Arguably the best single measure for assessing recent labor market trends is the employment-to-population ratio of 25-54-year-olds, which is simply the share of the 25-54 population that has a job. The restricted age range—25-54-year-olds, or people of “prime working age”—helps insure that trends are not being driven by retiring baby-boomers or increasing college enrollment of young people, but are instead caused purely by changes in job opportunities.

As the figure shows, the share of employed workers 25-54 plunged dramatically from the start of the Great Recession through the fourth quarter of 2009, and then, for nearly two years, essentially bumped around at the bottom of that extremely deep hole. Since the fall of last year, the ratio has just begun to show signs of improvement.

This means that the improvement in the unemployment rate, from 10.0 percent in Oct. 2009 to 8.1 percent in April 2012, has largely been due to people dropping out of, or not entering, the labor force—not to a larger share of potential workers finding work. This also means that while expansionary policies to generate demand are urgently needed and will help spur job growth, they may also generate upward pressure on the unemployment rate as these missing workers begin to enter or reenter the labor market. That kind of upward pressure on the unemployment rate would be a positive sign.

In the eyes of most of the world and in our own, to be an American is to be an optimist—entrepreneurial, positive-thinking, and future-oriented. It is not surprising, then, that our politics has not come to grips with the question of national decline. Yes, our governing elites have long debated America’s power in the world and whether it’s eroding. But about the future of Americans, as opposed to the future of the geopolitical hegemon, America,our most important politicians and pundits have much less to say. Despite the bitter public arguments over tax and budget policies, they share the implicit assumption that even harder times are ahead for the majority of Americans—if not 99 percent then at least 75 percent to 80 percent. But doom and gloom does not play well in American politics. So, whenever our policymakers cannot avoid the word “sacrifice,” it is gingerly presented as a temporary inconvenience, to someone other than the listener, necessary to rebalance the government’s books and return us to pre-crash prosperity in some unspecified, but surely near-term, future.

The evidence in front of our eyes is that on our current economic trajectory, the American middle class is headed for a further fall in its living standards, and the probability that the country’s two-party governing class will change course is close to zero.

The conventional chatter from the nation’s punditry declares that Washington has been made “dysfunctional” by excessive partisanship and incivility. A day does not go by without prominent editorialists, talking heads, and bloggers calling for Democrats and Republicans to come together in a “grand bargain” over budget policy. Yet from the point of view of its most influential clients, Washington is actually functioning quite well. Indeed, the most important grand bargain has already been consummated.

After three decades of policies that have undermined the country’s global competitiveness and the bargaining position of its workers, the United States economy can no longer provide the means to support its three most politically important American dreams: Wall Street’s dream of subsidized limitless profits; the military-industrial complex’s dream of global supremacy; and the middle class’s dream of rising incomes.

One out of three? Certainly. Two out of three? Perhaps. All three? No way.

The deal is done. The middle class will be sacrificed. The partisan disagreement is now over the details: how much pain there will be and how fast it will come.

The deal was not negotiated in some smoke-filled back room. It is the accumulation of decisions made and not made since 1981, when the Age of Ronald Reagan replaced the Age of Franklin Roosevelt. The 1970s had brought the first signs that America’s post–World War II global economic dominance was shrinking—an oil-price crisis and the appearance of our now-chronic trade deficit. One response was Jimmy Carter’s plan to wean us from dependence on imported oil. Another was a call by prominent business and political figures for a government-led strategy to respond to rising competition from a recovering Europe and Japan. But these efforts stopped dead with Reagan’s election; our collective economic future would be left to the market.

We remain in Reagan’s shadow. As Republicans Dwight Eisenhower and Richard Nixon governed within the New Deal framework established by FDR, so Democrats Bill Clinton and Barack Obama have governed within Reagan’s vision of a deregulated and privatized America. As the upbeat Reagan demonstrated in his victory over the dour Carter, placing ourselves at the mercy of inherently unstable global markets requires even more optimistic faith in Americans’ privileged destiny. The point was not lost on the Democrats: Clinton proclaimed that he was the “man from Hope”; Obama, that he had the “Audacity of Hope.”

Appropriate enough to an era brought to us from Hollywood, the economy enjoyed 30 years of illusionary prosperity. In 2007, the year before the financial crash, a typical worker was making roughly the same hourly earnings—adjusted for inflation—that his or her counterpart had been making in 1979. Yet over those three decades, Americans bought more and bigger houses, crowded into shopping centers, paid for college educations, and retired better off than their parents. They did it in two ways. First, families responded in the 1980s by sending more people—typically wives—to work. Second, they borrowed, almost doubling the amount of consumer debt relative to income over three decades—with money lent to our banks by the Chinese.

Both of these financial cushions have deflated. There are now as many women in the workforce as men, and some 70 percent of married women with children have a job. The credit crash, which left millions bankrupt and insolvent, demonstrated that spending more than you are earning is not sustainable. So, unless a resurgence of real wages occurs over the next decade or so, most American families will be less able to maintain a middle-class income.

In his first few months as president, Barack Obama defined the central question. Borrowing a metaphor from the Sermon on the Mount, he told Americans, “We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock … a foundation that will move us from an era of borrow and spend to one where we save and invest, where we consume less at home and send more exports abroad.”

Rebuilding our economic foundation is no easy task. But neither is it beyond our technical capacity. For years now, center-left economists have been piling up various plans for a “high road” strategy toward raising future living standards. Progressives may differ over the precise blueprint, but the main elements are clear. They include massive investment in infrastructure, education, and research; trade, tax, and regulatory policies to support domestic production; a universal, efficient health-care system; incentives for corporations to pursue longer-term investment horizons; restored collective-bargaining rights; and a large and sustained increase in the minimum wage. The problem, as these plans and manifestos typically conclude, is not in the economics but in the politics.

The financial crisis was thus a historic opportunity: We could pump up the economy today with massive government investments that would renew America’s competitiveness tomorrow. As we know, the opportunity was blown. Three years later, the economy remains stuck on the sandpile. Indeed, it has arguably sunk deeper.

Wall Street, which drove us over the cliff by systematically diverting the nation’s capital from long-term productive investment to its own speculative excesses—in which the “future” can now be defined in a nanosecond—remains untamed. Profits and bonuses in the financial sector have roared back thanks to the munificent government bailout and continued interest-rate subsidies. Bankers and brokers are busily exploiting the regulatory loopholes that their lobbyists drilled into the Dodd-Frank reform law. As their financial power has become more concentrated, the assumption that the largest are too big for the government to let them fail is even more enshrined.

Nor have the trade policies that have systematically undermined American competitiveness since the 1980s changed. Just as Bill Clinton drove the Reagan/George H.W. Bush trade agenda through Congress, so Obama collaborated with Republicans to pass George W. Bush’s trade deals with Korea, Panama, and Colombia and is now promoting a similar pact with at least eight more nations of the Pacific Rim. After each trade agreement, imports have risen faster than exports, cutting jobs and putting downward pressure on wages. First the lower-paid work—clothing, shoes, and toys—was offshored. Then the high-paid factory jobs—autos, steel, electronics. Then the call centers and computerized services jobs. Then engineering and systems design. Now accountant, research, and legal work are moving out. In response, for all but the most talented and well-connected, workers at virtually every level are taking lower salaries and accepting less job security and deteriorated working conditions.

