Six Bipartisan Entitlement Reforms to Solve the Real Fiscal Crisis: Only Presidential Leadership Is Needed

Abstract: The United States faces a real fiscal crisis, and the impending fiscal cliff of massive tax hikes and spending cuts in January is only the first act. In early 2013, the federal government will exhaust its ability to issue debt legally. Yet as large and as major a concern as federal budget deficits are today, they are of secondary consequence compared with the fiscal quagmire of unaffordable entitlement spending in the next decade. Fortunately, the entitlement problem can be resolved by six simple reforms to improve the fiscal future for Social Security and Medicare. But to implement these reforms, President Barack Obama must lead.

A high-stakes fiscal policy debate of unique size and import has just begun. Absent congressional action to the contrary, a massive slate of tax hikes and spending cuts will take effect on January 1, and that is only the first act. The second act will occur early in 2013 when the federal government will exhaust its ability to issue debt legally. Both acts need prompt solutions.

Speaker of the House John Boehner (R–OH) made the first move. After congratulating President Barack Obama upon his reelection, Boehner promised a willingness to work with him, giving Obama the additional revenues he desired through pro-growth tax reform accompanied by reforms in entitlement programs.[1] President Obama's counter, while unsurprising, was unhelpful because he focused exclusively on fiscally meaningless and economically harmful tax hikes on upper-income taxpayers. The President repeatedly has argued for a balanced approach, but he has yet to offer a single meaningful proposal on spending reductions.

While the President prepares to start his second term, he should set about negotiating in good faith with Republicans, especially in the House where Republicans were returned to office in the majority with expectations of cutting spending without increasing taxes. The voters, we are told, expect it. This means the President cannot sit back and just harp on revenues. He needs to address spending and in particular entitlements.

Fortunately, the President has occasion and opportunity to lead by proposing some simple yet transformational reforms in two of the prime sources of the nation's fiscal problems: Social Security and Medicare. Better yet, many such reforms have already been thoroughly considered and enjoy broad bipartisan support, lacking only the moment and the leadership to become a reality. These proposals will not resolve either program's key structural flaws—they constitute a start of the reform journey, not the conclusion—but they would be a powerful start that would markedly alter the nation's fiscal trajectory.

At the start of a President's second term, the political stars are in the best possible alignment for solving big problems. All the President needs to do is seize the moment. This is the moment; President Obama must lead.

Many events arrive by chance, but the present fiscal spectacle is not one of them. The fiscal cliff results from explicit actions by Congress and the President to push difficult fiscal policy issues past the recent election. In this, they succeeded, although it took a series of legislative acts to accomplish it. With regard to taxes:

The payroll tax cut, extended in the spring of 2012, will expire on December 31, 2012. The extension of the Bush tax cuts, signed into law in December 2010, will expire at the end of the year. This same law also established a new structure for the death tax with a 35 percent rate and a $5 million exemption per spouse, which will expire at the end of the year. Various Obamacare tax hikes begin at the start of 2013.[2]

The same pattern holds for the spending cuts. For example, the sequester slated to gouge defense spending while making modest cuts—such as a 2 percent across-the-board cut to Medicare providers—reflects the final leavings of the earlier Budget Control Act, which created the failed "supercommittee." Early in 2012, Congress also prevented deep and disastrous reductions in Medicare provider payments, but this "doc fix" remedy expires at the end of the year.

In May 2011, the federal government exhausted its legal authority to finance deficit spending by issuing debt. The U.S. Department of the Treasury exercised its typical but limited authorities for temporarily creating more room under the "debt limit," allowing policymakers to postpone action until early August. A brutal and economically risky political battle ensued, eventually resulting in legislation that raised the debt limit by $2.1 trillion, sufficient to fund the federal government past the November election.

Projections now suggest that the government will reach the debt limit late in 2012, after which the Treasury will again deploy its limited authorities. This will trigger what could be another difficult negotiation for Congress and President Obama—a negotiation that will be heavily influenced by what happens with the fiscal cliff.

President Obama clearly believes in raising taxes on upper-income taxpayers, and he is willing to weaken the economy, slow job growth, and constrain wage growth to do so. It is difficult to fathom his acceptance of this trade-off of economic security for an ideological doctrine of social justice, especially considering that this long-standing debate likely will rage indefinitely. However, these tax hikes are a distant sideshow in the present context, a political distraction that diverts attention from the central fiscal issue of runaway spending, which gives rise to persistent and economically dangerous deficits.

In his own budget, the President proposed to extend the Bush tax cuts except for those making $250,000 or more, raising $836 billion over the next 10 years. His companion proposal to limit the value of deductions for upper-income taxpayers would raise another $574 billion, for a total of $1.4 trillion. In absolute terms, that is a lot of revenue. However, even allowing for all the other budget gimmicks and tax hikes in Obama's budget, the federal debt would rise by $7.7 trillion over the next 10 years including these tax hikes and by $9.1 trillion without them.

Obama's tax hikes would reduce the rise in federal debt over the next 10 years by about 15 percent. The President is silent about the remaining 85 percent. The numbers confirm that President Obama's tax hike demands are at best tangential to attaining a balanced budget.

As large and as major a concern as federal budget deficits are today, they are nevertheless secondary in consequence to the fiscal quagmire of unaffordable entitlements. Social Security and Medicare in particular share certain vital characteristics. Both programs are extraordinarily complicated, having been built up in complexity over the years one Congress at a time. Similarly, each program badly needs programmatic reforms. For example, the minimum benefit in Social Security is woefully inadequate to protect low-income seniors from poverty, and Medicare still lacks a catastrophic benefit. These are only some of the many shortcomings that must be addressed in fundamental overhauls of each program.

Of most immediate concern, however, is that Social Security and Medicare are unaffordable in their current forms. When this year's kindergarteners enter college, just 13 years away, spending on these two programs plus Medicaid and interest on the debt will devour all tax revenue. (See Chart 1.)

Social Security will lack the funds to pay full benefits beginning as early as 2033.[3] Medicare's unfunded promises in current dollars reach into the many tens of trillions of dollars. These facts are not in dispute. Solutions to our fiscal challenges are needed, urgent, and inevitable.

The fiscal cliff and the debt limit have set the stage, but there is also the reality of the rhythms in the American political system. There are certain windows in every four-year or eight-year cycle when bold leaders can achieve bold things. The first few months of a reelected President's second term is one such window, but it closes fast, and lame-duck status arrives quickly.

Thus, the President must adopt the mantle of leadership, rather than brinksmanship, to steer the nation away from the fiscal cliff and all that is set to follow, and he must start with spending. However, the critical silver lining is that simple, commonsense, and thoroughly vetted solutions such as the four listed below constitute a strong start on the journey to more complete programmatic reforms remedying acknowledged flaws in these programs, and they already enjoy broad support across the political spectrum.

Raise the Social Security eligibility age to match increases in longevity. Originally set at 65, the normal eligibility age is rising two months every year until 2022, when it will reach 67. According to the Social Security actuaries, continuing to increase the eligibility age to 69 by the year 2034 and allowing it to rise more slowly thereafter to reflect gains in longevity could go a long way toward reducing Social Security's funding shortfall.[4] While this would not reduce today's budget deficit, it would strengthen Social Security's finances and dissipate far more important long-term budget pressures. Correct the cost-of-living adjustment (COLA). The annual COLA benefit adjustment is determined today by the Bureau of Labor Statistics' Consumer Price Index (CPI). However, the CPI, an antiquated measure, generally overstates inflation, meaning that benefits are increased a bit too much each year to offset inflation. The effect on benefits in a given year of switching to a more accurate inflation measure is minute, but Social Security spans generations.[5] Again, according to the Social Security actuaries, using a more modern inflation measure would substantially reduce Social Security's shortfall over time. Raise the Medicare eligibility age to agree with Social Security. Medicare has an eligibility age problem, but unlike Social Security, the Medicare eligibility age remains stuck at 65. An obvious solution is to wait five years and then slowly raise the eligibility age to align eventually with the Social Security eligibility age. While the short-term budgetary savings would be negligible, the long-term savings in Medicare would be profound. Reduce the Medicare subsidy for upper-income beneficiaries. In 2012, the average Medicare beneficiary received a subsidy of about $5,000. The subsidy is the per capita amount of Treasury revenue that is used to fill the financial hole arising each year because Medicare's premiums are inadequate, in conjunction with its other revenue sources, to cover Medicare's total costs. Subsidizing Medicare benefits for low-income seniors—and perhaps for some middle-income seniors—makes sense, but upper-income seniors do not need and should not receive a $5,000 subsidy to buy Medicare health insurance. The Medicare subsidy was first cut for the wealthiest seniors in legislation signed by President George W. Bush in 2004 by income-relating premiums so that higher-income beneficiaries pay a higher share of their Medicare cost. It was cut further in Obamacare, and President Obama proposed to pare it back still further in his budget proposals of February 2012 with still-higher premiums for upper-income beneficiaries.

Medicare has many programmatic problems that demand attention, and the sooner the better, but the immediate fiscal problem is straightforward: It is the subsidy. The total cost of the Medicare subsidy—about $230 billion in 2012—will soar over time as health care costs rise and the baby boomers retire.[6] Paring back the subsidy for well-to-do retirees is an obvious step toward reducing the budget deficit today and shoring up Medicare for the long run.

