Off the Charts Blog | Center on Budget and Policy Priorities

Bill Galston of the Brookings Institution and Maya MacGuineas of the New America Foundation offered a plan last week to reduce federal deficits and push down debt held by the public to 60 percent of gross domestic product by 2020. The plan explicitly recognizes that it would be unrealistic to hold federal revenues and outlays to the averages of recent decades, a topic on which we’ve recently written. We commend Galston and MacGuineas for proposing reasonably specific tax increases and spending cuts rather than relying largely on mechanical formulas that avoid making the hard choices.

However, several elements of the Galston-MacGuineas plan raise serious concerns — particularly its proposals to (a) reduce health insurance subsidies to moderate-income people participating in the new health insurance exchanges and (b) increase the age of eligibility for Medicare from 65 to 67 and beyond.

Both proposals are unwise. In combination, they would run a high risk of causing health reform to fail by driving premiums in the exchanges up to levels that many more people would find unaffordable. Here’s why their proposals are ill-advised.

The new health reform legislation (the Affordable Care Act) provides tax credits to help low-and moderate-income families afford coverage through the new exchanges. As we’ve previously explained, these credits are not generous and already require people with modest incomes to pay substantial amounts for coverage and care. Shrinking the subsidies would put the law’s insurance market reforms and cost-control measures at serious risk — because the law’s requirement that insurers offer coverage to everyone at a standard price, irrespective of their health status, can work only if everyone is required to have health insurance. (Otherwise, healthy people would wait until they got sick to buy insurance, and premiums would soar.) And such an individual mandate can work only if coverage is affordable to families with low and moderate incomes.

If the subsidies were reduced, as Galston and MacGuineas propose, more people would choose to go without insurance — generally those who are in better health and thus have less immediate need for health care. Their exit from the insurance pool would drive up premiums for those remaining in the pool since this group would be sicker, on average, and thus more costly to cover. In turn, the increase in premiums would encourage still more of the healthier people to drop coverage.

If this process proceeded very far, the individual mandate and market reforms would be difficult or impossible to maintain. The survival of the entire legislation — including its substantial cost-reduction measures in Medicare and elsewhere — could be jeopardized.

Raising the age of eligibility for Medicare so that 65- and 66-year-olds would have to obtain insurance through the health insurance exchanges would exacerbate this risk. Under the Affordable Care Act, insurers in the exchanges will be able to charge the oldest enrollees only three times as much as the youngest ones. But the average cost of covering the oldest enrollees is well over three times the average cost of covering the youngest. As a result, younger enrollees will hold down the cost of coverage for older enrollees by paying somewhat higher premiums than they otherwise would.

Adding 65- and 66-year-olds to the exchanges thus would raise premiums significantly for everyone else. This would cause more of the unsubsidized participants in the exchange to drop coverage. And once again, those most likely to drop coverage would be those who are in good health and feel they have less need for coverage. It also would increase the cost of subsidies to the federal taxpayer, a cost that Galston and MacGuineas may not have fully taken into account.

Moreover, many of those who lost Medicare but weren’t eligible for subsidies would end up uninsured, because they would not be able to afford coverage in the exchange, which could easily cost $11,000 or $12,000 a year for an elderly couple.

This week on Off the Charts, we discussed the recession, federal budget and tax issues, state tax issues, and a proposal that would impede implementation of the Affordable Care Act.

• On the recession, Chad Stone highlighted the jobs deficit that remains despite the official end of the recession.  Arloc Sherman pointed out that the number of people living in deep poverty has risen 22 percent since the recession began.  Donna Pavetti continued her countdown until the end of the now-expired TANF Emergency Fund, featuring what the fund accomplished, the support that existed to extend the fund, and next steps.
• On federal budget and tax issues, we summed up the issues that Congress debated in recent weeks and is likely to revisit during November’s lame-duck session.  Chuck Marr explained that growing income inequality is another reason not to extend tax cuts for the wealthy, with the majority of income gains in the last expansion going to the top 1 percent of households (updated charts here).  Jim Horney answered questions about what the new fiscal year means for federal programs and discussed a proposal at the President’s Fiscal Commission to move from an annual to a biennial federal budget.
• On state tax issues, Nick Johnson noted that while revenue losses for this recession exceed those of other recent recessions, states would have been in even worse shape if many of them had not raised  revenues.  And Jon Shure noted that a major business group in Massachusetts is opposing a cut in the sales tax because it would hurt the state’s business climate.
• On threats to health reform, Edwin Park discussed the implications of Senator Mike Enzi’s proposal to overturn federal regulations that help implement the Affordable Care Act.

