Social Security options

In 2010, for the first time since the enactment of the Social Security Amendments of 1983, Social Security’s annual outlays will exceed its annual tax revenues, CBO projects. If the economy continues to recover from the recent recession, those tax revenues will again exceed outlays, but only for a few years. CBO anticipates that starting in 2016, if current laws remain in place, the program’s annual spending will regularly exceed its tax revenues, and beginning in 2039 the Social Security Administration will not be able to pay the benefits currently specified in law. If revenues were not increased by that point, benefits would need to be cut by about 20 percent to equalize outlays and revenues. (Director's Blog)

In light of this dire outlook, the Congressional Budget Office (CBO) presents policy options for Social Security in a recent study. CBO analyzes 30 options in five categories:

• Increases in the Social Security payroll tax
• Reductions in people’s initial benefits
• Increases in benefits for low earners
• Increases in the full retirement age, and
• Reductions in the cost-of-living adjustments that are applied to continuing benefits

Social Security Policy Options, July 2010
      Report (pdf, 67pp/1.8MB)
      Summary (pdf, 4pp/148kB)
      Director's Blog, July 1, 2010

Unfunded mandates

The federal government may require state, local, and tribal governments and private-sector entities to expend funds for national goals. The Unfunded Mandates Reform Act of 1995 (UMRA, pdf, 25pp) was passed to ensure that Congress receives information about proposed federal mandates before enacting legislation. UMRA requires the Congressional Budget Office (CBO) to prepare "mandate statements" for bills approved by authorizing committees.

In those statements, CBO must address whether the direct costs of a bill’s federal mandates would be greater than the thresholds established in UMRA and identify any funding that the bill would provide to cover those costs. If the total direct costs of all mandates in the bill exceed the statutory threshold in any of the first five fiscal years in which the mandate is in effect, CBO must provide an estimate of those costs (if feasible) and the basis of its estimate.

CBO published a report on its UMRA activities in 2009. Per the Director's Blog: "As in previous years, few laws enacted in 2009 contained mandates whose costs, in CBO’s estimation, would exceed UMRA’s thresholds."

A Review of CBO's Activities in 2009 Under the Unfunded Mandates Reform Act
      Report (pdf, 82pp/3.4MB), March 2010
      Blog, April 1, 2010

Costs of reducing emissions

In a brief issued yesterday, the Congressional Budget Office (CBO) discusses the economic costs of reducing greenhouse-gas emissions in the U.S. in terms of (1) determinants of costs, and (2) size of costs.

What determines the costs of reducing emissions?

• Emissions in the absence of policy changes - if emissions are allowed to grow, mitigation costs would be greater
• Types of policies adopted - regulatory or market-based
• Response of the economy - the more easily producers and consumers can respond to price changes, the lower costs would be
• Efforts by other countries - their policies would influence U.S. costs

How large are estimated costs?

• Changes in energy use and emissions - changes are only modest in the near term, thru 2025
• Allowance prices - projections relate to H.R. 2454 (see below)
• Macroeconomic impact - net effects on GDP are likely to be negative because most benefits are expected in the second half of this century
• Impact on employment - H.R. 2454 would cause a significant shift in the composition of employment
• Distribution of costs - under H.R. 2454, the loss in purchasing power would be distributed to benefit lower-income households

CBO uses studies of H.R. 2454 (pdf, 1428pp), the American Clean Energy and Security Act of 2009, for its range of estimates.

The Costs of Reducing Greenhouse-Gas Emissions, Nov. 23, 2009
      Brief (pdf, 12pp/656kB)
      Blog

Retiring boomers' impact on assets

With the 78 million baby boomers born between 1946 and 1964 beginning to retire (the oldest having turned 62 in 2008), some economists had warned of a fall in prices of assets as boomers sold their holdings to finance their retirement. However, a paper from the Congressional Budget Office (CBO) reports that such a scenario is unlikely, based on the behavior of earlier groups of retirees. CBO cites three factors:

1. Retirees generally are cautious about selling assets to finance consumption because they might need those assets in the future. They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated.
2. Rather than spend all of their assets, retirees might intentionally retain some to make bequests.
3. Wealth in the United States is highly concentrated: One-third of the nation’s financial assets is held by the wealthiest 1 percent of the U.S. population. The wealthiest people do not spend significant portions of their assets during retirement and in most cases die leaving bequests.