The four foregoing proposals for Social Security and Medicare meet the test of simplicity, being relatively easy to communicate to the American people, having been thoroughly vetted, and enjoying widespread support. Together, they would dramatically improve America's fiscal future for the better. Two additional proposals, one each for Social Security and Medicare, meet the tests of simplicity and effectiveness but have not been considered as intensively. Yet they should also garner bipartisan support and consideration.

Phase out Social Security benefits for upper-income retirees. Everyone who has ever paid into Social Security is entitled to the benefits prescribed by law. However, as a nation, we need to ask whether today's working families should pay payroll taxes so that upper-income retirees can continue to receive their checks. We need to ask why phasing out the Medicare subsidy to upper-income seniors while continuing to send them their full Social Security check would make sense. In short, Social Security should be social insurance against poverty rather than a government-run pension scheme.

Some might charge that this is redistributionism, but would anyone suggest that millionaires should receive food stamps? Food stamps and other welfare programs are specifically intended to operate as part of the social safety net, yet their existence constitutes a form of redistributionism that most Americans accept. Social Security (and Medicare) should become real insurance against poverty, meaning that only those seniors who need help should receive help. On the other hand, if Social Security remains a universal government-run pension, then it remains a vastly larger program built on an entirely different redistributionist principle: redistribution from workers to retirees, including the wealthy.

Consolidate Medicare's elements and collect a single higher premium. Medicare is actually three distinct components, referred to generally as Parts A, B, and D, reflecting the fact that Medicare was built up over many years. This antiquated structure is confusing and inefficient. An obvious reform is to consolidate the three distinct parts into a unified Medicare program.

Medicare Parts B and D each require beneficiaries to pay a premium covering 25 percent of the cost of the programs. As the Medicare Parts are consolidated, the premium should be consolidated as well and then raised to 35 percent of the relevant costs.[7]

The nation's fiscal problems, today and beyond, derive entirely from excess spending, especially entitlement spending, not a dearth of revenue. While current revenues are exceptionally low as a share of the economy, this is due almost entirely to the weak economy. As analysis by the Administration's budget office and the Congressional Budget Office affirm, revenues will return to a more normal 18.5 percent of the economy as the economy recovers. Given these facts, President Obama's insistence on an economically harmful tax hike for what is essentially a fiscally meaningless increase in revenues will not help policymakers navigate successfully around the fiscal cliff.

A hopeful sign, however, is that the political timing is propitious, and important policy reforms in Social Security and Medicare are simple, straightforward, and well known. These proposals, while not correcting more fundamental programmatic flaws, would materially correct the spending excesses in these programs. Better yet, these proposals are not partisan in nature, but have been supported on a bipartisan basis in the past.

All that is lacking to avoid the fiscal cliff, profoundly stabilize the nation's public finances, and shore up these critical entitlement programs is for the President to take the lead. The nation waits.

—J. D. Foster, Ph.D., is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in and Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

[1] Alison Acosta Fraser, “Boehner’s Olive Branch: More Revenues, but Only Through Growth,” Heritage Foundation, The Foundry, November 9, 2012, http://blog.heritage.org/2012/11/09/boehners-olive-branch-more-revenues-but-only-through-growth/.

[2] Curtis S. Dubay, “Taxmageddon: Massive Tax Increase Coming in 2013,” Heritage Foundation Issue Brief No. 3558, April 4, 2012, www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013.

[3] David C. John, “Social Security Finances Significantly Worse, Says 2012 Trustees’ Report,” Heritage Foundation Issue Brief No. 3577, April 23, 2012, www.heritage.org/research/reports/2012/04/social-security-finances-significantly-worse-says-2012-trustees-report.

[4] Social Security Administration, Office of the Chief Actuary, “Individual Changes Modifying Social Security,” Actuarial Publications, December 21, 2011, http://www.socialsecurity.gov/OACT/solvency/provisions/index.html (accessed November 27, 2012).

[5] The Social Security actuaries have considered in particular a modern measure of inflation known as “chained CPI” (C-CPI). Price indices of this sort are constructed by looking at a basket of goods and services to proxy all consumer purchases. The traditional CPI rarely changes the basket and thus steadily becomes a less accurate proxy as the pattern of consumer purchases changes. The more modern C-CPI, relying on advances in economic theory, updates this reference basket regularly and thus better proxies consumer purchases.

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No, Obama Didn’t Tell Republicans He Would Approve The Keystone XL Pipeline

BuzzFeed reports that House Republicans came out of their lunch meeting with President Obama confident he will say yes to the controversial Keystone XL pipeline. Rep. John Carter (R-La.) said Obama “indicated” he will support the pipeline.

The truth is the Keystone XL pipeline decision is still months away. There is no indication of how the State Department will decide, and it will happen as early as this summer. Administration officials and reporters confirm the report is false:

.@arthurdelaneyhp says Freshmen GOP Rep at lunch meeting said Obama fielded Keystone pipeline Q but never said he’d approve

— Sam Stein (@samsteinhp) March 13, 2013

Additional reports of the meeting indicate Obama only said he will make a decision on Keystone XL soon. It is worth noting BuzzFeed’s own story now carries the rebuttal from the White House stating that the future of the tar sands pipeline has not been determined.

Keystone XL supporters might be optimistic based on a State Department’s draft report that surprisingly concluded the project is environmentally “sound.” There are tens of thousands of activists who disagree.

Of course, Republicans aren’t content to leave the decision to the State Department. Polluter-backed House Republicans have repeatedly tried to force its approval, with their most recent attempt just last week.

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Press Briefing by Press Secretary Jay Carney, 03/13/2013

The White House

Office of the Press Secretary

James S. Brady Press Briefing Room

12:47 P.M. EDT

MR. CARNEY:  Welcome to the White House.  Sorry I'm late.  Had some meetings that ran long.  I do have something I want to say at the top.

I wanted to provide a quick update on the ongoing engagement with the business community and the President, First Lady, and senior members of the President’s team on a broad range of issues including the President’s economic agenda, immigration reform, cybersecurity, and issues important to our veterans and military families, to name a few.

As you know, the President today will be dropping by two separate meetings with business leaders this afternoon.  The President will be attending a meeting with business leaders to discuss cybersecurity as a part of the administration’s ongoing dialogue with the private sector regarding this issue.  Attendees include David Cote from Honeywell International, Wes Bush from Northrop Grumman Corporation, and Randall Stephenson from AT&T. A full list of attendees will be provided later this afternoon.

After that, he will attend a meeting with business leaders where he will discuss our efforts on immigration reform and its role in our broader economic agenda.  Attendees of that meeting include Greg Brown from Motorola Solutions, Douglas Oberhelman from Caterpillar, and Virginia Rometty from IBM Corporation.  Again, a full list of the participants in that meeting will be provided afterwards.

Finally, as part of the Joining Forces initiative, the First Lady delivered remarks earlier today at the quarterly meeting of member CEOs of the Business Roundtable, where she continued her call on the private sector to hire America’s veterans and military spouses, and she also called on them to help reach their full potential within America’s companies.  Mrs. Obama made the case that it has never been more important to join together and help our veterans and military spouses find employment and to build their careers, especially with more than 1 million veterans who will be hanging up their uniforms and transitioning back to civilian life in the coming years.

Also this morning, senior staff, including Valerie Jarrett, Denis McDonough, Rob Nabors, met with members of the Business Roundtable executive committee to address a broad array of issues on the President’s agenda.  And Treasury Secretary Jack Lew held a meeting yesterday with business leaders to discuss the President’s economic agenda, including Jim McNerney from Boeing, and Fred Smith from FedEx.  I'd refer you to Treasury for the full list of attendees.

I do have one final note for the young among you in spirit or fact, and that is that Gene Sperling will be participating in an Ask Me Anything session on Reddit this afternoon at 2:00 p.m. (Laughter.)  I think you should check it out.  You will not regret it.   

Q    Awww.

MR. CARNEY:  I'll take your questions now.  Ask me anything. (Laughter.) 

Q    It sounds like yesterday the President was pushed during his meeting with Senate Democrats on chain CPI.  And this is something that the President and White House aides have said all along that he is going to support.  Is it going to be in his budget?

MR. CARNEY:  First of all, I don't have details to give to you of the President’s budget, as I think I've said to Roger many times.  But I can tell you that the President’s offer to Speaker Boehner, which includes among the entitlement reforms so-called chain CPI, remains on the table.  It is the President’s position. It is one of the items that demonstrates the seriousness with which he approaches this challenge, the seriousness with which he believes -- the seriousness with which he approaches the necessity of bipartisan cooperation and his willingness to make tough choices in an effort to find common ground.

Again, I’m not trying to telegraph too much here because I will not get ahead of the presentation of the President’s budget, which is a very detailed document, but the President’s offer remains on the table.  And it would be wonderful if the Speaker of the House were to take it up and move forward with it because it does represent both the opportunity to achieve further balanced deficit reduction, to meet and exceed the $4 trillion deficit reduction goal, to set our economy on an even more fiscally sustainable path, and to invest in those areas of the economy that help us grow in the future that ensure that we have the information necessary to compete, to ensure that we have the workforce necessary to compete.  So again, the President believes that bipartisan cooperation is possible.

