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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance.
This study was supported by Grant No. 07-90771-000-HCD to the National Academy of Sciences and Grant No. 07-90771-001-HCD to the National Academy of Public Administration from the John D. and Catherine T. MacArthur Foundation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project.
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Suggested citation: National Research Council and National Academy of Public Administration. (2010). Choosing the Nation’s Fiscal Future. Committee on the Fiscal Future of the United States. Washington, DC: The National Academies Press.
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COMMITTEE ON THE FISCAL FUTURE OF THE UNITED STATES
John L. Palmer, Cochair,
Maxwell School, Syracuse University
Rudolph G. Penner, Cochair,
Executive Office Research, Urban Institute, Washington, DC
Joseph Antos,
Healthcare and Retirement Policy, American Enterprise Institute, Washington, DC
Kenneth S. Apfel,
School of Public Policy, University of Maryland
Richard C. Atkinson, President Emeritus,
University of California, San Diego
Alan J. Auerbach,
Department of Economics, University of California, Berkeley
Rebecca M. Blank,*
Economic Studies, Brookings Institution, Washington, DC
Andrea L. Campbell,
Department of Economics, Massachusetts Institute of Technology
Chris Edwards,
Tax Policy Studies, Cato Institute, Washington, DC
Dana P. Goldman,
Leonard D. Schaeffer Center for Health Policy and Economics, University of Southern California
Robert F. Hale,*
American Society of Military Comptrollers, Alexandria, VA
Ellen Hughes-Cromwick,
World Headquarters, Ford Motor Company, Dearborn, MI
Joseph J. Minarik,
Committee for Economic Development, Washington, DC
Olivia S. Mitchell,
Wharton School, University of Pennsylvania
Sean O’Keefe, Chief Executive Officer,
EADS North America, Arlington, VA
Gilbert S. Omenn,
University of Michigan Medical School, University of Michigan
June E. O’Neill,
Zicklin School of Business, Baruch College, City University of New York
Paul L. Posner,
Department of Public and International Affairs, George Mason University
Robert D. Reischauer, President,
Urban Institute, Washington, DC
Margaret C. Simms,
Low Income Working Families, Urban Institute, Washington, DC
William E. Spriggs,*
Department of Economics, Howard University
Thomas C. Sutton,
Pacific Life Insurance Company (Retired), Newport Beach, CA
Susan Tanaka,
Citizen Education and Engagement, Peter G. Peterson Foundation, New York, New York
Ruth A. Wooden, President,
Public Agenda, New York, New York
Foreword
This report represents the outcome of a joint and shared effort between our two organizations: the National Academy of Public Administration (NAPA) and the National Academy of Sciences (NAS). In their respective spheres, these two institutions play important roles by bringing to bear expert advice on some of the most significant challenges facing our nation.
At the request of and with the support of the John D. and Catherine T. MacArthur Foundation and using procedures of the National Research Council, NAS and NAPA jointly undertook a 2-year study of the long-term fiscal challenge facing the United States. The work was performed by a stellar committee representing a diversity of disciplines and practices, a wealth of experience with the federal budget and various public policies, and a wide range of political and policy views. The committee has worked in harmony and forged a strong consensus under the leadership of its cochairs, John Palmer and Rudy Penner. We thank them for their leadership and the entire committee for their extraordinary efforts.
No one reading this report can avoid being struck by the magnitude of the long-term budget challenge facing the federal government. Other studies have called attention to this challenge in similar terms. Uniquely, however, this study provides a framework that leaders and others can use to systematically consider a range of choices to put the federal budget on a sustainable course.
This report neither presumes nor recommends a particular path to a stable fiscal future. In a democracy, it is not the role of experts from outside the government to decide important policy questions, especially questions of this magnitude. That is the task of political leaders. And voters have the
responsibility to engage in the issues, elect officials who understand the challenges, and then hold them accountable for acting responsibly.
As a group of experts, the committee is providing the basis for making policy decisions and their professional judgment about the key issues for our fiscal future. It acknowledges the differences in values and perspectives that must be reconciled in order to reach agreement. It illustrates the range, as well as the difficulty, of the policy choices that have to be faced. It also offers a set of analytical tools for weighing those choices, including practical tests that can be applied to budget proposals to determine their fiscal prudence.
Much is at stake. If we as a nation do not grapple promptly and wisely with the changes needed to put the federal budget on a sustainable course, all of us will find that the public goals we most value are at risk. This report will have served its purpose if its insights and analytical framework are widely used to support serious discussion of this most urgent question. We hope that it will receive the widest possible attention.
