DESCRIPTION OF THE LEGISLATION
A Roadmap for America’s Future
As noted in the introduction, this proposal is a comprehensive plan for restructuring health care, the Federal health entitlements, retirement security, and Federal taxation to put the Federal budget and the U.S. economy on a sustainable path. Its aim is not to back away from the missions of these programs and activities, but to fulfill them – which can only be done through reform.
The proposal should not be viewed as a rigid, absolute plan. It is built on a strategy for addressing America’s principal budget and economic concerns, and has flexibility built into it so that it can adapt to conditions that surely will change over the course of the century. Nevertheless, it is a complete and comprehensive approach.
Most important are the guiding principles underlying these proposals: focusing government on its proper role; rejuvenating America’s vibrant market economy; and restoring an American character rooted in individual initiative, entrepreneurship, and opportunity – qualities that make each American’s pursuit of personal destiny a net contribution to the Nation’s strengths as well.
Details of the full legislative proposal are contained in Appendix I of this report. Below are summaries and explanations of the major components.
HEALTH CARE SECURITY
Every American should have access to affordable health insurance, and the ability to acquire preventive health care and treatment – regardless of employment, health status, or income level. No one should face bankruptcy because of a catastrophic illness; no one should be denied health coverage because they are branded “uninsurable.” Yet few will be able to afford health care or insurance if rising costs continue to spiral out of control. The only way to ensure that all Americans have access to quality health care is to confront these rising costs and the market distortions that created them. Such an approach will not solve every problem in the complex network of health care delivery and financing, but it will correct the most fundamental flaws.
Central to this idea is putting American families and their doctors back in control of their health care needs. Current arrangements remove patients from the decision-making process and hide the true cost of services. In an effort to contain costs, employers have consistently limited choice, flexibility, and coverage options for their employees. Yet health coverage is currently linked to employment by the individual income tax exclusion for employer-sponsored health care. This tax treatment effectively discriminates against workers and families who do not have employer-sponsored health insurance. Compounding the problem, the number of employers providing health insurance has dropped 69 percent since 2000; and this alarming trend is continuing.
Equalizing the tax treatment of health care and coverage will give workers and families much more freedom to acquire a plan that best suits their needs. Making health insurance portable means an individual no longer will live in fear of losing his or her health care along with a job. As the marketplace begins to respond to this new patient-centered control, the resulting increase in competition will improve the quality of services and provide more options to meet the diverse needs of Americans, while lowering costs.
The Health Care Marketplace
Changing the Tax Treatment of Health Coverage. Ownership of health insurance must be shifted away from third parties to those who are actually using it. In place of the current Federal tax law creating the market distortion – the individual income tax exclusion for employer-sponsored health insurance – every American (except those enrolled in Medicare or a military health plan) will have the option to receive a refundable tax credit – $2,300 for individuals and $5,700 for families – to pay for health coverage. The tax credit is available solely for the purchase of health care. A family or individual may apply the credit to an employer-sponsored plan, if available, or to an alternative plan that better suits their needs. Employers continuing to offer insurance continue to claim contributions as a business expense deduction.
The payment will be made directly to the health plan designated by the individual, allowing those who use the health care to choose the insurance that best suits their needs. Any individual who obtains health coverage that costs less than the credit will receive any leftover amount as a payment from the health plan, to be used for other health expenses. Alternatively, those who choose to purchase policies with premiums higher than the credit will assume responsibility for the additional amount themselves. This will encourage individuals to shop for policies best suited to their needs, at the best prices; and as a result, every American will play a role in restraining health insurance premiums, and enhancing the quality of health care services.
There are several other advantages to this approach:
▫ Universal Access: Everyone, regardless of income, employment, or geography is eligible for the credit. There are no screenings, income-verification tests, or health criteria. Except those receiving Medicare or Tricare, every American citizen with a valid Social Security number may take advantage of the tax credit. Also, because it is refundable, ownership of health insurance is available to every American. The credit also is “advanceable,” enabling individuals to purchase coverage at the beginning of a year, rather than waiting for their tax returns.
▫ Portability. Individuals will be able to take their health insurance from job to job. The choice of physician and insurance plan will belong to the employee, not the employer. This is especially important for younger Americans who change jobs more frequently and are more apt to start their own businesses. It is also an important advantage for individuals with pre-existing health conditions, who may feel less free to change jobs for fear of losing health coverage.
▫ A More Responsive Market. Because current tax law encourages the employer, not the individual, to be the purchaser and owner of health insurance, insurance companies tend to market their products to employers, whose chief concern is keeping operating costs low. Placing those decisions in the hands of individuals and families will encourage insurance companies to offer more variety, higher quality, and more cost-effective plans to meet the needs of their customers.
▫ Greater Opportunity for Small-Business Coverage. The proposal creates an alternative for small businesses to offer health benefits. Currently, unless a business can afford to offer a full-scale health insurance plan, its options are limited. The refundable tax credit model allows employees to take responsibility for purchasing their own health care with the credit, but also allows small businesses to make defined contributions to accounts – such as Health Savings Accounts [HSAs] – to help fund their employees’ health care expenses.
▫ Enhanced Health Care Quality. Health care quality will improve under this proposal due to increased competition among providers. The current market reimburses providers at a specified rate set by health insurance companies almost irrespective of the quality of the care they provide their patients, or the efficiency with which they deliver the care. With individuals controlling their own health care dollars, providers will be encouraged to compete for business by increasing quality and charging more competitive prices. For providers, increased competition will mean they are less likely to be locked in to prices set by insurance plans, and will have more flexibility to determine the appropriate charges for services based on quality and demand.
State-Based Exchanges. Health care services should be easier to use, should be more predictable, and should provide integrated care in a more equitable manner. The current regulation of the insurance market does not give health plans incentives to cover sick patients. When patients do get sick, insurance companies have an incentive find ways of preventing that person from re-enrolling in the insurance plan. Insurance reform must be the linchpin of any health care reform. A one-size-fits-all approach dictated by Washington cannot solve the diverse problems that citizens in various States face. What is needed is a consistent and fair market, so everyone can afford coverage. Patients should choose which health care provider they trust. The freedom to choose creates enhances competition, fosters higher quality care, and puts downward pressure on costs, making care more affordable.
Geographic differences are a significant driver of current health care problems. The characteristics of patient populations differ from State to State. This means the type of basic medical care also differs from State to State. A uniform, national health care plan ignores these regional differences and lowers the standard of care the medical community can provide. Allowing each State to develop and regulate health coverage that meets the unique characteristics of its population and economy will encourage the innovative and patient-oriented health care that should be the hallmark medicine in America.
A Roadmap for America’s Future ensures a partnership between the Federal Government and States to create State Health Insurance Exchanges with the following benefits:
▫ Establishes High Risk Pools. State health insurance high-risk pools will offer affordable coverage to individuals who would otherwise be denied coverage due to pre-existing medical conditions, making coverage affordable for those currently deemed “uninsurable.” States may offer direct assistance with health insurance premiums and/or cost-sharing for low-income and/or high-cost families.
▫ One-Stop Market Place for Health Insurance. Each individuals will get an opportunity to choose the plan that best meets his or her needs through a State-based Exchange.
▫ Benefits by the Same Standard Used for Members of Congress. Plans offering coverage through an Exchange will have to meet the same statutory standard used for the health benefits given to Members of Congress.