He has put forward proposals that demonstrate his commitment to making tough choices, to meeting Republicans halfway in the arena of common ground and he certainly hopes that Republicans will similarly come forward with proposals that demonstrate that kind of spirit.

I think it’s -- as you know, the President is meeting with House Republicans today, the House Republican Conference, and that's part of engagements he’s having with lawmakers in an effort to talk about opportunities for bipartisan compromise on a whole range of issues -- budget issues but also immigration reform, measures to reduce gun violence, action that we can take to create more jobs and help our economy grow faster, invest in infrastructure and manufacturing.  These are the areas where there has traditionally been bipartisan cooperation and support and that he hopes there will be in the future.

Q    On another topic, could you explain to me a contradiction between you and the President, and your statements on whether the White House made the call to cancel the tours?

MR. CARNEY:  Nedra, the fact of the matter is that the White House runs the tours.  The tours are of the White House.  The Secret Service staffs the tours.  The Secret Service came to us with a decision that because of the sequester cuts, it would be, in their view, impossible to staff those tours; that they would have to withdraw staff from those tours in order to avoid more furloughs and overtime pay cuts.  It was our job then to cancel the tours.  The Secret Service cannot because those are White House tours.  So that is what the President was referring to.

Q    But it sounds like he was wrong, though, when he said that the decision wasn’t made by the White House.

MR. CARNEY:  Well, the decision to cease providing Secret Service staff to the tours was made by the Secret Service.  They have their budget.  They look at it; they evaluate the options, all the bad options that are on the table, including, as they have said and we have said, tours versus furloughs and cutting of overtime pay, which goes to their core mission, and made the decision that their core mission was better served by canceling tours, which are very labor-intensive, than by having more furloughs and cutting more pay.  And that's a decision that we agree with, that we think is not a happy choice but is the right choice when it comes to the need for every agency affected by the sequester to focus on their core mission as they implement these cuts.

Q    But didn't the President say this not a decision --

MR. CARNEY:  Sorry, go ahead.

Q    The President said this was not a decision made by the White House.  You just said it was.

MR. CARNEY:  Well, Ed, I think I just answered that question and said that the Secret Service made the decision about its budget and to withdraw personnel from tours.

Q    Right, and then you said it was --

MR. CARNEY:  We had to cancel the tours.  It’s our job to cancel the tours.  They cannot cancel them so -- because we run  -- this is not a tour of the Secret Service building.  It’s a tour of the White House and the grounds.  And we run the tours and invitations and that process.  So the White House, as we have said, canceled the tours, confronted with the choice made by the Secret Service -- which we concur with, but it is certainly their choice because it’s their budget -- that it was the right thing to do not to add further furloughs to the future for Secret Service agents, the men and women who put their lives on the line to protect senior officials in our government, and that the result would be cutbacks in staffing, hours in an area like tours, which is so labor-intensive. 

So let’s go back to the fact that none of this was necessary.  These choices are all bad.  And that was the point of the sequester.  And that's the reason why we should be avoiding it.  And while it is an unhappy choice to cancel tours, on the one hand, or furlough the hardworking men and women who put their lives on the line in service of the country, our even greater concern is with the 750,000 Americans who will lose their jobs because of the choice to implement the sequester.  That is the worst outcome of the sequester.

Another terrible outcome of the sequester is the reduction in economic growth that every economist on the outside who’s analyzed this say will occur.  So I think we're now seeing that there are unhappy results of sequester.  It may be a home run in some folks’ eyes, a victory for the tea party for some, but it’s bad for America.  It’s bad for those who will lose their jobs and those who suffer from diminished economic growth.

Q    The President indicated that White House tours are under review.  Last Thursday, Major asked you that question and you said no, they’re not under review. 

MR. CARNEY:  The decision has been made to cancel the general tours.  As the President said in his interview, he’s asked the White House to consult with the Secret Service to see if there’s any way to provide limited tours to school groups or others.  That's being reviewed.  But I should be clear that the choices here -- there’s not an option here to reopen the tours in general here, because, again, that's not an option because of the sequester cuts.  These are labor-intensive operations that require thousands of man-hours by the Secret Service, and the decision was made that given the unhappy set of choices sequester presented to the Secret Service, that this was the best option.

Q    The President said this morning that differences may be too wide to bridge the gap on reaching a grand bargain.  That's a pretty pessimistic assessment.  Has he thrown in the towel?  And would he prefer simply to be given greater flexibility in how to administer the sequester cuts?

MR. CARNEY:  Well, I think you're confusing two propositions here.  We've addressed the flexibility issue.  There is no positive way to slice $85 billion out of the budget in six months.  We're now seeing that.  It’s a fact.  And that's not on the table.

The second issue is whether or not we can achieve the grand bargain or the completion of the bigger deal that would achieve the $4 trillion-plus in deficit reduction that outside groups, as well as the President, the Speaker of the House and others have identified as the goal in deficit reduction over 10 years. 

It’s true, as the President said, the divide may be too wide.  But it is also true that there is at least the potential for bipartisan compromise.  I mean, if you look at it, both sides say they believe we should have additional savings from entitlement reforms, spending cuts.  Both sides say that we should reform our tax code in a manner that eliminates unnecessary loopholes and special breaks and incentives.  The President believes that that tax reform should generate revenue from the well-off and well-connected to contribute to the cause of deficit reduction.  And if we do that and take the additional savings from the entitlement reforms that he’s proposed, we can hit the mark and achieve that $4 trillion-plus in deficit reduction, in a way that helps our economy, allows it to grow, and does not unduly burden senior citizens or the middle class.

In many ways, the Ryan budget, as we talked about and as the President said, presents the best argument for why balance is necessary, because if you don't choose balance, a balanced approach, you have to make the stark choices that that budget represents -- dramatic cuts in our investments in education, in manufacturing, in infrastructure, voucherization of our Medicare program, dramatic reductions in our Medicaid program. 

These are necessary choices if you're willing to ask the well-off and the well-connected, as the President has said we should and as the public has said we should, to contribute, to be part of the solution. 

And the President will have this discussion with House Republicans today.  He will also talk about a number of other issues.  He will continue those discussions when he meets with Senate Republicans and House Democrats, and he will continue these discussions in conversations and meetings, small and large, with lawmakers going forward.

Q    On cybersecurity, the National Security Advisor and I guess now also the President have mentioned China specifically in connection with cyber intrusions.  Would the United States accept China’s offer to hold talks about cybersecurity?  And if there is any concrete evidence that the Chinese government is in any way behind any of the hacking attacks, what does the United States do?

MR. CARNEY:  Well, I spoke about Mr. Donilon’s speech, which was well covered and addressed this issue, among others.  And certainly the President has spoken about cybersecurity and made clear, as he has all along, that he sees it as an enormous priority, one that should have the attention of Congress and that Congress should act on through legislation that the President has supported but thus far has not made it out of Congress.

He has taken action -- executive action to enhance our cybersecurity, but Congress needs to act.  That's the first.

I would note -- you talk about the Chinese response, and we note that response from the Chinese foreign ministry and the foreign ministry said, “China is willing on the basis of the principles of mutual respect and mutual trust to have constructive dialogue and cooperation on this issue.”  And we welcome that statement and look forward to engaging in a constructive dialogue on this issue.  That is one of the things that Tom Donilon talked about in his speech -- we need to have that conversation; we need to have that dialogue.  This is an international challenge and we look forward to that.

Q    I wanted to get back to the comment that the President made that the differences may be just too wide.  Should he talk to the Republicans in the House and the Senate before making that assessment?

MR. CARNEY:  Well, I think you're -- isn't it a statement that is obvious?  As I have said, we're not saying that a deal is absolutely going to happen.  We're not trying to wish away the differences that exist.  We're trying to find common ground.  And the President believes there is common ground.  The President believes that we all have acknowledged that we need to reduce our deficit; we all believe that economic growth and job creation is a priority; and we all believe that the way forward in reducing our deficit should include entitlement reform savings and tax reform.  The open question is, in our minds, is what do you do with the savings from tax reform? 

The Speaker of the House identified, he said, up to a trillion dollars that you could gain just from the wealthy through tax reform, closing loopholes and exemptions.  That was just a few months ago.  He said that he would use that money to help pay down the deficit.  Now he says we won't use that money to help pay down the deficit.  But presumably, those loopholes exist and should be closed.  Those deductions can be capped and those exemptions should be eliminated.

If that was his view then, I assume it’s his view now.  The question is, Jim, what do you do with the money.  And the President’s proposition is that it is in the national interest and it is in the interest of fairness to the middle class and to senior citizens that they not be asked to bear the burden of further deficit reduction alone. 

Spending cuts have been signed into law.  Further spending cuts can be found, and the President has put spending cuts on the table.  He has put savings from entitlements on the table.  So there’s no question here that he believes that more can be done on that side of the ledger.  But we need to do more on the revenue side, as well.

