The Anchor Rising Pension Simulation: The Walshian Assumptions

These results are so counter-intuitive, someone needs to double check that I haven't made a mistake, but I think I have all the formulas in the right place. Using NEA-RI Executive Director Robert Walsh's suggested pension analysis parameters, 13.5% of salary contributed to the fund each year, 8.25% investment growth and a 75% benefit after 38 years, plus (for now) an assumption of 3.25% annual salary increases, and a 3.0% COLA after retirement not kicking in until the third year, an employee who retires after 38 years will fund him or herself for a very long time.

The result is very sensitive to the number you assume for growth. With a 7.0% growth figure, the retiree "only" stays self funded for about 26 years. The result is also sensitive to the figure you assume for an annual salary increase, but because (in percentage terms) the big increases in teacher salaries are at the front of a career, when the absolute numbers are relatively small, my initial guess is that the step-system doesn't pose a problem for the retirement of long-career teachers.

But if the 8.25% that Mr. Walsh suggests is realistic, and I haven't made an error in my spreadsheet, it's a truly amazing feat that pols across the nation have managed to screw the public pension system up as badly as they have.

Assuming 8.25% growth...

Assuming 7.0% growth...

The Anchor Rising Pension Simulation

James Cournoyer's observation, made in his May 5 Projo letter-to-the-editor, that contributions from employees into the Rhode Island public pension system don't come anywhere near to covering the amount that the system is obligated to pay out, shouldn't take anyone by surprise. Pensions (and defined contribution plans, for that matter) work on the principle that contributions + investment growth = mo' money, given time. The investment component cannot be neglected in any attempt to determine reasonable payouts.

The basic assumptions that go into building a pension fund are that...

1. Every year, an employer and employee will put some percentage of an employee's salary into a "kitty" of eventual retirement funds.

   (I can have a bit of an argument with multiple sides in the pension reform debate here. Especially when participation in a pension plan is mandatory, I don't see much point, from a fiscal perspective, in separating the "employer" contribution from the "employee" contribution.)

2. As the employee's salary grows each year, so do the contributions to the kitty.
3. The total in the kitty also grows (hopefully) through investment.

To get a sense of what the numbers are, we can start with the assumptions in Mr. Cournoyer's letter, an initial salary of $30,000 and annual raises of 3.25%. We'll also need to assume a figure for total employer-plus-employee contributions to the pension fund (I'll use 20%, for starters), and an annual investment growth rate, (I'll use 7%, relative to what's already in the kitty from the previous year plus one-half of the current year's contribution).

Under those conditions, after 20 years, Mr. Cournoyer's hypothetical employee will begin with about $287,000 to draw on for his or her retirement...

Now, our hypothetical retiree begins drawing out of the pension fund at age 45 after 20 years of contributions. According to Mr. Cournoyer, the rules are that…

1. The initial pension amount taken is 50% of the average of the highest (in this example, the last) five years of salary.
2. There is a 3.0% cost-of-living adjustment on the size of the annual withdrawals.

But also, there's a third rule we need to add -- a rule, I suspect, often forgotten in initial perceptions of how pensions work -- that growth (hopefully) continues in the kitty throughout the retirement drawdown period. In particular, we'll assume the same 7.0% growth used in the building phase continues, in this case calculated relative to last year's kitty minus one-half of the current year's withdrawal amount. The quantity to be concerned about is not when the money-out equals employee-contributions-in, but when the total in the kitty, contributions plus investment growth minus distributions, falls below zero. At that point, our hypothetical employee's retirement is no longer self-funded and additional money must be found to directly cover the pension cost. (There are two basic sources of this additional money. One, of course, is tax revenue sent directly to pensioners. The other is money already in the fund from people who die before they collect everything their contributions + growth would pay for. Sometimes I think that actuarial science, rather than economics in general, should be called "the dismal science").

Anyway, here's what happens to the fund based on Mr. Cournoyer's assumptions ...

I used Mr. Cournoyer's numbers, not because they are necessarily realistic (for state employees and teachers, for instance, I don't think that 50% pensions for 20 years of service are possible, and under some recent reforms, the COLA increase may not be so aggressive), but because they simultaneously illustrate...

1. That with solid investing, it is reasonable for a pensioner to expect to get many multiples of his or her contributions back, but also...
2. That many multiples may not be enough to cover the cost of an early retirement. Given that the average lifespan in the U.S. is around 75 years, a pensioner in the system above would require direct funding from some other source to pay for his or her retirement for about 15 years.