Not to worry, replies the governing class. We are, it is claimed, on the cusp of a revival in American manufacturing. General Electric, for example, recently brought back the production of a water heater from China to a facility in Kentucky. Missing from the press release is the fact that the GE workers who used to make $22 an hour now make $13 an hour. American workers have only one option for meeting the competition: reduced wages.

Yet the happy face remains. Like George W. Bush and Bill Clinton before him, Barack Obama tells us that Americans will somehow become smarter than everyone else. Last year he pledged that by 2020, the United States would have the highest proportion of college graduates in the world. “That’s our goal,” he announced in a Miami high-school auditorium. “That’s how we’ll out-educate other countries. That’s how we’ll out-compete with other countries tomorrow. That’s how we’ll win the future for the United States of America.”

Little evidence exists, however, that inadequate education and training are primarily responsible for stagnant wages. Even if you believe that, the proposition that we will solve the problem for the future by sending more kids to college is not credible.

As Obama spoke, we ranked 12th among advanced nations in the share of younger workers with a two-year associate degree or better. As for the next generation, public universities and community colleges have been in a free fall of shrinking departments and cutting programs since the onslaught of the Great Recession. Primary and secondary schools have been shutting down, teachers laid off, classrooms overcrowded, and school years shortened. To top it off, the education system is engulfed in a civil war over privatization, whose champions include Obama’s own education secretary.

The central problem is not an inadequate supply of educated workers; it is inadequate demand. The Bureau of Labor Statistics now projects that of the ten occupational groups that will add the most jobs between 2010 and 2020, five do not even require a high-school education. Three require high school, and one category requires a two-year associate degree. The tenth, Educational, Training and Library Jobs, requires a doctorate or a professional degree but is largely in sectors that depend on government funds; as a result, it is much less likely to be a major source of growth in an age of public-sector austerity.

As economist and former Federal Reserve Vice Chairman Alan Blinder—himself a free-trader—acknowledged six years ago, globalization is leaving American workers to compete in “personal service” jobs that require human contact and thus cannot be offshored. These include jobs like housecleaning, sports trainers, massage therapists, and pet handlers. An economy dominated by personal services is an economy of low productivity and therefore low wages.

Even with optimistic assumptions—unemployment reduced, Europe recovered, no new war—most Americans will have to sell their labor for less, whether they are industrial or service workers. The political mantra of both Obama and Mitt Romney is “jobs, jobs, jobs,” but the subtext is “lower wages, lower wages, lower wages.”

Whatever your view of the president (is he a compromising wimp? A closet conservative? A brave liberal mauled by a vicious GOP political mob?), he was arguably the best that the political system could have produced in its hour of crisis. The Republican candidates were in way over their head. The only alternative, Hillary Clinton, would have hired the same Wall Street economic advisers from the Bill Clinton administration. So the important lesson of the last three and a half years is not about Obama; it is about the narrow and corrupted values that prevent our politics from grappling with the reality facing the average American.

Rebuilding our economic foundation to support a brighter future for the average American is beyond the capacity of our political class. The problem is not just Tea Party reactionaries or business conservatives but liberal Democrats as well. “It is clear we must enter an era of austerity,” said Nancy Pelosi last July when she agreed to support Senate Majority Leader Harry Reid’s budget proposal for deep spending cuts and no tax increases.

In effect, Democrats have trapped themselves into accepting the Republican view that deficits are the cause, rather than the result, of the slowdown in incomes. Grappling with the roots of our crisis—financial speculation, offshoring, a deteriorated infrastructure, the bloated health-care system—has been excluded from the economic-policy debate. Decisions about the future are now centered on how to cut the deficit. Given an economy plagued by anemic spending growth, this will make our sick economy sicker.

In our economic-policy calendar, the future is next December. As per the agreement after the breakdown in budget talks last summer, Republicans and Democrats will have to negotiate some new combination of less spending and higher taxes over the next ten years or accept $1.2 trillion of automatic across-the-board cuts. The two parties’ budget negotiators insist that everything is on the table. For liberals, “everything” means military spending.

Many areas could be sharp-penciled out in that budget, but the fact that the Pentagon has never allowed a comprehensive audit of its books suggests that the chances are slim. The left wing of the Democratic Party and the libertarian right of the Republican Party may dissent, but the vast majority, and certainly the most influential, of the country’s politicians and pundits insist on maintaining a large, aggressive military presence around the world. Until that changes, no meaningful budgetary relief will come from the Pentagon.

The debacles in Afghanistan and Iraq have not led to a serious rethinking of the country’s role in the world any more than the debacles of the financial crash have led to a rethinking of Wall Street’s role in the economy. Nor, despite the predictable election-year return of populism, have three and a half years of high unemployment and shrinking incomes led the leadership of the Democratic Party to rethink its policies of accommodating both Wall Street and the Pentagon. In the absence of a fundamental shift in strategy, we are left with … hope.

The country’s policy intelligentsia tells us that the future will be more or less like the past. The economic forecasts of the Congressional Budget Office routinely predict a recovery based on the assumptions that the U.S. economy in the 2010s will resemble the economy of the 1980s or 1990s. The Budget Office is silent on the question of wages. The economist Robert Hall summarized the catechism: “In America, the bet is still that we will somehow find ways to get people spending and investing again.”

Somehow something will come up. Perhaps Apple will invent a device that can only be made in America, or CEOs will stop resisting labor unions, or the Chinese will decide to finance our trade deficits forever. Perhaps. But one thing is clear: There is no plan to reverse the middle-class slide.

The briefing paper begins by exploring the effects of the ongoing increase in the full retirement age from age 65 to 67 and examines when workers actually apply for Social Security benefits and retire. It then presents arguments in support of raising the retirement age, and considers demographic and economic trends that tend to undercut these arguments. It follows this with an analysis of the barriers to continued employment confronting older Americans, including poor health, physically demanding jobs and/or jobs with difficult working conditions, uncertain employment prospects, and caregiving responsibilities. It concludes by explaining why hardship exemptions are unlikely to shield vulnerable workers from the negative consequences of raising the retirement age.

Summary of findings

Continuing to work is not an easy option for older workers, many of whom have difficult jobs or retire sooner than planned due to job loss, illness, or the need to care for a sick family member:

• Poor health remains a significant barrier to continued employment for older Americans. Roughly 20–30 percent of Americans in their 60s have a health problem that limits their ability to work or to perform basic physical tasks.
• Many older workers continue to work in physically demanding or difficult jobs. According to recent studies, 45 percent of workers age 62 to 69 have physically demanding jobs or work under difficult conditions, and an even greater share have jobs that require at least sporadic physical effort.
• An estimated 20 percent of older adults provide unpaid care to a frail senior or other adult, according to one study.
• The argument that most workers can offset cuts by working longer assumes there are jobs for these additional older workers, including those who are laid off or otherwise find themselves unemployed. Returning to work is a particular challenge for unemployed older workers, who are likely to be out of work longer than prime-age workers and to experience larger pay cuts if they manage to find jobs.
• About 40 percent of workers retire earlier than planned due to poor health, caregiving responsibilities, job loss, or similar reasons.