I think President Ronald Reagan’s chief economist has said in the last couple of days in an op-ed that he believes that we should have tax reform that generates more than $2 trillion in revenue towards deficit reduction.  Well, the President admires the audacity of that proposal, but the President is asking for significantly less than that.  And maybe, in their veneration of Ronald Reagan, they will listen to that proposition and Republicans will say, we should do this and we can do this in the name of deficit reduction, which is allegedly or supposedly a top priority.

Q    Speaking of deficit reduction, the President also said that there was not an immediate crisis in terms of debt.  But back in 2008, when the national debt was at $9 trillion, he called that irresponsible and unpatriotic.  The national debt has nearly doubled since then.  How is it not an immediate crisis?

MR. CARNEY:  Well, here is why this chart is here.  When the President came into office, we were in economic free fall.  We were heading towards the worst recession of our lifetimes, and we were on the precipice of a Great Depression, the likes of which we haven’t seen since the 1930s.  The President took decisive action, working with Congress, to reverse the course of that downturn, to stabilize our economy and to set it back on the path of growth and job creation.

Once that stabilization began to take hold, he turned towards the task of reducing our deficit, which he believes is also a worthy and necessary goal when it is part of the overall project, the overall number-one priority which is growth and job creation.  And you can see here what the effect is.  Because of the Great Recession when he took office, and because obviously of the measures necessary to be taken to avert a depression, here is what happened to deficits as a share of GDP in 2009.  Now, look at this drop:  2010, 2011, 2012, the projection for 2013, 2014 and forward, if the President’s offer were enacted going forward.

You have deficits that fall consistently well below the 3 percent target that economists have said is economically important, and you have the largest reduction in the deficit since the end of World War II, when we had massive demobilization in the wake of that war. 

This is progress.  Work needs to be done, but the President’s point is we do not have an immediate debt crisis.  We are on the right trajectory.  We need to make decisions that affect the long term, and the long term not just in terms of deficit reduction, but in terms of economic growth.

And if we make those choices now -- and that includes investments in infrastructure, investments in education, investments in manufacturing and innovation -- we will be growing faster, we will be stronger economically.  And that contributes  -- as the veteran reporters from the 1990s here know, growth contributes to deficit reduction.  That's part of the package.  It is much harder to reduce your deficit and deal with your debt if you’re not growing. 

Q    But that only happens if you get a deal, if you get some kind of deal.

MR. CARNEY:  Well, this is if -- first of all, this has happened, and this will happen.  And that is the largest reduction in the deficit since the end of World War II.

Q    But the offer would be a deal of some sort.

MR. CARNEY:  The fact is that the further projections are if the President’s compromise solution were adopted.  I think if a compromise solution of any sort that represented the principles the President has put forward and bipartisan commissions have put forward -- a balance that includes revenues and reductions -- that you would have a similar positive impact on our deficits and debt.  And that would be tremendous for our economy.  It would be fantastic for our middle class.  And that's the goal here.

But it’s part of the bigger goal of growth and jobs.  It is not, as the President has said, and I’ve said less articulately, it’s not a goal unto itself.  It’s part of the bigger project here of growing the economy and strengthening the middle class.

Jonathan Karl.

Q    Jay, one of those groups that have been having bake sales and raising money for their trip to Washington, the President referred to, was the St. Paul’s Lutheran School in Waverly, Iowa.  Their tour was scheduled for Saturday.  Will you be able to provide a tour for the St. Paul’s School?

MR. CARNEY:  We have seen that report, and it’s very unfortunate, as is the case with all those who have seen their tours canceled because of the implementation of the sequester.  As I said, the Secret Service and the White House are talking about what is possible.  I would not anticipate that opening tours that soon would be possible.  But again, I don't want to prejudge the outcome of this, but I also want to set expectations here.

There is a stark reality that has come about because of the imposition of the sequester, the home run, the tea party victory, and that is that these cuts are being implemented across agencies and across the country.  And the effects are real, and they result in job loss or furloughs or pay cuts, and closures of tours in this case, because those are the options that are available. 

So there is no way to guild the lily here.  This is a bad situation that results in bad choices because the policy was designed to present bad choices and bad choices only, which is why Congress was supposed to avoid it and to come up with an alternative means of achieving the deficit reduction that is otherwise achieved through arbitrary, across-the-board cuts.

Q    The Secret Service told us that the tours cost $74,000 a week.  How much is it going to cost for the President to travel later this week to Illinois?

MR. CARNEY:  Well, the President is the President of the United States, and he is elected to represent all of the people. And he travels around the country, appropriately.  I don't have a figure on the cost of presidential travel.  It is obviously something, as every President deals with because of security and staff, a significant undertaking.  But the President has to travel around the country.  He has to travel around the world.  That is part of his job.

Q    How much does it cost for him to go and play golf?

MR. CARNEY:  Jon, again, you’re trivializing an impact here. People will lose their jobs.  Three-quarters of a million people will lose their job.

Q    This is about choices.  You have a certain amount of --

MR. CARNEY:  Right.  The law stipulates what the costs will be for each agency.  Those jobs will be lost, okay?  And you can report on White House tours, or you can find out what the impacts are out in the real world -- additional impacts are.  This is a real-world impact here, and it is unfortunate.  And it is an unhappy choice.

The fact of the matter is Congress made this choice -- Republicans made this choice.  Their option was to do what they did a few months ago and delay the sequester to allow for time to try to negotiate a bigger deal.  They chose not to because they refused to accept the principle that the well-off and well-connected ought to pay a little bit towards deficit reduction.  That was a choice.  And it was a choice that was presented to the American people as a home run, as something that was politically advantageous, in the back pocket of the Speaker of the House; it was a tea party victory.  But there are consequences to that victory for the tea party, and the consequences are what we’ve been discussing today. 

Q    When the President says there is no deficit crisis --

MR. CARNEY:  He didn't say that, actually.

Q    -- no immediate deficit crisis, and he said none for 10 years, how do you expect to get a grand bargain?  How do you expect to get both sides to make those difficult choices if there's no crisis?

MR. CARNEY:  Well, there is a long-term debt challenge.  Everybody recognizes this.  The President speaks frequently that our long-term deficit and debt are driven primarily by health care costs, the expense of administering programs like Medicare and Medicaid and Social Security.  That's why he’s put on the table, actually, more detailed entitlement reforms than the Speaker did, for example, on the fiscal cliff deal.  And that's why he has already implemented savings out of our entitlement program, savings that of course Chairman Ryan and others railed against but then adopted in their own budget proposals.

So this is a challenge.  But what we should not do is take action that does harm to our economy, does harm to our middle class, does harm to our seniors and only does well by the well-off and well-connected in order to address a deficit challenge that can be addressed appropriately in a balanced way that grows the economy, helps the middle class, and protects our seniors.  This is a pretty clear choice. 

And the President is heartened by the fact that there are not just Democrats and independents who support the balanced approach to deficit reduction, but Republicans and Republican lawmakers who have expressed it and who have an interest in finding common ground.  And that's why he's having these conversations on this issue and many others. 

Q    Briefly concluding the tour conversation, are the weekend staff tours, are those also --

MR. CARNEY:  All tours are canceled.

Q    Even for the staff members of the White House?

MR. CARNEY:  Well, there's no weekend staff tours.  Staff are able to give tours, but those are all canceled, correct.

Q    I want to ask a question that was sort of alluded to  -- you spoke to in brief yesterday.  But obviously, this is day two of this sort of shuttle diplomacy, this charm offensive as some have described it right now.  Is this, as one White House anonymous individual described it, this is a joke done for the media's benefit, mind you -- is this a legitimate, genuine effort as some Republicans have questioned?  Or is this --

MR. CARNEY:  I know Kristen was here yesterday.  Let me make clear -- I have no idea who said that to the writer of that article.  But that thought, that opinion does not represent the President's views.  It does not represent the White House's views.  It does not represent the administration's views.  The President is absolutely committed to engaging with members of Congress.  He has enjoyed his engagement so far.  He believes it has been productive and constructive, and has led to positive conversations both with Senate Republicans and House Republicans, and that includes his lunch with Chairman Ryan last week.  So I could not be more categorical in making clear, I believe, that that remark does not represent the views of this White House or this President. 

Q    So given the fact that he has now had that dinner with some Republican senators and that conversation over lunch with Chairman Ryan as well as Representative Van Hollen here, now we're several days into this and just yesterday, Chairman Ryan put out a budget that a senior administration official referred to as draconian and a "gimmick."  So how is it going?  Is this working, this so-called charm offensive?

MR. CARNEY:  We're not going to shy away from our policy differences any more than Chairman Ryan has shied away from his policy differences with us.  And the President believes that Chairman Ryan is sincere in the expression of his priorities that are demonstrated in his budget priorities -- in his budget proposal.  But he also believes that it was a constructive conversation; I believe Chairman Ryan has said that.  And he also believes that we can and should move forward to see if we can find common ground on this -- the general proposition that we can move together and take action to reduce our deficit in what the President believes should be a balanced way.

And let's just dial back to what the President said in his inaugural address.  The American people do not expect us to resolve all of our differences.  They do expect us to come together and work together to meet the challenges that face us.  There is no question that on matters of budget policy and fiscal policy, social policy, and other kinds of policy there are and there will be stark differences between the two parties, leaders of the parties.  And that is true today and it will be true four years from now.