▫ Guaranteed Access to Care. The Exchange will require all participating insurers to offer coverage to any individual regardless of the patient’s age or health history.
▫ Affordable Premiums. Under the status quo, plans offering coverage to individuals often charge exorbitant premiums. This proposal solves the problem through independent risk-adjustment among insurance companies. A non-profit, independent board will penalize insurance companies that cherry-pick healthy patients while rewarding companies that seek patients with pre-existing conditions. This solution will ensure health insurers compete based on superior products and price.
▫ Simple Auto-Enrollment. An Exchange would make it easy for individuals to obtain health insurance by providing new and automatic opportunities for enrollment through places of employment, emergency rooms, the Division of Motor Vehicles, and the like. If individuals do not want health insurance, they will not be forced to have it. Research has shown that auto-enrollment mechanisms have achieved near universal levels of coverage. An auto-enrollment mechanism has also been demonstrated to increase the percentage of employee-participation in employer provided 401(k) plans by 70 percent – from 20 percent of new employees enrolled after 3 months under self-employment, to 90 percent of new employees participating under auto-enrollment.
Interstate Purchasing. Currently, individuals and families can purchase health insurance only in the States in which they live, because insurance companies are prohibited from selling polices outside their respective States. Thus the consumer is prevented from purchasing coverage from another State that might offer more suitable, or more affordable, coverage.
This proposal breaks the lock, allowing each individual to use the refundable tax credit toward the purchase of health insurance in any State. This will greatly expand the choices of coverage available to the consumer, and also will encourage broader competition and diversity among insurers, who will be able to sell their policies to individuals and families in every State, as other companies do in other sectors of the economy. After analyzing Federal Employee Health Benefits Program [FEHBP] preferred provider organization [PPO] prices, the Government Accountability Office reports: “We found that FEHBP PPO hospital prices differed by 259 percent and physician prices differed by about 100 percent across metropolitan areas in the United States, after we removed the geographic variation associated with the costs of doing business such as rents and salaries, and differences in the types of services provided.”
Allowing consumers to shop across State lines will balance State regulation of health insurance. Individuals no longer will have to pay for health benefits mandated by their home States that they do not need; they will be able to choose policies from States whose mandates better fit their personal circumstances. States will then have an incentive to balance their insurance mandates against costs to remain competitive with other States.
Making Price and Quality Data Available to All. For individuals and families to shop for their health care, they must have a better sense of what they are expected to pay – and what they are getting for their money. Making data on the pricing and effectiveness of health care services widely available is critical to the success of an effective health care marketplace. So far, however, the market has been unable to develop a process for defining industry-accepted metrics that measure “quality” and define “price.” The result has been a flurry of reports by trade organizations, specialty groups, and government agencies, each using different terminology and definitions. The lack of uniform standards has prevented effective, “apples-to-apples” comparisons.
The environment resembles what existed in the securities markets before the stock market crash of 1929. Abuse, fraud, and misinformation about the nature of stocks and the rules governing their purchase were rampant. In response, the Securities and Exchange Commission [SEC] was formed with the main purpose of bringing transparency to the market and restoring consumer confidence.
With the increasingly rapid transformation of the financial markets and the growing complexity of financial transactions, the private sector began to take a more prominent role in developing accounting guidelines; and eventually the SEC began relying on the private sector to establish the basic standards by which it would be regulated. Since 1973, the SEC has recognized the nongovernment Financial Accounting Standards Board [FASB] as the authoritative standard-setting organization for financial accounting and reporting information. While the SEC has statutory authority to establish such financial standards, it has historically adopted FASB rules. The SEC allows the private sector to establish its own disclosure standards, so long as it demonstrates the ability to fulfill the responsibility in the public interest. The authority to enforce the standards, however, falls solely to the SEC.
Applying this model to the health care industry will allow all stakeholders to come together, without heavy-handed government intervention, to establish uniform and reliable measures by which to report quality and price information. To accomplish this goal, this proposal restructures the current Agency for Healthcare Research and Quality [AHRQ] and removes it from the Department of Health and Human Services. The new agency, renamed the Healthcare Services Commission [HSC], will be governed along the same lines as the SEC, and managed by five commissioners chosen from the private sector (with no more than three from the same political party), appointed by the President, and approved by the Senate.
The HSC’s purpose – to enhance the quality, appropriateness, and effectiveness of health care services through the publication and enforcement of quality and price information – will be guided by a standard-setting Forum for Quality and Effectiveness in Health Care. The group will play a role similar to that of FASB in establishing accounting principles. The forum will consist entirely of private-sector representation, with the authority to establish and promulgate metrics to report price and quality data. Forum members will represent views from medical providers, insurers, researchers, and consumers, and will serve independently of any other employment. The forum, designed to keep pace with innovation, will publish, for public comment, a preliminary analysis on standards for reporting price, quality, and effectiveness of health care services. After the comment period, the group will publish a final report containing guidelines for regulating the publication and dissemination of health care information. The HSC will be authorized to enforce these standards.
Protection for Those Who Need It Most. Uninsured individuals with pre-existing health conditions have the most difficult time finding and affording health care coverage. As a result, many individuals with pre-existing conditions often face bankruptcy to pay for health care expenses or, worse, go without treatment. If these individuals are fortunate enough to have group health insurance, their high costs are spread among their coworkers and employers in the form of ever-higher premiums, making coverage expensive for all.
Ensuring that “high-risk” individuals – those with the greatest medical costs – can obtain high-quality coverage is critical to the success of any plan to reform health care. High-risk individuals face an insurmountable burden in medical expenses themselves, and that burden is often transferred to taxpayers in the form of uncompensated care expenses from hospitals, or the placement of these individuals in Medicaid after having exhausted their financial resources paying for their medical costs.
Affordability for Small Businesses. The problem of rising health care costs is especially acute for small businesses, who cannot pool risks of thousands of employees, as large companies do – and therefore cannot afford group coverage for their workers. To correct the problem, this proposal allows the establishment of association health plans [AHPs], giving small businesses a means of offering health coverage to their employees. Under this strategy, small businesses will be able to pool together nationally to offer coverage to their employees. The plans offered will be subject to the same new rules for flexibility (using the tax credit to pay for health insurance at the workplace) and portability (being able to take insurance from job to job) described above.
Encouraging the Adoption of Health Information Technology. Just as individuals should own their own health coverage, they also should own their health records. By establishing a modern market-driven approach to building a National Health Information Network, this plan will give every American ownership over his or her own medical record, transitioning the health care industry from paper-based medical records to electronic medical records through the creation of Independent Health Record Trusts. With electronic accounts, medical records travel with the individual, allowing timely and more accurate diagnoses and treatments. The Health Record Trusts, modeled on the framework of credit unions, will allow medical information to be managed in the same manner that financial institutions, such as banks and credit card companies, manage financial data – establishing a nationwide health information technology network designed to improve health care quality, reduce medical errors, and ensure that appropriate information is easily accessible.