So, before going on and trying to figure out what is or isn't working in the pension system, are we anywhere close to having a method we can agree upon for analyzing it? (Also, I can tinker with the numbers, if people are interested in seeing the results under other conditions).

The Anchor Rising Pension Simulation

James Cournoyer's observation, made in his May 5 Projo letter-to-the-editor, that contributions from employees into the Rhode Island public pension system don't come anywhere near to covering the amount that the system is obligated to pay out, shouldn't take anyone by surprise. Pensions (and defined contribution plans, for that matter) work on the principle that contributions + investment growth = mo' money, given time. The investment component cannot be neglected in any attempt to determine reasonable payouts.

The basic assumptions that go into building a pension fund are that...

1. Every year, an employer and employee will put some percentage of an employee's salary into a "kitty" of eventual retirement funds.

   (I can have a bit of an argument with multiple sides in the pension reform debate here. Especially when participation in a pension plan is mandatory, I don't see much point, from a fiscal perspective, in separating the "employer" contribution from the "employee" contribution.)

2. As the employee's salary grows each year, so do the contributions to the kitty.
3. The total in the kitty also grows (hopefully) through investment.

To get a sense of what the numbers are, we can start with the assumptions in Mr. Cournoyer's letter, an initial salary of $30,000 and annual raises of 3.25%. We'll also need to assume a figure for total employer-plus-employee contributions to the pension fund (I'll use 20%, for starters), and an annual investment growth rate, (I'll use 7%, relative to what's already in the kitty from the previous year plus one-half of the current year's contribution).

Under those conditions, after 20 years, Mr. Cournoyer's hypothetical employee will begin with about $287,000 to draw on for his or her retirement...

Now, our hypothetical retiree begins drawing out of the pension fund at age 45 after 20 years of contributions. According to Mr. Cournoyer, the rules are that…

1. The initial pension amount taken is 50% of the average of the highest (in this example, the last) five years of salary.
2. There is a 3.0% cost-of-living adjustment on the size of the annual withdrawals.

But also, there's a third rule we need to add -- a rule, I suspect, often forgotten in initial perceptions of how pensions work -- that growth (hopefully) continues in the kitty throughout the retirement drawdown period. In particular, we'll assume the same 7.0% growth used in the building phase continues, in this case calculated relative to last year's kitty minus one-half of the current year's withdrawal amount. The quantity to be concerned about is not when the money-out equals employee-contributions-in, but when the total in the kitty, contributions plus investment growth minus distributions, falls below zero. At that point, our hypothetical employee's retirement is no longer self-funded and additional money must be found to directly cover the pension cost. (There are two basic sources of this additional money. One, of course, is tax revenue sent directly to pensioners. The other is money already in the fund from people who die before they collect everything their contributions + growth would pay for. Sometimes I think that actuarial science, rather than economics in general, should be called "the dismal science").

Anyway, here's what happens to the fund based on Mr. Cournoyer's assumptions ...

I used Mr. Cournoyer's numbers, not because they are necessarily realistic (for state employees and teachers, for instance, I don't think that 50% pensions for 20 years of service are possible, and under some recent reforms, the COLA increase may not be so aggressive), but because they simultaneously illustrate...

1. That with solid investing, it is reasonable for a pensioner to expect to get many multiples of his or her contributions back, but also...
2. That many multiples may not be enough to cover the cost of an early retirement. Given that the average lifespan in the U.S. is around 75 years, a pensioner in the system above would require direct funding from some other source to pay for his or her retirement for about 15 years.

So, before going on and trying to figure out what is or isn't working in the pension system, are we anywhere close to having a method we can agree upon for analyzing it? (Also, I can tinker with the numbers, if people are interested in seeing the results under other conditions).

The Iraq War and the State Budget?

At the Taubman Center panel on the Rhode Island budget crisis I attended at Brown University a few weeks ago, several members of the audience attempted to attribute at least part of the state deficit to Federal cut-backs in domestic spending forced by the costs of fighting in the Iraqi theater in the War on Terror. (And much to my disappointment, Paul Choquette, supposedly one of the voices of fiscal sanity on the panel, didn't disagree). However, the notion of a drastic -- or any -- reduction in domestic spending by the Federal government since 2001 or 2003 isn't supported by the numbers.