But there is remarkable consensus on some issues, on identifying a problem that should be solved -- deficit reduction.  We forget that now everybody takes for granted the idea that both sides agree with this notion that we should reduce our deficit by at least $4 trillion over 10 years.  That's a consensus opinion.  People forget that it's noteworthy that Republicans and Democrats alike believe that we ought to deal with our long-term entitlement challenges, that we ought to reduce spending in a smart way, and that we ought to reduce the size of our deficits as a portion of GDP.  That's significant. 

And people forget, too, that when you talk about the differences that if Republicans are firmly in the camp of no new revenues and Democrats are supposedly firmly in the camp of no spending cuts, this President -- this Democratic President -- has signed into law with Democratic support more than $2.5 trillion in deficit reduction, more than four to one, four dollars to one dollar in spending cuts.  That represents compromise.  That represents middle-of-the-road consensus, positive action for the economy and for the country.

Yes.

You seemed a little -- 

Q    I defer. 

MR. CARNEY:  Did you hear that everybody?  Major Garrett defers.  Are you deferring tomorrow?  This is a very chivalrous group. 

Yes.

Q    On cybersecurity, could you talk a little bit more about what it is the President is either going to impart to the CEOs or wants to hear from the CEOs?  And is there a reason in particular that the contents of that conversation in either direction requires them to be in the Sit Room?

MR. CARNEY:  I appreciate the question.  I know it sounds super cool.  But as those of you who are familiar with the West Wing, it is an amazingly small space, and when the Roosevelt Room is occupied with a meeting -- as is the case at the same time -- the options are few for a meeting of any size that would exceed, say, my office.

So the Situation Room is being utilized -- as it is frequently -- for that kind of meeting.  It's not related to the -- 

Q    It's not related to the subject.

MR. CARNEY:  Not related to the subject, no.  And we have meetings there on occasion on different topics that are not related to national security issues or classified matters.

And then on your first question, the President has obviously had discussions with business leaders on the cybersecurity issue. He has seen, as various corporations and business leaders have gone public with their concerns about cybersecurity and the effects of breaches of cybersecurity on their operations, and that is why he wants to have this conversation and why he thinks this is an important part of building a consensus about moving forward, about why it's necessary for our economy and for our national security.

The sharing of information and working with private -- with the private sector on this issue is vitally important in the comprehensive approach the President believes we need to take to deal with it.

Q    But is this more of the President wanting to communicate his concerns to them and employ them in the lobbying effort on Capitol Hill?

MR. CARNEY:  I think it's a two-way.  He wants to hear from out in the field what they're -- in the private sector -- what they're experiencing, what their concerns are, what their challenges are, what they hope to see in terms of action in Washington.  And he also wants to convey to them how seriously he takes this issue and what he believes the right steps are moving forward.  And he certainly hopes that out of this meeting and the many others he has on this topic, that we will build the kind of consensus necessary to compel Congress to take appropriate action.

Mara.

Q    Thank you.  You said earlier that Republicans consider this a home run.  You called it a tea party victory.

MR. CARNEY:  Those are quotes from the fine work of the fourth estate.  

Q    Yes, I know.  I'm assuming you were quoting Republicans, right.  But the recent polls have shown that the President's job approval, especially on the economy, has taken a hit as the gridlock and the sequester has gone forward.  It seems like he owns the economy no matter -- and dysfunction in Washington no matter what you've tried to do.  I'm wondering whether you think your efforts to explain to the country that it's the Republicans fault have fallen short.

MR. CARNEY:  I would say a couple of things.  First of all, as I say repeatedly and as we experience together, communally, be careful of making too much of any individual poll --

Q    Well, there’s a series of them.

MR. CARNEY:  -- or even a series of polls. 

I would also say, if we refer to the latest, the Washington Post or ABC News poll, that the President at 50-percent job approval is about where he was when he won reelection overwhelmingly with 332 electoral votes.  I'm just a layman in making that observation, but I think it's true.

It is a remarkable fact about how low the public's estimation of Republicans has sunk that the news of that poll was that the President was at 50 percent -- not that the Republican Party had a disapproval rating in the mid-seventies.  But let me say, having made those observations -- simply to urge you not to focus too much them -- is that we're about the business of trying to get stuff done for the American people. 

We understand when Washington is dysfunctional -- as Washington was dysfunctional when Republicans made the decision to allow the sequester to be implemented -- that the American people look at that and say, enough already.  They want positive action.  They want bipartisan cooperation.  And when Washington is dysfunctional, everybody in Washington looks bad. 

So we -- I would note, in that poll, as long as we're talking about it, that the change in view that Americans have developed in -- as it regards to the sequester, now that it has been implemented and the cuts are being felt -- I think frustrations with the result of congressional inaction are growing.  And it's just another reason why we need to come together and have the kind of discussions that hopefully can lead to a bipartisan compromise on deficit reduction.

Q    Just to follow up on Jon's question about the President's own budget.  Other briefers have said that every -- the sequester means that every single program from top to bottom has to be cut by the same percentage.  I don’t know what it is for nondefense -- like 9 percent or something.

MR. CARNEY:  I think it's 9 percent and 13 percent for Defense, roughly.

Q    So does that mean that the President's budget -- personal staff, household budget?  Or were those exempted -- I mean, in terms of how it affects his golf trips and his --

MR. CARNEY:  I believe the Executive Office of the President was affected just like every agency within the executive branch.

Q    It was?

MR. CARNEY:  But we've referred these questions to OMB for the details, and they have been providing information about how the sequester is affecting the White House and White House staff.

Q    Right, but the problem you're going to be faced with every day is to show that the President himself is taking a hit, his own activities are being curtailed by the same percentage as all those other people who are getting furloughed.  And my question is, are they?  I mean, you work here.  (Laughter.) 

MR. CARNEY:  I do, and everyone here works, obviously, in service of the President, and the fact is, his staff is going to be affected by the sequester.  So the President will be affected, there's no question, as the sequester takes effect and as the impacts of the sequester are felt in terms of pay reductions or furloughs or the like.  And I think we've provided information as it's become available about what those impacts will be on the executive branch.

Yes, sir.

Q    Thank you, Jay.  Does the President still think that American involvement and American mediation is necessary for resolving the Israeli-Palestinian conflict?  And why does he see the need to stress to the groups he met that he's not taking any new peace plan to the region?

MR. CARNEY:  Well, I think he's stressing a matter of fact; it's not a need.  He's simply saying that he's going to the region, going to Israel and Jordan and the West Bank, to have conversations with leaders that he's meeting with, and also with -- in Israel, to engage with young people in Israel about the future of the Israeli-U.S. relationship. 

And when it comes to the Middle East peace process, our fundamental position has been that the two sides need to come together in face-to-face negotiations to resolve the differences between them and to achieve the two-state solution that is the goal of both sides, as well as the United States and our international partners.  So that is why we are critical of unilateral steps by either side that we believe do not serve the cause of returning to face-to-face negotiations, and it is why we encourage both sides to return to face-to-face negotiations.

In the end, peace has to be reached in negotiation between Israelis and Palestinians -- not imposed by any outside party.  Now, the United States historically and in this administration has been engaged in that process, in trying to facilitate that process, and we remain very much engaged in that process.  But we believe the steps need to be taken to bring the two parties back to negotiations, and that's what the President I’m sure will stress when he talks about this.  But he doesn't have a new proposal, and I think that's the point he was making.

Q    Just one more question.  Does he intend to visit Syrian refugees while in Jordan?

MR. CARNEY:  I think we’re going to have a background briefing on the President’s schedule.  I don't have any more details for it -- about it today.

Let me go to Mike, yes.

Q    Thanks, Jay.  I just wanted to go back to the chart there and the goal that the President has set.

MR. CARNEY:  Sure.

Q    In the past, particularly around the time of the convention, the President had praised the balanced budgets and even surpluses that had been generated during the Clinton administration with a Republican Congress.  Now he’s setting the goal not at a balance or a surplus, but at 3 percent of GDP.  Why is that not a contradiction?

MR. CARNEY:  Well, because -- you were around, right?  You remember the recession in 1991?  Wouldn’t it have been wonderful for the country if the recession of 2007, 2008, and 2009 were anything like as shallow as that recession?  The country was faced with catastrophic economic decline, a global financial crisis.  The President inherited deficits from the previous administration that dwarfed the size of deficits that were inherited by the incoming President in 1993, which is not to suggest that the task that President Clinton met and the success he enjoyed working with Congress in eliminating those deficits was not significant, but the size of the problem was unprecedented that this President faced when he took office in January of 2009.

Let’s just review the fact that in the fourth quarter of 2008, prior to him taking office, the United States economy shrank by almost 9 percent -- 9 percent.  It is estimated that the United States lost $16 trillion of wealth -- that's the size of the debt -- $16 trillion of wealth because of the financial crisis.  Those figures are enormous, and the country faced enormous challenges as a result of the financial crisis. 

And because of the grit and determination of the American people, because of their ingenuity, because of the focus that was applied by the President, members of Congress, business leaders and others, we have reversed that course.  We have been on a period of sustained growth and sustained job creation for three years -- over $6.3 trillion -- sorry -- 6.3 million private-sector jobs created in three months. 