Will the Demand for Assets Fall When the Baby Boomers Retire?
      Report (pdf, 33pp/788kB), Sept. 2009
      Blog, Sept. 8, 2009

Social Security projections '09

On Aug. 7, the Congressional Budget Office (CBO) released the 2009 update of its long-term Social Security projections, covering the 75-year period 2009-2083. CBO "projects that the Social Security trust funds will be exhausted in 2043." The report concludes:

Long-term budget projections require a stable economic backdrop. For these projections, CBO assumed that even a large increase in federal debt would not affect economic growth or real interest rates after the first 10 years. However, CBO projects that under current law, federal debt will increase substantially, resulting in higher interest rates and slower economic growth than are assumed in this report. If that occurred, the actual shortfall in Social Security’s finances would be greater than that projected in this report.

CBO's Long-Term Projections for Social Security: 2009 Update
      Report (pdf, 44pp/328kB)
      Director's blog

Health insurance in Congress

Congress is considering major changes in the health insurance system. The Congressional Budget Office (CBO) released a brief on how it will judge budgetary treatments of the various proposals. The proposals share some or all of the following features:

• Mandatory insurance with specified minimum benefits
• "Play-or-pay" requirement for employers
• New subsidies and expanded eligibility for Medicaid
• New "exchanges" for individuals and some small employers to purchase insurance
• Establishment of a "public plan" alongside private plans
• A federal health board for oversight

In CBO’s view, the key consideration is whether a proposal would be making health insurance an essentially governmental program...(or)...a largely private-sector system.

The Budgetary Treatment of Proposals to Change the Nation's Health Insurance System
      Issue brief (pdf, 7pp/108kB), May 27, 2009
      Blog, May 27, 2009

Climate change and U.S.

A recent paper from the Congressional Budget Office (CBO) gives an overview of the potential impacts of climate change in the U.S. The paper discusses impacts on:

• The physical environment - temperature; precipitation; cyclones, typhoons, and hurricanes; ocean currents, sea level, and ocean acidification
• Biological systems - ecosystems and biodiversity; agriculture, forestry, and fisheries
• Economy and human health - water supply and other infrastructure; human health; and aggregate economic impacts

A primary source used for the paper was the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC).

Potential Impacts of Climate Change in the United States
    Report (pdf, 33pp/1.3MB), May 2009
    Blog, May 4, 2009

Ethanol on food prices, gas emissions

On April 8, the Congressional Budget Office (CBO) released a report on the impact of ethanol on greenhouse gas emissions, food prices, and federal nutrition programs. Last year, U.S. consumption of ethanol reached a record high of more than 9 billion gallons. Increased use of ethanol is mandated in the Energy Independence and Security Act of 2007 (EISA), P.L. 110-140 (pdf, 311pp). One-quarter of all U.S. corn now goes to produce ethanol.

The demand for corn for ethanol production has exerted upward pressure on corn prices and on food prices in general. CBO estimates that the increased use of ethanol accounted for about 10 percent to 15 percent of the rise in food prices between April 2007 and April 2008.

In turn, increases in food prices will boost federal spending for mandatory nutrition programs such as the Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) and the school lunch program by an estimated $600 million to $900 million in fiscal year 2009.

The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions
      Report (pdf, 26pp/2.5MB), April 2009
      Blog

Congestion pricing

The Congressional Budget Office (CBO) published a study on congestion pricing, which aims to reduce traffic congestion by charging drivers more for using a highway at times or places with heavy traffic and less in opposite circumstances. Congestion pricing is different from tolls and other highway user fees because the charges vary with the amount of traffic. The report presents several policy options for Congress, but "(b)ecause the federal government owns or operates very few highways itself, federal policy must rely on encouraging state and local government to expand the use of congestion pricing."