Modernizing the Benefit. Medicaid, the Federal-State health care entitlement program for qualifying low-income and indigent individuals, is outdated and fiscally unsustainable, and it is a leading cause of State budget deficits. Even worse, the program serves its intended beneficiaries poorly: Medicaid patients only receive the basic treatment they require, with costs set by Washington or State bureaucrats; and Medicaid patients often end up in the emergency room for basic needs simply because they cannot get access to up-front health care services. The right changes can form a more effective program, strengthen the health care safety net for the neediest populations, and bring fiscal relief to States.
This proposal transitions Medicaid from an open-ended entitlement to one that is patient-centered. Below are some of the particular benefits of this approach.
Direct Assistance. Providing low-income families with dependent children the financial assistance to purchase high quality private plans will end the two-tiered health care system that exists today. In addition to the health care tax credit, this individual Medicaid payment will provide Medicaid beneficiaries with nearly $11,000 that can be applied to health care costs. Additional assistance is provided for pregnant women and families with children younger than 1 year old. This will ensure families stay together within one provider network and foster coordinated and personalized health care as well as promote new and innovative care models for patients.
Realignment of Federal and State Responsibilities. In 2008, Medicaid’s total costs were $333.2 billion. According to the Department of Health and Human Services, the Medicaid improper payment rate is 10.5 percent, or $32.7 billion. That is more than three times the average improper payment 3-5-percent rate of other Federal agencies. With the Federal Government assuming responsibility for the distribution and coordination of the individual Medicaid payments, States’ budgets are freed from having to account for this burden. In return, States contribute 50 percent of the individual payment amount.
Removal of the Stigma. Medicaid recipients deserve to choose their own doctors and make their own health care decisions, instead of having the government dictate those decisions for them. But instead of helping the neediest gain access to the same level of care available to those with private insurance, the current Medicaid Program forces both doctors and patients to accept bureaucratically determined standards of care at government-set prices. The result has been a fraying safety net that fails to sustain the most vulnerable; forces the medical community into making the impossible choice of denying care or absorbing the financial loss (more than half of doctors will not take Medicaid recipients); and threatens to overrun State budgets. Additionally, Medicaid often fails to offer vision and dental care and various other services available in private health plans.
Low-income individuals should not be subject to second rate care simply because they receive more assistance from the government. Offering Medicaid beneficiaries the option to enroll in private plans with the refundable tax credit will remove the stigma Medicaid recipients face, and allow them to take advantage of the same range of options available to those with private plans.
Retention of Medicaid for Specific Populations. States’ long-term care and disabled populations do not take part in the tax credit, but continue in the current Medicaid program, with each State receiving a block grant of this portion of its Medicaid funds. This change allows States maximum flexibility to tailor their Medicaid programs to the specific needs of their populations. The long-term care block grant is indexed for inflation by a blended rate of the consumer price index [CPI] and the medical care component of the CPI, and adjusted for population growth.
State Children’s Health Insurance Program [SCHIP]. The current SCHIP population becomes eligible for the health care tax credit. This ensures that the children who need it most have access to the same variety of options and high quality care.
A Medicare Program for the 21st Century. As the long-term fiscal burden of Medicare becomes more unsustainable, it is clear that – to fulfill the mission of Medicare – small and gradual changes to the program will not suffice. The entire methodology of the program must be converted away from a program that shelters providers and consumers from prices – and is therefore inefficient in restraining rising costs – into one in which beneficiaries choose the most affordable coverage that best suits their needs.
Just as the Medicare Program requires a new methodology, so too does its structure of financing. In this proposal, the Part A and Part B trust funds are combined to create one unified trust fund. The new Medicare Program and the existing program continue to be financed by trust fund revenues, Medicare payroll taxes, and general revenue contributions. The measure of solvency is converted away from one based on the unfunded liability of the Part A trust fund and into one in which the program’s solvency is measured as a percentage of gross domestic product [GDP].
Medicare Payment. For future Medicare beneficiaries who are now under 55 or younger (those who first become eligible on or after 1 January 2021), the proposal creates a standard Medicare payment to be used for the purchase of private health coverage. Currently enrolled Medicare beneficiaries and those becoming eligible in the next 10 years (i.e. turning 65 by 1 January 2021) will see no changes in the current structure of their Medicare benefits. The payment will be made directly to the health plan designated by the beneficiary (similar to the administration of the refundable health care tax credit), with the beneficiary receiving any leftover amount as a payment from the health plan, or assuming financial responsibility for any difference in the payment and the total cost of the premium. This allows the Medicare beneficiary to invest the leftover amount in a Medical Savings Account [MSA] to pay for other medical expenses, or to purchase long-term care insurance.
Each Medicare beneficiary becomes eligible for the payment by enrolling in a health insurance plan. Medicare will publish an annual list of plans that are “Medicare certified.” Medicare enrollees are able to use their payment to pay for one of the Medicare certified plans, or any other plan, such as those offered by former employers or available from the private market.
When fully phased in, the average payment is $11,000 per year (the average amount Medicare currently spends per beneficiary), and is indexed for inflation by a blended rate of the CPI and the medical care component of the CPI. For affected beneficiaries, the payment replaces all components of the current Medicare Program (Medicare fee-for-service, Medicare Part B, Medicare Advantage, and Medicare Part D). Payment amounts are income-related and risk-adjusted. They also are partially geographically adjusted, with the geographic adjustment phasing out over time.
Risk Adjustment. When the plan is fully implemented, Medicare beneficiaries will receive on average the standard $11,000, with the flexibility to receive a positive adjustment of that amount based on a risk-assessment from their chosen health plan. Once enrolled, beneficiaries may complete initial health exams through their insurance plans to determine whether they are eligible to receive a higher risk-adjusted payments. Each health plan must submit to the Medicare program any necessary results of the exam for Medicare to determine an adjusted risk-assessment.
Under the current system, Medicare frequently overpays for some services and beneficiaries and underpays for others. By risk-adjusting beneficiaries’ payments based on their health condition, this reform targets support to those who truly need additional help.
Income-Relating. The payment amount is modified based on income, in a manner similar to that for current Medicare Part B premium subsidies. Specifically: beneficiaries with incomes below $80,000 ($160,000 for couples) receive full standard payment amounts; beneficiaries with annual incomes between $80,000 and $200,000 ($160,000 to $400,000 for couples) receive 50 percent of the standard; and beneficiaries with incomes above $200,000 ($400,000 for couples) receive 30 percent.
Enhanced Support for Low-Income Beneficiaries. While any Medicare beneficiary, regardless of income level, is able to set up a tax-free MSA if he or she desires, the new Medicare Program establishes and funds an MSA for low-income beneficiaries. Specifically, for those who are fully “dual eligible” (eligible under current policies for both Medicare and Medicaid), and beneficiaries with incomes below 100 percent of the poverty level, the plan provides an MSA payment equal to the amount of the deductible for the average Medicare high-deductible health plan. Those with incomes between 100 percent and 150 percent of poverty receive 75 percent of the full deposit.
Retention of Medicare for Those 55 and Older. Clearly, the transition to this restructured Medicare Program should protect those at or near retirement – people who have long planned on the existing Medicare Program for their retired years. That is why the transition to the individual purchase of private health insurance applies to those eligible starting on 1 January 2021. For those eligible prior to that date (those 55 and older), the existing Medicare Program remains, and is strengthened with changes, such as income-relating of drug benefit premiums, to ensure its long-term sustainability.
