CBO Analyzes Ryan Budget Proposal: 2050 Debt/GDP At 10% Versus 344% In Revised Existing Budget... But How?

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The Congressional Budget Office has chimed in with a 30 page summary comparing the proposed Ryan budget and two previously analyzed scenarios: scenarios—an extended-baseline scenario based on June 2010-current law and an alternative fiscal scenario that incorporated several changes to then-current law that were widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. In essence these are merely variation on the theme of an Obama budget. Needless to say, the divergences are quite dramatic. Since the Ryan budget is focused on fiscal solvency, it achieves that: indeed, comparing projected 2050 Debt/GDP in the Ryan proposal, the CBO reaches a number of 10%, compared to 90% and 344% for the extended-baseline and the alternative fiscal scenarios. On the other hand, the credibility of the assumptions used to goalseek this outcome remain very much in doubt (much more on these in the CBO analysis below). The massive amount of spending cuts, coupled with some very aggressive revenue postulates, will certainly bring the critics out of the woodwork. It will also mean that with fiscal stimulus essentially curtailed, the only source of incremental economic boosting will be monetary policy, read - the Fed, which is an outcome that Bernanke has vocally warned against, due to his concern of Fed "politicization." Then again, with no other choice, it means that the debauchery of the dollar, since the economy is nowhere near the stage where the morphine can be removed, is about to kick into hyperdrive. In the meantime, here are the CBO summary observations.

First, a table showing the key outcomes in the three scenarios.

Then the CBO takes up the topic of key spending line items. Needless the say, total spending is expected to be cut in half in 40 years. Then again, not even Moody's ever tried to forecast more than 5 years out...

Last it a chart showing the breakdown of "Spending on Health Care for a Typical 65-Year-Old with a Standardized Health Insurance Benefit" - i.e., the most contentuous topic at hand: the socialization of US healthcare.

And a summary of the key features of the proposal. Those who wish to sound intelligent while praising or bashing the proposed budget should at least read the following bullets:

Chairman Ryan’s proposal, as specified to CBO by his staff, encompasses changes to Medicare, Medicaid, the major 2010 health care legislation, other government spending (excluding that for Social Security), and tax law.

Medicare

Starting in 2022, the proposal would convert the current Medicare system to a system of premium support payments and would increase the age of eligibility for Medicare:

  • Starting in 2022, the age of eligibility for Medicare would increase by two months per year until it reached 67 in 2033.
  • People who turn 65 in 2022 or later years and Disability Insurance beneficiaries who become eligible for Medicare in 2022 or later would not enroll in the current Medicare program but instead would be entitled to a premium support payment to help them purchase private health insurance.
  • Beneficiaries of the premium support payments would choose among competing private insurance plans operating in a newly established Medicare exchange. Those plans would have to comply with a standard for benefits set by the Office of Personnel Management. Plans would have to issue insurance to all people eligible for Medicare who applied and would have to charge the same premiums for all enrollees of the same age. The premium support payments would go directly  from the government to the plans that people selected.
  • The premium support payments would vary with the health status of the beneficiary. In addition, the Centers for  Medicare and Medicaid Services would collect fees from plans with healthier enrollees, on average, and convey the proceeds to plans with less healthy enrollees, on average, with the goal of appropriately compensating plans for the health risks of their insured population. This riskadjustment mechanism would be known as the risk review audit and would be budget-neutral.
  • The payment for 65-year-olds in 2022 is specified to be $8,000, on average, which is approximately the same dollar amount as projected net federal spending per capita for 65-year-olds in traditional Medicare (that is, the program’s  outlays minus receipts from the premiums enrollees pay for Part B and Part D, expressed on a per capita basis) under current law in that year. People who become eligible for Medicare in 2023 and subsequent years would receive a payment that was larger than $8,000 by an amount that reflected the increase in the consumer price index for all urban consumers (CPI-U) and the age of the enrollee. The premium support payments would increase in each year after initial eligibility by an amount that reflected both the increase in the CPI-U and the fact that enrollees in Medicare tend to be less healthy and require more costly health care as they age. (For example, projected net federal spending per capita for all people age 65 and older in traditional Medicare would be about $15,000 in 2022, CBO estimates, in comparison with about $8,000 for 65-year-olds.)
  • The premium support payments would also vary with the income of the beneficiary. People in the top 2 percent of the annual income distribution of the Medicare-eligible population would receive 30 percent of the premium support amount described above; people in the next 6 percent of the distribution would receive 50 percent of the amount described above; and people in the remaining 92 percent of the distribution would receive the full premium support amount
  • described above.
  • Beginning in 2022, the federal government would establish a medical savings account (MSA) for certain beneficiaries with low income. (An MSA is an account that holds deposits that can be used for medical expenses.) Eligibility for MSA  payments would be determined annually by the federal government on the basis of income relative to the federal poverty thresholds. The amount of the contribution in 2022 would be $7,800, and the annual amounts in subsequent  years would grow with the CPI-U.
  • Eligibility for the traditional Medicare program would not change for people who are age 55 or older by the end of 2011 or for people who receive Medicare benefits through the Disability Insurance program prior to 2022. As a result, the average age and average costs of enrollees remaining in the traditional Medicare program would increase over time. However, enrollees’ premiums under traditional Medicare would be adjusted to equal what they would be under current law—a so-called hold harmless provision. People covered under traditional Medicare would, beginning in 2022, have the option of switching to the premium support system.

