Saving the AMERICAN dREAM     The Heritage Plan to Fix the Debt,   Cut Spending, and Restore Prosperity                   ...
Saving the  AMERICAN  dREAM  The Heritage Plan to Fix the Debt,Cut Spending, and Restore Prosperity
About the Editors    Stuart M. Butler is Distinguished Fellow and Director of the Center for Policy    Innovation at The H...
FoREwoRdFellow Americans:W           E HAvE CoME To A TIME oF DECISIoN. For far too long, Congress has been on          an...
At the end of the day our plan, while economic      the world, and we decided to change the course of his-in nature, has a...
INtRoduCtIoNThere Is Only One ChoiceA          MERICA MUST CHANGE CoURSE. We face a staggering fiscal problem that threate...
expensive Medicare and Social Security benefits to             CHART 1the baby-boom generation,2 but the money to pay for ...
and invest almost $40 trillion of our tax dollars today     to pay the bills. This leads to rampant inflation.to cover thi...
CHART 2Hiking Taxes to Pay for Entitlements Would Require Doubling Tax RatesThe cost of Medicare, Medicaid, and Social Sec...
needlessly complex, burdensome, and highly unfair         CHART 3tax system to sharpen incentives and reward saving       ...
What the Heritage Plan Will Achieve    The Heritage plan will solve America’s twin crises                           percen...
CHART 4The Alternative—Saving the American DreamBy rapidly lowering total federal spending, the Heritage plan would balanc...
Protects America and its interests around                          federal government, and essential to preserving     the...
SoCIAl SECuRItySummaryS      oCIAl SECURITY IS THE lARGEST SINGlE federal program, paying out about $700 bil-       lion p...
over the next 75 years, the program has promised                who work more than 35 years—a flat payment thatto pay $7.8...
Americans live much longer than they used to.               To encourage people to stay in the workforce lon-   While this...
Security income will see larger reductions in their           expectancy and those anticipated in the future. Underchecks....
are invested through an improved version of the               First, under the reformed tax system detailedIRA/401(k) empl...
MEdICARESummaryT      HE MEDICARE PRoGRAM FACES A 75-year unfunded liability in excess of $30 trillion       even as it is...
Medicare must be reformed to solve this huge                           costs for all enrollees. Today’s traditional fee-fo...
plans, much as Members of Congress and millions of          have the financial resources to pay insurance claims.federal e...
couples with incomes over $165,000 receive no gov-        TABLE 2ernment contribution and pay full, unsubsidized pre-miums...
and cost-sharing and for the Medicare Part D drug          However, the previous organizational and benefitcoverage.      ...
Other Key Changes in Medicare   The Heritage plan envisions other important                 Beginning immediately, a perma...
in Medicare Part D and the FEHBP, the program that        unreformed, our children and grandchildren will paycovers Member...
HEAltH CARE                FoR FAMIlIESSummaryH        EAlTH CARE CoSTS ARE RISING at an alarming rate, while individuals ...
In conjunction with the plan’s tax reforms, the cur-        Medicaid would no longer participate in the costlyrent individ...
TABLE 3                                                               instead of offering health insurance or by continuin...
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity
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Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

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In this landmark report, The Heritage Foundation presents a comprehensive plan to grow the economy and balance the budget. Saving the American Dream boldly reforms Medicare, Social Security, Medicaid, taxes, health insurance, and government spending. Dive deep into these policy ideas with seven full-color charts and six in-depth tables. Originally published May 2011.

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Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

  1. 1. Saving the AMERICAN dREAM The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity savingthedream.org
  2. 2. Saving the AMERICAN dREAM The Heritage Plan to Fix the Debt,Cut Spending, and Restore Prosperity
  3. 3. About the Editors Stuart M. Butler is Distinguished Fellow and Director of the Center for Policy Innovation at The Heritage Foundation. Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. William W. Beach is Director of the Center for Data Analysis at The Heritage Foundation.The editors are grateful to the team leaders who worked with policy experts throughoutThe Heritage Foundation to develop this report: J. D. Foster, Ph.D., Norman B. Ture SeniorFellow in the Economics of Fiscal Policy; Rea S. Hederman, Jr., Assistant Director andResearch Fellow in the Center for Data Analysis; David C. John, Senior Research Fellow inRetirement Security and Financial Institutions; Robert E. Moffit, Ph.D., Senior Fellow in theCenter for Policy Innovation; Nina Owcharenko, Director of the Center for Health PolicyStudies; and Brian M. Riedl, Grover M. Hermann Research Fellow in Federal Budgetary Affairs._______This plan was developed as part of the Solutions Initiative and funded by the Peter G. PetersonFoundation.The Peterson Foundation convened organizations with a variety of perspectives to develop plansaddressing our nation’s fiscal challenges. The American Enterprise Institute, Bipartisan Policy Center,Center for American Progress, Economic Policy Institute, The Heritage Foundation, and Roosevelt InstituteCampus Network each received grants. All organizations had discretion and independence to developtheir own goals and propose comprehensive solutions. The Peterson Foundation’s involvement with thisproject does not represent endorsement of any plan. The final plans developed by all six organizations willbe presented as part of the Peterson Foundation’s second annual Fiscal Summit in May 2011.The spending and revenue estimates have been extensively reviewed by a team of independentscorekeepers, led by Barry Anderson and including William Menth and the staff of the Urban-BrookingsTax Policy Center. The Urban-Brookings Tax Policy Center assessed the revenue effects of each plan.The Urban Brookings Tax Policy Center and the other members of the scorekeeping team do notnecessarily endorse any of the estimates made by the Participants of their own plans.© 2011 by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999(202) 546-4400 • heritage.orgNothing written here is to be construed as necessarily reflecting the views of The Heritage Foundationor as an attempt to aid or hinder the passage of any bill before Congress.