Ralph J. Cicerone
President
National Academy of Sciences
Chair
National Research Council
Jennifer L. Dorn
President and Chief Executive Officer
National Academy of Public Administration
Acknowledgments
This study is the product of the generous support, hard work, and dedication of many organizations and individuals. The officers and staff of the John D. and Catherine T. MacArthur Foundation originated the idea for the study and provided its funding. They maintained strong support and interest throughout the course of the work.
Jennifer Dorn, president and chief executive officer of the National Academy of Public Administration; Lois Fu, senior adviser to the president of the National Academy of Public Administration; Michael Feuer, executive director of the Division of Behavioral and Social Sciences and Education (DBASSE) at the National Research Council (NRC); and Jane Ross, director of DBASSE’s Center for Economic, Governance, and International Studies provided leadership in the development of the study and continued support through the study process.
We owe special thanks to our fellow committee members, who gave long hours to this project, providing not only in-depth analyses, but also drafts—and repeated redrafts—of text for the report. The members hold a broad range of views on topics related to this study, and they used those differences to explore a very wide range of policy ideas and to draft a report that would be useful to individuals and groups with diverse beliefs and priorities.
A great deal of the success of this project is due to its excellent staff, who performed innumerable analyses and produced many drafts of the report. We are especially indebted to our study director, Steve Redburn, who managed the overall work of the panel, led a complex set of analytic activities, and helped us to meet our deadlines. The fast pace of the work
and the outstanding quality of the final product are due to an important extent also to the work of Mark Menchik, Malay Majmundar, Kathy Ruffing, and Danielle Bland. Eugenia Grohman, associate executive director of DBASSE, shared her extensive experience at critical points in the study process, especially in editing the manuscript.
Staff members of the Social Security Administration’s Office of the Chief Actuary provided cost estimates on various proposals contained in the report’s illustrative scenarios and reviewed text for completeness and accuracy. The Urban Institute-Brookings Institution Tax Policy Center contributed to the detailed analysis in the report by producing simulations of tax changes that were part of several illustrative scenarios. Barry Anderson and his colleagues in the Budgeting and Public Expenditures Division of the Public Governance and Territorial Development Directorate of the Organisation for Economic Co-operation and Development produced a study of the international experience with long-term budgeting.
This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the Report Review Committee of the NRC. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process.
We thank the following individuals for their participation in the review of this report: Henry J. Aaron, Economic Studies Program, Brookings Institution, Washington, DC; Robert Greenstein, Center on Budget and Policy Priorities, Washington, DC; Edwin L. Harper, Public Affairs/Government Relations, Assurant, Inc., Washington, DC; Ron Haskins, Brookings Institution, Washington, DC; Peter S. Heller, Paul H. Nitze School of Advanced International Studies, Johns Hopkins University; James R. Horney, Center on Budget and Policy Priorities, Washington, DC; Philip G. Joyce, George Washington University; Lawrence S. Lewin, Executive Consultant, Chevy Chase, MD; Alicia H. Munnell, Carroll School of Management, Boston College; William Nordhaus, Department of Economics, Yale University; Marilyn Rubin, Department of Public Management, John Jay College of Criminal Justice; John B. Shoven, Department of Economics, Stanford University; and Theda Skocpol, Department of Government, Harvard University.
Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations nor did they see the final draft of the report before its release. The review of this report was overseen by Charles F. Manski, De-
partment of Economics, Northwestern University, and M. Granger Morgan, Department of Engineering and Public Policy, Carnegie Mellon University. Responsibility for the final content of this report, however, rests entirely with the authoring committee and the institutions.
John L. Palmer and Rudolph G. Penner, Cochairs
Committee on the Fiscal Future of the United States
Appendixes |
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Appendixes A through G are not printed in this book; they can be found online at http://www.nap.edu/catalog.php?record_id=12808.