In other news, the Center released a report on a flawed study about a corporate tax break in California and a podcast on what the new fiscal year means for federal programs (on iTunes here).

Below is a brief run-down on some of the issues Congress has debated in recent weeks and may revisit during its lame-duck session in November:

• Taxes. Neither the House nor Senate voted on whether to extend key tax provisions scheduled to expire at the end of December:  the Bush tax cuts and the Recovery Act’s expansion of tax credits for low- and moderate-income working families.  Those votes will likely take place during the lame-duck session.

• Health reform. Congress rejected several proposals in recent weeks to undo individual pieces of the Affordable Care Act.  This week, for example, the Senate defeated a proposal from Senator Mike Enzi (R-WY) to repeal federal regulations concerning which health plans would be exempt from the law’s consumer protections and insurance market reforms.  As we explained, the proposal would likely have left many consumers without access to critical protections the Affordable Care Act provides.  Last month, the Senate defeated an amendment by Senator Mike Johanns (R-NE) to repeal an Affordable Care Act provision designed to improve businesses’ compliance with federal tax laws.  The amendment would not only have allowed tax avoidance to continue, but also eliminated critical funding for health prevention and seriously weakened the health reform law’s requirement that individuals obtain health insurance or pay a penalty.Similar proposals to repeal Affordable Care Act provisions or block aspects of the law’s implementation will likely emerge during the lame-duck session.

• TANF Emergency Fund. This Recovery Act fund, which states have used to create more than 200,000 jobs, expired yesterday when the Senate failed to extend it.  (The House has twice passed legislation to extend the fund.)  Congress is expected to revisit the issue in the lame-duck session, though many of the programs around the country that have relied on the Emergency Fund will have shut down by then.
• Child nutrition reauthorization. The Senate failed to vote on a bill that would renew the federal child nutrition programs, including the school lunch and WIC programs.  The continuing resolution that Congress approved yesterday will extend those programs until early December.
• SSI benefits for refugees. Up to 5,600 poor refugees and other poor individuals admitted to the United States because they faced persecution in their home countries lost eligibility for Supplemental Security Income (SSI) benefits today after efforts in Congress to extend their benefits failed.  It is unclear whether Congress will vote during the lame-duck session on restoring the benefits.
• Housing vouchers for low-income families. The House Financial Services Committee has approved the Section 8 Voucher Reauthorization Act (SEVRA), which would make important improvements in the voucher program, but neither the full House nor the Senate has acted on the bill.  Congress may take further action during the lame-duck session.

Many low-income families across America have experienced considerably less hardship in the downturn than they would have without the TANF Emergency Fund.  The fund expires today, which means that starting tomorrow, needy families will have less help getting through what continue to be very tough times.

While my many posts on the fund have focused on the thousands of low-income parents and teens who will lose their jobs, states have also used the fund for purposes other than providing jobs.  So, many other low-income families will also feel the impact of its expiration.  Here are some examples of what lies ahead:

• In New Jersey, homeless families will receive much less help.  A fund-supported program that assisted 3,678 homeless families in need of social services in the first seven months of the year will be significantly scaled back today.
• Nevada, facing an unemployment rate of 14.4 percent — the highest in the nation — will reduce TANF funding for child welfare services, a program for autistic children, and other services for vulnerable families.  These cuts were part of $9 million in cuts the state specified in its budget that would take effect if Congress failed to extend the fund.
• In Washington State, the fund’s expiration more than doubled the size of the state’s TANF budget shortfall, from $50 to $110 million.  The state is considering reducing child care assistance, shrinking monthly TANF cash assistance benefits, and scaling back its subsidized jobs program, among other things.
• Texas, facing a statewide budget shortfall of between $11 and $18 billion, has proposed cutting its already low TANF benefits of $260 per month for a family of three by 20 percent.

The TANF Emergency Fund did what it was intended to do:  provide much-needed support to our nation’s most vulnerable citizens during a time of sharply increased hardship.  Because of the fund, fewer children went to bed hungry, fewer families became homeless, and more parents proudly supported their families through the wages they earned.  And though the fund itself has gone away, the need for it has not.

We’ve updated our chart and table on how the change in income distribution between 1979 and 2007 affected different income groups to reflect a slightly different methodology. Below are the revised figures.

For example, the average middle-income American family had $13,000 less after-tax income in 2007, and an average household in the top 1 percent had $782,600 more, than they would have had if incomes of all groups had grown at an equal rate since 1979.