Proponents also assert that hardship exemptions can be put in place to protect vulnerable workers. However, past experience and the nation’s current contentious political environment do not support the claim that effective hardship exemptions, even if theoretically possible, are politically feasible:

• Previous studies using restrictive definitions have found that 1 in 10 older workers would be at risk of facing hardship from an increase in the retirement age. This briefing paper estimates that the share at risk would probably be closer to 1 in 2 older workers.
• Offsetting the impact of retirement age increases with hardship exemptions, if done properly, would be expensive, and much or perhaps all of the potential savings to Social Security from raising the retirement age would evaporate.
• Nothing has been done to offset hardships arising from retirement age increases enacted in 1983. At that time, Congress charged the Social Security Administration (SSA) with studying what would happen if the full retirement age increased above 65. Though SSA concluded that a significant problem would exist—finding about 30 percent of new retirees to be at risk—no legislative efforts ensued.

Effects of the ongoing increase in the full retirement age from 65 to 67

The 1983 amendments to the Social Security Act legislated a gradual increase in the full retirement age, from age 65 for workers born in 1937 or earlier, to 66 for those born from 1943 to 1954, and to 67 for those born in 1960 or later. (In the intervening years—1938 through 1942, and 1955 through 1959—the retirement age increases by two months per year.) These increases amount to a roughly 7 percent benefit cut for persons born from 1943 to 1954, and a 13 percent cut for those born in 1960 or later.¹

As the full retirement age² increases, workers covered under Social Security can still accept retired worker benefits at any age from age 62 onward, though their benefits will be smaller if they accept them before the full retirement age. For example, for workers first receiving benefits when they turn 62:

• Those starting their benefits in 1999 (with a full retirement age of 65) received 80 percent of the full benefit.
• Those starting their benefits in 2005 (with a full retirement age of 66) received 75 percent of the full benefit.
• Those starting their benefits in 2022 (with a full retirement age of 67) will receive 70 percent of the full benefit.

In the same vein, workers who apply for benefits at age 65 receive a benefit that is roughly 93 percent of the full benefit, now that the full retirement age has increased from 65 to 66. When the full retirement age increases to 67, those who apply at age 65 will receive a benefit equal to roughly 87 percent of the full benefit (SSA 2010).

When do workers actually apply for benefits and retire?

For the past three decades, the vast majority of applicants for retired worker benefits have applied prior to the full retirement age and, as a result, have accepted permanent reductions in their Social Security benefits. According to the authors’ analysis of SSA data (2012a), in 2010 nearly three-fourths (72 percent) of new beneficiaries, or roughly 1.9 million out of 2.6 million persons, accepted retired worker benefits before the full retirement age, and nearly half (46 percent) accepted retired worker benefits at the earliest eligibility age of 62.

Not all of the workers claiming retirement benefits before the full retirement age, however, are retiring completely from work. Many people use retirement benefits to supplement income from a full- or part-time job and therefore are not “retired” in the conventional sense. The average retirement age—the age when half of nondisabled workers have left the labor force—is now 65.5 (Morrissey 2011b). Both the “official” full retirement age of 66 and the effective retirement age of 65.5 are already higher than the average retirement age in Canada and most of Western Europe (OECD 2011).

Current proposals to further raise the retirement age

Although the retirement age changes enacted in 1983 will not be fully implemented until 2027, proposals to raise the Social Security retirement age even further are squarely on the public agenda. Most prominently, the co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform, Erskine Bowles and Alan Simpson, called for indexing the full retirement age to longevity gains once the increase to age 67 is fully phased in; this change would fix the ratio of work years to retirement years (National Commission on Fiscal Responsibility and Reform 2010). As a result, the full retirement age would reach 69 by around 2070 (Ruffing and Van de Water 2011). A Bipartisan Study Center task force headed by former Senator Pete Domenici and former Federal Reserve Vice Chair Alice Rivlin made a similar recommendation (Bipartisan Policy Center 2010).³

A number of policymakers and would-be policymakers, including presidential candidate Mitt Romney, House Speaker John Boehner, House Budget Committee Chairman Paul Ryan, and Senators Tom Carper, Dick Durbin, Diane Feinstein, Joe Lieberman, Lindsey Graham, Kay Bailey Hutchison, Mike Lee, and Rand Paul, have weighed in supporting retirement age increases (Strengthen Social Security 2012; Wereschagin and Zito 2010; Goss 2008; Bolton 2011; Durbin 2010; Goss, Wade, and Chaplain 2011). Senators Graham, Paul, and Lee proposed raising the full retirement age to 70 by 2032 and then indexing it to longevity, a move that would cut benefits 29 percent by 2080 (Goss, Wade, and Chaplain 2011).

Arguments in support of increasing the full retirement age

Proponents of increasing the full retirement age maintain that it is a practical and fair way to improve Social Security’s financing. They argue that retirement age increases are warranted by past and projected increases in life expectancies at older ages, improved health of the older population, a decline in the share of jobs requiring physical labor, and the need to reduce the federal deficit or address projected financial shortfalls in Social Security (American Academy of Actuaries 2010; National Commission on Fiscal Responsibility and Reform 2010; Committee for a Responsible Federal Budget 2010; Gale 2010; Johnson 2011; Rivlin and Kingdon 2008; also see discussion in Ghilarducci 2008). Some proponents also argue that raising the full retirement age may actually improve the overall economic circumstances of some older persons, despite the fact that it is equivalent to an across-the-board cut in benefits (Butrica, Smith, and Steuerle 2006).⁴

The focus on longevity gains is misplaced, since these account for only one-fifth of Social Security’s projected shortfall. The main causes, rather, are slow and unequal wage growth and a decline in fertility (Morrissey 2011b). Moreover, economic growth has always far outpaced increases in life expectancy and is projected to do so in the future.

As this briefing paper will outline in greater detail, while we may be healthier and have less physically demanding jobs than in the early years of Social Security, it does not follow that an insignificant number of people would be harmed by an increase in the retirement age. Furthermore, those who face hardship include not just older workers in poor health or with physically demanding jobs (a group that, while not as large as it used to be, is still sizable), but also those who lose their jobs late in life or retire to take care of ailing family members.

Workers with health problems and limited employment opportunities would be especially hard hit, as would low-income and minority workers. These workers are generally less able to offset cuts by working longer and also tend to be more financially dependent on Social Security (Haveman et al. 2003; Haverstick et al. 2008; Kingson and Brown 2009; Leonesio, Vaughan, and Wixon 2000; Munnell et al. 2007; Turner 2007a).

Moreover, Americans are already working longer to afford retirement, as all three legs of the proverbial retirement stool—Social Security, pensions, and savings—are getting weaker. The Center for Retirement Research at Boston College has conservatively estimated that Social Security cuts implemented in 1983, the shift from secure pensions to inadequate and risky 401(k)s, and the bursting of the stock and housing bubbles have left more than half of households at risk of a significant drop in living standards at retirement (Munnell, Webb, and Golub-Sass 2009). Thus, despite the weak economy, the labor force participation rate of workers age 55 and older is the highest in over half a century (according to the authors’ analysis of basic monthly Current Population Survey microdata).

Demographic and economic trends

Life expectancy at age 65 has increased by about six years over the past seven decades. A man who turned 65 in 2010 could expect to live 18.6 more years, compared with 12.7 years for his counterpart in 1940. A woman who turned 65 in 2010 could expect to live 20.7 more years, compared with 14.7 in 1940 (SSA 2012c). Growth in life expectancy at age 65 appears to have slowed somewhat. It is projected to increase by around four more years over the next 75 years, to 23.0 for men and 24.6 for women. To put this in perspective, real wages are projected to grow five times as fast as life expectancy at age 65 over the same period, according to the authors’ analysis of SSA data (2012b). Thus, we could afford to increase contributions to pay for longer retirements.