  4. 4. FoREwoRdFellow Americans:W E HAvE CoME To A TIME oF DECISIoN. For far too long, Congress has been on an unsustainable binge of spending, taxing, and borrowing. our nation is going broke, and we are passing the costs of these misguided policies to our childrenand their children. over time, our national government has become keeps it balanced. It reduces the debt and cuts govern-bloated, overextended and unrestrained, oblivious of ment in half. It eliminates government-mandated healthits core functions, operating far beyond its means care and fully funds our national defense. In order toand vastly outside of its proper constitutional bounds. get our fiscal house in order, we must address SocialUnchecked, the course we are on now will cripple our Security, Medicare, and Medicaid, the three so-calledeconomy, undermine our prosperity, and lead to fiscal entitlement programs which together account forinsolvency. By robbing the future of opportunity and 43 percent of federal spending today. Far too many se-freedom, it will destroy the American Dream for future niors still lack enough help to avoid poverty. Saving thegenerations. American Dream therefore does not end these Already, we are living through the shame of being programs; instead it focuses them on those whopublicly lectured by our Communist Chinese creditors, need them.who have contempt for our profligacy. The day it our plan also encourages Americans to becomewas announced that Standard & Poor’s had lowered more fiscally responsible themselves. It redesigns ourthe outlook on our economy, a collective gasp went entire tax system into an expenditure tax that will havethrough the international community. If our elected a single flat rate. This is a structure that will promoteleaders keep it up, we are certain to face financial savings, therefore benefiting individual Americans, ourcrises like Greece or Portugal. body politic, and the economy. Greater savings mean America is on the verge of becoming a country stronger capital formation and thus a more robustin decline—economically stagnant and permanently economy, which means real jobs for Americans.debt-bound, heavily regulated and bureaucratic, less This plan substantially reduces the size and scopeself-governing and less free. of the federal government, fundamentally increases But this fate does not have to be our future. We the role of the states in choosing their own practices,can get spending under control, balance the budget, and brings decision-making closer to the peopleand shrink our debt. We can limit the size of govern- rather than unelected administrators. These are cru-ment and set free once again the unlimited genius of cial steps that will get our nation on a path of fiscal,Americans to create wealth and jobs. We can turn the political, and constitutional responsibility. It is parttide and change our nation’s course. of our larger effort to get our country back on track, Saving the American Dream is our plan to fix the reclaim its truths, conserve its liberating principles,debt, cut spending and, above all, restore prosperity. and build an America where freedom, opportunity,It balances the nation’s budget within a decade—and prosperity, and civil society flourish.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 1
  5. 5. At the end of the day our plan, while economic the world, and we decided to change the course of his-in nature, has a higher moral purpose. If entitlements tory. In 1860 we were told the Union could not hold andare not reformed, the next generation and future that America was over, and we brought forth a newones will have to pay punitive tax rates that will end birth of freedom. In 1980 we were told that the Ameri-liberty as we have known it. our proposal aims to can century was at an end, and we launched a greatpreserve America’s promise bequeathed to us by economic expansion, rebuilt our military, and revivedpast generations. our national spirit. Edmund Burke reminds us to think of our time on Hard times demand tough choices. The future ofthis earth not as an individual and temporary event, our nation is at stake.but rather as a partnership “between those who are All that is required, as my hero Ronald Reagan onceliving, those who are dead and those who are yet to be said, is “our best effort, and our willingness to believeborn.” Keeping faith with this partnership is what we in ourselves and to believe in our capacity to performaim to do with Saving the American Dream. great deeds; to believe that together, with God’s help, We have been here before, and every time the we can and will resolve the problems which now con-American people have always risen to the occasion front us.”and seized the moment. In 1776 we were told that no Together, let us seize the moment, change ourupstart colonists could defeat the strongest nation in country’s course, and save the American Dream. —Edwin J. Feulner President, The Heritage Foundation 2 Saving the AMERICAN DREAM
  6. 6. INtRoduCtIoNThere Is Only One ChoiceA MERICA MUST CHANGE CoURSE. We face a staggering fiscal problem that threatens the very future of our nation. Not only will we continue to struggle with huge federal deficits into the near future, but the problem will become ever larger and ever dead-lier in the decades to come. Unless we act wisely, massive government spendingand surging public debt will destroy the foundations of our economy and darken theAmerican Dream for our children and grandchildren. But this is not inevitable. We can in fact preserve caused by this and past borrowing already stands atthe American Dream. With bold and decisive action, nearly 70 percent of the country’s annual economicwe can reduce spending and solve our debt problem. output and is set to climb to at least 100 percent byWe can safeguard our legacy of freedom, opportu- the end of this decade.nity, and prosperity, and we can do it in such a way According to some international comparisons,that shrinks the government to a manageable size, the U.S. economy is already in worse shape than theinvigorates our economy, and ensures basic economic stumbling economies of most European nations, andsecurity to younger and older Americans alike. We it is only a matter of time until our financial housecan save ourselves from a sea of red ink while doing collapses. We are living on borrowed time and risk anbetter for our seniors and the poor than the current economic catastrophe unless somebody in govern-programs that have gotten us into the present mess. ment exercises real leadership to reduce spending The Heritage Foundation has come up with such and borrowing. We can and must do better.a plan. What if we fail to act before domestic and foreign The underlying problem that it addresses is lenders lose confidence that America and Americanssimple: The government is doing things it should not will ever act responsibly? What if a crisis engulfs us?be doing and spending far more than we can afford To see our grim future, we need only look at countriesto pay or should be paying. It is time to start mov- like Greece that are experiencing stringent and dis-ing decisively toward a federal government that is ruptive austerity and sudden drops in living standards.limited and carries out its appropriate function. As Yet we can still avert such a catastrophe in Americaa result of the government’s doing far too much, with real leadership and bold action. A growingspending since World War II is at record levels as a number of states in America are confronting similarproportion of the U.S. economy (in terms of gross challenges with creative remedies to return to fiscaldomestic product, or GDP1) and is growing. The discipline.federal government is borrowing 40 cents of every However, if we do nothing, spending will continuedollar that it spends. The accumulated national debt to surge. Past Congresses made utterly unafford- able promises to Americans that are now coming1. The gross domestic product is the measure of the value of the total output of goods and services within the United due. These promises will continue to come due in States in a year. the next decades. In particular, Washington promisedThe Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 3
  7. 7. expensive Medicare and Social Security benefits to CHART 1the baby-boom generation,2 but the money to pay for The Current and Future Crisis:these programs is running out. Runaway Federal Spending Will These programs promise benefits for one set of Result in Huge Budget DeficitsAmericans that are being paid through taxes and bor-rowing. The way this is done needs some explaining. Revenue and Spending as a Percentage of GDPMany Americans believe that the taxes and premi- 35% 35.2%ums they pay into Social Security and Medicare gointo real trust funds where they will be used to coverpromised future benefits. That’s not the case. Instead, 30%the money taken from one set of Americans todayjust goes out the door to pay for benefits for others. SPENDINGAny “surplus” is not kept in a fund either, but rather is 25%spent immediately by the government for other pur-poses and replaced with an IoU that is nothing morethan a tax lien that future taxpayers will be forced torepay. And that means obligations against the future 20% REVENUE 19.3%incomes of unsuspecting Americans, many of whomhave yet to be born. Pay-as-you-go schemes can work only as long 15%as enough people are paying into the system. Yetwith the leading edge of the enormous baby-boomgeneration now reaching retirement, these programs 10%are no longer cash cows covering other government 2010 2015 2020 2025 2030 2035spending. Instead, they are rapidly deepening seas Surplus/Deficit as a Percentage of GDPof red ink. Fifty years ago, there were five workers 0%paying the benefits of each retiree. Today, thereare only three workers per retiree, and in 20 years,there will be just two. Simple math shows that thiscannot continue. -5% We are facing the consequences of generationsof politicians from both political parties having prom-ised millions of Americans certain services without -10%regard to cost or how we will pay for them. Thethree major entitlements—Social Security, Medicare, DEFICITand Medicaid—account for 43 percent of federal -15%spending, or 10.3 percent of GDP. These three pro- –15.9%grams will surge from 10.3 percent of the economyto almost 20 percent in just 40 years. To pay these -20%promised benefits in full for just Social Security and 2010 2015 2020 2025 2030 2035Medicare, the government would need to set aside Source: Heritage Foundation calculations based on data from Congressional Budget Office, Alternative Fiscal Scenario.2. Baby-boom generation refers to people born in the years 1946 to 1964.4 Saving the AMERICAN DREAM