The Heritage Foundation's Brian Riedl has calculated that Federal spending, adjusted for inflation, has grown by about 30% overall since the year 2001. Riedl doesn't break out an Iraq-war figure specifically, but he does separate out the defense-related portion of the Federal budget. According to his numbers, 63% of the amount of the Federal spending increase has gone to entitlements and other non-defense related areas, while 34.5% has gone to defense. Non-defense related spending, in fact, has risen in the vicinity of 3% to 4% above the rate of inflation, on an annual basis, since the year 2001.

So, with Federal spending per household already near its highest levels ever (over $23,000, according to the Heritage Foundation), are advocates for bigger-and-bigger government really willing to attach themselves to the position that non-defense related government spending should always be climbing by more than twice the rate of inflation, no matter how much of the nation's GDP is ultimately consumed?

Federal government outlays reported in Federal Spending by the Numbers 2008, dated February 25, 2008, by Brian M. Riedl of the Heritage Foundation; all figures are in BILLIONS of dollars…

New Spending since 2001: $675,000,000,000

New Defense Spending since 2001: $233,000,000,000 (34.5%)

New Entitlement/Non-Defense Discretionary Spending: $425,000,000,000 (63%)

The Entitlement Mindset of Rich and Poor

A relevant thought for the day from Claremont's Richard Reeb:

Entitlements ought to be understood only as goods or honors that we have earned, not something we think that we, or someone else, ought to have. That necessarily and unavoidably entails taking from one person or group and giving to another. The impolite word for that is theft. It impoverishes the victim and corrupts the beneficiary...

There is no point in being charitable toward what is truly not a charitable, but rather a greedy and a covetous, impulse, this political game called income redistribution. People who advocate it call themselves liberals (or progressives since liberalism got a bad name in the 1980s), but liberal people don’t demonstrate any moral virtue by forcibly taking someone else’s money instead of donating their own.

...the words of the Declaration of Independence clarify the matter: one is entitled only (though this is no small thing) to life, liberty and the pursuit of happiness, meaning that all must respect, and the government that we establish should secure, the free exercise of those rights.

The pursuit of happiness is not merely following one’s passions or inclinations but making the decisions and forming the habits which sustain one’s life, enhance one’s liberty and attain one’s happiness. None of this is easy, nor can it be, but it is easy to understand: one works to enrich oneself and not a king, aristocrat, dictator or bureaucrat, not to mention citizens who choose not to work and expect you to support them.

The entitlement mentality is so strong and pervasive that both the well off and the poor have fallen prey to it. In this democratic country, it has become a political creed that there is a permanent "underclass" that deserves to be supported. But no less a force are the wealthy farmers, businessmen and bureaucrats whose subsidies, write offs and sinecures fill their pockets and distort the marketplace.

Decent people are rightly critical of what they call "crazy" government programs that waste billions of taxpayers’ dollars. But the recipients of those giveaways are not crazy by any means, except perhaps crazy like a fox.

But maybe the foxes watching the Rhode Island hen house have finally out-foxed themselves.

Hide Your Wallets, D.C. Dems are Coming....

Republican Senator Mitch McConnell writes:

While most of the media were busy covering the latest developments on the Iraq funding bill or the bipartisan immigration proposal, congressional Democrats on Thursday quietly passed a budget creating the framework for the largest tax increases in American history...

Everyone takes a hit. Forty-five million working families with two children will see their taxes increase by nearly $3,000 annually. They’d see the current child tax credit cut in half — from $1,000 to $500. The standard deduction for married couples is also cut in half, from the current $3,400 to $1,700. The overall effect on married couples with children is obvious: Far from shifting the burden onto the wealthy, the Democratic budget drives up taxes on the average American family by more than 130 percent.

Seniors get hit hard too. Democrats like to crow that only the richest one percent of Americans benefit from the stimulative tax cuts Republicans passed in 2001 and 2003. What they rarely mention is how much seniors benefited from those cuts in the form of increased income as a result of lower taxes on dividends and capital gains. More than half of all seniors today claim income from these two sources, and the Democratic budget would lower the income of every one of them by reversing every one of those cuts.