The increase in life expectancy in retirement is often presented as an unsustainable trend in which active workers support an ever-growing number of retirees. However, for much of Social Security’s history, increases in life expectancy at age 65 were offset by other factors that stabilized the ratio of covered workers to beneficiaries at around 3-to-1. These factors included an increase in life expectancy during prime working years, an expansion in coverage, and an influx of women and immigrants into the workforce (Morrissey and Garr 2009; Morrissey 2011a). And costs are not rising inexorably over the next 75 years, as would be the case if life expectancy were the driving force behind projected shortfalls. Costs are projected to increase from 5.1 percent of GDP in 2012 to 6.4 percent over the next quarter century before declining to around 6.1 percent at the end of the 75-year projection period (SSA 2012b).

Though the worker-to-beneficiary ratio is projected to drop sharply over the next two decades before stabilizing at around 2-to-1, the main cause of this decline is not rising life expectancy, but rather a decline in the birth rate (Goss 2010a).⁵ This fact is often misunderstood or misrepresented. For example, a recent Congressional Budget Office report supporting an increase in the Social Security retirement age notes that the aging of the population “stems both from increases in life expectancy and from past declines in fertility,” before focusing almost exclusively on life expectancy (CBO 2012).

The decline in fertility has implications in terms of policy prescriptions for Social Security as well as broader issues relating to future living standards and the affordability of government programs. As Social Security Chief Actuary Stephen Goss remarked, “Because the large shift in the cost of OASDI [Old-Age, Survivors, and Disability Insurance program] over the next 20 years is not due to increasing life expectancy, it is not clear that increasing the NRA [normal retirement age] should be the principal approach for restoring long-term solvency” (Goss 2010a).

While elderly households are the largest beneficiaries of federal expenditures, children are also major beneficiaries of government programs, especially at the state and local level.⁶ While the total dependency ratio—the ratio of the population under age 20 or over age 64 to the working-age population—is projected to rise over the next 75 years, it will remain below its peak in the 1960s, when the large baby boom generation was young (SSA 2012b). Indeed, the projected increase in Social Security costs between now and 2035 is smaller than the growth in spending for public education that occurred when the boomers were children (Gregory 2010), and this increase in funding did not hinder economic growth at the time or result in major budget deficits. In other words, it is easy to construct narrow demographic arguments for or against public policy initiatives if one is willing to ignore other critical factors, such as, in the case of Social Security, productivity and wage growth, labor force participation, and immigration.

A number of studies have documented a growing gap in life expectancy by socioeconomic status, with most of the gains in life expectancy in recent decades going to higher-income and better-educated workers (see Morrissey 2011a for a partial list). For example, the Social Security Administration has found that between 1982 and 2006, life expectancy at age 65 increased by one year for men in the lower half of the earnings distribution and five years for men in the upper half. In 2006, men in the lower half of the earnings distribution had not even caught up to where upper-income men were in 1982 (Waldron 2007). Groups that have seen little or no increase in life expectancy will see a decline in lifetime benefits as the retirement age increases. Since these groups also depend on Social Security the most, they will be hardest hit by the reduction in monthly benefits.

Barriers to continued employment faced by older Americans

Continuing to work is not an easy option for older workers due to several factors—namely, the poor health of many older Americans, the incidence of physically demanding jobs and/or jobs with difficult working conditions, uncertain employment prospects, and caregiving responsibilities.

The health of older workers

It might be reasonable to think that the increased life expectancy at retirement previously discussed means that the older population is getting healthier. However, some of the increase in life expectancy is due to medical advances that extend the lives of sick people. Behavioral and environmental trends also have had mixed effects on life expectancy—for example, smoking has declined, but obesity is on the rise. Nevertheless, it appears that health has improved modestly for older Americans since the 1980s, though these improvements may have stalled in recent years (Munnell and Libby 2007; Munnell and Sass 2008; Johnson 2010).

Despite these advances, poor health remains a significant barrier to continued employment for older Americans. Several studies have found that roughly 20–30 percent of Americans in their 60s have a health problem limiting their ability to work or to perform basic physical tasks:

• According to the authors’ analysis of King et al. 2010, Current Population Survey data from the U.S. Census Bureau show that 18 percent of 62- to 69-year-olds had a work disability in 2010.
• National Health Interview Survey data from the Centers for Disease Control and Prevention indicate that in 2009, 19 percent of 45- to 64-year-olds and 28 percent of 65- to 74-year-olds had difficulty performing one or more basic physical activities such as walking a quarter mile or climbing 10 steps (Pleis 2010).
• Social Security Administration researchers analyzing the Census Bureau’s Survey of Income and Program Participation found that 27 percent of 62- to 64-year-olds had health problems severe enough to prevent them from working or performing basic functional tasks, and an additional 22 percent reported that they were in fair or poor health, had undergone a recent hospital stay, or used a wheelchair or cane (Leonesio, Vaughan, and Wixon 2000).
• Government Accountability Office (2010) researchers analyzing the Health and Retirement Study found that 28 percent of 60- to 61-year-olds reported that their health limited their ability to work.

Health problems increase rapidly as people age. Researchers at the Urban Institute found that disability rates more than doubled (from 21 percent to 43 percent) between age 55 and 64 (Johnson, Favreault, and Mommaerts 2010). The authors considered someone disabled if their health score would rank them in the bottom 20 percent of the distribution for adults age 51 to 61. While this is a subjective definition, it nevertheless suggests that focusing on workers’ health when they are in their early 60s greatly overstates the ability of people to keep working until the current full retirement age, let alone into their late 60s or even 70s.

Difficult jobs persist

Another rationale for increasing the retirement age is that the nation has shifted from a largely blue-collar and manufacturing economy to a more white-collar and service economy. As a result, the share of those with physically demanding jobs has declined over the past four decades (GAO 2010).

Nevertheless, many older workers still work in jobs with physical demands, which may range from standing for long periods to more strenuous activities such as lifting heavy objects. Others work under difficult conditions, such as exposure to contaminants, hazardous equipment, or uncomfortable noise or temperatures. According to an analysis by the Center for Economic and Policy Research, 45 percent of workers age 62–65 and 46 percent of workers age 66–69 have physically demanding jobs or work under difficult conditions (Rho 2010). An even greater share of older workers may have jobs that require sporadic physical effort: GAO (2010) found that 64 percent of 60- to 61-year-old workers had jobs that were physically demanding at least some of the time.

Many older workers are of course capable of handling stressful jobs or jobs with significant physical demands. The point is whether it is reasonable to expect most workers in difficult or physically demanding jobs to continue working into their late 60s or beyond. In a typical eight-hour shift, for example, hospital nurses lift an average of 1.8 tons (Dubose and Donahue 2006). This requirement almost certainly becomes more onerous with age.

Uncertain employment prospects

Older workers have usually been with their employers longer than younger workers and are therefore less likely to lose their jobs (Johnson and Mommaerts 2011).⁷ However, older workers who do find themselves unemployed face bleak re-employment prospects. They are more likely to be unemployed for long periods than are prime-age workers (Ilg 2010) and to experience larger pay cuts if they manage to find a job (Johnson and Mommaerts 2011; Munnell, Sass, and Zhivan 2009). Among displaced workers age 55 and older who lost their jobs in 2007–2009, 65 percent were either still unemployed or had dropped out of the labor force when surveyed in January 2010. By contrast, in the same weak economy, more than half of displaced younger workers had been re-employed by that time (Borbely 2011).