Premiums continue to be based on an all-beneficiary average, so the phasing of the younger population into the new program will not increase premiums for the population continuing in the existing program. The proposal also retains the Medicare payroll tax of 2.9 percent of the Federal Insurance Contributions Act [FICA] and Self-Employed Contributions Act [SECA] payroll tax, as is the case now.
For individuals now younger than 55 only, the proposal adapts Medicare’s eligibility age to reflect Americans’ improving lifespans, raising in gradually, and in modest steps, from the current 65 to 69 years and 6 months.
Fail-Safe Mechanism. The proposal would establish a mechanism that would be activated in the Medicare trustees determined that the percentage of funding from general revenues exceeded 45 percent in the prior fiscal year. If activated, on 1 July or 2 months after the Medicare trustees’ report is released, whichever comes later, the mechanism would apply an automatic 1-percent reduction in payments for services provided in Medicare’s fee-for-service sector.
The plan was developed in consultation with the Congressional Budget Office [CBO] Office of the Chief Actuary of the Centers for Medicaid and Medicare Services, and would assure the solvency of the overall Medicare Program for the long term.
More than 30 million Americans depend on Social Security to provide a significant share of their retirement income. Since the program was enacted in 1935, it has served as a vital piece of the “three-legged stool” of retirement security, which today includes employer-provided pension plans and personal savings. Still, President Roosevelt himself viewed Social Security as an evolving program. As he wrote in a 1939 message to Congress: “We shall make the most orderly progress if we look upon Social Security as a development toward a goal rather than a finished product. We shall make the most lasting progress if we recognize that Social Security can furnish only a base upon which each one of our citizens may build his individual security through his own individual efforts.” In this regard, Social Security is one critical piece of the retirement security safety net for seniors – especially those with limited incomes.
As currently structured, however, Social Security is going bankrupt and cannot fulfill its promises to future retirees. Without reform, future retirees face benefit cuts of up to 24 percent in 2037. Attempts to fix the problem without fundamental reform will excessively burden future workers and sacrifice U.S. prosperity.
Further, even if the current system could be sustained, it is no longer a good deal for American workers. The real rate of return for current workers is only about 1 percent to
2 percent, and the expected rate of return for today’s children is expected to fall below
Social Security’s shrinking value and fragile condition pose a serious problem that threatens to break the broader compact in which workers support the generation preceding them, and earn the support of those who follow. To maintain the program’s significant role as a part of the retirement security safety net, Social Security’s mission must be fulfilled somehow. The legacy envisioned by President Roosevelt must be completed without bankrupting future workers.
This proposal addresses the shortcomings of the current system and strengthens the retirement safety net by providing workers with the voluntary option of investing a portion of their FICA payroll taxes into personal savings accounts. Due to the higher rate of return received by investments in secure funds consisting of equities and bonds, these accounts would allow workers to build a significant nest egg for retirement that far exceeds what the current program can provide. Each account will be the property of the individual, and fully inheritable, which will allow workers to pass on any remaining balances in their accounts to their descendants.
Individuals 55 and older will remain in the current system and will not be affected by this proposal in any way: they will receive the benefits they have been promised, and have planned for, during their working years. All other workers will have a choice to stay in the current system or begin contributing to personal accounts. Those who choose the personal account option will have the opportunity to begin investing a significant portion of their payroll taxes into a series of funds managed by the U.S. government. The system would closely resemble the investment options available to Members of Congress and Federal employees through the Thrift Savings Plan [TSP]. As these personal accounts continue to accumulate wealth, they will eventually replace the funding that comes through the government’s pay-as-you-go system. This will reduce the demand on government spending, lead to a larger overall benefit for retired workers, and restore solvency to the Social Security Program.
As with Medicare, the Social Security component of this plan will make the program sustainable for the long run. It will do so without overtaxing future workers and crippling the economy. Based on estimates by the CBO, the program will be solvent with permanent and growing surpluses by 2069, without requiring general fund transfers. While not incorporated in the plan, these surpluses will make it possible to reduce the regressive payroll tax in the future.
In addition, the creation of personal investment accounts for future retirees will provide additional capital stock for the U.S. economy, increasing the potential for growth. This will be especially important in coming decades in helping compensate for the projected slowdown in labor force growth, a key component to increases in GDP.
Guarantee of Contributions. Individuals who choose to invest in personal accounts will be ensured every dollar they place into an account will be guaranteed, even after inflation. With the recent market downturn, individuals must be assured their retirement is secure. By guaranteeing the dollars put into an account, individuals can be assured that a large-scale market downturn will not cost them their Social Security personal accounts.
Personal Choice in Retirement Accounts. Beginning in 2012, the proposal allows each worker younger than 55 to shift a portion of his or her Social Security payroll tax payment into a personal retirement account, chosen from a group of investment funds approved by the government (see below). When fully phased in, the personal accounts will average 5.1 percentage points of the current 12.4-percent Social Security payroll tax.
The personal investment component is phased in to allow a smooth transition. Initially, workers are allowed to invest 2 percent of their first $10,000 of annual payroll into personal accounts, and 1 percent of annual payroll above that up to the Social Security earnings limit. The $10,000 level will be indexed for inflation. After 10 years, the amount that workers can invest will be increased to 4 percent up to the inflation-adjusted level, and 2 percent above that. After 10 more years, these amounts will be increased to 6 percent and 3 percent. Eventually, by 2042, workers will be able to invest 8 percent up to the inflation-adjustment level, and 4 percent of payroll above that, for an account averaging 5.1 percent.
The choice of personal retirement accounts is entirely voluntary. Even those under 55 can remain in the current system if they choose. Further, those who choose to enter the personal account system also have an opportunity to leave the system, and those who initially opt out of the system of personal accounts can enter into it later on.
Property Right. Each personal account is the property of the individual, and the resources accumulated can be passed on to the individual’s descendants. This contrasts with current government Social Security benefits, which are subject to reductions or other changes by Congress, and which cannot be passed on. The benefits of the personal accounts are tilted in favor of low-income individuals who do not have disposable income to invest. As a result, these individuals will be able to join the investor class for the first time. As Social Security benefits become an individual’s property, the government no longer will be able to raid this money to pay for spending on other programs.
Soundness of Accounts. Those choosing the personal account option will select from a list of managed investment funds approved by the government for soundness and safety. After an account reaches a low threshold, a worker will be enrolled in a “life cycle” fund that automatically adjusts the portfolio based on age. A worker may continue with the life cycle option or choose from a list of five funds similar to the Thrift Savings Plan options. After workers accumulate more than $25,000 in their account, they can choose to invest in additional nongovernment options approved by the Personal Social Security Savings Board.
Protection for Current Retirees and Those Nearing Retirement. As with Medicare, this plan recognizes the obligation to preserve the existing Social Security Program for those who already are retired, and for those near retirement who have planned on its benefits for most of their working lives. Therefore, persons now retired and receiving Social Security benefits, and those currently 55 and older, will remain in the existing system and will receive their promised benefits. Their benefits will in fact be more secure because the transformation of the program, along with other reforms in this proposal, ensures the Federal Government will be able to pay promised benefits.
