Bloomberg News

Evolution of Ryan Budgets Steers Fiscal Complexity: BGOV Insight

August 12, 2012

Before Paul Ryan became a household name this weekend as Mitt Romney’s running mate, the Wisconsin congressman and chairman of the House Budget Committee was a fixture of the Republican policy world. Bloomberg Government looks back at Ryan’s budget proposals.

Medicare and Medicaid

The focus of Ryan’s budget proposals, and the parts that have gained the most attention, are his ideas for reducing federal spending on Medicare, the health-care program for the elderly, and Medicaid, the program for poor.

Medicare is the larger of the two and more politically sensitive. Americans above the age of 65 are more likely to vote than their younger compatriots, and they are more likely to vote Republican.

In 2010, when Ryan was still the ranking minority member of the Budget Committee in the Democratic-controlled House, he released a budget proposal, “Roadmap for America’s Future,” that called for replacing Medicare with vouchers starting in 2020. Under his proposal, those who entered the program before then would see no change in their benefits; those who entered after would receive vouchers for buying private insurance.

Ryan’s voucher proposal would lead to slower growth in federal Medicare spending because the value of the voucher would grow more slowly than current projections for the program. In his 2010 budget, Ryan proposed increasing the voucher at a rate halfway between the consumer price index, which measures general inflation, and the price index for medical care. The Congressional Budget Office estimated the voucher would grow at 2.7 percent each year, compared with 5 percent growth in national health-care spending under then-current law.

The Medicare voucher proposal was greeted with skepticism, but rather than pull back, Ryan released an even more aggressive proposal the following year, when Republicans took control of the House and he became chairman of the Budget Committee. In his 2011 budget, Ryan proposed vouchers that would increase at a rate equal to the consumer price index alone -- a rate significantly lower than projected growth in medical costs.

To alleviate concerns that his plan would hit poorer seniors hardest, Ryan included a proposal to “means-test” the vouchers, giving less money to wealthier beneficiaries. A Bloomberg Government Study found that the effect of the means- testing proposal would be modest, saving the federal government 4.4 percent of what vouchers would have cost otherwise.

In his latest budget, released earlier this year, Ryan gave future Medicare beneficiaries the choice of staying on the current, government-run program, or instead receiving vouchers to buy private insurance. There was one catch: If competition failed to reduce cost growth, this plan would impose a hard cap on the federal government’s contribution. That cap would be equal to nominal growth in gross domestic product, plus 0.5 percentage point.

By excluding those 55 and older from any reduction in Medicare benefits, Ryan’s new plan wouldn’t save as much money. He looked instead for the health-care savings from Medicaid, a program run by state governments that are reimbursed by the federal government for 50 percent to 83 percent of their costs, depending on each state’s wealth. As with Medicare, the cost of Medicaid is driven in part by increases in the cost of medical care, causing spending on the program to grow faster than inflation.

Ryan proposes converting federal spending on Medicaid into a block grant, in which the federal government gives states a payment each year, which they could use as they see fit. The value of those payments would grow more slowly than the current program. Unlike Medicare, there would be no exclusion for current beneficiaries. A Bloomberg Government Study examined the finer distinctions among various types of Medicaid block-grant proposals.

Social Security

Ryan’s willingness to overhaul mandatory spending programs once extended to Social Security, the largest such program. In his 2010 budget proposal, the last before Ryan became House Budget chairman, he called for reduced payments for those who turn 65 starting in 10 years. His proposal also included individual Social Security investment accounts, with the government guaranteeing a rate of return at least equal to inflation.

Once Republicans won the House, Ryan’s budgets stopped advocating for changes to Social Security. His 2011 budget called simply for Congress to “move the conversation to solutions to save Social Security,” without saying what those solutions ought to be. This year’s budget proposal neglected to mention Social Security at all.

Defense

A consistent theme in Ryan’s budgets has been scant attention to defense spending. In his 2010 budget proposal, Ryan made no mention of defense cuts, except to cite former Comptroller General David M. Walker’s quote that “cutting way back on defense will not solve the problem” of rising deficits.

After becoming Budget chairman, Ryan’s first plan called for implementing $178 billion in cuts proposed by then-Defense Secretary Robert Gates. Only $78 billion would go toward deficit reduction; $100 billion would go back to the department, “reinvested in higher priority combat capabilities.”

“Responsible budgeting must never lose sight of the fact that the first responsibility of the federal government is to provide for the defense of the nation,” Ryan wrote in that 2011 budget.

By this year, Ryan had dropped even that modest call for defense cuts. His 2012 budget contained much discussion of defense spending, but no proposals for reducing it. Instead, the budget called for reversing the cuts included under the so- called sequestration process set to begin in 2013 -- cuts that were triggered when last summer’s “supercommittee” failed to agree on how to reduce the deficit.

Other Spending

Much of Ryan’s projected reductions to federal spending would come from what’s known as non-defense discretionary funding -- a category that encompasses much of the vast range of what Washington does, from cancer research to education funding to air traffic control.

By leaving defense cuts off the table, backing away from Social Security cuts, and limiting Medicare reductions to those who won’t join the program for 10 years, Ryan has ensured that any significant drop in federal spending must rely heavily on discretionary spending.

That calculation can be seen in Ryan’s proposals. His 2010 budget called for freezing non-defense discretionary spending for 10 years at its pre-stimulus 2009 level -- and in nominal terms, meaning that spending wouldn’t increase with inflation. As a result, what was technically a freeze would have led to significant cuts, as prices increased and the population grew. Ryan’s latest budget called for replacing the $1.2 trillion in cuts under the sequestration process -- half from the defense budget, the other half mostly from discretionary spending --with $261 billion in cuts over 10 years.

Fiscal Policy

Not all of Ryan’s cuts would go toward deficit reduction. His latest budget called for reducing the corporate tax rate to 25 percent from 35 percent; consolidating the six current brackets of personal income tax into just two, at 10 percent and 25 percent; and making permanent the 2001 and 2003 tax cuts signed by President George W. Bush.

For more on Ryan’s latest tax proposals, see Bloomberg Government’s Fact Sheet.

Ryan’s 2011 budget would have led to lower debt than the president’s plan, according to a Bloomberg Government Study. However, the difference was small, and Ryan’s plan would still have left the country with a debt-to-GDP ratio above 60 percent, the international standard for fiscal responsibility.

Ryan’s 2011 budget would have left the publicly held debt at 65.4 percent of gross domestic product in 2020, Bloomberg Government found. By comparison, Obama’s 2011 budget would have led to a debt-to-GDP ratio of 68.7 percent.

The study concluded that, while both plans’ cuts had been criticized, “even bolder measures will be needed” to bring U.S. debt down to an acceptable level.

(Christopher Flavelle is a health-care analyst for Bloomberg Government. The views expressed are his own.)

To contact the analyst: Christopher Flavelle in Washington at cflavelle@bloomberg.net

To contact the editor responsible: Kenneth Sands at kjsands@bloomberg.net


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