A table in the study lists congestion-pricing projects in the U.S., both operating and under study. The Appendix details case studies of four different types of congestion pricing: cordon pricing, priced facilities, priced lanes, and high-occupancy toll (HOT) lanes:

• Central London congestion-charging zone (cordon pricing)
• Port Authority of New York and New Jersey's bridges and tunnels (priced facilities)
• State Route 91, Orange County, CA (priced lanes) and
• I-394 in Minneapolis, MN (HOT lanes)

Using Pricing to Reduce Traffic Congestion (pdf, 39pp/2 MB), March 2009

Health care in Congress

The Congressional Budget Office (CBO) released two reports on Dec. 18 relating to health care issues for Congress to consider. From the Director's blog:

The first document, Key Issues in Analyzing Major Health Insurance Proposals, focuses on large-scale proposals, provides extensive background information, and explains CBO’s analysis of numerous issues that could arise should the Congress seek to enact major changes in the health insurance system.

The second document, Budget Options, Volume I: Health Care, is much more specific and focused on discrete changes. It presents 115 discrete options, encompassing a broad array of issues related to the financing and delivery of health care. (Volume 2 of Budget Options, which will address policy options in other areas of the federal budget, will be issued in 2009.)

Key Issues in Analyzing Major Health Insurance Proposals (pdf, 196pp/2.2MB), Dec. 2008

Budget Options, Volume 1: Health Care (pdf, 236pp/2.6MB), Dec. 2008

Housing starts

Housing starts for 2009-2012 is the subject of a report from the Congressional Budget Office (CBO). Factors that determine housing starts include "the underlying demand for new housing units, especially the role of demographics; cyclical and financial conditions, such as unemployment rates and lending standards; and the number of excess vacant units."

CBO presents three possible scenarios:

• Optimistic - housing starts already at their trough; rebound begins late this year, back to underlying levels by end of 2009
• Cyclical downturn - housing starts remain below recent levels through 2009; construction recovers during 2010, rising to underlying rates in early 2011
• Pessimistic - housing starts continue decline to end of 2009; slow rebound in construction, held back by vacant units and weak household formation; starts would not return to underlying rates until second half of 2012

The Outlook for Housing Starts, 2009 to 2012 (pdf, 36pp/180kB), Nov. 2008

CBO weighs in

Yesterday Peter Orzsag, Director of the Congressional Budget Office (CBO), testified before the House Budget Committee on the turmoil in financial markets. He identified two problems facing the markets: illiquidity triggered by market panic and the potential insolvency of many financial institutions.

After analyzing the Troubled Asset Relief Act of 2008 proposed by the Treasury, Orzsag presented an alternative approach to address insolvency concerns. That proposal would have the government "invest directly in financial institutions to strengthen their capital positions, without directly purchasing troubled assets. The injections could take the form of preferred stock, which would effectively lower the cost of new capital for the institutions." Orzsag stated that variations of this proposal have been offered, and he listed their pros and cons.

Federal Responses to Market Turmoil (pdf, 11pp/68kB), September 24, 2008

See also Director's 9.25.08 blog on this testimony.

CO2 cap & trade

Congressional Budget Office (CBO) Director Peter Orzsag testified before the House Committee on Ways and Means on designing a cap-and-trade program to reduce carbon dioxide emissions. Under cap-and-trade, policymakers would set a cap on total emissions for a certain period and regulated firms would have allowances of the emissions; after initial distribution, firms could buy and sell the allowances among themselves. Among the testimony's key points:

• Emission allowances would have substantial value. Under the cap-and-trade proposal that went to the Senate floor in June, allowances would be worth around $112 billion once the cap took effect in 2012.
• The ultimate effect of a policy decision to sell or give away allowances could be either progressive or regressive on high-income or low-income households, respectively.
• The rise in prices for energy and energy-intensive goods and services would impose a larger burden, relative to income, on low-income than on high-income households.
• Energy-intensive U.S. industries that face foreign competition could lose sales to countries with less stringent emission policies.