  8. 8. and invest almost $40 trillion of our tax dollars today to pay the bills. This leads to rampant inflation.to cover this long-term shortfall. America and many other countries have experienced With the baby-boom generation now reaching high inflation before. It devastates economies andretirement, the finances of these programs are in dire perniciously eats away at the hard-earned savings ofcrisis, and they are placing an increasing burden on working and retired Americans.Americans. These entitlement programs consume a This is not a real choice. Global capital markets willlarge and rapidly growing proportion of the nation’s demand action at some point. Moreover, doing nothingeconomic output. is a choice that Americans emphatically rejected in Politicians and policymakers have put forward three the 2010 elections. They do not want an ever-growingvisions of how to respond to this, but only one of these federal government. They want the federal govern-choices would deal with the budget and economic ment to be limited and to operate in line with its con-threat while beginning to restore the federal govern- stitutional functions. And they do not want Congressment to its proper, limited role and not passing on a to continue spending and making promises that wehuge financial burden to our children and grandchildren. cannot keep without undermining our prosperity and burdening future generations with debt.Choice #1: Cross our fingersand hope for the best. Choice #2: Raise taxes. Many politicians either flinch from taking the Some argue that the proper approach is to con-necessary action or delude themselves into believ- tinue our spending and entitlement binge and simplying that somehow things will magically turn out okay. raise taxes until we balance the books. But if we didothers seem to believe that the federal government this, spending and taxes would rise over the next fewis somehow just “too big to fail”—something many decades to levels more like those endured in EuropeGreeks once believed of their government—and that than those we expect in America.the Chinese and other lenders will trust in our ability For instance, financing promised entitlementto pay them back and thus never sell off their hold- spending solely by raising tax rates would require dou-ings of Treasury securities. But if they lose confidence, bling the marginal tax rates for all income bracketsinterest rates will skyrocket. The federal government over the next 30 years, reaching a 66 percent federalwould then need to make savage cuts to restore inter- income tax rate for many middle-income Americans,national confidence. on top of payroll taxes or state and local income taxes. Even before such a crisis, growing concern among Corporate taxes—already among the highest in theforeign and domestic lenders about our willingness industrial world—would also need to double. Americato take the necessary long-term action will push up cannot possibly compete economically at that level ofinterest rates, hurting American businesses, investors, spending and taxation.homebuyers, and borrowers. But even if this crisis And who would pay the bulk of these taxes? Thosenever occurs, the only way we can continue to pay for in retirement or near retirement today would not, eventhe promised entitlements is to pass tens of trillions of if rates were raised immediately. The Americans whodollars of debt onto our children and grandchildren. In would pay the lion’s share are those just starting outthis scenario, our children and grandchildren will pay in life. They would bear this staggering tax burdenthe bill. And it is a huge bill: Each working American for decades while still trying to provide for their ownand each of his or her children now owes more than needs. Indeed, this second choice would simply substi-$200,000. tute taxes on young Americans for borrowing on the Perhaps the biggest danger is that when Washing- same young Americans.ton sees this mounting debt, it will choose the most Some argue that even if spending commitmentsdangerous, “easy-way-out” strategy: printing money are trimmed, tax increases will still be needed becauseThe Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 5
  9. 9. CHART 2Hiking Taxes to Pay for Entitlements Would Require Doubling Tax RatesThe cost of Medicare, Medicaid, and Social Security is rising substantially. Paying for this spending solely through federalincome tax increases would require more than a twofold increase of current tax rates, even for the lowest tax bracket.Marginal Income Tax Rates 100% 88% 88% 80% 63% 66% 66% 60% 47% 40% 35% 35% 25% 25% 19% 10% 20% 0% 2010 2050 2082 2010 2050 2082 2010 2050 2082 2010 2050 2082 Lowest Bracket Middle Bracket Highest Bracket Corporate TaxesSource: Congressional Budget Office.Americans are not willing to cut spending enough. programs that are financially unsound and that causeYet Americans have awakened to the spending prob- more and more Americans to become dependent onlem. They are demanding spending cuts, not more government.taxes. They also realize from experience that if moreof their money is sent to Washington to “deal with Choice #3: Actually fix the spending andthe deficit,” Congress will likely spend it rather than debt problem and begin to restore the fed­use it to reduce the long-term debt. Moreover, raising eral government to its proper functions.taxes will hit younger generations longer and will still The third choice is to recognize that the U.S. gov-shift much of the burden onto the people who did not ernment has gone well beyond its proper functions. Itcause the problem. has been living beyond the means of the American This, too, is not a real choice. Imposing any new people, and Congress after Congress has madetaxes or increasing current taxes—for example, by unwise and unaffordable promises. Americans mustraising rates—would erode American competitiveness return to the basic truths and values of our vision ofand discourage entrepreneurship and investment, limited government and reshape our federal govern-slowing growth and job creation and dimming future ment accordingly.prosperity. Even more important, it would lock in a To ensure prosperity and growth for ourselves andvision of government that reflects the European tra- our children, we must reduce the federal governmentdition far more than it does the American tradition. so that it is closer to its proper size and focus it onIt would fuel an ever-growing federal government performing its core responsibilities. This will meanthat continues to engage in activities that should be deep and sustained reductions in federal spending.handled by the states or the people themselves, with We must also hold down taxes while reforming our6 Saving the AMERICAN DREAM
  10. 10. needlessly complex, burdensome, and highly unfair CHART 3tax system to sharpen incentives and reward saving Discretionary Spending Cuts Aloneif we want America to be prosperous once again. Are Not an Adequate Substitute forWe must re-energize entrepreneurs and workers to Entitlement Reformrestore America’s prosperity powerhouse. We can Annual spending on entitlement programs is massivebest solve our spending and debt problem through compared to other federal spending priorities. Cuttingthe growth, opportunity, and prosperity that come discretionary spending is a necessary step, but cuts towith low tax rates and limited government. foreign aid alone or pulling out of Afghanistan will not close the deficit. Entitlement spending must be reined in. This choice requires that we tackle the root of thespending problem by squarely addressing the unsus- Spending in 2011tainable entitlement promises that are overwhelm-ing us. If we act soon rather than waiting until theproblem is too urgent and too big to fix prudently, wecan fix the problems in ways that actually strengthen Entitlements Global (Medicare, Medicaid, War on Foreigneconomic security. Social Security, and Terrorism Aid NASA To deal with entitlements, we must ask parents other mandatory $159.3 $28.6 $19.5 programs) billion billion billionand grandparents to think not just of the promisespast Congresses have made to them, but also of the $2.4 trillionconsequences their children and grandchildren willsuffer if these promised benefits remain untouched.To repeat, the money that Americans have paid into Note: Figure for entitlements includes net interest. Without netthese programs has already been spent. It is no lon- interest, the total is $2.2 trillion.ger available to pay for all of the promised benefits. Source: White House Office of Management and Budget.That is an indictment of Washington, but it is also afact—and one that we must address. government that has characterized recent decades. Today, we must ask ourselves tough questions Faster growth through greater economic freedom willabout how we can allocate public funds in the most enable more and more Americans to build both a solideffective way. We must acknowledge that everyone and secure life and retirement for themselves and thewill need to pitch in to solve the problem. means, as a community, to help those who worked The good news is that we can do this. We can hard but do not have the means to support them-guarantee economic security to middle-aged and selves in retirement.older Americans even as we reduce the crippling debt This third choice is the only one that upholds thethat we have piled onto the shoulders of the young. vision of government shared by the vast majority of However, fixing these programs is only half of the Americans. It is the only real choice. That is why Theeconomic equation. The other half is to foster the Heritage Foundation made this vision the basis of ourAmerican spirit of self-reliance to flourish and to plan to fix America’s spending and debt crisis.cast off the growing and dispiriting dependence onThe Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 7