Economist Joanna Lahey (2008) found that younger job seekers were 40 percent more likely to be offered an interview than older job seekers with similar résumés. Reasons why employers may be reluctant to hire older workers include age discrimination, higher health costs, skill obsolescence, and a shorter expected time remaining until retirement.

Caregiving responsibilities

Especially for women, caregiving can affect the timing of benefit uptake and benefit amounts. Caregiving to children during her younger years, and then to older parents, severely ill spouses, or other family members later in life, often results in intermittent labor force patterns, less job advancement, smaller salaries, and smaller Social Security and occupational pension incomes for women (Raymo and Sweeney 2006; Kingson and O’Grady-Leshane 1993).

A 2003 survey by the National Alliance for Caregiving and AARP (2004) found that one in five adults (21 percent) provided unpaid care to a frail senior or other adult. Though the share of older adults with caregiving responsibilities was roughly the same as the share of the general population,⁸ caregivers age 50 and older were much more likely to have a very high “level of burden” based on the amount of time devoted to caregiving and the recipients’ need for help with basic activities of daily living (NAC-AARP 2004). Additionally, 830,000 grandparents or other relatives age 60 and over live with and have primary responsibility for one or more young children (Generations United 2012).

Caring for older parents, severely ill spouses, and others leads some late-middle-aged caregivers to leave work and accept reduced retired worker benefits, though other caregivers delay retirement due to the high costs associated with their family members’ medical conditions (Kubicek et al. 2010). Women, in particular, may retire early due to caregiving responsibilities. One study found that, over a 10-year period, women who give care are five times more likely to retire than noncaregivers (Dentinger and Clarkberg 2002). Another found that caring for parents appeared to be a bigger factor than declining health or job loss in single women’s decisions to retire early (Munnell and Sass 2008).⁹

Although caregiving responsibilities cause some workers to retire early and others to delay retirement, both groups would be affected by policies that forced them to choose between working longer or accepting reduced Social Security benefits, especially since caregiving is strongly associated with poverty (see White-Means and Rubin 2008 for an overview).

Older workers often leave work earlier than planned

Given the challenges previously outlined, it is not surprising that many workers leave work and/or accept benefits sooner than they had planned or would like. The Employee Benefit Research Institute found that 42 percent of workers retire early due to poor health, caregiving responsibilities, job loss, or similar reasons (according to the authors’ analysis of Helman, Copeland, and VanDerhel 2011).¹⁰ Specifically, 63 percent of early retirees cited health problems or disability as a factor in their decision, 23 percent cited downsizing or other changes at their company, and 18 percent cited the need to care for a spouse or other family member. Other reasons included changes in skills required for the job (8 percent) and other unspecified work-related reasons (20 percent) (Helman, Copeland, and VanDerhel 2011).

Similarly, a 2006 McKinsey survey found that 40 percent of workers stopped working earlier than planned. Of these, 47 percent cited health reasons, 44 percent cited job loss or downsizing, and 9 percent cited the need to care for a spouse or other family member (Hunt, Revell, and Rotenberg 2007).

Hardship exemptions

Beginning in the early 1980s and continuing into the present, members of Congress, other policymakers, and researchers have looked at the possibility that later retirement ages could impose material hardship on some older workers. The issue involves two important questions: How much hardship results from increasing retirement ages, and can effective and politically feasible policies be designed to protect workers placed at risk as retirement ages increase?

Size of the “hardship problem”

The question of how much raising the retirement age would increase workers’ risk of falling into material hardship depends on how hardship is defined.

When it passed legislation in 1983 to increase the full retirement age, Congress directed the secretary of the Department of Health and Human Services to conduct a comprehensive study of the implications of changes in the retirement age, especially in terms of older workers who might be placed at risk. The resulting report (SSA 1986) found that 30 percent of new retirees were either unable to work for health reasons, held jobs with heavy strength requirements, or had partial health limitations and held jobs with medium strength requirements. Moreover, the report found that workers in physically demanding jobs or ill health were less likely than other workers to have saved to offset a potential benefit reduction and were unlikely to extend their work lives substantially in response to the increase in the retirement age. Because these workers would be less able to extend their working lives to compensate for increases in the retirement age, they were considered to be “at risk.”

Later studies using more restrictive definitions found the share of workers at risk of facing hardship to be closer to 10 percent. These studies focused on early retirees who fell short in terms of two measurements—poor health status and lack of financial resources besides Social Security benefits. For example, using a very restrictive definition that defined risk as both having work-limiting health conditions and being solely dependent on Social Security for pension income, Burkhauser, Couch, and Phillips (1996) concluded that about 10 percent of men and 20 percent of women accepting Social Security benefits at ages 62–63 were at significant risk if the earliest age of eligibility were raised to 64. Turner (2007a; 2007b) suggested that the share at risk might even be lower than 10 percent if eligibility for disability benefits were taken into account, though he noted that the studies he reviewed did not count older workers who were laid off before age 62 and unable to find a job.

A Congressional Budget Office (1999) study, however, highlighted how sensitive the assessment of risk is to the criteria used to define it. It noted, “On the basis of either a simple poverty measure alone or the absence of a pension alone, roughly one-quarter to one-third of the early beneficiaries were dependent. … But if dependency is determined on the basis of being poor and having a work-limiting disability, its incidence falls to about one in 10.” Similarly, Kingson and Arsenault (2000) found that the group at risk could range from 3 percent to 52 percent of early retirees depending on whether the definition required early retirees to meet more than one restrictive criterion (having below-poverty incomes and being in fair or poor health), or simply to meet one less restrictive criterion (having incomes below 200 percent of poverty or having less than $30,000 in liquid assets).

Our survey of the research suggests that the proportion of older workers at risk of material hardship due to retirement-age increases is probably closer to 1 in 2 than it is to 1 in 10 if we use a relatively expansive but nevertheless reasonable definition of “at risk.” As we have seen, around 45 percent of older workers have physically demanding jobs or work under difficult conditions, 20–30 percent of people in their 60s are in poor health, about 20 percent of older adults are caring for a frail relative, and around 40 percent of retirees retire earlier than planned for job, health, or caregiving reasons. Unless there is perfect overlap of these categories, then the share at risk is probably close to half of older workers.

This share likely includes some workers who may prefer to continue working despite health limitations or other challenges. On the other hand, it does not take into account workers who lose their jobs without officially retiring. The share at risk would also likely be higher if we restricted the sample to those in their late 60s or older—that is, if we focused on the age when workers would be eligible for unreduced benefits under current or proposed rules—since older workers are more likely to have health problems or other work limitations.

Our measure also does not include workers who would be vulnerable simply as a function of their low incomes. In practice, low-income workers would be among the hardest hit even if they are able to continue working, since low-income groups are more dependent on Social Security benefits. In any case, poor health and other obstacles to working longer are closely tied to income. For example, the GAO (2010) found that among 60- to 61-year-olds, those reporting good or excellent health were more than twice as likely to have some college education, were more than twice as likely to be working, and had household incomes more than twice as high as those in fair or poor health.

Can policy be designed to mitigate potential hardships?

