Domestic Entitlements and the Federal Budget

Mr. Chairman, Mr. Spratt, and Members of the Committee:

I am Isabel Sawhill, Senior Fellow and Director of Economic Studies at the Brookings Institution. I am pleased to have this opportunity to testify but want to emphasize that my testimony represents my personal views and not those of the Brookings Institution or any of its other scholars, trustees, advisers, or funders. Let me begin by summarizing my testimony.

Overview

In efforts to restore fiscal balance, it’s important to focus on entitlements for a number of reasons:

•  Entitlements are where the big dollars are.
•  They are growing rapidly.
•  Given the unsustainable deficits that this growth implies, there are only three possible options: restructure entitlements, eliminate most of the rest of government, or raise taxes to unprecedented levels.
•  Sooner or later, entitlements will have to be addressed—and sooner is much better than later.
•  As long as entitlements are left off the table, all of the pressure will fall on discretionary programs.
•  That pressure is likely to lead to underinvestment in the next generation and to cuts in programs for low-income families.

What might be done?

•  In the long-run, new but politically contentious ideas should be considered and debated, such as:
  •  Moving toward income-relating benefits but in ways that protect the vulnerable
  •  Increasing the normal retirement age
  •  Moving from defined benefits to defined contributions in retirement and health programs
  • Making the contributions mandatory
  •  Using public health programs to introduce greater efficiency and effectiveness into the entire health care system
  •  Raising existing taxes by broadening the tax base for both payroll and income taxes and adding a value-added tax to the mix

  Why Focus on Entitlements?

  At present, 84 percent of the federal budget is for entitlements, defense, homeland security, or interest on the debt. Any effort to achieve a reduction in spending by focusing on the remaining 16 percent is unlikely to be very effective. For example, a 1 percent cut in nominal non-security discretionary spending for one year reduces total spending by only 0.17 percent. Over five years, it reduces total spending by 0.89 percent.

•  In the short-run, Congress should consider a temporary suspension (or partial suspension) of indexing of both benefits and taxes that would remain in effect until a preset deficit reduction goal is achieved. I estimate that this would save $150 billion over three years (2007-2009).