So I think the answer to your question is the size of the problem was exponentially larger, but the goal of reducing our deficit is worthwhile within the context of the bigger goal of economic growth and job creation.

Q    Can I ask you just about one other thing?

MR. CARNEY:  Sure.

Q    You just announced Deborah Jones has been picked as the Ambassador to Libya.  Can you tell us a little bit about why the President chose her?

MR. CARNEY:  I appreciate the question.  The President has announced today his nomination of Deborah K. Jones to serve as the next U.S. Ambassador to Libya and to represent the American people during this important stage of Libya’s new democracy.

We are pleased also to welcome Libyan Prime Minister Zeidan to Washington for his first official visit.  The Prime Minister is meeting with Secretary Kerry today at the State Department and will also be at the White House for meetings with senior administration officials. 

I can tell you that Ambassador-to-be Jones is a career Foreign Service officer who has served admirably in diplomatic posts around the world.

Q    Thanks.

MR. CARNEY:  Thanks.

END 
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Real Medicare Reform: Why Seniors Will Fare Better

[1] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, p. 229, Table V.E2, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf (accessed November 16, 2012).

[2] For a description of the Heritage Medicare reform plan, see Robert E. Moffit, “The Second Stage of Medicare Reform: Moving to a Premium Support Program,” Heritage Foundation Backgrounder No. 2626, November 28, 2011, http://report.heritage.org/bg2626. See also, Robert E. Moffit and Rea S. Hederman Jr., “Medicare Premium Support: The Best Reform Option,” Heritage Foundation WebMemo No. 3483, February 2, 2012, http://report.heritage.org/wm3483.

[3] For an overview of the performance of the government’s defined-contribution programs, including cost control, see Robert E. Moffit, “Expanding Choice Through Defined Contributions: Overcoming a Non-Participatory Health Care Economy,” Journal of Law, Medicine and Ethics (Fall 2012), pp. 558–573.

[4] For the best summary of this issue, see Walton J. Francis, Putting Medicare Patients in Charge: Lessons from the FEHBP (Washington, DC: AEI Press, 2009), pp. 111–143.

[5] Under the FEHBP formula, no plan can get a government contribution on behalf of a beneficiary that exceeds 75 percent of the plan’s total premium cost. In other words, by limiting the savings that enrollees can secure, current law undercuts the greater potential of FEHBP to achieve an even better performance in cost control.

[6] Moffit, “Expanding Choice Through Defined Contributions,” p. 565, and Congressional Research Service, The Federal Employees Health Benefits Program: Possible Strategies for Reform, May 24, 1989, p. 255.

[7] Deborah Brunswick, “Health Insurance Costs to Rise Again Next Year,” CNN Money, September 22, 2011.

[8] Jeff Lemieux, Memorandum to the Medicare Commission, The National Bipartisan Commission on the Future of Medicare, February 17, 1999, http://medicare.commission.gov/medicare/jeff.html (accessed May 15, 2013).

[9] Roger Feldman, Bryan Dowd, and Robert Coulam, “A Competitive Bidding Approach to Medicare Reform,” Preserving Medicare for Future Generations: Market-Based Approaches to Health Care Reform, The Robert Wood Johnson–American Enterprise Series (April 2013), p. 10.

[10] The Heritage Foundation was opposed to adding a universal prescription drug entitlement to Medicare, but has always favored a competitive system of private plans offering seniors drug coverage.

[11] In 2003, there were several Democratic proposals to have the government cap monthly premiums. See “Medicare Overhaul Continues in Congress,” Coalition on Human Needs, June 23, 2003, p. 3.

[12] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, p. 231.

[13] Sarah Kliff, “What a 76 Cent Premium Decrease Says About Medicare’s Future,” The Washington Post, August 9, 2011.

[14] News release, “Medicare Prescription Drug Premiums to Remain Steady for Third Straight Year,” U.S. Department of Health and Human Services, August 6, 2012, http://www.hhs.gov/news/press/2012pres/08/20120806b.html (accessed May 15, 2013).

[15] Jonathan D. Ketcham, Claudio Lucarelli, Eugenio J. Miravette, and M. Christopher Roebuck, “Sinking, Swimming, or Learning to Swim in Medicare Part D,” American Economic Review, Vol. 102 (October 2012), pp. 2639–2673. The researchers used data for the years 2006 and 2007.

[16] Ibid., p. 2642.

[17] Ibid.

[18] Centers for Medicare and Medicaid Services, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table II.C18, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/tr2004.pdf (accessed May 15, 2013), and 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table III.D3, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf (accessed May 15, 2013).

[19] Marsha Gold, Gretchen Jacobson, Anthony Damico, and Tricia Neuman, “Medicare Advantage 2012 Data Spotlight: Enrollment Market Update,” The Henry J. Kaiser Family Foundation, Data Spotlight, June 2012, p. 1, http://kff.org/health-costs/report/medicare-advantage-2012-enrollment-market-update/ (accessed May 15, 2013).

[20] In fact, the average bid for all Medicare Advantage plans is 98 percent of the costs of traditional Medicare in the geographic bidding regions, and for HMOs the bids are 95 percent of those traditional Medicare costs. See James C. Capretta, “The Role of Medicare Fee-for-Service in Inefficient Health Care Delivery,” in Preserving Medicare for Future Generations: Market-Based Approaches to Reform, The Robert Wood Johnson- American Enterprise Series, (April 2013), p. 7.

[21] The law does not allow seniors to receive cash rebates for choosing plans that provide coverage below the Medicare benchmark payments.

[22] Most Medicare Advantage plans come under the Medicare payment benchmark, and are thus legally required to rebate 75 percent of the difference to enrollees in richer benefits or lower premiums. The remaining 25 percent is retained as savings to the federal government. See Medicare Payment Advisory Commission, “A Data Book: Health Care Spending and the Medicare Program,” 2012, p. 142.

[23] National Bipartisan Commission on the Future of Medicare, “Impact of the Commission Premium Support Proposal on Different Types of Beneficiaries,” p. 1., http://medicare.commission.gov/medicare/impact.htm (accessed May 20, 2013).

[24] Letter from Dan Crippen, CBO director, to Senator John Breaux (D–LA), co-chair, National Bipartisan Commission on the Future of Medicare, February 18, 1999, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/10xx/doc1092/breaux.pdf (accessed May 13, 2013).

[25] Douglas W. Elmendorf, “CBO’s 2011 Long-Term Budget Outlook,” testimony before the Committee on the Budget, U.S. House of Representatives, June 23, 2011, http://budget.house.gov/uploadedfiles/623elmendorftestimony.pdf (accessed May 13, 2013).

[26] A Medicare spending cap is no longer just a policy proposal; it is current law. As a policy matter, a Medicare spending cap has been embraced by the Obama Administration (a key feature of the PPACA) and congressional Republicans. In the case of centrist and conservative proponents of Medicare premium support, however, any such cap would function as a “backstop” to ensure savings that are guaranteed and thus measurable by the Congressional Budget Office. For conservatives and centrists, competition, not global Medicare budgets or price controls, is to be the mechanism to control cost and slow the growth in Medicare spending.

[27] Roger Feldman, Robert Coulam, and Bryan Dowd, “Competitive Bidding Can Help Solve Medicare’s Fiscal Crisis,” American Enterprise Institute Health Policy Outlook, February 2012, http://www.aei.org/files/2012/02/16/-competitive-bidding-can-help-solve-medicares-fiscal-crisis_081704430956.pdf (accessed May 13, 2013).

[28] Ibid.

[29] Zirui Song, David M. Cutler, and Michael E. Chernew, “Potential Effects of Reforming Medicare Into a Competitive Bidding System,” Journal of the American Medical Association, Vol. 308, No. 5 (August 1, 2012), http://jama.jamanetwork.com/article.aspx?articleid=1273025 (accessed April 15, 2013).

[30] James C. Capretta and Yuval Levin, “More Mediscare,” The Weekly Standard, August 20, 2012, http://www.weeklystandard.com/articles/more-mediscare_649725.html (accessed May 15, 2013).

[31] National Economic and Domestic Policy Councils, “The President’s Plan to Modernize and Strengthen Medicare for the 21st Century,” detailed description, July 2, 1999, p. 8, http://clinton2.nara.gov/WH/New/html/medicare.pdf (accessed April 15, 2013).

[32] For a description of the Medicare Advantage payment system and its flaws, as well as the program’s strengths in delivering high quality care, see Jeet S. Guram and Robert E. Moffit, “The Medicare Advantage Success Story—Looking Beyond the Cost Difference,” The New England Journal of Medicine, Vol. 366 (March 29, 2012), pp. 1177–1179, http://www.nejm.org/doi/full/10.1056NEJMp1114019?viewType=Print&viewClass=Print (accessed May 15, 2013).

[33] The Center for American Progress Health Policy Team, “The Senior Protection Plan,” November 2012, p. 6, http://www.americanprogress.org/wp-content/uploads/2012/11/SeniorProtectionPlan-3.pdf (accessed April 15, 2013). It is unclear whether a senior could choose a plan that bids above or below the benchmark under CAP’s proposal.

[34] Office of Management and Budget, “A New Era of Responsibility: Renewing America’s Promise,” February 2009, p. 28, http://www.gpo.gov/fdsys/pkg/BUDGET-2010-BUD/pdf/BUDGET-2010-BUD.pdf (accessed April 15, 2013).