Heritage also has some analysis on the Senate Budget--most of the tax increases are because the Senate is going to simply let the Bush tax cuts expire--and more here:

With federal spending surging above $24,000 per household per year, the incoming Democratic majority of Congress promised to restore fiscal responsibility in Washington. Instead of paring back the growth of government, however, Congress came to agreement in conference on a budget resolution that:

* Raises taxes by $721 billion over five years, and a projected $2.7 trillion over 10 years, or more than $2,000 per household;
* Includes 23 reserve funds that could be used to raise taxes by hundreds of billions more;
* Increases discretionary spending by nearly 9 percent in FY 2008 and does not terminate a single wasteful program;
* Completely ignores the impending explosion of Social Security, Medicare, and Medicaid costs; and
* Creates rules that bias the budget toward tax increases.
...

Congress’s budget resolution is consistent with the Democratic majority’s budget agenda so far. In just a few months in Washington, the Democratic Congress has tacked $21 billion in unrelated deficit spending onto the Iraq war emergency bill; passed a $7 billion farm bailout—without any offsets—that violates the majority’s own pay-as-you-go (PAYGO) rules by adding new mandatory spending;[1] and waived its own PAYGO rules in order to add new mandatory spending as part of a bill to expand the House of Representatives.[2] Coming on the heels of these initiatives, Congress’s irresponsible budget resolution is hardly a surprise.

President Bush has vowed to veto the Democratic budget.

New House Budget Means Higher Taxes

The Heritage Foundation has done an analysis of the new House Budget crafted by the Democratic majority in Washington and concluded that it means higher taxes across the board. Their reasoning:

The House leadership has proposed to increase spending over the next five years. Given the leader­ship's avowed commitment to paying for spending increases, tax revenues will have to rise. Which taxes will have to rise is unclear, as budget resolutions are notoriously short on details. However, the failure of House leaders to include any language addressing the expiring Bush tax cuts of 2001 through 2004 indicates that they could intend to end these tax cuts.[1] This, in turn, means that the House leadership could be allowing American taxpayers to assume a large and expensive tax increase upon the expiration of these tax cuts.

The House budget resolution has the potential to cost the average American taxpayer an additional $3,026 in taxes. In addition to the increased tax bur­den, Americans could also see their personal income decrease by an average of $502 dollars due to a weaker economy. Moreover, the budget resolution could dam­age employment growth, causing about one million fewer jobs to be created, and has the potential to damage economic output by over $100 billion nationally. The average cost of the House budget resolution to each congressional district amounts to the potential loss of 2,284 jobs that would have oth­erwise been created and a loss in economic output by an average $240 million.

The culprit for these negative impacts is higher taxes. Many economists believe that higher taxes, particularly on capital, cause the level of private investment to fall, thereby slowing productivity improvements and weakening the earning capac­ity of households. Wages and business earnings, which are closely tied to productivity, would fall as well.

Again, the budget resolution does not contain a detailed tax plan. However, the resolution also is silent on the most important tax policy change since 2001: the expiration of the tax law changes from 2001 through 2004 over the next four years. This paper presents estimates of the potential impact that allowing the Bush tax cuts to expire would have on Americans.[2]

Here's how--according to their calculations--Rhode Islanders would be affected:

Democrats Hiding Earmarks?

The new Democratic Congress really is changing the way things are done in Washington, aren't they? I'll leave it up to the reader to define "change" (h/t) in John Fund's story:

Democrats promised reform and instituted "a moratorium" on all earmarks until the system was cleaned up. Now the appropriations committees are privately accepting pork-barrel requests again. But curiously, the scorekeeper on earmarks, the Library of Congress's Congressional Research Service (CRS)--a publicly funded, nonpartisan federal agency--has suddenly announced it will no longer respond to requests from members of Congress on the size, number or background of earmarks. "They claim it'll be transparent, but they're taking away the very data that lets us know what's really happening," says Oklahoma Sen. Tom Coburn. "I'm convinced the appropriations committees are flexing their muscles with CRS."

Indeed, the shift in CRS policy represents a dramatic break with its 12-year practice of supplying members with earmark data. "CRS will no longer identify earmarks for individual programs, activities, entities, or individuals," stated a private Feb. 22 directive from CRS Director Daniel Mulhollan...The concern now is that free-spending appropriations committees will use the new CRS gag rule to define earmarks downward. "We need CRS to continue its reliable reporting so we can save the taxpayers money," says Sen. [James] DeMint...