Both proponents and opponents of raising the retirement age acknowledge that something should be done to mitigate the impact on at-risk older workers if retirement ages are further increased. For example, Erskine Bowles and Alan Simpson (the co-chairs of the National Commission on Fiscal Responsibility and Reform) propose “a hardship exemption for those who cannot work past 62 but who do not qualify for disability benefits [which would] hold them harmless from additional actuarial reduction resulting from increasing retirement ages.” As was done in 1983, the co-chairs would “mandate the Social Security Administration with designing a policy over the next ten years that best targets the population for whom an increased [early retirement age] poses a real hardship” (National Commission on Fiscal Responsibility and Reform 2010).

If a preliminary analysis by the Social Security actuaries serves as a guide, hardship exemptions along the lines proposed by Bowles and Simpson would likely fall short of offsetting the harm arising from increasing retirement ages. Older workers disadvantaged by unemployment and age discrimination, middle-income persons unable to work for health or other reasons, and caregivers would likely not be protected (Strengthen Social Security n.d.; Goss 2010b).

In theory, hardship exemptions could be implemented to take much of the sting out of retirement age increases, but to truly hold potentially vulnerable older workers harmless, they would have to go well beyond the types of modest offsets suggested in the Bowles-Simpson plan. They might include, for example:

• implementation of a more realistic disability standard for persons age 60 and over¹¹
• extension of unemployment benefits for older workers, who generally have a more difficult time finding new employment
• employment support and other policies to encourage older persons with disabilities to remain in or return to the labor force
• stronger and better enforcement of laws against age discrimination
• lowering the age of eligibility for Supplementary Security Income (SSI) benefits from 65 to 62 in order to provide immediate relief to some of the lowest-income early retirees

Other mitigating policies are outlined in the GAO (2010) report. But as good as such policy ideas may be in theory, they are not feasible. Offsetting the impact of retirement age increases would be expensive. If done right, much or perhaps all of the potential savings to Social Security from raising eligibility ages would evaporate.

It has been 29 years since Congress charged the Social Security Administration with studying the problems that could arise from raising the full retirement age from 65 to 67. SSA concluded in 1986 that a significant problem would exist, but to date no Congress has addressed the issue. Assuming the past is a good indicator of the future and given contemporary political realities, it is highly unlikely that Congress would include effective hardship exemptions with legislation that raises retirement ages.

Conclusion

It is simply not true that the large majority of older workers can work longer to offset cuts to their Social Security benefits. Such claims have been, and will continue to be, put forth by those seeking to justify further increases to the full retirement age and other benefit cuts, but as this briefing paper indicates, these claims do not withstand close examination.

Using narrow definitions of risk, some have argued that only a relatively small group, 10 percent of older persons, would be harmed by further increasing the full retirement age to age 69 or older. But such claims ignore many challenges facing older workers. For example, research shows that roughly 40 percent of retirees retire earlier than planned for job, health, or caregiving reasons; 20–30 percent of people in their 60s report that their health is poor; around 45 percent of older workers have physically demanding jobs or work under difficult conditions; and about 20 percent of older adults are caring for a frail relative.

Further, the evidence does not support the claim that benefit cuts such as further increases in the full retirement age can be implemented in a way that would hold harmless those older workers who either cannot or are not well positioned to continue to work.

Raising the retirement age might make sense if longevity gains were equally shared by all workers, regardless of income group, educational status, or race; if increased longevity meant continued good health; and if older workers had opportunities in the workforce equal to those of younger workers. But none of these conditions is true; thus, a further increase in the Social Security retirement age would impose hardship on many older workers. In any case, there is no need to cut benefits at all if Americans prefer to contribute more to the program to restore it to long-term solvency. Closing the projected shortfall on the revenue side makes sense given the weaknesses in employer-based plans and personal savings—the other two legs of the retirement stool.

—Eric Kingson co-chairs the Strengthen Social Security Coalition (www.strengthensocialsecurity.com). He is a professor of social work at Syracuse University and a senior research associate in the Maxwell School’s Center for Policy Research. Kingson served as policy advisor to two presidential commissions—the 1982–83 National Commission on Social Security Reform and the 1994 Bipartisan Commission on Entitlement and Tax Reform. 

—Monique Morrissey is an economist at the Economic Policy Institute. Before joining EPI in 2006, she worked at the AFL-CIO Office of Investment and the Financial Markets Center.

Endnotes

1. These reductions are for a worker who accepts benefits at age 65. For the majority of workers—those who accept benefits between ages 62 and 66—the reduction ranges from 6–8 percent as the full retirement age increases from 65 to 66, and from 12–14 percent as it increases from 65 to 67. The reduction is somewhat smaller for workers who accept benefits at age 67 and above (according to the authors’ analysis of SSA n.d.).

2. The “full” or “normal” retirement age, when workers are eligible for full benefits, is currently 66. The earliest eligibility age, when workers are first eligible for reduced benefits, is currently 62. Since participants receive a credit for delaying take-up each month until they turn 70, the “full” retirement age is something of a misnomer, since those who delay until age 70 will receive monthly benefits that are 32 percent higher than the “full” benefit. Where possible, the focus of this analysis is workers age 62 to 69 who could theoretically offset proposed cuts by working longer. However, proponents of raising the retirement age often suggest that participants can work until they are eligible for full benefits. Thus, it is also instructive to focus more narrowly on people in their late 60s and older who would be eligible for full benefits under various proposals.

3. Technically, the Domenici-Rivlin approach does not involve an increase in the full retirement age, but rather changes the benefit formula each year to offset longevity gains.

4. A related issue, not discussed in this report, is whether to increase the early eligibility age, either by itself or in tandem with an increase in the full retirement age. The argument for raising the earliest eligibility age is that early retirees may be retiring too early for their own good, and forcing them to delay retirement would increase their monthly Social Security benefits and possibly other retirement resources, while reducing the time spent in retirement. However, raising the early eligibility age would have no significant impact on Social Security’s finances because workers’ lifetime benefits would remain roughly the same (they would receive higher monthly benefits over a shorter period) (Munnell and Sass 2008).

5. The number of beneficiaries per hundred workers is projected to increase from 35 in 2011 to 47 in 2030, a 34 percent increase. Meanwhile, life expectancy at age 65 is projected to increase from 18.7 to 20.0 years for men and from 20.7 to 21.9 years for women over the same period, a 6 percent increase overall (according to the authors’ analysis of SSA 2012b).

6. Children are also the biggest beneficiaries of exchanges that take place in the context of the family—including the transfer of material resources and time spent providing care.

7. This is one reason the unemployment rate of older workers is lower than that of younger workers. Another is that many older workers who lose their jobs retire.

8. The share was somewhat higher for adults age 50–64 and lower for adults 65 and older. In 2003, 30 percent of adult caregivers were age 50–64, and 13 percent were age 65 or older (NAC-AARP 2004). These age groups were roughly 26 percent and 20 percent of the adult population, respectively (according to the authors’ analysis of Howden and Meyer 2011).

9. The 2003 NAC and AARP survey found that 6 percent of caregivers had given up work and 3 percent had chosen early retirement. This understates the likelihood that caregiving responsibilities would eventually cause caregivers to leave the workforce, since the survey included caregivers of all ages. The survey also found that only 48 percent of caregivers age 50–64 and 3 percent of caregivers age 65 and older were working full time, though it does not tell us how many had been in the workforce to begin with (NAC-AARP 2004).

10. In all, 45 percent of retirees said they retired earlier than planned, but 6 percent of these cited only positive reasons for their decision, such as a desire to do something different or having the financial means to retire. This leaves 42 percent who based their decision in whole or in part on negative reasons (45 percent – [6 percent x 45 percent] = 42 percent).