Enhanced Benefits for Low-Income Americans. Low-income Americans are likely to benefit most from the personal account arrangement, should they choose it. They will have an unprecedented opportunity to join the investor class and increase their personal wealth, and also will be allowed to have larger personal accounts than others. Further, both those who remain in the current system, and those who opt for personal savings accounts, will receive increased benefits. All individuals in the traditional system who meet certain working requirements will be ensured that their minimum benefits are equal to at least 120 percent of the Federal poverty level, an improvement from current law. Those in the personal account system will be guaranteed a minimum of at least 150 percent of the Federal poverty level.
The use of progressive price indexing for lower-income workers (see below) will also allow the benefits for lower-income workers to grow faster than those who have greater means to provide for their retirement. These changes will ensure the system favors those individuals who are most reliant on it for support. In fact, according to a distributional analysis by the CBO, lower-income workers should see an increase in their benefits above currently scheduled benefits.
No Change for Survivors and the Disabled. Those receiving survivor and disability benefits will see no change.
Fiscal Sustainability. The plan makes adjustments in the determination of future initial Social Security benefits that will modernize the program, provide greater support for lower-income beneficiaries, and at the same time make the program’s overall spending sustainable for the long run. This would continue to allow benefits to grow for all individuals. Further, it would only affect individuals under 55. To accomplish these objectives, the proposal uses progressive price indexing and modernizes the Social Security retirement age.
▫ Progressive Price Indexing. At present, an individual’s initial level of Social Security benefits are based on the individual’s average career earnings. To determine average career earnings, an individual’s income from previous years is adjusted upward by the rate that average American wages have increased over time. This approach, called “wage indexing,” exceeds the amount of initial benefit growth needed to keep pace with economic conditions, and contributes to the unsustainable projected burden on Social Security. An alternative approach is “price indexing,” under which initial benefits are adjusted according to the consumer price index.
This reform, starting in 2018, employs “progressive price indexing” – a mix of wage indexing and price indexing – for initial Social Security benefits. Individuals who make less than approximately $27,700 per year will continue to receive initial benefits based on wage indexing. Those who make between $27,700 and $149,900 (in 2018) will have their initial benefits adjusted upward by a combination of wage and price indexing that becomes more oriented toward price indexing as they move up the income scale. For example, an individual whose income is half way between roughly $27,700 and $149,900 will have his initial benefit adjusted upward approximately 50 percent by wage indexing and 50 percent by price indexing. Individuals making more than $149,900 will have their initial benefits adjusted upward by price indexing. These amounts will be indexed for inflation.
As a result, all future Social Security beneficiaries will see their benefits grow by an amount at least equal to inflation over time. The reform will not affect the cost-of-living adjustment that Social Security beneficiaries receive each year once they have begun receiving benefits. The use of progressive price indexing will peg the growth of future Social Security outlays to a realistic index of the cost of living, while rescuing the program from the insolvency that will otherwise occur. It will place the program on a sustainable fiscal and economic course.
▫ Modernizing the Retirement Age. When Social Security was enacted, the average life expectancy for men in America was 60 years; for women it was 64. Today, average life expectancy has increased to 75 years for men and 80 years for women (2007 figures). Life expectancies are expected to continue lengthening throughout the century. Given these facts, and the choice among many Americans to work additional years, this proposal extends the gradual increase in the retirement age, from 65 to 67, occurring under existing policies, and speeds it up by 1 year. Once the current-law retirement age reaches 67 in 2026, this proposal continues its progression in line with expected increases in life expectancy. This will have the effect of increasing the retirement age by 1 month every 2 years. The retirement age will gradually increase until it reaches 70 in the next century.
The modernization of the retirement age will not affect the ability of an individual who chooses the personal account system to retire early, as long as his or her account has accumulated enough funds to provide an annuity equivalent to 150 percent of poverty.
FEDERAL TAX REFORM
As is true of the major Federal entitlement programs, Federal tax law cannot be corrected by merely tinkering with an excessively complex and burdensome tax code. What is needed is a thorough restructuring of the tax laws – one that is broad and yet achievable.
This proposal eliminates the alternative minimum tax [AMT] and allows individuals to choose how they will pay their Federal income taxes. It eliminates the tax on savings and shifts toward a consumption tax for businesses, making it easier for U.S. businesses to invest and create more jobs in the U.S. Most important, this plan is designed to hold down the tax burden on the economy, limiting it to 19 percent of GDP – rather than allowing the tax burden to rise to unprecedented levels, as assumed under current tax law.
Individual Income Taxes
A world-class tax system should be simple, fair, and efficient. The U.S. tax code fails on all three counts. The system is notoriously complex, as families must spend significant time and money negotiating a labyrinth of deductions and credits, a tangle of different rules for characterizing income, and a variety of schedules for taxing that income. The code is also patently unfair, as many of the deductions and preferences in the system – which serve to narrow the tax base – are mainly used by a relatively small class of mostly higher-income individuals. It is also highly inefficient, as tax considerations, rather than economic fundamentals, often distort individual decisions to work, save, and invest, leading to a misallocation of resources and slower economic growth.
Individuals react negatively toward the tax code partly because it is complex and attempts to steer them toward certain activities and away from others. In addition, there are always a few “surprises” – such as the AMT – that end up raising their tax bills. They lack control over their own financial lives.
This reform proposal responds in a fundamentally American way: it offers individuals a choice. Individuals can choose to pay their Federal taxes under the existing code, with all the familiar deductions and schedules; or they can move to a highly simplified income tax system. The simplified plan broadens the tax base by clearing out nearly all of the existing deductions and credits, compresses the tax schedule down to two low rates, and retains a generous standard deduction and exemption level. The tax form for this system would fit on a postcard. The goal is a more simple, fair, and efficient tax code, the components of which are described below.
Full Repeal of the AMT. The alternative minimum tax originally was intended to apply to a small fraction of wealthy taxpayers. But because it was never indexed for inflation, it has in recent years threatened to ensnare millions of middle-income filers. To date, Congress has only extended protection from this AMT expansion on a year-by-year basis. This proposal eliminates the AMT entirely and permanently.
Elimination of Double Taxation of Savings. The current system essentially taxes savings twice: individuals pay tax on their earnings and, if they choose to invest those after-tax funds, they pay another tax on the return from their savings (i.e. interest, capital gains, or dividends). This proposal eliminates the second layer of taxation. Not only is this fair to individual taxpayers, it also is good for the economy. Greater savings leads to more investment and higher rates of productivity. Higher productivity ultimately drives increased living standards. The plan also eliminates the estate tax, another form of double taxation that is particularly harmful to small businesses.
Taxpayers Choice. The proposal allows individual income taxpayers to make their own choice about how best to pay their taxes. Within 10 years of enactment of this legislation, individuals choose one of the two tax systems. But they are allowed one additional changeover between the two systems over the course of their lifetimes. Individuals are also allowed to change tax systems when a major life event (death, divorce, or marriage) alters their tax filing status.
Simplified Income Tax Rates. In contrast to the six tax rates in the current code, the simplified tax has just two rates: 10 percent on adjusted gross income [AGI] (as defined below) up to $100,000 for joint filers, and $50,000 for single filers; and 25 percent on taxable income above these amounts. These tax brackets are adjusted each year by a cost-of-living adjustment as measured by increases in the consumer price index [CPI]. (See Table 7 and Table 8 on the next page for comparisons with current tax brackets.) Taxable income equals gross earnings minus a standard deduction and personal exemption.
