More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

Full bio and recent public appearances | Research archive at CBPP.org


“Generational Accounting” Spreads Confusion

August 1, 2014 at 1:05 pm

“Generational accounting” purports to compare the effects of federal budget policies on people born in different years.  But, contrary to economist Lawrence Kotlikoff’s New York Times op-ed promoting a bill requiring federal agencies to adopt the practice, generational accounting is far more likely to obscure than illuminate the budget picture.

Kotlikoff helped develop generational accounting over 20 years ago.  It was supposed to provide useful information missing from standard budget presentations.  It doesn’t do that, however, and few budget analysts use the approach.

Generational accounting rests on several highly unrealistic assumptions, as our detailed analysis explains.  It doesn’t account for the benefits that government spending can have for future generations (for example, education and infrastructure spending that raises living standards).  It also ignores the fact that our children and grandchildren will be richer than we are and have more disposable income, even if they pay somewhat higher taxes.

Generational accounting’s most serious flaw may be that it requires projecting such key variables as population growth, labor force participation, earnings, health care costs, and interest rates through infinity.  Budget experts recognize that projections grow very iffy beyond a few decades — and spinning them out to infinity makes them much more so.  The American Academy of Actuaries describes projections into the infinite future as “of limited value to policymakers.”

The Congressional Budget Office, the Center on Budget and Policy Priorities, and other leading budget analysts focus instead on the next 25 years or so, which amply documents future fiscal pressures and presents a reasonable horizon for policymakers.  These organizations produce simple, straightforward long-run projections that show the path of federal revenues, spending, and debt under current budget policies.  In that way, they show clearly what’s driving fiscal pressures, and when (see chart).

Policymakers should certainly look beyond the standard ten-year horizon of most budget estimates, but they already have the tools to do that.  Generational accounting is hard to interpret and easily misunderstood, and including it in the federal government’s regular budget reports and cost estimates would be a mistake.

Social Security’s #1 Priority: Raise Share of Payroll Tax Going to Disability Insurance

July 29, 2014 at 4:49 pm

The Social Security trustees’ new report shows why the program’s immediate priority should be to raise the share of payroll taxes allocated to Disability Insurance (DI) and lower the share allocated to Old-Age and Survivors Insurance to keep the DI trust fund from running out in 2016.  Nine million disabled workers face a 20 percent across-the-board cut in DI benefits if the trust fund is depleted.

Social Security’s disability and retirement programs are closely linked, so ideally Congress would address DI’s finances as part of a long-term solvency package for Social Security as a whole — one that extends the solvency of both trust funds well beyond 2033, when the combined trust funds face exhaustion.  Enacting a balanced solvency package before late 2016, however, is highly unlikely.

Surveys find that Americans are willing to pay higher Social Security taxes to preserve and strengthen Social Security for future generations.  Yet some politicians argue for preserving solvency solely through benefit cuts.  Bridging such sharp divisions will be difficult, and holding DI beneficiaries hostage by refusing to reallocate payroll taxes wouldn’t make the task any easier — or success more likely.

Reallocation is unavoidable.  Even if policymakers miraculously agreed on a balanced solvency package by 2016, any changes in DI benefits or eligibility would phase in gradually and hence do little to replenish the DI trust fund by 2016.

Reallocation is a historically noncontroversial action that policymakers have often taken to shift resources between the two trust funds, in either direction.  Both the Bush and Clinton Administrations endorsed it in the early 1990s, and Congress enacted it in 1994 without a single dissenting voice.

Reallocation isn’t a “patch” or “kicking the can down the road,” as some contend — descriptions appropriate for the recent House-approved bill to extend the Highway Trust Fund by ten months, or Congress’ repeated one-year delays in implementing scheduled cuts in Medicare payments to doctors.  A payroll tax reallocation will keep Social Security’s disability and retirement programs solvent for another 15 to 20 years.

And reallocation doesn’t preclude additional actions to strengthen Disability Insurance.  Reversing the recent decline in Social Security’s administrative funding would allow the Social Security Administration to process claims more quickly and ensure that recipients remain on the rolls only as long as they are eligible.  Changes in the process for approving or denying claims might improve the accuracy and consistency of those disability determinations.  We could also test new strategies to help people with disabilities remain in the workforce, as the President’s 2015 budget proposed.

New Chart Book Paints Picture of Disability Insurance

July 21, 2014 at 1:53 pm

The Senate Finance Committee will hold a hearing this Thursday on Social Security Disability Insurance (DI).  We’ve just released a new chart book about DI.  Its more than 20 figures illustrate the essential facts and dispel some common misperceptions about this vitally important program.

For example, the following graph shows how growth in DI’s benefit rolls has slowed sharply.

The growth in the number of DI beneficiaries in recent decades stems largely from well-known demographic factors.  These include the growth of the population; the aging of the baby boomers into their 50s and 60s, which are years of peak risk for disability; growth in women’s labor force participation, which makes women much more likely to earn insured status for DI; and the rise in Social Security’s full retirement age from 65 to 66.