Figures, Tables, and Boxes
FIGURES
S-1 |
The long-run budget outlook, |
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S-2 |
Debt savings from stabilizing the debt-to-GDP ratio in 12 years, |
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S-3 |
Projected federal spending under the committee’s four scenarios, |
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1-1 |
The long-term budget outlook, |
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1-2 |
The long-term outlook for the debt, |
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1-3 |
Factors in projected Social Security, Medicare, and Medicaid spending, 2009-2079, as a percentage of GDP, |
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1-4 |
Federal outlays in fiscal 2008, |
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1-5 |
Federal spending as a percentage of GDP, 1962-2008, |
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1-6 |
Federal revenues and borrowing in fiscal 2008, |
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2-1 |
Federal government spending by function, 1962-2007, |
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2-2 |
General government total tax and nontax receipts as a percentage of nominal GDP in 2008, |
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3-1 |
Debt savings from stabilizing debt-to-GDP ratio in 12 years, |
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5-1 |
Federal health spending under four sustainable budget trajectories and in the baseline, |
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5-2 |
Average excess cost growth in Medicare and Medicaid, |
6-1 |
Annual Social Security benefits and earnings replacement rates, for workers who retire at age 65, scheduled for 2010, |
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6-2 |
Social Security benefits as a percentage of total income, for families and individuals aged 65+, by quintile of total income, 2006, |
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6-3 |
Social Security scheduled spending and tax revenues as a percentage of GDP, |
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6-4 |
Cumulative Social Security revenue less spending under current-law tax rates and scheduled benefits, |
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6-5 |
Monthly Social Security benefits for workers who retire at age 65 under current law and under option 1 (in 2009 dollars), |
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6-6 |
Social Security benefits as a percentage of past earnings for new retirees at age 65 under current law and under Option 1, |
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6-7 |
Monthly Social Security benefits for workers who retire at age 65 under current law and under Option 2 (in 2009 dollars), |
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6-8 |
Social Security benefits as a percentage of past earnings for new retirees at age 65 under current law and under Option 2, |
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6-9 |
Annual Social Security payroll tax projected for 2010 and for 2050 under current law and under Option 2 (in 2009 dollars), |
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6-10 |
Monthly Social Security benefits for workers who retire at age 65 under current law and under Option 3 (in 2009 dollars), |
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6-11 |
Social Security benefits as a percentage of past earnings for new retirees at age 65 under current law and under Option 3, |
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6-12 |
Annual Social Security payroll tax projected for 2010 and for 2050 under current law and under Option 3 (in 2009 dollars), |
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6-13 |
Annual Social Security payroll tax projected for 2010 and for 2050 under current law and under Option 4 (in 2009 dollars), |
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7-1 |
Defense and other domestic spending as a percentage of GDP, 1962-2008, |
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7-2 |
Defense and other domestic spending as a share of GDP in 2019 under four options, |
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8-1 |
Federal government revenues as a share of GDP, |
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8-2 |
Tax revenues as a share of GDP, |
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8-3 |
Top corporate tax rates in the United States and 30 OECD countries, |
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8-4 |
Current tax structure: top personal income tax rates for the committee’s four scenarios, |
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8-5 |
Personal income tax rates for the first and second brackets under a simplified tax structure for the committee’s four scenarios, |
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8-6 |
Distribution of the percentage share of combined federal taxes by relative income in 2050 for the committee’s four scenarios, |
9-1 |
Projected federal spending under the committee’s four scenarios, |
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9-2 |
Projected federal debt under the committee’s four scenarios, |
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9-3 |
Projected federal deficits under the committee’s four scenarios, |
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9-4 |
Federal spending and revenues under the committee’s low scenario, |
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9-5 |
Deviation from the study baseline for revenues and noninterest outlays under the committee’s low scenario, |
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9-6 |
Federal spending and revenues under the committee’s high scenario, |
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9-7 |
Deviation from the study baseline for revenues and noninterest outlays under the committee’s high scenario, |
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9-8 |
Federal spending and revenues under the committee’s intermediate-1 scenario, |
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9-9 |
Deviation from the study baseline for revenues and noninterest outlays under the committee’s intermediate-1 scenario, |
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9-10 |
Federal spending and revenues under the committee’s intermediate-2 scenario, |
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9-11 |
Deviation from the study baseline for revenues and noninterest outlays under the committee’s intermediate-2 scenario, |
TABLES
6-1 |
Four Illustrative Social Security Options: Overview, |
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8-1 |
Federal Tax Structure and Revenue Levels Under the Committee’s Four Paths, |
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8-2 |
Percentage Change in After-Tax Income Under the Committee’s Four Scenarios in Comparison with Current Law for Selected Income Groups, in percent, |
BOXES
5-1 |
2009 Health Care Reform Proposal: Affordable Health Care for America Act, |
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5-2 |
Medicare and Medicaid, |
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6-1 |
Sustaining the Social Security Trust Fund, |
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8-1 |
Distortions in the Current Tax Code, |
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10-1 |
The 1990 Budget Agreement, |
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10-2 |
Australia’s Experience with Long-Term Budgeting, |
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10-3 |
New Zealand’s Budget Principles, |
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10-4 |
Automatic Balancing Mechanisms in Canada, Germany, and Sweden, |