  11. 11. What the Heritage Plan Will Achieve The Heritage plan will solve America’s twin crises percent within 25 years.3 Lower debt will removeof debt and spending with reforms that are consis- the threat of financial crisis and restore the confi-tent with the principles of democratic governance dence of investors and lenders. It will also sharplyand deeply held American values. reduce the debt burden on future generations, Our plan does this by cutting government down relieve the pressure on interest rates, and help toto size, re-energizing American enterprise through secure our prosperity.fundamental tax reform, and transforming entitle-ment programs to provide real economic security Cuts the size of the federal government bywithout passing a crushing financial burden onto about half within 25 years. By achieving bal-younger generations. ance at this level, we stop the federal govern- Specifically, the Heritage plan: ment from growing to over one-third of the entire U.S. economy. Left unchecked, it would Balances the federal budget within a decade reach that size by the time a baby born today and keeps it balanced forever at no more graduates from college. than 18.5 percent of GDP. Americans have made very clear to Washington over many Stops scheduled tax increases and replaces decades the limits of how much they are willing the complex and unfair tax code with a com­ to pay for government. That historical average pletely new tax system. In addition to holding figure is approximately equal to 18.5 percent of revenues at no more than their historical average, GDP, so we balance spending and revenue at we replace the current Byzantine tax system with that level. a much simpler system that minimizes tax distor- tions and perverse incentives. Reduces the debt to 30 percent of GDP within 25 years and puts it on track to continue fall­ 3. Congressional Budget Office, “The Long-Term Budget ing thereafter. Our national debt now is nearly Outlook,” June 2010, at http://www.cbo.gov/ftpdocs/ 70 percent of GDP and on track to hit 185 115xx/doc11579/06-30-LTBO.pdf (May 3, 2010).TABLE 1Heritage Plan Curbs Revenue, Spending, and DebtFigures REVENUE AND SPENDING PUBLICLY HELD DEBTare %of GDP Heritage Current Heritage Current Plan Projections Plan Projections Surplus/ Surplus/ Revenue Outlays Deficit Revenue Outlays Deficit 2011 14.8 24.7 –9.8 16.9 24.5 –7.6 69.4 67 2012 16.1 22.1 –6.0 17.6 22.9 –5.3 72.9 69 2021 18.3 18.1 0.2 19.3 26.3 –7.0 58.2 91 2035 18.5 17.7 0.8 19.3 35.2 –15.9 30.0 185Sources: Current projections: Heritage Foundation calculations based on data from Congressional Budget Office, Alternative Fiscal Scenario.Heritage Plan: Calculations by the Center for Data Analysis, The Heritage Foundation, based on baseline data in the current projections, dataprovided by the Peter G. Peterson Foundation, and CDA policy models.8 Saving the AMERICAN DREAM
  12. 12. CHART 4The Alternative—Saving the American DreamBy rapidly lowering total federal spending, the Heritage plan would balance the budget by 2021 and keep it therepermanently, without raising taxes. Current Projections Heritage Plan Revenue and Spending as a Percentage of GDP Revenue and Spending as a Percentage of GDP 35% 35.2% 35% 30% 30% SPENDING 25% 25% SPENDING 19.3% 20% REVENUE 20% 18.5% 17.7% REVENUE 15% 15% 10% 10% 2010 2015 2020 2025 2030 2035 2010 2015 2020 2025 2030 2035 Surplus/Deficit as a Percentage of GDP Surplus/Deficit as a Percentage of GDP 0.8% 0% 0% SURPLUS -5% -5% DEFICIT -10% -10% DEFICIT -15% -15% –15.9% -20% -20% 2010 2015 2020 2025 2030 2035 2010 2015 2020 2025 2030 2035Sources: Current projections: Heritage Foundation calculations based on data from Congressional Budget Office, Alternative Fiscal Scenario.Heritage Plan: Calculations by the Center for Data Analysis, The Heritage Foundation, based on baseline data in the current projections, dataprovided by the Peter G. Peterson Foundation, and CDA policy models.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 9
  13. 13. Protects America and its interests around federal government, and essential to preserving the globe by ensuring full funding for American liberty and prosperity. Waste and national defense. Defense is a core constitu- inefficiency in defense spending should be tional responsibility, a fundamental duty of the rooted out, but we use the savings to meet defense needs.CHART 5The Heritage Plan Would Reverse Eliminates Obamacare and creates a healthTrajectory of Unsustainable Debt care system that is affordable both for the nation and for individuals and families. ThisWithout significant spending reforms, the national debtis projected to reach 185 percent of GDP by 2035. system fosters the individual choice, compe-Under the Heritage plan, federal spending would be tition, and state-level innovation needed toreduced by about half, which would dramatically lower control underlying health costs while assuringour debt to 30 percent. continuous and portable coverage. By overhaul-Publicly Held Debt as a Percentage of GDP ing subsidies and tax breaks for health care,200% we ensure that Americans can afford adequate 185% coverage. Redesigns Social Security and Medicare as sus­150% tainable programs that truly protect seniors CURRENT and will be around for our children and grand­ PROJECTIONS children. The current system will soon be running 2023: massive deficits and unable to pay in full for all 100% of its promised benefits. Accordingly, we redesign100% these defined-benefit entitlement programs as budgeted “real insurance” programs that focus on those who need them and are phased out by income for those who do not really need them. In 50% contrast with those who argue for raising taxes on HERITAGE current and future Americans, the Heritage plan PLAN 30% eliminates the need to raise taxes. 0% Provides powerful incentives for working 2010 2015 2020 2025 2030 2035 Americans to save and invest so that they willSources: Current projections: Heritage Foundation calculations based be less dependent on these programs. Our taxon data from Congressional Budget Office, Alternative Fiscal Scenario.Heritage Plan: Calculations by the Center for Data Analysis, The and Social Security reforms provide new ways forHeritage Foundation, based on baseline data in the currentprojections, data provided by the Peter G. Peterson Foundation, and Americans to save for their future security and toCDA policy models. create capital for enterprise.10 Saving the AMERICAN DREAM
  14. 14. SoCIAl SECuRItySummaryS oCIAl SECURITY IS THE lARGEST SINGlE federal program, paying out about $700 bil- lion per year to some 60 million Americans. It is a major source of retirement income for millions of Americans. Yet Social Security went into the red in 2010, pay-ing out more in benefits than people paid in as payroll taxes. The CongressionalBudget office says that these deficits will continue for at least the next 75 years and prob-ably indefinitely. What Is Social Security? Social Security, today’s largest single federal Social Security does have a $2.5 trillion program, provides (1) retirement income to work- trust fund from the surpluses that it collected ers and their spouses, (2) survivors benefits to the between 1983 and 2009—but that money isn’t family members of deceased workers, and (3) dis- there. Rather than build up real assets in a real ability benefits for workers who have been injured trust fund, Congress actually spent that money and are unable to work and to the families of those on everything from roads to corporate wel- workers. The program is funded by a 12.4 percent fare. That trust fund is filled with special-issue payroll tax that is paid equally by both the worker Treasury bonds that the U.S. Treasury is required (6.2 percent) and his or her employer (6.2 percent). to finance when they are needed to fund Social Employers correctly see their contribution as a part Security’s deficits. As they are bonds not backed of the employee’s total compensation. by any real assets, the government will have to In 2009, the most recent year for which data either borrow or raise taxes to pay for them. are available, Social Security spent a total of In essence, then, these bonds are really a $685.8 billion providing these benefits. That was demand on future tax collections—a lien. In 2010, also the last year that Social Security collected the Treasury started to redeem these bonds, or more in payroll taxes than it paid out in benefits. tax liens, by tapping into other tax sources in Starting in 2010, the program started to run cash- order to cover Social Security’s deficits. Around flow deficits that the Congressional Budget office 2037, even those special-issue bonds will run says are unlikely ever to end. The annual Social out. From that time on, under the provisions of Security deficit will increase every year until about current law, every retiree—no matter how wealthy 2030, when it will reach about $350 billion annu- or how poor—will have his or her Social Security ally in 2010 dollars (without including any inflation), benefits cut by about 22 percent. and stay at approximately that level permanently.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 11
