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Fiscal policy is out of control. Programs, such as Social Security and Medicare, have design features that push up spending faster than the growth of revenues. It is time to change the course of the automatic pilot driving these programs. To do so, policymakers can develop “triggers” that automatically curb spending. Triggers will level the playing field between programs that have large automatic growth and those where growth or even maintenance of effort cannot be obtained without new legislation. The paper examines triggers employed to reform Social Security in other advanced democracies and explores design options for an optimal trigger.
Fiscal policy is simply out of control. It’s not the deficit per se, however—we have had deficits before. Usually, they could be easily contained in subsequent years simply by allowing revenues to grow as the economy expanded while enacting only small or no increases in appropriations for discretionary programs, most of which were newly funded every year. But discretionary programs now constitute less than 40 percent of spending, whereas they were almost 70 percent of spending in 1962. In fiscal year 2006, mandatory spending and interest made up 62 percent of spending.
Spending in these mandatory programs rests on contractual obligations to make payments and to pay benefits to eligible recipients, whose benefits and conditions for eligibility are defined by law. Consequently, spending is on automatic pilot unless Congress takes active steps to change the law.
Although mandatory spending may occupy a large portion of the current budget, it would represent less of a problem were it not for another issue. Existing law implies that this spending, particularly in some very large programs, will continually grow faster than tax revenues—and the economy. Much has been promised for far into the future. Because it is so difficult politically to take back past promises—even for benefit levels not yet attained by current recipients—policymakers find it almost impossible to control the future direction of policy. Past decisions have committed so many resources that legislators are limited in their ability to allocate resources to meet the current needs of society, and it has become extremely hard to satisfy the new wants of voters. New presidents with mandates for change, for instance, now come into power with much less discretionary power than their predecessors.
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