Both demographic and economic pressures on DI are easing.  In recent months, growth in the number of DI beneficiaries has slowed to its lowest rate in 25 years.  Social Security’s actuaries project that the program’s costs will level off as the economy continues to mend and baby boomers move from the disability rolls to the retirement rolls.

DI costs are projected to exceed revenues, however, and the program’s trust fund needs to be replenished in 2016.  Unless Congress increases the share of the Social Security payroll tax devoted to DI, beneficiaries would then face a 20 percent cut in benefits.

Reallocation between the DI trust fund and Social Security’s much larger Old-Age and Survivors Insurance (OASI) fund is a traditional method of addressing shortfalls in one program, and Congress should do so to avoid a harsh and unacceptable cut in benefits for an extremely vulnerable group.

For the full chart book, click here.

Congress Needs to Boost Disability Insurance Share of Payroll Tax

July 17, 2014 at 2:29 pm

Congress should increase the share of the Social Security payroll tax that’s devoted to Disability Insurance (DI) and reduce the share allocated to Old-Age and Survivors Insurance (OASI).  We explain in a new paper why that’s essential to avoid a 20 percent across-the-board cut in DI benefits in 2016, how Congress has reallocated payroll tax revenues many times in the past, and that reallocation has not been controversial.

The current Social Security tax is 6.2 percent of wages up to $117,000 in 2014, which both employers and employees pay.  Of this total, 5.3 percent of covered wages goes to the OASI trust fund, and 0.9 percent goes to the DI trust fund.

Traditionally, lawmakers have divided the total payroll tax between OASI and DI according to the programs’ respective needs.  Congress has reallocated payroll tax revenues many times — sometimes from OASI to DI, sometimes in the other direction — to maintain the necessary balance.

The current allocation reflects policymakers’ decision in 1994, when they last reallocated taxes between the programs.  The 1994 reallocations only partly mitigated the effects of the 1983 Social Security amendments, which slightly raised DI’s cost and cut DI’s share of the payroll tax.

Lawmakers expected that the 1994 reallocations would keep DI solvent until 2016.  Despite fluctuations in the meantime, current projections still anticipate that the trust fund will be depleted in 2016 as forecast.

DI’s anticipated trust fund depletion does not indicate that the program is out of control or that it’s “bankrupt;” that is, if the trust fund were depleted and policymakers took no action, the program could still pay about 80 percent of benefits.  But, at the same time, cutting benefits by one-fifth for an extremely vulnerable group of severely disabled Americans is unacceptable.

Ideally, Congress would address DI’s finances in the context of legislation to restore overall Social Security solvency, as we’ve previously pointed out.  But even if policymakers make progress toward a well-rounded solvency package before late 2016, which seems unlikely, any changes in DI benefits or eligibility would surely phase in gradually and hence do little to replenish the DI fund by 2016.  Consequently, reallocating payroll tax revenues between the two programs would still be necessary.

There is nothing novel or controversial in such a step, and failing to take it would be irresponsible.

Click here to read the full paper.

New CBO Long-Term Budget Projections Tell Familiar Story

July 15, 2014 at 2:47 pm

The Congressional Budget Office (CBO)’s new long-term budget projections, released today, are very similar to those that CBO published in September 2013 and to ones that we released in May 2014.  They show that the nation’s fiscal outlook is stable for the rest of this decade and then worsens gradually.

CBO projects that, under current policies, the federal debt in 2020 will amount to 74 percent of GDP — the same level as in 2014.  The debt will rise slowly thereafter, reaching 106 percent of GDP by 2039.

Other recent budget projections have told the same familiar story.  CBO projected last year that the debt-to-GDP ratio would reach 102 percent in 2039, and CBPP recently projected a debt-to-GDP ratio of 101 percent in 2040.

For the 2014-2024 period, CBO’s new long-term projections are identical to its April 2014 baseline.  Beyond the first ten years, CBO has made some small revisions in assumptions that, on balance, leave the projected path of debt largely unchanged.

When we released our long-term estimates in May, we said:  “No deficit or debt crisis looms, and the weak labor market remains the nation’s most immediate economic concern. But policymakers and the public should not ignore the long-run budget problems, which remain challenging.”  That conclusion still holds.

A stable — or declining — debt-to-GDP ratio is an appropriate goal for fiscal stability.  Although a rising debt ratio may be advantageous when the economy is operating well below its potential, as it has been since 2008, a rising debt ratio in good times reflects an unsustainable budget policy that ultimately poses threats to financial stability and long-term growth.  Policymakers should reduce projected debt-to-GDP ratios through carefully designed policies that strengthen (rather than weaken) the slow economic recovery in the near term, while putting in place equitable and balanced deficit reduction that grows over time.