  15. 15. over the next 75 years, the program has promised who work more than 35 years—a flat payment thatto pay $7.8 trillion more in benefits than it will receive is sufficient to keep them out of poverty through-in payroll taxes. The only way that future retirees can out their retirement.collect all of the benefits promised to them is to maketheir children and grandchildren pay massive amounts Because the new Social Security is a real insur-of additional taxes. ance system, designed to protect seniors from pov- Heritage proposes to solve these problems and erty, retirees with high incomes from sources otherstrengthen the Social Security system by tightening than Social Security will receive a smaller check,its benefits and returning it to its original purpose: a and very affluent seniors will receive no check.guarantee that older Americans won’t fall into poverty. This transparent way of income-adjusting benefitHeritage proposes to make Social Security “real insur- checks will replace the method used today, where-ance” for Americans as they reach retirement. by the checks of even modest-income seniors are This reform means that Social Security’s promises taxed and thus reduced.in the future will change in several ways: To help make up the difference between the new Social Security will gradually be transformed from Social Security benefit and what workers may an “income replacement” system back to its origi- desire for a more comfortable retirement, our plan nal purpose of guaranteeing seniors freedom from will create greater incentives for workers of all fear of poverty and assuring a decent retirement income levels to save more for retirement. These income. This means that Social Security benefits savings will supplement their Social Security and will evolve over time into a flat payment to those create a more secure retirement.CHART 6Without Reforms, Entitlements Will Consume All Tax RevenuesTax Revenue and Entitlement Spending as a Percentage of GDP 25% Tax Revenue Social 20% Security 15% Medicaid, Obamacare Subsidy Program 10% Medicare 5% Projected 0% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080Source: Congressional Budget Office.12 Saving the AMERICAN DREAM
  16. 16. Americans live much longer than they used to. To encourage people to stay in the workforce lon- While this is good news, it means that they are ger, those who work beyond full retirement age will spending a much higher proportion of their lives receive a higher level of after-tax income during in retirement. Regrettably, these longer retire- the period when they are not claiming benefits. ments play a major role in Social Security’s finan- cial problems. For this reason, the Social Security This new Social Security system is reasonable, pre- retirement ages will be raised gradually and then dictable, and affordable. It focuses resources on those indexed to life expectancy. This will create a more who need the most help while providing complete pro- reasonable balance between the number of years tection against poverty for all seniors who qualify for a person works and the number of years one full benefits. receives Social Security benefits.The DetailsA Predictable Benefit That Provides Economic retirement, who have more flexibility in planningSecurity. The centerpiece of the new Social Security their future, will see larger changes in their benefits.system involves a gradual transition to a flat benefit Workers born after 1985 will come under the new flatthat pays retirees who qualify for a full Social Security Social Security benefit system when they retire.check. This amount is well above the income level thatthe Census Bureau says an American over the age of Limiting Social Security to Those Who65 needs to avoid poverty. Actually Need It. In addition to moving to a flat Thus, the new system will guarantee that no retir- benefit over time, the plan makes Social Security aee falls into poverty because of insufficient income. properly financed, true insurance program. It starts toUnder today’s system, retirees can pay Social do that immediately. This means that the program willSecurity taxes for 35 years and still receive a benefit concentrate on protecting the economic security ofthat is below the poverty level. Some of these seniors retirees rather than following the current approach ofare forced to go on welfare. The new system corrects promising unaffordable benefits to all without regardthis serious flaw. to need. The flat benefit will be the equivalent of about This new approach means that retirees with sub-$1,200 per month in 2010 dollars when the reform stantial non–Social Security retirement income willis complete. This is both higher than today’s average start receiving a lower benefit on a sliding scale thatSocial Security retirement benefit payment ($1,164 per gradually reduces Social Security checks to zero formonth) and well above the 2009 poverty level for a those with the highest non–Social Security incomes.single adult over age 65 ($857 per month). To ensure This transparent mechanism will apply to benefitsthat future retirees do not slip back into poverty, the received by affluent Americans under both the currentflat benefit level will be indexed for wage growth. system and the flat-rate system. This transparent, slid- ing-scale approach is a major improvement on today’sSlow Transition to the New Flat Benefit. taxation of Social Security benefits.The new flat benefit will be phased in slowly. Current Under the plan, income-adjusted benefits start inretirees and those who are close to retirement will 2012 as individual retirees with non–Social Securitysee only a minimal change in the basic design of their incomes above $55,000 start to see a slight reduc-benefits. Those with a significantly longer time before tion in benefit payments. Those with higher non–SocialThe Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 13
  17. 17. Security income will see larger reductions in their expectancy and those anticipated in the future. Underchecks. Individuals with more than $110,000 in non– the plan, these changes are phased in gradually. ThoseSocial Security income will receive no Social Security nearing retirement are affected only slightly. over thepayments. Married couples who file taxes jointly would next 10 years, the age for full benefits rises to 68 forbe subject to higher thresholds, with benefits beginning workers born in or after 1959. over the next 18 years,to phase out at a joint non–Social Security income of the early retirement age rises to 65 for workers born$110,000 and ending when income reaches $165,000. in or after 1964. After that, both early and normalMarried couples can decide whether they want to qual- retirement ages will be indexed to longevity, which willify for benefits as individuals or jointly as a couple. The add about one month every two years according toincome thresholds will be indexed for inflation. current projections. Income-adjusting benefits is not new. It occurs in The plan recognizes that a small proportion oftoday’s Social Security system. But it is largely hidden workers will be physically unable to work until thesetoday and hits lower-income seniors, not just the afflu- ages. It therefore includes an improved disability sys-ent. Seniors with as little as $15,000 in non–Social tem to protect them. The reformed disability systemSecurity income, or even less in some cases, must pay ensures that those who are unable to work longertax on part of their benefits. Seniors with more income receive a quick and accurate decision on their benefitthan that pay steadily higher rates of tax on more of application rather than facing today’s long delays,their Social Security benefits. The Heritage approach, and improves today’s often arbitrary decision-makingwhen fully phased in, would income-adjust ben- process.efits transparently and not tax the benefits a seniorreceives. It also would start income-adjusting at a Incentives to Work Longer. Starting immediately,much higher income. Today, about half of seniors have those who work past their full-benefit age receive atheir checks eroded by taxation. Under the Heritage special annual tax deduction of $10,000, regardlessplan, only about 9 percent of seniors would see their of income level. For instance, once the new system ischecks reduced and only just over 3.5 percent of completely phased in, a worker earning $50,000 perseniors would receive no check. year who delays Social Security payments will see a Real insurance also protects seniors from poverty $200 per month increase in spendable income.if their financial situation changes. Retirees who suffera sudden and permanent drop in non–Social Security An Improved Savings Plan to Supplementincome would find their benefits rapidly restored. Social Security. As Social Security is transformed into a real insurance system that focuses scarceMore Accurate Inflation Protection. The annual resources on those who need them most, the plancost of living adjustment (ColA) for Social Security, also creates better ways for workers to build savingswhich protects retirees against inflation, will be based for retirement.on the Chained Consumer Price Index (C-CPI-U), a Beginning in 2014, a new savings plan will bemeasure of inflation that is more accurate than the introduced over two years. Under this plan, 6 percentindex used currently. The Bureau of labor Statistics of each worker’s income is placed in a retirement sav-specifically designed this inflation measure to better ings plan that the worker owns and controls unlessreflect the way that consumers buy different items as he or she explicitly declines to have such an account.the prices of various products fluctuate. (This approach is known as automatic enrollment.) This new, additional retirement security sys-A More Reasonable Retirement Age. The plan tem gives Americans another tool with which toadjusts the retirement ages to reflect increases in life secure their retirement standard of living. Savings14 Saving the AMERICAN DREAM
  18. 18. are invested through an improved version of the First, under the reformed tax system detailedIRA/401(k) employment-based retirement savings sys- below, all savings (without limit) will no longer be dou-tem already familiar to Americans. The money put into ble-taxed. Savings remain completely free of taxationthese savings accounts will not be double-taxed, unlike until they are actually spent.today’s Social Security payments and many other sav- Second, as benefit reforms drive the costs ofings mechanisms. Social Security below the level of taxes collected, In addition to this new savings plan, workers have those savings will go into the workers’ accounts.two other important ways to save for retirement.The Bottom Line The Heritage plan reforms Social Security to cre- or more faces poverty or economic insecurity. At theate a retirement security system that will be available same time, this new system protects our children andfor future generations. It will be one that provides a grandchildren from the massive tax increase thatreasonable, predictable, and affordable benefit that would be necessary to pay all of the Social Securityensures that no retiree who has worked for 35 years benefits that Washington has irresponsibly promised.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 15
