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The Baucus Plan’s Phony Deficit Reduction

Thursday, October 22, 2009

The true effect of Senator Baucus’s healthcare bill will likely be large increases in the deficit, not an $81-billion reduction.

When the Congressional Budget Office (CBO) released its analysis of Senate Finance Committee Chairman Max Baucus’s (D-Montana) health legislation, Baucus and other Democrats were greeted by exactly the news headlines they had hoped for. The National Journal said, “CBO: Finance Plan Would Save $81 Billion.” The Washington Post’s headline was “CBO Says Senate Health Bill Would Expand Coverage, Reduce Deficit,” and the article said the bill “would keep Obama's pledge that health reform will not increase budget deficits by ‘one dime’ now or in the future.” CBS declared, “President Obama’s health care plan gets a green light from the Congressional Budget Office, as a key bill not only pays for itself, but actually saves billions.” To make sure no one was confused, the New York Times simply said, “Healthcare Bill Gets Green Light in Cost Analysis.”

I feel richer already.

An Internet search on the words “Baucus” and “$81 billion”—the amount by which his plan purportedly reduces the budget deficit over ten years—produces thousands of hits. Yet this $81 billion in savings is almost entirely a function of “raiding” the Social Security trust fund. Fully 99 percent of the reduction in the budget deficit is due to Social Security taxes increased by the Baucus plan. Without Social Security taxes, CBO states the plan would reduce the deficit by at most $0.5 billion over ten years, or might increase it by a similar amount. That’s cutting it pretty close, given that President Obama has stated “I will not sign a plan that adds one dime to our deficits either now or in the future. Period.”

Fully 99 percent of the reduction in the budget deficit is due to increased Social Security taxes generated by the Baucus plan.

Baucus’s proposal generates new Social Security taxes when individuals leave (or are dropped from) employer-sponsored healthcare and instead purchase coverage from a new insurance exchange. The amount their employer previously spent on health insurance would now count as wages and therefore be subject to Social Security taxes. In addition, Baucus’s new 40-percent excise tax on high-cost health insurance would cause some plans to reduce premiums, either by limiting coverage or increasing co-payments. Reduced premiums would also increase taxable wages, again raising Social Security revenues.

Of course, paying higher Social Security taxes today entitles a person to higher benefits in the future. The new Social Security taxes generated by the Baucus plan should be saved to fund those increased benefit costs—not to mention Social Security’s overall multi-trillion dollar deficit—not cited as a supposed deficit reduction today. Social Security was originally placed “off budget” on the recommendation of the 1983 “Greenspan Commission,” which stated that “changes in the Social Security program should be made only for programmatic reasons, and not for purposes of balancing the budget.”

To get around this, politicians of both parties cite the “unified budget,” which includes Social Security and allows Social Security surpluses to count against deficits in the rest of the budget. Kent Smetters of the American Enterprise Institute, where I am a resident scholar, has shown that Social Security surpluses correlate with non-Social Security deficits: in other words, Congress borrows Social Security money, which is counted neither against the budget deficit nor the publicly held national debt, to spend more or tax less than it otherwise would.

The new Social Security taxes generated by the Baucus plan should be saved to fund those increased benefit costs, not cited as a supposed deficit reduction today.

The Baucus plan is a case in point. It’s one thing for surpluses within Social Security to net out against deficits in the non-Social Security budget. In the Baucus plan, however, much-touted deficit reduction depends almost entirely upon increased Social Security taxes. Without Social Security funds, CBO says, the plan is as likely to increase the deficit as reduce it.

Even this miniscule deficit reduction is entirely theoretical. In practice it is unlikely Congress will anger seniors by implementing the Baucus plan’s hundreds of billions of dollars in cuts to Medicare, Medicaid, and other federal health programs. Even today, as Democrats count such cuts toward the deficit reduction of the Baucus plan, they are rushing to repeal $245 billion in cuts to physicians’ fees passed in 1997 as a way to reduce costs for the massively insolvent Medicare program. The true effect of the Baucus plan on the federal deficit will likely be large increases, not an $81-billion reduction.

Due to its favorable budget headlines, Senator Baucus’s plan has been anointed the fiscally responsible healthcare plan. In truth, however, there is almost no chance that the Baucus plan in practice would actually reduce the deficit.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute.

FURTHER READING: In "How Different Is Grandma’s Spending?" Biggs discusses how the inflation seniors experience is far more similar to that felt by other Americans than it is different. In “Full Faith and Overextended Credit,” the author warns that the federal government’s long-term budget could bring about a financial crisis that surpasses the current one. And in “The Straw Men of Social Security,” he argues Social Security badly needs reform.

Image by Darren Wamboldt/Bergman Group.

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