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June 2011, Week 4

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Fri, 24 Jun 2011 23:19:36 -0400
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Unbalanced Budgeting

Federal Spending Cap May Endanger Social Security

By Rebeccaa Thies
Economic Policy Institute
June 22, 2011
http://epi.3cdn.net/65f3207fad698dc717_0km6bnaw9.pdf

Congress is considering a range of policies to limit, or
"cap," overall federal spending, either as stand-alone
legislation, or as part of a balanced budget amendment.
Supporters argue that these efforts are necessary to
reduce the deficit and to impose limits on current and
future Congresses.

One such proposal is the Commitment to Prosperity (CAP
Act),  sponsored by Senators Bob Corker (R-Tenn.) and
Claire McCaskill (D-Mo.), along with 14 other senators.
The CAP Act (S. 245) would create hard caps on
government spending, to be phased in over 10 years
(2013-2022). In 2022 and subsequent years, the Act would
cap spending at 20.6% of gross domestic product, based
on the bill's formula and assumptions.

This policy memorandum shows the possible impact of
overall spending caps on the elderly through reductions
in Social Security payments and on communities through
decreases in federal outlays. It analyzes the impact
nationally and within states and congressional
districts. The memorandum also briefly reviews the even
more dire cuts to Social Security under a proposed
balanced budget amendment.

The cap specified by Corker and McCaskill would likely
lead to severe reductions in projected spending on
Social Security, Medicare, Medicaid, and other
government programs. Cuts of the magnitude proposed
could not only significantly impact overall program
spending but could also cut individual benefit levels,
and harm employment growth.

Specifically, the spending caps as defined in the CAP
Act, assuming levels are achieved through across-the-
board proportionate decreases in spending, could lead to
the following outcomes:

  $882 billion in cuts to Social Security outlays
   over 2013-2021. In 2021, Social Security outlays
   would be cut 13.6% relative to what they would have been absent the act.

  Significantly greater cuts over the long-term. By
   2025 Social Security would be cut by between 21% and
   36%, depending upon baseline assumptions on cost
   growth; by 2045, outlays would be cut by between 47%
   and 83.5%.

  Deep cuts to benefits in response to lower
   spending levels. In 2017, we could expect the average
   Social Security benefit to drop by 10.1%, an almost
   $2,000 cut in benefits for a scaled medium earner; by
   2036, the year the Social Security Trust Fund is
   expected to expire, the benefit cut could grow to a
   37.5% cut, or $9,300 for this earner. For comparison,
   a cut of that size is a much deeper benefit cut than
   the estimated 23% reduction in benefits that would
   occur if no policy changes were made to close Social
   Security's long-range funding gap.

  Unnecessary cuts. Reductions of the magnitude
   required to meet the annual spending caps would leave
   Social Security overfunded over the long-term, with
   Social Security tax contributions exceeding benefits.

  Lost jobs. Employment levels could suffer as a
   result of cuts. In 2013, the shock to aggregate
   demand from these cuts could lead to around over
   250,000 jobs lost. In 2014, these cuts could lead to
   around 470,000 jobs lost.

  Widespread impact on local economies. States and
   congressional districts would lose spending power
   with cuts to outlays-somewhere between $17 million
   and $124 million in 2013 (depending on their size and
   their demographic composition), with older
   populations losing proportionally more. (See the
   supplemental tables posted online for a breakdown of
   cuts under the global spending cap by state and
   congressional district, and the appendix to this
   paper for cuts by gender, race, and ethnicity.)

Though less likely to pass Congress, the cap provisions
in balanced budget amendments proposed as part of the
debate over raising the federal debt limit could also
pose a threat to Social Security. Specifically, a
balanced budget cap as currently defined in the
proposals could:

  Cut Social Security outlays by $1.8 trillion from
   2016 to 2020.

  Cut the Social Security program 32.7% in 2016, the
   first year the amendment, growing to 35.8% in 2020.

[For the entire document, go to
http://epi.3cdn.net/65f3207fad698dc717_0km6bnaw9.pdf
-- moderator]

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