  19. 19. MEdICARESummaryT HE MEDICARE PRoGRAM FACES A 75-year unfunded liability in excess of $30 trillion even as it is plagued by serious gaps in coverage, an increasing number of demoralized doctors refusing to accept new Medicare patients, a sluggish and outdated system of in-flexible governance, and tens of billions of dollars in annual losses to waste, fraud, and abuse. What Is Medicare? Medicare is the federal government’s health already compete in the Medicare program. insurance program for all Americans age 65 and They are funded by a combination of enrollee older and for the disabled. In 2010, the program premiums and taxpayer subsidies, including covered 47 million enrollees. Almost half (47 per- Part A funds. cent) have annual incomes below 200 percent of the federal poverty level ($21,660 in 2010 dol- Part D is the voluntary Medicare prescrip- lars for individuals and $29,140 for couples). An tion drug program. FICA payroll taxes do estimated 45 percent have three or more chronic not fund this part of Medicare. Enrollees pay medical conditions, and 17 percent are non-elderly income-adjusted premiums, but the costs for people with disabilities. Medicare is projected to all beneficiaries are subsidized by taxpayers, spend $549 billion in 2011, increasing to $891 bil- with greater subsidies for low-income enroll- lion per year by 2019. ees. While beneficiary premiums account for Medicare has four parts. approximately 10 percent of Part D financ- ing, 82 percent comes from general federal Part A covers in-patient hospitalization, hos- revenues, and approximately 8 percent of the pice care, and some home health care. It is funding comes from states and other sources. funded by a 2.9 percent payroll tax, but project- As with Medicare Part B, wealthy retirees pay ed spending will far exceed future tax revenue. higher premiums, up to 80 percent of the costs of the drug benefit. Part B is voluntary and covers physician services, outpatient hospital services, preven- Medicare Part A and Part B together are tive care, and some home health services. sometimes referred to as traditional Medicare or Beneficiary premiums cover just 25 percent of Medicare fee-for-service (FFS). This means that Part B costs. Taxpayers pay for the remaining doctors, hospitals, and other medical professionals 75 percent. Federal Insurance Contributions are paid for the individual services that they pro- Act (FICA) payroll taxes contribute nothing to vide to patients as opposed to being paid salaries Part B. Premiums are income-related. or given “capitated” payments as payment for all of the care provided to a senior. The fees are gov- Part C, the Medicare Advantage program, is erned by government fee schedules or payment also voluntary. It consists of private plans that formulas for specific medical services.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 17
  20. 20. Medicare must be reformed to solve this huge costs for all enrollees. Today’s traditional fee-for-financing problem, to improve access to quality care, service Medicare program provides no such protec-and to ensure that health care will be available for tions. Because of this gap, nine out of 10 seniors feelyounger Americans when they retire. compelled to buy supplemental private health insur- The Heritage plan accomplishes this by transform- ance, including Medigap, to cover themselves againsting Medicare from an open-ended and unsustainable the financial devastation of catastrophic illness. Thisdefined-benefit entitlement into a properly budgeted means that seniors pay an extra set of premiums andprogram that focuses Medicare subsidies on those often incur high out-of-pocket costs for both premiumwho need them most. The new Medicare program and non-premium medical expenses.would look much more like the Federal Employees Finally, the plan establishes a true long-term bud-Health Benefits Program (FEHBP), the health care sys- get for Medicare.tem for Members of Congress and federal employees. over a five-year period, the plan transforms The Reformed System. When the changes areMedicare into a defined-contribution system, with fully phased in, seniors will enroll in the health plansstronger health security for the poor and less healthy, of their choice and receive a defined contributionand guarantees new protections against catastrophic (known as premium support) toward the cost of theirCHART 7The Heritage Plan Would Rein in Mandatory Entitlement Spending Current Projections Heritage Plan Spending as a Percentage of GDP Spending as a Percentage of GDP 20% 20% 17.1% 15% 15% 10% 10% 9.1% Medicare, Medicaid, Exchange, CHIP Medicare, Medicaid, Exchange, CHIP 5% 5% Social Security Social Security 0% 0% 2010 2015 2020 2025 2030 2035 2010 2015 2020 2025 2030 2035Sources: Current projections: Heritage Foundation calculations based on data from Congressional Budget Office, Alternative Fiscal Scenario.Heritage Plan: Calculations by the Center for Data Analysis, The Heritage Foundation, based on baseline data in the current projections, dataprovided by the Peter G. Peterson Foundation, and CDA policy models.18 Saving the AMERICAN DREAM
  21. 21. plans, much as Members of Congress and millions of have the financial resources to pay insurance claims.federal employees and retirees do through the FEHBP. It also provides marketing rules to protect consum-Unlike today, all plans will include catastrophic protec- ers against fraud and a requirement that benefits betion. Thanks to the structure and insurance rules in described in plain English without surprises or denialsMedicare, the premium support will be sufficient for in fine print. By increasing choice and competition, theseniors to afford an adequate level of benefits, regard- reformed Medicare program will deliver better careless of age or health care condition. and provide true health care security for less money The range of choices in the transformed system than under current projections.includes Medicare premium-based fee-for-service The cash value of premium support is reduced forinsurance as well as other fee-for-service plans, upper-income seniors and eventually phased out forMedicare Advantage plans, managed care plans, those with the highest incomes. However, all seniorsassociation plans, and Taft–Hartley Act and employer- will have access to the same Medicare system withbased plans. Existing health savings accounts (HSAs) no need to buy a separate plan to cover catastrophiccan also be carried into retirement. expenses. Poor seniors remain eligible for Medicaid Medicare’s basic rules for insurance are retained, assistance. like the Social Security adjustments intogether with an improved risk-adjustment mecha- retirement age, Medicare’s eligibility age becomes 68nism to offset the impact of any adverse selection. in 10 years and is indexed thereafter for increases inUnder the reformed system, Medicare’s Center for longevity.Drug and Health Plan Choice, whose mission today During the five-year transition period, Medicare’sis to identify abuse and oversee marketing rules for traditional fee-for-service system also changes. PartMedicare Advantage and Medicare drug plans, carries A costs are offset by a new premium payment systemout that function for all plans. for upper-income retirees. The premiums for Parts B Beyond retaining the Medicare insurance rules, and D rise according to income. The highest-incomethe reform provides for fiscal solvency and reserve seniors pay an unsubsidized premium for Parts B andrequirements for all health plans to ensure that plans D during the transition.The DetailsA Defined Contribution Adjusted by Income. competing health plans. After the first five years, theFive years after enactment, all new retirees receive government contribution is based on the lowest bida contribution (premium support) from the govern- of competing plans in a region. The bidding systemment, just as federal employees and retirees do today. will be phased in and will include the bids of the com-They can use this contribution to choose Medicare’s peting managed care plans, other private plans, andpremium-based FFS plan or one of the other health the Medicare premium-based FFS plans offering anplans. After one year of operation, Medicare enrollees approved range and quality of services.in the traditional Medicare FFS program are free to Under the Heritage plan, low-income enrolleesjoin the new Medicare premium-support program. They receive the full Medicare defined contribution. Thecan then choose a premium-based FFS plan or an amount of the defined contribution starts to phasealternative. out for Medicare enrollees with annual non–Social During the first five years of the premium-support Security incomes between $55,000 and $110,000program, the government’s contribution is based on and couples with incomes between $110,000 andthe weighted average premium of the regional bids of $165,000. Enrollees with incomes over $110,000 andThe Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 19