CLICK HERE TO VIEW TABLE
Broader Tax Base. The new, simplified code eliminates nearly all existing tax deductions, exclusions, and other special provisions, but retains the health care tax credit described above. As a result, it broadens the base of taxable income, allowing for lower income tax rates. Lower rates reduce disincentives to work and increase earnings.
Generous Standard Deductions and Personal Exemptions. The standard deduction is $25,000 for joint tax filers, $12,500 for single filers. The personal exemption is $3,500. The combination is equivalent to a $39,000 exemption for a family of four.
Prevention of Future Increase in Tax Burdens. This individual tax system – in combination with the business tax described below – is designed to keep the Federal tax burden at its current level; and as the economy recovers from the recession, it caps revenues at 19 percent of GDP.
Greater Certainty. Under current law, the scheduled expiration of the 2001 and 2003 tax relief measures, along with a growing expansion of the AMT, will push overall tax burdens to an unprecedented level in the coming years. By reforming the entire tax code and removing these upward pressures on taxes, this plan offers greater certainty so taxpayers can better plan for their financial futures.
In addition to creating a simpler and fairer income tax system for individuals and families, this plan does away with the corporate income tax, which discourages investment and job creation, distorts business activity, and puts American businesses at a competitive disadvantage against foreign competitors. In its place, the proposal establishes a simple and efficient business consumption tax [BCT] that will enhance the international competitiveness of U.S. businesses and put the economy on solid footing to meet the challenges of the 21st century.
Business Consumption Tax. The proposal creates an 8.5-percent BCT on goods and services. The tax is calculated and administered based on the “subtraction method,” under which a business determines its tax liability by subtracting its total purchases from its total sales. The BCT is then imposed on this net receipts figure (i.e. the firm’s value added) and paid to the Federal Government once each reporting period (i.e. each business quarter). Analysts generally point out that a “subtraction-method” BCT is simpler and easier to administer than a “credit-invoice method” tax. For instance, Gary Clyde Hufbauer of the Peterson Institute for International Economics notes that a “subtraction-method” BCT more closely resembles the existing U.S. corporate income tax. Because businesses will calculate and pay their BCT based on their total business purchases and sales information, they can rely on their existing books and accounts. Under the “credit-invoice method,” a business would calculate and pay its BCT on each individual transaction, which would require a host of new additional records, such as invoices, and tracing rules.
Figure 9 presents a stylized example of how the BCT would operate for a business involved in the production of a wood table. Revenues are remitted to the government at each stage of the production process and the BCT is incorporated in the final sale price to the end consumer.
Transition to the BCT. The plan incorporates temporary “transition relief” to facilitate the switch from the current tax system to the BCT. The plan also addresses complications in the treatment of the financial services industry under a tax system such as the business consumption tax.
Leveling of the Playing Field. To level the playing field and eliminate the competitive disadvantage on American businesses and American-made products, the BCT is not imposed on U.S. exports when they leave the U.S. It is instead imposed on foreign imports when they enter the U.S. Thus, the BCT is “border adjustable.”
Currently, the U.S. corporate income tax is not border adjustable (i.e., the tax cannot be removed from exports or imposed on imports). In contrast, foreign competitors in Europe have the advantage of removing their own taxes on their exports. The World Trade Organization [WTO] established the requirements for a border adjustable tax system. Direct taxes, such as the corporate income tax, are not border adjustable, but indirect taxes, such as the BCT, are border adjustable.
Encouragement of Investment. Under the current corporate income tax, an investment is typically depreciated gradually over the life of an asset. A portion of the cost of the investment is deducted from revenues each year until the full price is recaptured over time (depending on the length of the depreciation schedule).
Under the BCT, the cost of an investment is fully deducted immediately – in other words, investments are “expensed.” That becomes important from a tax perspective because a dollar’s worth of tax benefit today is worth more than a tax benefit in the future for any business. Expensing becomes the key element in shifting from a system that taxes income to a system that taxes consumption (i.e. income less investment). This will boost overall investment in the economy, spurring job creation, productivity and rising living standards.
Elimination of the Corporate Income Tax. Like the individual income tax, the corporate income tax contains a host of tax preferences that end up narrowing the corporate tax base by up to 25 percent, according to the Treasury Department. That narrow tax base requires higher tax rates to raise a given amount of revenue. The current statutory U.S. corporate tax rate (including State corporate taxes) is 39 percent, the second highest tax rate in the Organisation for Economic Cooperation and Development [OECD] and 8 percentage points higher than the OECD average. This adds to the disadvantage already placed on American businesses and, in turn, American jobs. In addition, a country’s corporate income tax rate can become one of the key determinants of where businesses choose to locate and invest.
The plan eliminates the corporate income tax entirely, replacing it with the business consumption tax on a broad tax base. The tax base is broadened by eliminating various business tax preferences in today’s system, which allows for a significantly lower tax rate under the BCT.
Boost to Competitiveness. By eliminating the corporate income tax and instituting a single-digit business consumption tax with immediate expensing, the U.S. would dramatically enhance its investment climate.
The figure alongside gives a sense of how much. It shows a cross-country comparison of the marginal effective tax rates on new business investment. Effective tax rates are a useful way to distill all of the elements of the tax code that influence the burden on new investment (e.g. statutory business tax rates and depreciation treatment). Currently, the marginal effective tax rate on new business investment in the U.S. is roughly 25 percent, above the OECD average of 20 percent. By implementing the BCT, the U.S. would essentially drive down the marginal effective rate to zero. In other words, the BCT will essentially eliminate the tax distortion on new business investment in the U.S. The result will be a quantum leap in terms of establishing a competitive business tax for the 21st century.
The move will also help to level the playing field so American businesses and American-made products are no longer at a competitive disadvantage against foreign competitors. In fact, this plan gives the U.S. a leg up on its foreign competitors by only taxing investment once – at the business level. Foreign competitors will continue to tax investment twice – at the business level and at the individual level via a tax on capital gains or dividends – which has the effect of raising their cost of capital.
One further metric of the enhanced competitiveness of U.S. businesses under this plan is the level of the consumption tax itself. A U.S. business consumption tax of 8.5 percent is roughly half that of the OECD average. (Other countries typically employ a consumption tax along with a corporate income tax and their business taxes as a whole typically raise more revenues as a share of their overall economy than the U.S.)
Key Benefits of the Business Consumption Tax
To summarize some of the principal benefits of the tax policy described above:
▫ An uncompetitive business tax climate has forced many U.S. companies to relocate and send jobs abroad, often through mergers and acquisitions with foreign companies. This tax plan reverses the trend.
▫ With an enhanced investment climate, international businesses, particularly capital-intensive industries such as manufacturing, will have a greater incentive to invest in the U.S. and expand production here, which creates jobs.
▫ The United States’ relatively high statutory corporate income tax has led to multinational corporations shifting their profits to lower-tax countries, essentially shifting the tax base overseas. Many U.S. businesses also delay the repatriation of earnings from their foreign affiliates. This plan brings these earnings and profits back to the U.S.
▫ Greater investment in the U.S. will also help to speed the pace of technological innovation in the U.S. economy, a key factor in raising productivity.