11. Gerald McIntyre, directing attorney of the National Senior Citizen Law Center, notes that “Social Security determines disability by means of a 5 step sequential evaluation process.” He suggests the “elimination of the 4th step of the process when someone reaches age 60….The 4th step requires a determination of whether or not someone has the residual functional capacity to return to previous employment. If someone has that capacity then the claim for benefits is denied. This is true even if the job no longer exists….One significant advantage of this over other proposals for tweaking the disability system is that it would be extremely simple to administer and could be implemented immediately” (personal communication, May 2011).

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Turner, John. 2007b. Promoting Work: Implications of Raising Social Security’s Early Retirement Age. Center for Retirement Research at Boston College, Working Paper #12, Work Opportunities for Older Americans Series. http://crr.bc.edu/wp-content/uploads/2007/08/wob_12.pdf

Waldron, Hilary. 2007. “Trends in Mortality Differentials and Life Expectancy for Male Social Security-Covered Workers, by Socioeconomic Status.” Social Security Bulletin, vol. 67, no. 3. http://www.ssa.gov/policy/docs/ssb/v67n3/v67n3p1.html

Wereschagin, Mike, and Salena Zito. 2010. “Obama’s Good for GOP, Boehner Says.” Pittsburgh Tribune-Review, June 29. http://pittsburghlive.com/x/pittsburghtrib/news/s_688102.html

White-Means, Shelley, and Rose Rubin. 2008. Retirement Security for Family Elder Caregivers with Labor Force Employment. National Academy of Social Insurance, Social Security Innovative Policy Program. http://www.nasi.org/sites/default/files/research/White-Means_and_Rubin_January_2009_Rockefeller.pdf

Most Americans would rightly scoff at the claim that landscaping companies can’t find workers here in the U.S. and have to go abroad to find them. Many of us mowed lawns, weeded gardens, trimmed hedges, planted flowers and raked leaves as kids, and we know that this is work that can be done by most teenagers and healthy adults. It’s obvious that there are hundreds of thousands of potential landscaping workers among the 13 million unemployed, especially if they were to receive the prevailing wage, which averages about $12 an hour across the country.

But few of us have ever worked at shucking oysters or picking crab meat, so the idea that seafood processing companies might have trouble finding workers willing to do such hard, dirty work for minimum wage is plausible. But what if those companies offered higher pay? What if they offered $10 an hour or $12 an hour, instead of $7.25? It’s possible they would get enough workers, but the companies claim it would raise the price of their products beyond what the market can bear. But would a smaller pay increase — for example, $2 an hour — be both enough to attract U.S. workers and keep prices competitive?

Or what if we cast the recruiting net a little farther? Rather than the company merely advertising in a local newspaper for a couple of days, what if we had the Labor Department use the Internet to advertise the jobs nationally and search for able and willing unemployed workers nationwide? If workers are willing to come to Maryland’s Eastern Shore from Mexico, can’t we find unemployed workers in Florida or South Carolina willing to travel a much shorter distance in order to earn a few thousand dollars?

Unfortunately, such questions are never asked (at least publicly) by the seafood industry or its advocates in Congress. Instead, without trying such solutions, they simply assume that nothing can be done to persuade U.S. workers to take these jobs (even though many U.S. workers actually are doing them — after all, every currently employed seafood worker isn’t a foreign guest worker). If nearly half of Maryland’s seafood companies can operate without guest workers, isn’t it possible that the others, with some help, could also find U.S. workers?

The academic work the industry and its allies cite to support their efforts to get more guest workers simply assumes there are only two stark choices: providing all the guest workers the companies want while paying them minimum wage, or shutting down their operations and laying off their entire workforce. The academic report most cited by the seafood industry is a two-page brief by Douglas Lipton of the University of Maryland. He asks the question: “If we assume that H-2B visa workers (foreign guest workers) cannot be replaced by domestic workers,” what would happen if there were no H-2Bs? His answer, obviously, is that production would fall, revenues would fall, and jobs would be lost.

But that’s the wrong question, or at least an unhelpful one, if we are looking for a policy that fairly balances the need of U.S. workers for decent jobs and the need of seafood companies for low-paid, willing workers.

The Department of Labor recently issued a new rule for the H-2B guest worker visa program, which would have tested whether U.S. workers could be attracted to crab-picking work with higher wages. The rule would have required employers to offer the full prevailing wage to U.S. workers, which would have meant about a $2 per hour increase for workers on Maryland’s Eastern Shore. Because Congress and a federal court both blocked the rule, we don’t know the extent to which it would have worked to attract a domestic workforce.

On the other side of the balance, we can predict what it would have meant in terms of increased costs for the employers, who defeated the rule with arguments that they would go out of business if they had to pay a higher wage. According to Justin M. Donnelly’s report, “Blue Crab Farming on Maryland’s Eastern Shore,” the wholesale price of blue crab averaged about $13.57 a pound in 2008, and crab pickers are reportedly paid a piece rate between $2 and $2.50 for each pound of picked crabmeat. Their wages must average at least the federal minimum wage of $7.25, though the cost of housing and fees for tools and protective clothing are usually deducted from the workers’ pay. To increase the workers’ pay by $2 an hour, to $9.25, would mean a 28 percent increase and would require the processing companies to increase the per-pound piece rate by 28 percent. Thus, a $2.50 per pound rate would become $3.20 per pound, adding 70 cents to the wholesale price of the crab meat, assuming the new cost was entirely passed on to the customer.

There’s no evidence that a 5 percent increase in the wholesale price of a luxury product like Maryland blue crab meat would dampen sales significantly. As Lipton acknowledges, “Also lacking are the retail market studies to know what the elasticity of demand would be at that level. That is a key question as to how much of the cost can be passed on to the consumer, and why the availability of imports as substitutes is so important.” And, of course, all of the labor cost increase would not have to be passed on to the customer. Some could be absorbed by lowering executive salaries or profits.

It is time for Congress to permit a true test of the labor market, a real opportunity for more U.S. workers to hear about and consider taking seafood-processing jobs like crab picking. If they aren’t attracted by better wages, the companies can make that case and, perhaps, seek an exemption from the wage requirements. But in no case should businesses whose work can readily be done by able-bodied teenagers be exempted from these rules. Allowing them to offer jobs at substandard wages cheats U.S. workers, depresses wages, and closes off opportunities for young people here to enter the world of work.

Unemployment among young people between the ages of 16 and 24 is around 16 percent and the labor force participation rate is heading toward all-time lows. A policy that denies these workers jobs that they can easily do is not just wrong-headed, it’s economically disastrous.

The short answer to this debate is: Around two-thirds of the drop in labor force participation since the beginning of the Great Recession is cyclical, while around one-third is structural, according to data from EPI’s forthcoming The State of Working America, 12th Edition (Mishel, Bivens, Gould, and Shierholz 2012).

Why does this debate matter? Most concretely, for close observers of economic trends, this debate is consequential because the answer allows us to determine the number of “missing workers” (workers who would be in the labor market if job prospects were strong). In turn, this helps provide a sense of how much upward pressure will be exerted on the unemployment rate if the economy begins a robust jobs recovery. While it may sound counterintuitive for a robust recovery to put upward pressure on the unemployment rate, it can happen.