[35] Obama for America, “Promises,” television ad, August 25, 2012, http://www.youtube.com/watch?feature=player_embedded&v=b9XkVonSIxk (accessed May 13, 2013).

[36] For a more detailed discussion of this controversy, see Rea S. Hederman Jr., “Why Medicare Premium Support Would Not Cost Future Beneficiaries $6,400 More,” Heritage Foundation Issue Brief No. 3745, September 28, 2012, http://www.heritage.org/research/reports/2012/09/why-medicare-premium-support-would-not-cost-future-beneficiaries-$6400-more.

[37] Glenn Kessler, “Health Care’s $6,400 Question—Fast Fact Check,” The Washington Post, September 4, 2012, http://www.washingtonpost.com/politics/health-cares-6400-question--fast-fact-check/2012/09/04/086b1046-f6d9-11e1-8398-0327ab83ab91_video.html (accessed October 19, 2012).

[38] Gretchen Jacobsin, Tricia Neuman, Anthony Damico, “Transforming Medicare into a Premium Support System: Implications for Beneficiary Premiums,” Kaiser Family Foundation, October 2012, http://www.kff.org/medicare/upload/8373.pdf (accessed October 23, 2012).

[39] Joseph R. Antos, “The Problem with Kaiser’s Premium Support Study? Seniors are Smarter than That—and So Are Health Plans,” AEIdeas blog, October 15, 2012, http://www.aei-ideas.org/2012/10/the-problem-with-kaisers-study-on-premium-support-seniors-are-smarter-than-that-and-so-are-health-plans/ (accessed May 15, 2013).

[40] Ketcham et al., “Sinking, Swimming, or Learning to Swim in Medicare Part D,” p. 2642.

[41] News release, “Feds Health Benefits Changes Save Taxpayers and Employees Nearly $2 billion,” U.S. Office of Personnel Management, October 17, 1983.

[42] U.S. Office of Personnel Management, Compensation Report: U.S. Civil Service Retirement System, Federal Employees Health Benefits Program, Federal Employees’ Group Life Insurance Program, Pay Programs, fiscal year 1983, p. 2, http://babel.hathitrust.org/cgi/pt?id=uiug.30112105073313#page/n2/mode/1up (accessed January 18, 2013).

[43] News release, “Feds Health Benefits Changes Save Taxpayers and Employees Nearly $2 billion.”

[44] U.S. Office of Personnel Management, Compensation Report: U.S. Civil Service Retirement System, Federal Employees Health Benefits Program, Federal Employees’ Group Life Insurance Program, Pay Programs, p. 55.

[45] Determined using a Consumer Price Index calculator: Federal Reserve Bank of Minneapolis.

[46] For a comparative description of the leading Medicare premium support proposals, see Robert E. Moffit, “Saving the American Dream: Comparing Medicare Reform Plans,” Heritage Foundation Backgrounder No. 2675, April 4, 2012, http://report.heritage.org/bg2675.

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Notice -- Continuation of the National Emergency with Respect to Iran

The White House

Office of the Press Secretary

NOTICE

- - - - - - -

CONTINUATION OF THE NATIONAL EMERGENCY WITH RESPECT TO IRAN

On March 15, 1995, the President issued Executive Order 12957, which declared a national emergency with respect to Iran and, pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701-1706), took related steps to deal with the unusual and extraordinary threat to the national security, foreign policy, and economy of the United States constituted by the actions and policies of the Government of Iran. On May 6, 1995, the President issued Executive Order 12959, imposing more comprehensive sanctions on Iran to further respond to this threat. On August 19, 1997, the President issued Executive Order 13059, consolidating and clarifying the previous orders. I took additional steps pursuant to this national emergency in Executive Order 13553 of September 28, 2010, Executive Order 13574 of May 23, 2011, Executive Order 13590 of November 20, 2011, Executive Order 13599 of February 5, 2012, Executive Order 13606 of April 22, 2012, Executive Order 13608 of May 1, 2012, Executive Order 13622 of July 30, 2012, and Executive Order 13628 of October 9, 2012.

The actions and policies of the Government of Iran continue to pose an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States. For this reason, the national emergency declared in Executive Order 12957 must continue in effect beyond March 15, 2013. Therefore, in accordance with section 202(d) of the National Emergencies Act (50 U.S.C. 1622(d)), I am continuing for 1 year the national emergency with respect to Iran declared in Executive Order 12957. The emergency declared by Executive Order 12957 constitutes an emergency separate from that declared on November 14, 1979, by Executive Order 12170. This renewal, therefore, is distinct from the emergency renewal of November 2012.

This notice shall be published in the Federal Register and transmitted to the Congress.

BARACK OBAMA

The First Lady met today with the Business Roundtable to talk about Joining Forces, her initiative that supports veterans and military families.

As part of our Sunshine Week series, Macon Phillips discusses We the People.

view all related blog posts

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Saving the American Dream: The Fiscal Cliff and Beyond

Abstract: Unless Congress and the President act promptly and wisely, sequestration under the Budget Control Act (BCA) will undermine military readiness, and the nearly $500 billion tax increase starting on January 1, 2013, will greatly harm an already weak economy. However, this fiscal cliff can be avoided. The key to avoiding this and future fiscal calamities is reform of the mandatory spending programs, from welfare to Social Security, that currently drive federal deficits. The Heritage Foundation’s Saving the American Dream plan would rein in spending immediately, restructure the major entitlement programs to bring entitlement spending under control over the long term, and strengthen the core foundations of these programs.

Since the Heritage Foundation’s Saving the American Dream plan[1] was first published in April 2011, there has been almost no substantive progress on spending control. The only plausible exception was the flawed Budget Control Act (BCA), a product of a contentious debt limit debate. The complete failure of the resultant bipartisan “supercommittee” to reach agreement was a sad reflection on a Congress that is divided and unwilling to pass the legislation necessary to rein in spending.

As a result, the nation is facing the looming sequester, which will further undermine the defense budget, jeopardizing one of the federal government’s core constitutional responsibilities. Yet it would leave entitlement programs virtually untouched, even though they are the largest driver of spending today and in the future. Meanwhile, the prospect of a huge tax increase in January has had a deleterious effect on the economy for many months, although the effect is only a small portion of the harm the economy will incur if the tax increase ultimately takes effect. America seriously needs a true way forward.

The Heritage plan reflects the need to rein in spending immediately and to rethink major programs. Spending on the open-ended Social Security, Medicare, and Medicaid entitlements must be brought under control, and the core foundations of these programs should be strengthened.

The following principles guide the policy solutions in Saving the American Dream:

Total spending must be brought under control to balance the budget without raising taxes, ultimately holding revenues at their historical share of gross domestic product (GDP). Entitlement programs should, unlike today, actually guarantee seniors economic security in retirement and be recast as real and sustainable insurance programs focused on those who truly need them. Other spending must be curbed, and the federal government must be restricted to its proper functions. Defense, as a core constitutional function of the federal government, should be fully funded and efficiently delivered. The tax system should be structurally reformed to foster growth by eliminating tax distortions of private economic decisions, especially decisions on savings and investment, and to make the system simpler and more transparent.

Fiscal year (FY) 2012 closed on September 30 with the Congressional Budget Office (CBO) estimating spending of $3.5 trillion and a deficit of $1.1 trillion.[2] Debt held by the public was $11.3 trillion (73 percent of GDP). According to the CBO, debt will explode to 199 percent of GDP by 2037, driven by growth in spending that will reach 36 percent of GDP.[3]

The main drivers of spending and debt increases are incontrovertibly the major entitlement programs: Social Security, Medicare, and Medicaid. However, the slow economy with its high unemployment rate, which remains stuck at around 8 percent, also adds to deficits and debt through two channels: mandatory spending for those workers who are most affected by the slow economy (e.g., unemployment compensation) and below-average tax revenues.

It is clear that the top priorities for Congress and the President should be controlling spending, especially entitlement reform, and setting an economic growth agenda through tax reform. After averting the fiscal cliff, Congress and the President should immediately turn their attention to these pressing issues.

As noted, entitlements are the fastest-growing programs. Even if all other spending was eliminated, these programs would still cause large and unsustainable deficits in the future. Their growth is automatic, with autopilot spending increases built in and no serious budgetary constraints. The top priority must be to restructure entitlements and put a brake on their spending levels while strengthening and preserving them for future generations.

A number of robust proposals for health care reforms already exist, both in Congress and in the policy community.[4] Congress and the President should take advantage of this policy momentum and focus on reforming Medicaid and especially Medicare. However, changes in Social Security should follow quickly, and the rules that govern these programs in general should be more consistent. For example, increases in the normal eligibility age should proceed simultaneously for both Social Security and Medicare.