▫ There is a clear link between investment and capital formation on the one hand, and productivity and rising living standards on the other. Between 1973 and 1995, for instance, productivity grew at just under 1.5 percent, implying that living standards in the U.S. would double every 50 years. Since 1995, productivity, spurred by technological innovation and investment, has increased at a 3.0-percent rate. This rate implies it will take only 25 years for living standards to double, half as long as under a slower rate of productivity. A business climate that fosters investment, therefore, is one of the keys to future U.S. prosperity.
▫ The way the U.S. taxes international business operations is important because roughly two-thirds of U.S. export trade (a growing share of the U.S. economy) is facilitated by U.S. multinational companies and their foreign affiliates.
The days when a college graduate could expect to join a company and climb its ladder for an entire career are gone. Also evaporating are the jobs on production lines that could instantly lift any high school graduate securely into the middle class. Regardless of how well or poorly the economy is doing, most Americans already know they will likely have to switch jobs, and even careers, more than once during the course of their lifetimes.
One reason is globalization. The world’s economies have become irrevocably interconnected from forces such advances in transportation, technological gains, the explosion of the Internet, and lowered trade barriers. All these have served to open the global economic playing field. Now that new markets have emerged in other countries, and money and work assignments can move around the world in a matter of seconds, Americans no longer compete only with their fellow citizens for jobs; they also are challenged by workers in India, China, Europe, and the rest of the world.
Further, as the U.S. economy becomes more complex and innovative, workers will have to be more knowledgeable and flexible to succeed – which means they will need additional education and/or job training throughout their careers. Life-long learning will be a necessary part of career development. Government cannot insulate workers from the forces of globalization, but it can help facilitate the training needed to avoid, or push through, any period of uncertainty or unemployment. While the Nation’s existing job training system has been improved over ineffective strategies of the past, the government can better leverage and target existing resources, and make it more responsive to the effects of globalization.
Existing Education and Training Opportunities
Globalization will increase the demand for educational institutions that are able to effectively anticipate the labor market and quickly train workers to take advantage of them. In the meantime, the United States has an abundance of opportunities for those seeking additional education beyond high school. There are thousands of public and private colleges and universities. There is a robust system of community colleges that offer vocational training, 2-year degrees, and established ladders to 4-year institutions. There are also a number of for-profit and non-profit organizations that offer in-class and on-line instruction to advance basic literacy and various job skills. Citizens also can enter military service, and obtain some of the best job experience and training the world has to offer.
To help pay for this, Congress has steadily increased the number and amount of Pell Grants it offers to the disadvantaged. Students can also save for their education in tax-deferred 529 accounts and compete for scholarships.
Government Job Training Programs
In addition to these opportunities, Congress passed the Workforce Investment Act [WIA] in 1998. This law consolidated a number of disparate Federal Government job training programs and in their place established a nationwide system of “One-Stop” centers. These centers are required to help all job seekers with their resumes and job placements. In addition, if it is determined that additional training is needed to obtain employment, a job-seeker can receive a voucher to help purchase needed classes. WIA set the stage for a nationwide transformation toward a greater system of universal employment and job training assistance by harnessing the forces of customer choice, system accountability and efficiency.
Nevertheless, there is much room for improvement. A study recently released by the Department of Labor [DoL] found that the benefits of WIA job training programs were “small or nonexistent” for laid-off workers. Similarly, the Government Accountability Office [GAO], in a September 2008 report, concluded the Department of Labor did not set up comparable performance measures for $900 million in WIA grants that it awarded over 7 years, so there is no way to evaluate their impact. Finally, even though WIA consolidated a number of job training programs, a great deal of duplication remains. There are 49 Federal programs, administered by eight different agencies, that provide a range of employment and training services.
Strengthening Federal Job Training Programs by Requiring Continual Improvement in Outcomes
This legislation establishes requirements to increase job training outcomes across the board. First, it improves accountability by creating a common set of metrics for all of the 49 existing Federal job training programs so that policymakers and the public can see whether, and how well, individuals are benefitting from the training. It also requires that both training outcomes and the spending data for programs are placed on a centralized website for public access. It requires the GAO and the Department of Labor’s Inspector General to conduct routine audits and studies on these data, to ensure programs are successfully serving all participants.
The legislation also maximizes the effectiveness of Federal dollars by requiring competitive bidding for all job training grants to private contractors, giving preference to proposals that leverage private investment, and prohibiting renewal of grant contracts that fail to produce results. The bill institutes public awareness campaigns about the training opportunities available in local communities and the need for workers to continually invest in their education and skill sets so that they prosper in the global economy. It makes training more accessible for those in need. Most important, it allows each State to work with the Department of Labor [DoL] on a viable plan to improve job training outcomes and receive a 3-year block grant that waives the silos and red tape associated with existing Federal job training funding to accomplish their goals.
Streamline and Improve Performance Metrics. The challenge with current law is that each of the 49 existing Federal job training programs has its own unique set of performance measures. Several programs allow grantees to define their own outcome measures. Some allow the measures to be negotiated with the Federal Government each year. The Food Stamp Employment and Training Program does not even bother to consistently track outcomes.
This legislation addresses the problem by requiring every Federal job training program to track the following:
▫ The type of training provided and the cost per student.
▫ The employment status immediately after training, and then 1 year, 3 years, and 5 years after training.
▫ Whether or not trainees are working in the field for which they were trained in order to determine whether the training led directly to employment.
▫ The participant’s income level two years before and up to 5 years after training to determine if the training led to increased income.
▫ The participation level in Federal support programs (i.e. Temporary Assistance for Needy Families [TANF], the Supplemental Nutrition Assistance Program [SNAP], Supplemental Security Income, and the like) before and up to 5 years after training to determine if it led to self sufficiency.
In addition, the legislation clarifies that these performance measures do not prohibit programs from creating or continuing their own additional outcome measures. Further, the legislation requires the DoL to do a periodic control group study, where it compares the performance measure outcomes of those who have participated in subsidized training against similarly situated individuals who did not receive any training. In cases in which training is obtained with a WIA voucher, the legislation limits performance tracking only to the subsidized trainee. This is designed to prevent the current problem of voucher-holders from being denied access to private-sector training programs where the program administrator does not want to bear the burden of reporting on the rest of the unsubsidized trainees.
To prevent program administrators from artificially inflating their performance outcomes by selecting job training participants based on their likelihood of success, or only formally enrolling those individuals who successfully completed the training, this legislation creates an explicit prohibition on such behavior and requires the Department of Labor’s Inspector General and the GAO to conduct periodic audits to ensure compliance.
These common-sense measures together will enable policymakers to determine whether a training program is effective. If a program is not resulting directly in job placement, and not putting participants on a path to financial self-sufficiency, then it must be reformed until does.
Increased Transparency. The legislation requires the DoL to publicly provide annual performance and spending data from all federally subsidized job training programs on a centralized and easily accessible DoL website. The spending data must include how much program administrators spend on their own salaries, on administrative expenses, and on students. This approach will help ensure that Federal job training dollars are focused on students and spent efficiently. It will also go a long way to prevent and address unjust enrichment, without the unintended consequences of salary caps.
Improve Effectiveness Through Competition. Current law recommends, but does not require, that all job training grants be awarded competitively. A May 2008 GAO report revealed that since 2001, the DoL spent nearly $900 million on grant initiatives, most of which were awarded without competition. This legislation ends this problem by requiring that all job training grants (excluding block and formula grants) issued to private contractors be competitively bid. It also encourages stretching Federal dollars farther by requiring that DoL give priority to grant proposals that leverage private sector investment. Finally, the legislation prohibits the DoL from renewing any job training grants that fail to help participants succeed.