...CRS is merely being asked to continue providing objective data. If it can't do that, why do taxpayers shell out $100 million a year to employ its 700 researchers?

Governor Carcieri's Budget: Early Reporting

The Governor has just releases his State budget proposal for next year. Scott Mayerowitz of the ProJo chose to highlight the "several accounting tricks, one-time sources of revenue and other gimmicks to balance his tax and spending plan," (sheesh, no in-story editorializing there, Scott) and glossed over one major source of cuts (state workers). Ray Henry of the AP (via the Boston Globe) was more detailed in explaining the nature of those cuts:

Hundreds of state workers would be laid off and social spending programs would be slashed to close a $350 million budget deficit under a budget proposal released Wednesday by Gov. Don Carcieri.

The Republican governor's $7.02 billion spending plan also taps into the state's rainy-day fund to help close the gap. But it avoids tax increases and pumps money into education initiatives backed by Carcieri, a former math teacher, including expanding nursing programs and modestly increasing education assistance for cities and towns.

"The decisions contained in this revenue and expenditure plan were not easy ones to make, but they were made with careful consideration for the best interests of all Rhode Islanders," Carcieri wrote in a letter to lawmakers.

His budget staff justified cutbacks by warning that expenditures were projected to grow 9 percent for the 2008 fiscal year starting in July. Revenue was only projected to increase around 4.3 percent. By law, Rhode Island must pass a balanced budget.

State workers are among the groups hit the hardest. Carcieri's plan calls for saving $9.8 million by firing 168 state workers, both unionized employees and management. Carcieri's plan would also privatize the food service and housekeeping staffs at a state hospital and veteran's home, eliminating an additional 214 workers.

All nonessential employees would have to take three unpaid days off scheduled around the Thanksgiving, Christmas and New Year's holidays, a move that he estimated would shave $4.8 million off the deficit...

And just like last year, the Governor is targeting both RIte Care and Child Care subsidies (I can hear the shrieking now).

As required by a new federal law, Rhode Island health officials will begin demanding more proof of U.S. citizenship, for example a birth certificate or passport, before allowing people to enroll in subsidized health care services.

Those changes could force an estimated 5,700 people off RIte Care, the state's insurance program for the needy, said Gary Alexander, the acting director of the Department of Human Services...

One of the larger social spending cuts would tighten the eligibility requirements for families that use state-subsidized child care programs, probably eliminating about 3,800 children from the program. Those children would largely come from families that already contribute some money toward their child care, Alexander said.

Of course, there's much more and a lot of it won't make many people happy. I don't like that the Governor has chosen to freeze the car-tax reduction, has proposed several fee hikes and I don't like the stop-gap measure of getting another tobacco settlement buyout. There's a lot to go over, and I'm sure we'll hear all sorts of whining from many quarters (including here). The lesson: don't spend more than you take in and you won't have to worry about "cuts." Now we ALL will have to make some sacrifices to pay for our fiscal largesse.

House Dems Like Earmark Reform. Senate Dems? Not so much...

Ah yes, see how much has changed! Looks like the House Democrats earmark reform bill is being supported by most Senate Republicans and a few Democrats....but the heartiest opposition is being put up by Sen. Majority Leader Harry Reid (via Glenn Reynolds). TPM Muckraker has one report and Andy Roth at the Club For Growth kept a running commentary on the goings on. Roth also posted a follow-up, which included this bit:

Senator Jim DeMint offered strong reform to the most egregious spending abuses in Congress-a proposal that was sponsored by Speaker Nancy Pelosi and that passed the House just last week. After trying, and failing, to kill the DeMint proposal, Senate Majority Leader Harry Reid, Senator Ted Kennedy and other Democrats used stall tactics to delay a final vote. Ultimately, the Senate was forced to postpone it.

I had heard that some local "new media" outlets sympathetic to the Democrats were starting up some countdown or something to track all of the "change" that was going to happen. (Funny, I checked them out and haven't seen anything about this yet. Maybe they'll get around to it. That is, of course, once they work out how to frame it as a positive for "their side.")

Which gives me an opportunity to offer a little advice for those new to the porkbusting/earmark reform movement in particular. You're either "all in" by going after anyone of either party who is a roadblock to said reform or you're not "in" at all. That means that you really, truly have to hold people accountable, even if, you know, you really, really like them, and all. So, yes, you actually have to put the pom-poms down every once in a while and throw a "boo" and "hiss" their way. Or you can just keep being a Party cheerleader.