Issues in Designing a Cap-and-Trade Program for Carbon Dioxide Emissions (pdf, 22pp/172kB), September 18, 2008

Social Security projections

The Congressional Budget Office (CBO) last week updated its projections of revenues and outlays for Social Security. The report covers 75 years from 2008 through 2082. Currently the Social Security program runs an annual surplus but as baby boomers retire, beneficiaries will increase substantially.

CBO projects that outlays will first exceed revenues in 2019 and that the Social Security trust funds will be exhausted in 2049. If the law remains unchanged, the Social Security Administration (SSA) will then no longer have the legal authority to pay full benefits.

Updated Long-Term Projections for Social Security (pdf, 45pp/856kB), August 2008

Behavioral econ for retirement, health care

Peter Orszag, Director of the Congressional Budget Office (CBO), recently spoke on how behavioral economics as applied to decisionmaking in savings and retirement can be applied to health care. Speaking on the Utility of Defaults, he said: "Inertia...is a powerful force in decisionmaking, so people tend to stick with a default, even when they can, at very low cost, pick another option." He analyzed the positive effect of automatic enrollment of workers in 401(k) plans.

According to Orszag, applying behavioral economics to health care has been limited because relatively little research and implementation have been carried out.

To reduce the amount of money spent on ineffective health care, we must first determine which procedures and treatments are effective....Incentives must be properly structured and made evident. Defaults must reflect expert knowledge and judgment about what choices will optimize the welfare of the typical individual but still allow individual choice.

Perpetuating inefficient health care, he said, are such factors as the lack of clarity in health insurance costs and the influence of doctors and other medical professionals on health decisions. However, "an even more important determinant than the health care system is an individual's behavior." Just as automatic 401(k) enrollment has narrowed the gap in savings between high and low socioeconomic groups, incentives can be used to narrow the socioeconomic gap in healthy lifestyles.

Behavioral Economics: Lessons from Retirement Research for Health Care and Beyond (pdf, 14pp/140kB), Aug. 7, 2008

Fannie and Freddie costs

In the last two days the Congressional Budget Office (CBO) has issued two items relating to Fannie Mae and Freddie Mac: a letter to the House Budget Committee from CBO Director Peter Orszag and a cost estimate of a pending bill.

Orszag's letter responded to the proposal released July 14 by the Treasury Dept., specifically Treasury's temporary authority to purchase equity in the housing finance government-sponsored enterprises (GSEs) that include Fannie Mae, Freddie Mac, and the Federal Home Loan (FHL) Banks. The letter stated in part:

Taking into account the probability of various possible outcomes, CBO estimates that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010. That estimate accounts for both the possibility that federal funds would not have to be expended under the new authority and the possibility that the government would have to use that authority to provide assistance to the GSEs.

CBO's cost estimates of H.R. 3221 (pdf, 636 pp.), the Housing and Economic Recovery Act of 2008, as amended by the Senate on July 11, 2008, span fiscal years 2008-2018. The bill includes Treasury's temporary authority to purchase equity in the GSEs. CBO and the Joint Committee on Taxation (JCT) estimate that enacting this legislation would:

• Increase direct spending by $41.7 billion over the 2008-2018 period, and
• Increase revenues by about $16.8 billion over the 2008-2018 period.

In total, those changes would increase budget deficits (or reduce future surpluses) by about $24.9 billion over the 2008-2018 period.

CBO's Estimate of Cost of the Administration's Proposal to Authorize Federal Financial Assistance for the Government-Sponsored Enterprises for Housing (pdf, 10pp/60kB), July 22, 2008

H.R. 3221, Housing and Economic Recovery Act of 2008 (pdf, 5pp/80kB), July 23, 2008

Transparency in health costs

A recent issue brief from the Congressional Budget Office (CBO) discusses whether increased transparency in prices for health care services and drugs would curb rapidly rising costs. CBO concludes that the implications of transparency are ambiguous because of a multitude of factors, such as the lack of incentives or feasibility for individuals to change their purchasing behavior, and differences in markets where providers or insurers are concentrated. The brief also cautions about the effectiveness of transparency: on the consumer side, health insurance cushions the full cost of health care; on the provider side, transparency may lead to higher prices but would probably narrow the range of prices.