  22. 22. couples with incomes over $165,000 receive no gov- TABLE 2ernment contribution and pay full, unsubsidized pre-miums. As with Social Security, married couples can Percent of Defined Benefitdecide whether they want to qualify for benefits as Contribution for Medicareindividuals or jointly as a couple. The phaseout income Beneficiaries, by Incomelevels will be inflation-indexed. However, Medicare % of SINGLES Contributionremains a valuable program for higher-income seniors $0–$55,000 100%because they retain access to a guaranteed-issue and $56,000–$57,000 98%community-rated insurance program. $75,000–$76,000 64% Under the Heritage plan over 90 percent of $82,000–$83,000 49%seniors would receive the full defined contribution. $100,000–$101,000 18%only just over 3.5 percent have such high incomes $109,000–$110,000 2% More than $110,000 0%that they would pay the entire premium without anycontribution from the government. % of MARRIED COUPLES Contribution This income-adjustment of Medicare is not new. $0–$110,000 100%Today, for instance, Medicare Part B and Part D pre- $111,000–$112,000 98%miums are changed significantly according to income. $130,000–$131,000 64%For single retirees, Part B premiums can range widely, $137,000–$138,000 49%from $96.40 per month to as much as $369.10 per $155,000–$156,000 18% $164,000–$165,000 2%month, depending on their income. Upper-income More than $165,000 0%retirees can pay as much as $69.10 per month morefor the same Part D coverage as a lower-income Sources: Calculations by the Center for Data Analysis, The Heritage Foundation.senior. What the Heritage plan does is rationalizethe income adjustment of Medicare so that it fulfillsthe true insurance purpose of the program while premium, and the original Medicare Part B premiumassuring that the program will be available for future contribution was set at 50 percent in 1965.generations. The Heritage plan also caps total Medicare spend- ing. The spending cap is indexed annually for infla-A Medicare Budget and Financing System. tion using the Consumer Price Index plus 1 percentDuring the first five years of the new Medicare pro- and Medicare population growth. If Medicare spend-gram, the government’s annual contributions to enroll- ing exceeds the cap, the government’s contributionees’ plans are based on the weighted average pre- declines from 88 percent to the percentage that com-mium of participating health plans’ bids on a regional plies with the Medicare spending cap, thereby pressur-basis. The plans bid to provide Medicare benefits plus ing the competing plans and providers to control costscatastrophic coverage and, just like the FEHBP, are more tightly.weighted on plan enrollment. Thereafter, the govern-ment contribution is based on the premium bid of the Additional Assistance for Dual-Eligibles.lowest-cost health plan that meets the required level Medicaid, the federal–state program for the poorof quality and provides an adequate range of benefits. and the indigent, provides supplemental coverageIn both cases, the per capita government contribution for about 8 million Medicare beneficiaries. Theseon the basis of the plan bidding is set at 88 percent are poor people, and most qualify for full Medicaidof the bids. By comparison, the FEHBP contribution benefits, including long-term care services in nursingis set at 72 percent of the national average weighted homes. They receive subsidies for Medicare premiums20 Saving the AMERICAN DREAM
  23. 23. and cost-sharing and for the Medicare Part D drug However, the previous organizational and benefitcoverage. distinctions within Medicare FFS (Medicare Parts A, Beginning five years after enactment, states have B, C, and D) disappear because Medicare becomes athe option to “top up” the Medicare defined-contribu- single, unified program with a unified trust fund thattion amount for dual-eligibles who choose to enroll is financed by a defined contribution.in a private health plan. Dual-eligible enrollees who A single stated premium incorporates today’sstay with the revamped Medicare FFS plan continue multiple Medicare FFS premiums plus the cost of ato receive Medicaid coverage as they do today. new catastrophic benefit. Cost-sharing parameters are adjusted to ensure that the Medicare benefitIntegrating Traditional Medicare into the package is actuarially equivalent to the packageSystem and Adding Catastrophic Cost provided under current law. In the first year ofProtection. Under the Heritage plan, all senior citi- competition with private health plans, the initialzens have the option of keeping their current health value of the catastrophic benefit will need to equalplans or choosing better health plans. Five years the average of such benefits currently provided inafter enactment, traditional Medicare FFS begins to the Medicare Advantage program, but it may becompete directly with private plans on a level playing adjusted thereafter by the Secretary of Health andfield. Seniors can remain in Medicare FFS if they wish. Human Services.Changes in Traditional Medicare FFS During the Transition During the transition, the Heritage plan: Individuals with an annual income of $110,000 and couples with an annual income of $165,000 pay Reduces subsidies and phases them out for full, unsubsidized premiums. upper-income enrollees. For upper-income seniors, the premium subsidies for Part B and Part D Changes co-payments. Medicare Part A, which are phased out and a premium for Part A is phased covers hospitalization, has a deductible. During the in. For upper-income seniors, the subsidy implicit in transition, the deductible is indexed annually to an their premiums is phased out over the same range average of the Consumer Price Index (CPI) and the as for Social Security ($55,000 to $110,000 for Medical CPI. A co-payment of 10 percent is added individuals and $110,000 to $165,000 for couples). for the total cost of each home health care epi- Under the changes in traditional Medicare, these sode (defined as 60 days of service). Today, there subsidy reductions and phaseouts also apply to is no such co-payment in spite of heavy utilization government subsidies for those who are enrolled in of this costly benefit. Medicare Advantage plans. Raises the premiums for Part B and Part D. A new income-related Part A premium for retirees The Part B and Part D premium percentage for is phased in to cover the full cost of Part A ser- most beneficiaries is gradually raised from 25 per- vices during the transition and to cover any deficit cent to 35 percent in increments of 2 percentage in the Hospital Insurance trust fund. The premiums points per year over the five-year transition. The are phased in for individuals with annual incomes existing “hold harmless” provisions are retained for between $55,000 and $110,000 and couples with low-income seniors. annual incomes between $110,000 and $165,000.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 21
  24. 24. Other Key Changes in Medicare The Heritage plan envisions other important Beginning immediately, a permanent “doc fix” ischanges and rules in the current Medicare program: implemented using any Medicare savings from legislation, including savings from this proposal. Eliminating restrictions on doctor–patient From this point forward, physician payments are contracting. Beginning immediately, the plan adjusted for inflation, measured by the CPI (not eliminates the statutory and regulatory restric- the Medical CPI). However, the law is changed tions on private contracting outside of Medicare to permit balanced billing in combination with a that were enacted in the Balanced Budget Act of price disclosure requirement for Medicare physi- 1997. There were no such statutory restrictions cians’ services. before 1997. This means that Medicare enrollees can enter into private agreements for medical Thus, for traditional Medicare FFS during the tran- services with the physicians of their choice with sition, the government determines Medicare reim- no statutory or regulatory restrictions. For reasons bursement, while physicians determine patient of privacy, or for whatever reasons seem good fees. This change will encourage doctors who to them, they can go outside of the Medicare otherwise might drop out of Medicare to continue program without being required to submit a claim to treat Medicare patients. Moreover, the required to the Medicare bureaucracy for the physician’s transparency in physician fees guarantees price service. This restoration of the right of private competition in physician services, thus helping to contracting will also encourage the treatment of lower Medicare costs. Medicare patients by more physicians who other- wise might not participate in the program. Allowing new retirees to keep their existing plans. Surveys show that the vast Retaining Medicare savings for Medicare majority of working Americans are satisfied alone. Beginning immediately, any savings in the with and, if possible, want to keep their exist- Medicare program are prohibited from being cred- ing health plans. The Heritage plan expands ited to the cost of current or future “health care the opportunities for Americans to keep their reform” provisions that fund Medicare benefits or existing plans into retirement. Even before the subsidize those who are not enrolled in the pro- five-year transition to a full premium-support gram. Five years after enactment, any remaining program, Medicare provides a risk-adjusted savings from traditional Medicare are deposited defined contribution for any retirees who want to into the new unified Medicare trust fund. remain in their pre-existing health plan, including employer-based coverage. Subsidies will also be Enacting a permanent “doc fix” and adjusted by the new income rules. making physician pricing fully transparent.The Bottom Line By moving to a premium-support program, health plans and providers to deliver value for tax-Congress can introduce the powerful forces of con- payer and beneficiary dollars. Similar approaches tosumer choice and competition into Medicare, forcing health care financing and delivery have been used22 Saving the AMERICAN DREAM
  25. 25. in Medicare Part D and the FEHBP, the program that unreformed, our children and grandchildren will paycovers Members of Congress. The record shows that those higher taxes even as they work and save tothis approach can successfully control and slow the provide for their own families.growth of health care costs while increasing patient By reducing the level of tax subsidies forsatisfaction. seniors with higher incomes, the Heritage plan Medicare today is less a traditional social insur- reduces both the burden on future taxpayers andance program, in which beneficiaries pay for their dependence on government. By adding catastroph-benefits, and is becoming more of an income transfer ic protection against serious illness and targetingprogram. Today’s enrollees are not, in fact, “paying funding to those who are most in need, the planfor” their Medicare benefits, since it is really a “pay strengthens Medicare as safety-net insurance foras you go” system with today’s workers paying for all Americans and guarantees them better healthtoday’s beneficiaries. Even so, payroll taxes pay for and economic security. Finally, by reducing thejust a portion of one part of Medicare, and the pre- role of bureaucracy and red tape in the delivery ofmiums that seniors pay for the other parts cover less medical care, the Heritage plan makes the practicethan a quarter of those costs. of medicine more attractive, thereby encourag- Taxpayer subsidies account for 85 percent of ing dedicated and talented individuals to join thetotal Medicare program costs. If Medicare is left health professions.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 23
