The Congressional Budget Office (CBO) has released its annual report of options to reduce the budget deficit. The report comes at a welcome time as Congress is negotiating a year‐end spending package in which it might increase deficits steeply. Instead of making the fiscal situation even worse, Congress should hit the deficit brakes and reduce spending.
Based on CBO’s budget and economic outlook (last issued in May 2022), federal deficits will average 5.1 percent of gross domestic product (GDP) per year between 2023 and 2032. Or roughly $1.6 trillion each year over the next 10 years. Under that scenario, federal debt held by the public would reach 110 percent of GDP by 2032—the highest level ever, exceeding the debt following World War II.
Projecting out even further, publicly held debt would reach 185 percent of GDP at the end of CBO’s long‐run 30‐year projection period. And this rosy scenario assumes Congress allows middle‐class tax cuts for individuals and families to expire as scheduled in 2025, which is unlikely. Under more realistic assumptions, where Congress extends those tax cuts and revenues return to their 50‐year average, publicly held debt would exceed 260 percent of GDP by 2052. And even this shocking outlook may prove to be rosy as it does not take into account the potential for unexpected crises, such as a prolonged recession, war, or another pandemic.
CBO presents 76 options to reduce deficits in its latest report. I selected five that deserve more congressional attention because they would reduce spending growth in some of the largest federal programs that are also growing at the fastest rates (savings are over 10 years):
Reduce tax subsidies for employment‐based health insurance: $900 billion
My Cato colleague Michael Cannon recently wrote that “The tax exclusion for employer‐sponsored health insurance is the largest source of compulsory spending in the United States, larger than the federal Medicare program.” He’s argued that “federal lawmakers should eliminate the exclusion for employer‐sponsored insurance and other health‐related tax preferences.” This policy has been identified as a key driver of rising health care costs in the U.S.
One of CBO’s options would limit the income and payroll tax exclusion for employment‐based health insurance to the 50th percentile of premiums. In other words, this policy would tax employer contributions that exceed $8,900 a year for individual coverage and $21,600 a year for family coverage as employment income (based on 2024 premium figures, adjusted for inflation). Falling far short of eliminating the tax exclusion, CBO’s option takes a step in the right direction.
Cap federal Medicaid spending: $836 billion
My Cato colleague Chris Edwards recently wrote that state‐administered programs that rely on federal matches tend to continually expand. He argues that “Converting matching programs to fixed block grants would reduce overspending incentives.”
One of CBO’s options would cap federal Medicaid spending, saving $836 billion over the next decade, assuming the federal contribution were to grow no faster than inflation, as measured by the chained CPI (C‑CPI‑U).
Reduce Social Security benefits for higher earners: $184 billion
I’ve previously argued that to the extent that the government provides income subsidies to retirees, it should focus them on those retirees with limited means to support themselves.
One of CBO’s options would adjust the Social Security benefit formula to slightly reduce benefits for the top 50 percent of earners who enter the Social Security program. No current beneficiaries would be affected.
Increase the Social Security retirement age: $121 billion
I’ve also previously argued that Congress should raise the early and full Social Security eligibility ages by 3 years each (to 65 and 70) and index both to increases in longevity. Life expectancy at birth has increased by nearly 20 years as Social Security’s eligibility has increased by only two years (from 65 to 67—to be fully phased in by 2027).
One of CBO’s options would gradually increase the full Social Security retirement age from 67 to 70, over a period of 16 years. The benefit eligibility age would increase by two months every year, beginning with workers born in 1962, until it reached 70, affecting workers born in 1978 and after.
Adopt a more accurate inflation index to adjust federal benefit programs: $250 billion
Some federal benefits are indexed for inflation to protect beneficiaries from a decline in purchasing power when the prices of goods and services rise. However, the index used to calculate benefit increases, such as Social Security’s cost‐of‐living adjustment, is outdated. Congress recently adopted the more accurate chained CPI (C‑CPI‑U) to adjust tax brackets in the U.S. income tax code. Congress should also ensure that inflation adjustments for federal benefit programs use the most accurate index.
One of CBO’s options would adopt the chained CPI for Social Security benefits and other federal benefit programs.
Given inflationary pressures and a fiscal trajectory of high and rising deficits and debt, Congress should begin focusing on ways to reduce spending and deficits. CBO’s options to reduce the deficit are a good place to start.
Departments:
Themes:
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