the Gross Domestic Product includes a new “sequestration” process — automatic spending cuts if the spending limit is exceeded — that has some features in common with those now used to enforce the pay-as-you-go law and that were part of the Gramm-Rudman-Hollings (GRH) law in the late 1980s. But the McCaskill-Corker sequestration is dramatically different in one key respect — it would potentially impose big cuts in entitlement programs such as Social Security, Medicare, and Medicaid.
Under GRH, the President’s Office of Management and Budget was required to impose automatic spending cuts to eliminate a projected excess in the deficit above that year’s deficit target. The cuts would come half from defense and half from non-exempt nondefense spending (discretionary as well as entitlement or other mandatory spending). However, the law protected many crucial programs: Social Security, Medicaid, many veterans benefits, Supplemental Security Income, Food Stamps, and most other programs for low-income Americans were exempt, while automatic cuts in Medicare were limited to 2 percent of program expenditures.
Under pay-as-you-go, which aims to prevent changes in law that would increase entitlement spending or cut taxes without offsetting the costs, sequestration applies only to entitlement and other mandatory spending. But Social Security, Medicaid and other low-income mandatory programs remain exempt from cuts, while any reduction in Medicare is limited 4 percent.
Although the McCaskill-Corker spending limit covers all spending, its sequestration procedure would disproportionately apply to entitlement and other mandatory programs. Rather than follow the GRH approach and get half of the savings from defense and half from nondefense programs, or reduce all programs by an equal percentage, McCaskill-Corker says the percentage reduction that applies to each of the three categories defined by the legislation — entitlement and other mandatory spending, security discretionary spending, and non-security discretionary spending — must be “in proportion to the growth of outlays in such category from the previous year.” In addition, McCaskill-Corker removes the exemptions for Social Security, Medicaid, and other low-income programs and the limits on Medicare cuts of the sequestration process under both GRH and the pay-as-you-go law. The only spending exempt from cuts would be interest payments on the debt.
Since entitlement and other mandatory spending generally grows faster than security or non-security discretionary spending (reflecting the fact that the growth of the three biggest entitlement programs — Social Security, Medicare, and Medicaid — is driven by the aging of the population and rising per-person health care costs), its percentage cut would be bigger than the percentage cut in the discretionary programs. And since total spending for entitlement and other mandatory programs is larger than total discretionary spending, the dollar amount of cuts in entitlements and other mandatory programs would be much larger than the discretionary cuts. In dollar terms, the biggest cuts by far would come from Social Security, Medicare, and Medicaid.
Under McCaskill-Corker, Social Security, Medicare, Medicaid, Food Stamps (now called the Supplemental Nutrition Assistance Program, or SNAP) and other programs on which millions of elderly, disabled, and poor Americans depend would face potentially very large automatic cuts.