CBO notes 3 states that provide cost information: Wisconsin's PricePoint System and California's Hospital Chargemaster Program give hospital charges, while New Hampshire's HealthCost is more comprehensive.

Increasing Transparency in the Pricing of Health Care Services and Pharmaceuticals (pdf, 8pp/132kB), June 5, 2008

Uninsured children and SCHIP - Update

On May 15, Peter R. Orszag, Director of the Congressional Budget Office (CBO), gave testimony on the State Children's Health Insurance Program (SCHIP) to the Subcommittee on Health, House Committee on Energy and Commerce, substantially similar to his testimony to the Subcommittee on Health Care, U.S. Senate Committee on Finance, that was the subject of a previous FR post.

The additional information Orszag presented on May 15 relates to the August 17, 2007, directive from the Centers for Medicare and Medicaid Services (CMS). He stated:

On May 7, 2008, in response to inquiries from the states, CMS released a follow-up letter explaining certain aspects of the August 17 directive. The May 7 letter provides the following clarifications:

• Policies intended to prevent substitution apply only to children entering the program for the first time, not to those already enrolled (unless they leave the program and reapply later);
• States may submit alternatives to the 95 percent coverage test, which CMS will consider and approve if those states present supporting data showing their effectiveness in reducing crowd-out;
• CMS believes most states already meet the 95 percent test and will work with states regarding data sources CMS considers acceptable; and
• The policies stipulated in the August 17 directive do not apply to unborn children.

The clarifications that CMS issued in its letter of May 7 are generally consistent with how CBO originally interpreted the directive of August 17; therefore, CBO has not altered its estimates of the policy’s impact on cost and coverage.

Covering Uninsured Children in the State Children's Health Insurance Program (pdf, 19pp/156kB), May 15, 2008

See also CBO's website on the May 15, 2008, testimony.

Uninsured children and SCHIP

Peter R. Orszag, Director of the Congressional Budget Office (CBO), testified on coverage of uninsured children in the State Children's Health Insurance Program (SCHIP). SCHIP was established in 1997 for children in families with incomes that are modest but too high for Medicaid. In his testimony, Orszag compares SCHIP with Medicaid, and discusses SCHIP's displacement, or "crowding out," of private coverage, the substitution of SCHIP for employer-sponsored insurance, and the effect on SCHIP of the Administration's August 2007 directive on state coverage of children.

Covering Uninsured Children in the State Children's Health Insurance Program (pdf, 20pp/120kB), April 9, 2008

See also CBO's website on SCHIP.

Gas prices braking drivers

Citing a 100% increase in U.S. gasoline prices (to $3 per gallon) since 2003, the Congressional Budget Office (CBO) has published a study on gas price effects on driving and car sales. CBO analyzed data from California highways and sales of new and used vehicles from 2003 to 2006.

Among the findings:

• Freeway motorists are making fewer trips and driving more slowly
• Market share of light trucks (including SUVs and minivans) began to decline in 2004
• Used vehicle prices have shifted, with prices declining for larger models and rising for fuel-efficient cars

CBO notes two policy tools that encourage the use of more-fuel-efficient vehicles: the federal corporate average fuel economy (CAFE) standards and federal and state gasoline taxes.

Higher prices for gasoline affect both types of policies. By increasing the market demand for fuel-efficient vehicles, higher gasoline prices reduce the economic costs--to manufacturers and to consumers--of achieving stricter CAFE standards. Also, with higher gasoline prices, the average gasoline tax--or any given increase in that tax--is now a smaller share of the price of gasoline than it was in the past.

Effects of Gasoline Prices on Driving Behavior and Vehicle Markets (pdf, 58pp/828kb), January 2008