Specific steps for Congress and the President include the following:

The President should submit a budget by the 2013 tax deadline deadline that outlines strong, sweeping changes in entitlement programs that will reduce spending over the 10-year budget window and significantly improve the long-term trajectory of these programs. The President’s budget should lay out specific goals for a pro-growth, revenue-neutral tax reform plan. Congress and the President should include reforms in entitlement programs and further reductions in other spending areas, including the Patient Protection and Affordable Care Act (Obamacare), in exchange for any increases in the debt limit. These should reflect lessons learned from the 2011 Budget Control Act, such as avoiding high-stakes mechanisms like sequestration that are designed to fail. Congress should pass a joint budget resolution by the April 15, 2013, deadline that includes reconciliation instructions for entitlement and tax reform. The budget resolution should also require reforms of other spending programs to bring spending below the BCA levels for 2014 and beyond.

If only one issue is thoroughly addressed in 2013, it should be the federal role in health care, the biggest driver of spending. The flawed Obamacare law only adds to the problem. Instead of expanding the government’s role, health care should follow a true patient-centered, market-based model, including reforms in Medicare, Medicaid, and the tax treatment of health insurance.

Medicare. Medicare’s finances must be brought under control. As a first step, the age of eligibility should be raised gradually from 65 to 68 and then indexed to life expectancy. Premiums for Parts B and D should also gradually increase, thus expanding the current policy for Medicare of adjusting the level of taxpayer subsidies to income, with the most affluent seniors receiving much smaller (or in some cases no) taxpayer subsidies for their health coverage. These steps, among others,[5] should occur immediately because they are easily achieved and less controversial and should be part of new debt-limit legislation.

Within five years of these initial changes, patients should also be transitioned to a defined-contribution or premium-support model that would be adjusted for income. Expanding competition in Medicare would restrain federal spending, slow health care costs, and promote greater innovation in the delivery of care.[6]

Medicaid. Federal spending on Medicaid should be put on a budget subject to regular congressional review to bring greater fiscal certainty and stability to the process. Federal Medicaid spending would follow antipoverty spending caps by reverting to the 2007 spending levels when the economy approaches full employment (e.g., the unemployment rate dips below 6 percent) and be adjusted for medical inflation thereafter.

In lieu of traditional Medicaid, able-bodied individuals and families should receive direct federal assistance in the form of tax credits or direct assistance to enable them to buy private insurance coverage of their choice. For the disabled and frail elderly, Medicaid would remain a joint federal–state safety net program, but states would have additional flexibility to adopt more patient-centered models.

Reform of the Tax Treatment of Health Insurance. As a part of tax reform (see below), the employee tax break for employer-sponsored coverage would be converted to a non-refundable tax credit that individuals and families could use to purchase the health plan of their choice.

These larger reforms are best achieved through normal legislative order. This could include the legitimate use of reconciliation as part of a comprehensive budget plan. In any case, Congress should pass a concurrent budget resolution for FY 2014.

Social Security needs to be reformed. It is running permanent cash-flow deficits and has severe programmatic flaws.[7]

First, Social Security’s eligibility age should gradually be increased in tandem with Medicare’s eligibility age. For both, this change is straightforward and could be included in an initial, small reform package. Next, Social Security should return to its original purpose of guaranteeing that all Americans are protected from poverty in retirement. As part of this insurance protection, benefits would evolve to an understandable, predictable flat benefit that is well above the poverty level. With Social Security functioning as an insurance program, moderate-income retirees would receive a smaller check, while affluent seniors would receive no check unless their financial circumstances change.

To encourage people to stay in the workforce longer, those who work beyond full retirement age would receive a higher level of after-tax income until they do retire.

Tax reform would support Social Security reforms by significantly increasing personal savings that seniors can take into retirement, and there would be no limit on the amount of these tax-deferred savings. Thus, more retirement income would be possible than under the current system. Social Security would become a safety valve against economic reversals and a floor for income after the statutory retirement age.

Defense cuts are already reducing military readiness, thus endangering the security of the United States. The defense portion of the BCA cuts is dangerously flawed and must be reversed. In Saving the American Dream, the sequester for defense spending (including the 2013 cuts) is eliminated, and the higher spending is more than offset with reforms in other spending and entitlements. Defense spending is brought slowly up to and held at 4 percent of GDP. Non-defense discretionary spending is set for 2013 at the BCA sequester level and then reduced to 2 percent of GDP, after which it is indexed to inflation.

Spending in 2014 and beyond should include reforms in long-standing but growing and expensive programs such as farm subsidies and transportation. A program of privatization, including federal asset sales, could begin as early as 2015. Anti-poverty spending should be rolled back and capped when the economy approaches full employment and then consolidated into fewer programs that reflect strong incentives for work and marriage.

Tax Reform. The economy remains plagued by the uncertainty of expiring tax policy and an unwieldy and inefficient tax code. Beyond preventing Taxmageddon by extending all current tax policy and delaying the Obamacare tax increases before January 1, 2013, Congress should pass broad substantive tax reform consistent with the New Flat Tax in Saving the American Dream. Tax reform should focus on promoting economic growth by reducing both tax rates and tax distortions while maintaining revenue and distributional neutrality. It should also simplify the tax system and improve its transparency so that taxpayers can better understand the influence of tax policy as well as the true cost of government.[8]

The broad direction for tax reform already in play, especially the bipartisan push for lower corporate income tax rates, is fully consistent with the New Flat Tax. Congress will likely find the goal of lower corporate tax rates quickly running up against the consequent need to lower tax rates for non-corporate businesses. This occurs naturally under the New Flat Tax, which taxes all businesses at a single rate on their domestic net cash flow at the entity level. Likewise, the growing support for a territorial tax system—under which U.S. businesses are taxed solely on their domestic income—is also fully consistent with the New Flat Tax, which levies tax solely on domestic income.

Under the New Flat Tax, the individual income tax and the payroll tax are rolled into one system with the same tax rate that is imposed on business income. Nearly all other federal levies are repealed, leaving a simple system for both individuals and businesses. Under the New Flat Tax as it applies to individuals, only income used for consumption is taxed, thus eliminating the existing tax bias against saving. In addition, all distorting credits, exemptions, and deductions are eliminated, leaving only two credits and three deductions.

The first credit is the above-mentioned tax credit for health insurance. This tax credit is less distortive of economic decisions than current law is, but it remains a clear subsidy for the purchase of health insurance. It is necessary because the current-law tax bias favoring health insurance is so powerful and so entrenched that simply eliminating the tax advantage is impracticable.

The second credit carried over from current law is the earned income credit (EIC). The EIC needs reform in its own right, but it is also the largest income-support component of the overall federal anti-poverty program and one of its most effective elements. Changes in the EIC should then be considered part of the proposed budget for anti-poverty programs.

The three deductions are as follows:

The deduction for charitable expense, which is retained because this tax system taxes the individual on what he or she spends. Charitable contributions benefit the receiving organization and thus should be deductible for the recipient. A deduction for higher education, which recognizes that education expenses are a form of saving and investing simultaneously, which in every other instance is excluded from tax under the New Flat Tax. An optional home mortgage deduction with the proviso that if the homeowner chooses a mortgage with deductible interest, then the lender must, as under current law, continue to pay tax on interest income earned. Alternatively, the home owner may choose to forgo the deduction, in which case the lender earns tax-free interest income and can thus charge a lower mortgage interest rate.

The New Flat Tax, the tax reform plan, is implemented effective January 1, 2014.

Addressing the Fiscal Cliff

Table 1 addresses each element of the fiscal cliff and the proposed steps that Congress should take on each of them.

—Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies, William W. Beach is Director of the Center for Data Analysis and Lazof Family Fellow in Economics, and Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at The Heritage Foundation.

The editors are grateful to the team leaders who worked with policy experts throughout The Heritage Foundation to develop this report: J. D. Foster, Ph.D., Norman B. Ture Senior Fellow in the Economics of Fiscal Policy; Rea S. Hederman, Jr., Assistant Director and Research Fellow in the Center for Data Analysis; David C. John, Senior Research Fellow in Retirement Security and Financial Institutions; Robert E. Moffit, Ph.D., Senior Fellow in the Center for Policy Innovation; Nina Owcharenko, Director of the Center for Health Policy Studies; and Drew Gonshorowski, Policy Analyst in the Center for Data Analysis.

This plan was developed as part of the Solutions Initiative and funded by the Peter G. Peterson Foundation. The Peterson Foundation convened organizations with a variety of perspectives to develop plans addressing our nation’s fiscal challenges. The American Action Forum, Bipartisan Policy Center, Center for American Progress, Economic Policy Institute, and The Heritage Foundation, each received grants. All organizations had discretion and independence to develop their own goals and propose comprehensive solutions. The Peterson Foundation’s involvement with this project does not represent endorsement of any plan.

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BREAKING: Civil Unions To Become Law In Colorado After Final House Vote

Openly gay Colorado Speaker Mark Ferrandino (D)

Just now, the Colorado House voted 39-26 to grant final approval to a bill that would offer civil unions to same-sex couples, advancing  it to Gov. John Hickenlooper’s (D) desk for his promised signature. Colorado has a constitutional amendment banning same-sex marriage, so civil unions are an important extension of partner benefits until that amendment can be repealed or overturned.

Lawmakers have attempted to pass civil unions for several years now. In 2012, enough Republicans supported the bill for it to pass, but Republican leadership in the House blocked it by sending it to a (fourth) committee whose members voted to kill it. The expediency with which the bill advanced this year reflects the large victories Democrats enjoyed in the November election.

Here is how the House voted:

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