Then, of course, maybe some Democrats supported earmark reform only because it was the GOP running Congress, right? Nah.....couldn't be that.

UPDATE: Looks like Senator Reid has acquiesced (via CFG quoting a Congressional Quarterly $$ article):

After losing a critical floor vote Thursday and scrambling in vain to reverse the decision, Senate Majority Leader Harry Reid, D-Nev., found the spirit of bipartisan compromise more to his liking Friday morning.

Reid offered an olive branch to Sen. Jim DeMint, R-S.C., agreeing to embrace his amendment to a pending ethics and lobbying overhaul (S 1) with some modifications. DeMint’s amendment, which Democratic leaders tried but failed to kill on Thursday, would expand the definition of member earmarks that would be subject to new disclosure rules.

[...] Reid admitted Friday that he was caught off guard when nine Democrats and independent Joseph I. Lieberman voted against his motion to table, or kill, the DeMint amendment. His effort failed, 46-51.

[...] Friday morning, a chastened Reid said, “Yesterday was a rather difficult day, as some days are. We tend to get in a hurry around here sometimes when we shouldn’t be. Personally, for the majority, we probably could have done a little better job.”

DeMint, who was flabbergasted Thursday by Reid’s maneuvering to change the outcome of the vote, was happy to accept the compromise Friday.

“DeMint has been happy to work to come to a bipartisan compromise that solidifies the reforms done by [Speaker Nancy] Pelosi [D-Calif.] and House Democrats,” said DeMint spokesman Wesley Denton.

Congrats to those on the left, right and center who held Reid's feet to the fire. Maybe next time, when such hypocrisy becomes readily apparent, even more folks from across the political spectrum will chime in!

The New Congress Encourages Automatic Tax Increases to Pay for Unlimited Spending Increases

The new Democratic-led Congress has passed so-called pay-as-you-go (PAYGO) rules that require new spending or new tax-cut legislation to be approved by a 3/5 majority, if the Federal budget deficit is projected to increase because of it. Pay-as-you-go, however, is a misnomer. The Federal budget will continue to increase on autopilot under the House’s version of PAYGO rules. The trick is hidden in the dense prose of this amendment to House rule XXI…

7. It shall not be in order to consider a concurrent resolution on the budget, or an amendment thereto, or a conference report thereon that contains reconciliation directives under section 310 of the Congressional Budget Act of 1974 that specify changes in law reducing the surplus or increasing the deficit for either the period comprising the current fiscal year and the five fiscal years beginning with the fiscal year that ends in the following calendar year or the period comprising the current fiscal year and the ten fiscal years beginning with the fiscal year that ends in the following calendar year.

The problem is that annual spending increases in programs like Social security, Medicare, and Medicaid -- the programs at the heart of the American fiscal crisis -- are approved in a concurrent resolution on the budget that does not make any “changes in law”. Amounts spent on these programs are determined by formulas written into already-passed laws. Entitlement spending will thus continue to grow without limit under PAYGO rules.

PAYGO is not about fiscal responsibility. It is about political cover, intended to allow Congressional Democrats (and the 48 Republicans who voted with them) to say they have no choice under House rules but to vote for individual pieces of legislation that increase taxes. Don’t believe it. Congress had a choice when it voted for PAYGO and it chose a fiscally profligate set of operating rules.

What could have been done instead? Well, if Congress was truly in a fiscally conservative mood, they could have done the obvious -- amend PAYGO to include automatic entitlement increases. Brian Riedl and Alison Acosta Fraser of the Heritage Foundation suggest this extension to PAYGO …

Congress would set multi-year spending targets for entitlement programs covered by PAYGO. If OMB projects that spending will exceed these targets, the president would have to submit reform proposals as part of the annual budget request, and Congress would have to act on those proposals. A similar trigger for Medicare spending was included in the 2003 Medicare prescription drug legislation, and expanding the concept could help Congress address current entitlement spending growth.