  26. 26. HEAltH CARE FoR FAMIlIESSummaryH EAlTH CARE CoSTS ARE RISING at an alarming rate, while individuals and families have less control over their health care dollars or decisions. Worse still, the recently enacted Patient Protection and Affordable Care Act (PPACA, or obamacare) isaccelerating these problems. In sharp contrast to the centralized government approachof the obama legislation, the Heritage plan uses a consumer-centered, market-basedapproach to reduce health care costs and give patients and their families a greater sayin health care spending and decisions that affect their lives. This begins by repealing obamacare. includes key budget and tax components of the over- The Heritage Foundation has already proposed all Heritage health care reform, including reform ofmajor health care reform to create an affordable the tax treatment of health expenses and assistancehealth care system in America. The reform is based for health insurance for lower-income families. otheron consumer choice and ownership of coverage, features of the health care reform are developed intogether with an infrastructure for competitive pri- other studies and reports.vate plans and state-led innovation. The Heritage plan The Heritage Foundation health care proposal Making available new pooling arrange- assumes numerous other policy initiatives that ments, such as individual association plans; accompany the budget design elements in the and Heritage plan. These include: Supporting strong state-led initiatives to Removing consumer barriers to the pur- promote innovation and experimentation with chase of health insurance, such as existing consumer-centered, market-based reforms. limits on interstate purchase; These and other insurance reforms are Developing mechanisms, such as risk- intended to augment the Heritage plan, to pro- adjustment and high-risk pools, to address mote competition, drive down cost, and advance access issues for the hard-to-insure; stability, portability, and personal ownership.The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 25
  27. 27. In conjunction with the plan’s tax reforms, the cur- Medicaid would no longer participate in the costlyrent individual tax exclusion for employer-sponsored and failing Medicaid program; instead, they would behealth insurance and other tax mechanisms are replaced able to enroll in private coverage.with a nonrefundable fixed tax credit for households to In addition, under the Heritage plan, low-incomepurchase health coverage. The credit is phased out as individuals who are not currently eligible for Medicaidincome rises and eliminated for upper-income house- would receive financial assistance toward a plan. Thisholds. The switch from the exclusion to the credit sys- ensures that everyone who needs assistance receivestem is revenue-neutral to the federal government. assistance in purchasing health insurance. like those This change is needed because under today’s who receive the tax credit, individuals and familiessystem, the tax code provides unlimited tax breaks receiving assistance have the same health care planonly to those workers who receive coverage through choices as those with the tax credit and can buy, own,their employers. Workers cannot use this tax break and keep their health insurance.if no plan is offered through their employers or if The Heritage plan transforms the remainder ofthey simply prefer a plan other than their employer’s. today’s Medicaid program—for the frail elderly andMoreover, while upper-income workers obtain a very disabled—into a health care safety-net program ratherlarge tax break, the exclusion provides little or no than today’s catch-all, patchwork program. In addition,help to lower-income workers who are struggling to the Heritage plan replaces the open-ended federal–afford coverage for their families. state financing arrangement that is crippling state and Through tax reform and other measures, the federal budgets with a more consistent and sustainableHeritage plan ensures that everyone, regardless of job capped allotment. In exchange for the capped allot-situation, is eligible for a tax credit or other help in pur- ment, states are given much more flexibility to redesignchasing health insurance. This means that people can health services for the disabled and the elderly poorbuy, own, and keep the health care plans of their choice. so that they can provide better and more integrated For poor Americans, the plan provides assistance services at lower cost. This new arrangement enablesfor coverage, paid with reductions in other federal states not only to provide better care for the neediestspending. Under this reform, low-income able-bod- in our society, but also to keep to their budgets with-ied adults and their children who are currently on out cutting other state priorities or raising taxes.The DetailsA New Health Tax Credit. The Heritage plan Employers and employees could decide whether toends the existing tax exclusion for employee com- have the employer continue to buy coverage or topensation in the form of employer-sponsored health cash out the existing coverage in the form of higherinsurance. This means that the value of employer- cash income. Either way, the tax break for coveragepaid health insurance premiums is included in the would change from an exclusion to a credit.employee’s total taxable compensation. Today’s The net value of the credit is $2,000 for an indi-system excludes this compensation from income and vidual and $3,500 for a couple or family. Under thepayroll taxes, effectively giving upper-income workers Heritage plan, this credit can be used either to offsetin high-tax brackets a large tax benefit. the cost of coverage offered through the workplace In return for ending this tax break, the plan intro- or to buy insurance outside the workplace. For mostduces a new uniform, nonrefundable federal tax credit middle-income working families, the value of theto assist families in their purchase of health insurance. credit is similar to the tax relief that they receive26 Saving the AMERICAN DREAM
  28. 28. TABLE 3 instead of offering health insurance or by continuing to offer coverage to their employees. Either way, weHealth Care Credits and Subsidies know from research that the employee’s overall com- FAMILY OF FOUR pensation should stay the same in most cases. Enhanced Income (% of Federal There is no mandate on individuals to obtain insur- Poverty Level) 2011 Income Credit Subsidy ance, but if they did not obtain coverage, they would 0%–133% Less than $29,727 $3,500 $5,500 have to forgo the credit or assistance for insurance. 134%–200% $29,727–$44,700 $3,500 $2,750 Importantly, the Heritage plan envisions much wider 201%–400% $44,701–$89,400 $3,500 $0 use by employers of auto-enrollment mechanisms in 401%–500% $89,401–$111,750 $3,340 $0 501%–700% $111,751–$156,450 $1,789 $0 the future, with employees automatically enrolled in 701%–1,000% $156,451–$223,500 $68 $0 a plan as the default option. Research suggests that 1,001%+ $223,501+ $0 $0 such an auto-enrollment approach, combined with tax SINGLE incentives or subsidies, is likely to result in high rates Income (% of of enrollment under the credit system. Poverty Level) 2011 Income Credit 0%–133% Less than $14,485 $2,000 Assistance for Lower-Income Working 134%–200% $14,485–$21,780 $2,000 201%–400% $21,781–$43,560 $2,000 Families. Financial assistance for purchasing insurance, 401%–500% $43,561–$54,450 $1,954 equivalent to the tax credit, is made available to house- 501%–700% $54,451–$76,230 $1,231 holds with no tax liability and prorated to those house- 701%–1,000% $76,231–$108,900 $145 holds with a tax liability less than the value of the avail- 1,001%+ $108,901+ $0 able credit. This money can be used only for purchasingSources: Calculations by the Center for Data Analysis, The Heritage health insurance and typically would be sent directly toFoundation. the chosen plan in return for a dollar-for-dollar reduc- tion in the premium to the family. This is like the wayfor health insurance today. For upper-income house- the government’s contribution to a federal employee’sholds, the new credit is typically less and is reduced FEHBP reduces the employee’s premium.as income rises. The phaseout begins at $50,000 for Thus, if a family’s tax liability is less than the valuean individual and $100,000 for a family. The credit of the credit, the family receives assistance partly inis fully phased out at $90,000 for an individual and the form of a credit (up to its tax liability) with the rest$170,000 for a family. in the form of direct assistance for insurance. If this The credit is advanceable, assignable, and avail- family’s income rises in subsequent years, the amountable on a prorated basis. This means that the credit it receives as assistance is phased out and the creditis available when premiums are due, enabling families amount is phased in, maintaining the same full credit/to claim the credit for premiums already paid before assistance amount throughout the income change. Inthe end of the tax year. An assignable credit allows contrast to the current patchwork health care model,a family to assign their tax credit to a health plan in the Heritage plan streamlines federal assistance toreturn for a dollar-for-dollar lower premium, eliminat- ensure that no families fall through the cracks.ing the need to claim it on their own tax forms. For very-low-income families with children earn- It is important to note that health care benefits ing less than 200 percent of the federal povertyare a form of worker compensation directed by the level (FPl), the Heritage plan provides an additionalemployer and are not “paid for” in any charitable federal subsidy worth $5,500. The full additional sub-sense by the employers. Therefore, in the labor mar- sidy would be available to families up to 133 percentket, employers would likely adapt to the tax reform of the FPl and would gradually phase out betweeneither by increasing the wages for their employeesThe Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity 27

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