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President’s Budget Eyes the Future, But Doesn’t Pay for It

By Ben Ritz

Thursday, February 11, 2016

Lots of innovative policy ideas, but little in the way of solutions for the country’s long-term debt problem: those are the major takeaways from President Obama’s Fiscal Year (FY) 2017 budget proposal. This is the final blueprint of his administration, released by the Office of Management and Budget (OMB) earlier this week. The budget conforms to the terms of last year’s agreement on discretionary spending, and lays out an ambitious roadmap for the future that includes major initiatives in retirement policy, health care, scientific investment, infrastructure spending, and more.

The White House projects that the net effect of included policy proposals on spending and revenue would be to reduce deficits by almost $3 trillion over 10 years. However, this would still leave sizable deficits throughout the period. The president’s budget also increases discretionary spending above sequestration-level caps by a cumulative $227 billion but more than offsets the cost with revenue increases and some modest spending cuts in other areas.

If implemented, the budget purports to stabilize the nation’s public debt-to-GDP ratio at 75 percent—about 12 percentage points below OMB’s baseline—at the end of the 10-year window. Such a ratio is still almost double the post-World War II historical average and, with the worst of the country’s fiscal problems materializing in the second decade, it would leave future policymakers little flexibility to react to unforeseen emergencies such as war or economic recession. This would be a troubling result even if the proposal was implemented in its entirety, yet the political prospects for the policies necessary to achieve the promised savings make even these debt projections at best optimistic.

While the president’s budget is better understood as an expression of one party’s agenda (in this case, the Democrats) than a prediction of future policymaking, the 2,000-page document does include a variety of new proposals. Some of them even have bipartisan roots or have aspects in common with Republican ideas. Noteworthy proposals in the president’s budget include:

Enhancing Retirement Security

Among the many new initiatives proposed by the president is the creation of open multiple-employer plans (MEPs). Currently, a group of employers can jointly administer a defined contribution retirement plan for their workers only if they share a “common bond” (usually being within the same industry). Banding together allows them to share in the cost of administration and reduce overhead expenses. Open MEPs would relax this restriction and give more businesses the ability to enroll their employees in similar plans. Doing so has the potential to expand access to workplace retirement plans for workers who currently do not have any. Bipartisan legislation has been introduced in Congress to allow open MEPs, and the proposal has been the topic of two recent committee hearings in the U.S. Senate and an event organized by BPC’s Commission on Retirement Security and Personal Savings.

The president also proposes to waive the early withdrawal penalty from tax-advantaged retirement accounts (such as 401(k) plans and Individual Retirement Accounts (IRAs)) for individuals who are unemployed for an extended period of time. They would be allowed to withdraw penalty-free up to $50,000 per year for no more than two years. While this change, by itself, might reduce savings available to support consumption during retirement, allowing individuals more opportunity to access retirement savings during a prolonged spell of unemployment could encourage greater contributions to the plans in the first place, reassuring savers that their money will be accessible if they truly need it.

These proposals join several other innovative ideas from previous Obama budgets to enhance retirement security.

Expanding Social Safety Net Programs

One potential area of bipartisan consensus is expanding the Earned Income Tax Credit, which supplements earnings for low-income adults. Expansions of tax credits for work have been proposed by members of both parties, including House Speaker Paul Ryan, and BPC’s Debt Reduction Task Force. OMB estimates the president’s proposal to cost roughly $61 billion over 10 years.

The budget also proposes the creation of a “wage insurance” benefit within the current Unemployment Insurance program. If a worker loses their job through no fault of their own and takes a new job with a lower wage (up to a maximum of $50,000 per year), this new benefit would replace half the difference between the worker’s old pay and new pay for up to two years. The expanded benefit is estimated to cost $11 billion over 10 years and would be paid for with reforms to the existing Unemployment Insurance program and tax base.

Additionally, the budget includes $2.2 billion in funding to assist five states with launching paid family leave pilot programs over four years.

Investments in Infrastructure and Research

President Obama announced in last month’s State of the Union address that his administration would be launching a “moonshot” effort to cure cancer, led by Vice President Joe Biden. His budget requests $755 million to fund the effort in its first year, with $680 million for the National Institutes of Health and $75 million for the Food and Drug Administration.

The president also reinforces his environmental agenda by proposing a doubling of funding for clean energy research (an additional $27 billion over the next decade), almost $40 billion in tax credits to promote more efficient and renewable energy usage, and $247 billion in new infrastructure spending to develop more energy-efficient transportation systems. These programs would be paid for with a $10.25 tax per barrel of oil, which is estimated to raise $319 billion over 10 years.

In addition to physical infrastructure, the budget proposes a $3 billion fund to help modernize obsolete IT systems and enhance cybersecurity infrastructure at federal agencies.

Tax Reform

The vast majority of the estimated savings from the president’s budget are achieved through his tax proposals. The president proposes increased taxes on financial institutions, tobacco products, and affluent taxpayers. His budget also includes comprehensive business tax reform, which in addition to removing tax expenditures and lowering rates, would recoup much of the revenue lost in last year’s tax extenders package.

What’s Missing

Commendably, the president’s budget proposes ways to pay for new spending and for presenting a plan to modestly reduce future deficits. His proposal also seeks to reduce future health care spending by almost $380 billion over 10 years. But the budget offers no significant proposals to address the unsustainable finances of Social Security’s Old Age and Survivors Insurance program (which is currently running an annual cash shortfall and projected to become insolvent by 2035) and, according to the president’s own projections, the package would still allow mandatory spending to increase by almost 2.5 percent of GDP by the end of the decade.

Just two weeks after President Obama declared victory for seven years of falling deficits in his State of the Union Address, the Congressional Budget Office warned that deficits are once again rising with no end in sight. Yesterday, Federal Reserve Chair Janet Yellen echoed this warning in her testimony before Congress, saying that policymakers must “address this longer-run budget deficit issue.” It is unfortunate that the president does not demonstrate the same ambition to tackle this challenge as he does with so many of the proposals laid out in his final budget to address other challenges. We hope the next president and Congress will go further in using the annual budget process to address growing entitlement programs and the nation’s long-term debt problem.

KEYWORDS: 401(K)S, CONGRESSIONAL BUDGET OFFICE, DEFINED CONTRIBUTION PLANS, EARNED INCOME TAX CREDIT, FOOD AND DRUG ADMINISTRATION, FY 2017, IRAS, JANET YELLEN, PRESIDENT BARACK OBAMA, SOCIAL SECURITY, VICE PRESIDENT JOE BIDEN