Increased Awareness of Opportunities for Life-Long Learning. With technological advancements and globalization churning through old jobs and creating newer and better ones, workers will have to acquire a range of skills and be ready to meet the more sophisticated demands of the job market. This will require a commitment to life-long learning. This legislation will take two significant steps to raise awareness about the need for life-long learning and about training opportunities available in local communities. First, the bill provides incentives to public broadcasters to spread awareness through their system of PSAs. In addition, it requires all those who receive grant money for job training programs to conduct life-long learning awareness campaigns. These provisions will serve to continually reminded the American workforce of the need to keep tabs on their skill sets, on the demand for their skills in the marketplace, and on how to get additional training if needed.
Increased Access to Training for WIA Participants. Current law implies that States must provide WIA services in a sequence. In practice, this often causes career counselors to make training-seekers wait and look for a job for an extended period of time, and only offer a training voucher as a last resort. This legislation reforms the statutory bias toward providing WIA services in a sequence, and encourages One-Stop centers to offer services in any order or combination based on the needs of the individual job seeker and the local job market. This will give flexibility to career counselors and enable them to get job seekers the right kind of training in a timely fashion. This can be especially helpful for areas where significant layoffs have occurred or are anticipated.
Third-Party Evaluation. The legislation requires the GAO to conduct a study of all the job training programs and identify duplications and report back to Congress within 1 year. It also requires the GAO to prepare a report every 2 years analyzing the results of the various Federal job training programs based on the new performance metrics. This information will arm policy makers with the necessary information to continually improve Federal job training programs.
State Innovation. Every State and locality has its own unique set of challenges to address when it comes to job training, as well as a strong incentive to make their areas as attractive to capital investment and economic growth as possible. Some States may see ways to improve upon approaches dictated by the 49 existing Federal programs and should be given the chance. That is why this legislation includes a new block grant option for States. Under this option, a State may present to the DoL a viable 3-year plan to improve upon existing outcomes, and obtain a 3-year waiver from the silos and red tape of existing Federal job training programs. If the State fails to demonstrate significant improvement at the end of 3 years, the waiver is removed and job training funding reverts to its original program tracks. If the State improves on the status quo, it can continue with 3-year waivers and may become a model of best practices for other States.
REFORMING THE BUDGET PROCESS
One reason the Federal Government’s major entitlement programs are difficult to control is the way they are designed. A second is that current congressional budgeting lacks a means of identifying the long-term effects of near-term program expansions. A third is that these programs are not subject to regular review, as annually appropriated discretionary programs are; and as a result, Congress rarely evaluates the costs and effectiveness of entitlements except when it is proposing to enlarge them.
Nothing can substitute for sound and prudent policy choices. But an improved budget process, with enforceable limits on total spending, would surely be a step forward. This proposal calls for such a reform.
The Fundamental Problem of Entitlement Spending
Entitlement spending has become an increasingly dominant part of the Federal budget over the past several decades. As then-Congressional Budget Office Director Peter R. Orszag noted:
Spending for mandatory programs has increased from less than one-third of total Federal outlays in the early 1960s to more than one-half in recent years. Most of that growth has been concentrated in Medicare, Medicaid, and Social Security. Together, gross outlays for those programs now account for about 45 percent of Federal outlays, compared with 2 percent in 1950 (before the health programs were created) and 25 percent in 1975.
Within the next 10 years, gross entitlement outlays (excluding offsetting receipts) are projected to exceed 60 percent of the budget; and the largest contributors will be Social Security, Medicare, and Medicaid, which are growing faster than the economy.
For the purposes of current budget rules and conventions, entitlement spending is projected to grow according to the formulas established in permanent law, regardless of the rate of growth and whether the government has the means to support it. Benefits to individuals are guaranteed, so that total spending for any one program depends on factors outside the control of Congress – such as caseloads, inflation, and other economic and technical factors. This is a prescription for losing control of such spending. In addition, any proposal to slow the growth in this spending is characterized as a “spending cut.”
In most cases, once an entitlement program is enacted, there is no additional review or approval required by Congress – it simply keeps running – and the President cannot veto an increase that arises from existing law. The only way to slow the growth in mandatory spending is through a change in law.
Weaknesses in the Budget Process
The current Federal budget process has a short-term focus and does not systematically review the huge and growing commitment the Federal Government is making for entitlement programs. While Congress and the administration thoroughly review discretionary programs annually and this spending must be appropriated in laws annually, discretionary spending represents less than half of the Federal budget.
Although both the Office of Management and Budget and the Congressional Budget Office make long-term projections, the current budget process lacks a comprehensive and enforceable mechanism for current-law mandatory spending and its long-term impact. Current budget rules are designed to enforce discretionary spending levels on an annual basis and mandatory revenue levels over a 10-year period. Under the current process, it is difficult to make trade-offs between discretionary and mandatory spending, and there is no current enforcement on spending levels beyond the 10-year budgeting period.
The current budget process uses a “baseline” to measure the budgetary impact of legislation that instills an upward bias in mandatory spending. For example, the baseline projects the automatic growth in entitlement spending that will occur under current-law formulas, regardless of whether the government has the means to finance this spending. If legislation slows the growth of spending for a program relative to the baseline, it is considered a “cut in spending.”
As a result, the current budget process does not fully capture the long-term cost of these programs and shields them from changes to address their unsustainable growth. Unfortunately, Congress is more likely to take action to aggravate the problem. At best, Congress will attempt to offset the cost according to current rules that cover the 1- or 10-year timeframe, but usually uses revenue, spending gimmicks or both to offset the cost, which hides the long-term spending impacts.
In their report, Taking Back Our Fiscal Future, a diverse group of 16 budget experts included a recommendation to reform the Federal budget process, focusing especially on Social Security, Medicare, and Medicaid. They wrote:
We believe that these three programs must be subjected to serious periodic review and decision. Their estimated future costs must be shown clearly and budgeted in advance. If they run significantly over budget, a triggering mechanism should force the President and Congress to deal with the shortfall. This requirement would give the public and their elected representatives a chance to decide explicitly how much they want to spend on these three entitlements, how much on other priorities – such as national defense, education, and scientific research – and what level of taxes they are willing to pay to support these programs.
Based on this recommendation, A Roadmap for America’s Future establishes a binding cap on total spending as a percentage of GDP at the spending levels that are projected to result from the plan. It requires the President’s budget and the CBO to make projections annually in comparison to these spending limits. It requires a comprehensive review of the long-term budget outlook every 5 years. If spending gets out of control again, and Congress fails to address the problem during the 5-year review, the proposal provides a mechanism to slow the growth in faster spending programs by no more than 1 percent, to bring spending back in line with the spending limits.
Over the past 2 years, non-defense discretionary spending, has grown at double-digit rates, even after excluding “stimulus” and emergency funding. As Senator Bayh of Indiana has said, Washington is “serially incapable of getting Federal spending under control.” In addition to caps on total spending, the Roadmap establishes enforceable caps on discretionary spending.
The proposal also requires a three-fifths supermajority vote in the House and Senate to pass legislation that increases revenue.