Finally, Mr. Riedl and Ms. Fraser also serve reminder that PAYGO-syle rules of any form can only go so far in promoting fiscal responsibility, because fiscal responsibility is more than reducing deficits; it is also choosing to control spending…

PAYGO also focuses on only the budget deficit, rather than the size of government. A strong PAYGO would ensure that new or expanded programs are balanced with other spending cuts or tax increases, but it would not prevent the government from taking a steadily larger share of citizens' paychecks. PAYGO would allow escalating entitlement program costs to push the size of the federal government to nearly 50 percent of GDP by 2050. PAYGO would also promote the expiration of all Bush tax cuts and force millions of Americans to pay the Alternative Minimum Tax. As a result, tax revenues would rise from the historical average of 18.3 percent of GDP to a record 23.7 percent by 2050.

Following-Up the Projo's Debate Follow-Up on Taxing and Spending

There are a few gaps that need to be filled in Mark Arsenault's Republican Senate debate follow-up article appearing in today's Projo. The article contrasts the positions of Senator Lincoln Chafee and Mayor Steve Laffey on the issues of taxes and spending.

1. Though Arsenault's description of the PAYGO rule supported by Senator Chafee regarding deficits is correct in a technical sense,

Chafee is a believer in "pay as you go," a philosophy from the 1990s that requires spending cuts or a new source of revenue to balance each tax cut or new spending program.

...Arsenault doesn't discuss PAYGO's ultimate ramification. The key word in Arsenault's description is "new". The authors of PAYGO were certain to exempt the growth of "old" spending -- spending on already existing entitlement programs that increases according to pre-determined formulas -- from any limitation. Here's how the exception appears in the text of the legislation...

(1) IN GENERAL -- It shall not be in order in the Senate to consider any direct spending or revenue legislation that would increase the on-budget deficit or cause an on-budget deficit for any 1 of the 3 applicable time periods as measured in paragraphs (5) and (6)...

(4) EXCLUSION.--For purposes of this subsection, the terms "direct-spending legislation'' and "revenue legislation'' do not include --
(A) any concurrent resolution on the budget

Since Congress' concurrent resolution on the budget is that the only place where spending on existing entitlements needs an annual approval, exempting the budget resolution from the PAYGO rule exempts entitlement growth from the PAYGO rule. And, as Isabel Sawhill of the Brookings Institution explains, entitlement programs are where our country's biggest spending problems are...

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.

Ultimately, the entitlements-exempt PAYGO rule favored by the Democrats and Senator Chafee becomes a way of forcing automatic tax-increases on the public. Here's Brian Riedl of the Heritage Foundation explaining how...

While PAYGO allows current entitlement programs to grow on autopilot, it would likely lead to the expiration of the current tax cuts. Merely retaining the tax relief that Americans now enjoy would, under PAYGO, require 60 votes in the Senate and a waiver in the House. To avoid this supermajority requirement, lawmakers seeking to prevent tax increases would have to either: A) raise other taxes; or B) reduce mandatory spending by a larger amount than has ever been enacted. Option A is still a net tax increase (raising one tax to avoid raising another), and Option B is probably politically unrealistic.

Senator Chafee tries to define his position on taxes and spending, which presumably includes PAYGO, as that of a traditional conservative Republican...

Chafee says that, while opposing the big tax cuts, he also voted against major spending items, such as the Medicare prescription drug benefit, which he says is too expensive. "I'm a very traditional conservative Republican on taxes and spending," he said.

But it is difficult to accept this statement as meaningful when the Senator supports a program that seeks to turn the Federal Government into an entitlement machine paid for through automatic yearly tax-increases.

2. Arsenault devotes only a single to line Mayor Laffey's proposal for tax simplification...

He also proposes rewriting and simplifying the tax code,

...presenting tax-simplification as if it were an add-on to the the Mayor's fiscal proposals, when it is actually a starting point. Mayor Laffey argues that simplifiying the tax code will reduce the power of lobbyists and the associated corruption they can bring. He is far from alone in arguing this (Mickey Kaus provided one of the best explanations I can remember seeing, but I can't locate the exact quote). The essential argument is that the influence of K-Street lobbyists in Washington is rooted in their knowledge of and their ability to manipulate an arcane tax code; simplify the tax-code, and corporate and industrial-sector lobbyists will become no more or less influential than Sierra Club-type lobbyists.

Unfortunately, since Arsenault relegates tax-simplification to a sidebar, we never learn Senator Chafee's position on tax simplification, nor any arguments for or against the idea. Do politicians unwilling to pursue tax-simplification take that position because they believe that tax-simplification does not matter, because they believe a complex tax-code is an inherently good thing, or because they are simply unwilling to challenge the existing network of lobbyists on this issue?