Medicaid

The proposal would modify Medicaid as follows:

  • Starting in 2013, the federal share of all Medicaid payments would be converted into block grants to be allocated to the states. The total dollar amount of the block grants would increase annually with population growth and with growth in the CPI-U.
  • Starting in 2022, Medicaid block grant payments would be reduced to exclude projected spending for acute care services or Medicare premiums and cost sharing paid by Medicaid.
  • States would have additional flexibility in designing their programs.

2010 Health Care Legislation

The proposal would make several changes to the Patient Protection and Affordable Care Act (or PPACA, Public Law 111-148) and the health care provisions of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152). In general, it would repeal the provisions of those laws that deal with insurance coverage, including:

  • The requirement that most legal U.S. residents obtain health insurance;
  • The establishment of health insurance exchanges and the provision of subsidies for certain individuals and families who purchase coverage through the exchanges;
  • The expansion of Medicaid coverage to include most nonelderly people with income below 138 percent of the federal poverty level;
  • The penalties on certain employers if any of their workers obtain subsidized coverage through the exchanges; and
  • The tax credits for small employers that offer health insurance.
  • The proposal would also change some other provisions of PPACA and the Reconciliation Act:
  • It would repeal the Community Living Assistance Services and Supports (CLASS) program for long-term care insurance, as well as a number of mandatory grant programs including funds for so-called high-risk pools, reinsurance for early retirees, and prevention and public health activities.
  • The proposal would repeal the provisions that created the Independent Payment Advisory Board and that expanded subsidies for the “coverage gap” in Part D (a range of spending in which many enrollees have to pay all of their drug  costs, sometimes called the doughnut hole).

Most of the other changes that PPACA and the Reconciliation Act made to the Medicare program would be retained.

Other Spending

The path for all other federal spending excluding interest—that is, for discretionary spending and mandatory spending apart from that for Social Security and the major mandatory health care programs—was specified by Chairman Ryan’s staff. The remaining part of mandatory spending includes such programs as federal civilian and military retirement, the Supplemental Nutrition Assistance Program, unemployment compensation, Supplemental Security Income, the refundable portion of the earned income and child tax credits, and most veterans’ programs. Discretionary spending includes both defense spending and nondefense spending—in roughly equal amounts currently. That combination of other mandatory and discretionary spending was specified to decline from 12 percent of GDP in 2010 to about 6 percent in 2021 and then move in line with the GDP price deflator beginning in 2022, which would gen-erate a further decline relative to GDP. No proposals were specified that would generate that path.

Revenues

The path for revenues as a percentage of GDP was specified by Chairman Ryan’s staff. The path rises steadily from about 15 percent of GDP in 2010 to 19 percent in 2028 and remains at that level thereafter. There were no specifications of particular revenue provisions that would generate that path.

Hopefully the bolded sentence means there is something more than just a magic wand being waved around in geting this revenue rise.

Full report

CBO - Ryan Budget 2011-04-05