Structural versus cyclical factors

The unemployment rate is the number of unemployed (jobless workers who are “actively looking for work”) divided by the size of the labor force (the sum of the employed and the unemployed). If the decline in labor force participation in recent years was largely driven by otherwise-willing workers who were discouraged from looking for work because of the weak job market, a robust recovery would draw them into the labor market, boosting the labor force participation rate (as they would now be “actively looking for work”), and thus the unemployment rate.

If instead a large portion of the labor force participation decline is structural—that is, if the workers who make up the decline in the labor force participation rate would not be in the labor force even if job prospects were strong—there would be no sizable influx of workers into the labor market as a robust recovery takes hold. Consequently, the unemployment rate would fall much more quickly.

Given the importance of determining how much of the recent labor force participation decline is driven by near-term economic weakness (i.e., cyclical factors) versus long-run demographic trends (i.e., structural factors), this preview of The State of Working America, 12^th Edition brings some evidence to bear on this debate.

Table 1 shows the labor force participation rate overall and for men and women in various age groups in 1989 and 2007 (two business cycle peaks) and in 2011. It also shows what the labor force participation rate would have been in 2011 if, from 2007 to 2011, labor force participation rates within age/gender/education groups had followed their long-term trends—namely, their trends from 1989 to 2007—but if the relative sizes of those groups evolved as they actually did. The gap between this counterfactual rate for all workers and the actual rate is an estimate of the effect of cyclical changes (i.e., the weak labor market stemming from the Great Recession and its aftermath) on labor force participation from 2007 to 2011.¹

For each group except men age 55 and older, the labor force participation rate in 2011 would have been higher if it had followed its long-term trend. For prime-age (25–54) male workers, it would have been 1.6 percentage points higher; for prime-age female workers, it would have been 0.9 percentage points higher. Overall, the labor force participation rate would have been 1.3 percentage points higher. In other words, this exercise suggests that around two-thirds of the decline in the overall labor force participation rate between 2007 and 2011 (1.3 percentage points out of a 1.9-percentage-point decrease) was due to a cyclical drop in the demand for workers, and the rest (about one-third) was part of long-term structural trends.

Effect on the unemployment rate

If the labor force participation rate had not dropped due to the weak labor market, and instead the people who made up the cyclical decline in the labor force participation rate were in the labor force and counted as unemployed, the unemployment rate would now be significantly higher. The last two columns of the table explore the possible impact of the cyclical decline in the labor force participation rate since the start of the Great Recession on the unemployment rate. These columns provide the unemployment rate in 2011, along with what the unemployment rate would have been if the workers who made up the difference between the 2011 labor force participation rate and its long-term trend—i.e., the workers who dropped out of, or never entered, the labor force because of weak job prospects—had instead been in the labor force and counted as unemployed. For all groups except men age 55 and older, the unemployment rate in 2011 would have been higher. For prime-age men, it would have been nearly 10 percent in 2011 instead of 8.2 percent, and for prime-age women it would have been nearly 9 percent instead of 7.6 percent. Overall, the unemployment rate would have been 10.7 percent instead of 8.9 percent. While it is unlikely that these missing workers would all be unemployed if they were in the labor market, this exercise suggests the possible scale of the effect on the unemployment rate of the cyclical decline in the labor force between 2007 and 2011.

Measuring the “missing workforce”

The key point here is that the large majority—around two-thirds—of the drop in the labor force participation rate since the start of the recession is due to weak job prospects, not structural factors. In April 2012, the labor force participation rate was 63.6 percent. Two-thirds of the way between that and the rate in 2007 (66.0 percent) is 65.2 percent. All else equal, if the labor force participation rate were currently 65.2 percent, there would be 3.9 million more people in the labor force. In other words, the size of the missing workforce is likely nearly four million, and if job prospects were better these missing workers would be in the labor market.

Conclusion

Though the labor market is slowly healing, the unemployment rate is still above 8 percent, hiring is still far below its pre-recession rate, and more than 40 percent of the country’s 12.5 million unemployed workers have been unemployed for over six months. In other words, this is not yet a labor market that draws workers in. It is unlikely the missing workers will enter or reenter the labor market until job prospects are strong enough that they will not face months of fruitless job searching.

This analysis—and the determination that the likely size of the missing labor force is nearly four million—shows that while expansionary policies to generate demand are urgently needed and will certainly help spur job growth, they may also generate upward pressure on the unemployment rate as these missing workers begin to enter or reenter the labor market. That kind of upward pressure on the unemployment rate would be a positive sign of the economy’s strength.

Endnote

1. This exercise ignores the fact that the weak labor market from 2000 to 2007 also probably caused a cyclical decline in the labor force participation rate and simply uses the 1989–2007 trend as the long-term structural trend within groups. Thus, this exercise may understate the cyclical decline in labor force participation since 2007.

References

Current Population Survey basic monthly microdata. Various years. Survey conducted by the Bureau of the Census for the Bureau of Labor Statistics [machine-readable microdata file]. Washington, D.C.: U.S. Census Bureau. http://www.bls.census.gov/cps_ftp.html#cpsbasic

Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012, forthcoming. The State of Working America, 12th Edition. An Economic Policy Institute Book. Ithaca, N.Y.: Cornell University Press.

Add in interns from high schools, community colleges, university graduate programs, and even mid-career adults, and there may be as many as 2 million interns employed each year. Experts agree that the internship phenomenon was growing even before the Great Recession and has accelerated since. Yet, few can provide any information on the impact of internships, paid or unpaid, on the labor market or the wages and employment prospects of young people.

The U.S. Census Bureau and the Bureau of Labor Statistics provide the following useful data about internships:

Long-term unemployment

Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010 (Figure A). In both of these years, the Asian American share slightly exceeded the African American share.

Figure A

Figure A (continued)

Share of unemployed who have been unemployed 27 weeks or more, by race and ethnicity, 2010–2011 Notes: The data for whites, blacks, and Asians exclude biracial or multiracial individuals and Hispanics. Data refer to workers age 16 and over. Source: Author’s analysis of basic monthly Current Population Survey microdata

Figure B

Figure B (continued)

White and Asian American unemployment rates, by quarter, 2007–2011 Notes: These data are not seasonally adjusted and exclude biracial or multiracial individuals and Hispanics. Data refer to workers age 16 and over. Source: Author’s analysis of basic monthly Current Population Survey microdata

The Asian American labor force is the most highly educated labor force by race (Kim 2012), and yet Asian Americans’ long-term unemployment share remains very high. That their long-term unemployment share increased from 2010 to 2011 is yet another illustration that a lack of jobs—not a lack of skills—underlies the country’s persistently high unemployment rate.

Overall unemployment

As far as overall unemployment is concerned, 2011 was largely a continuation of recent years. The Asian American unemployment rate continued to closely track the white rate, as it did from 2007 to 2010 (Figure B). While the Asian American rate was consistently lower than the white rate from 2007 through 2008, the Asian American rate sometimes equaled and even exceeded the white rate during some quarters in 2009, 2010, and 2011. In the final quarter of 2011, the Asian American unemployment rate exceeded the white rate by 0.5 percentage point.

In 2011, highly educated Asian Americans continued to have a higher unemployment rate than similarly educated whites. As Unfairly disadvantaged? noted, this is significant because the majority of the Asian American labor force has at least a college degree (57.2 percent of the age 25-and-over population, as of 2010), compared with less than two-fifths (38.6 percent) of the white labor force (Kim 2012).

Overall, Asian Americans with a college degree had an unemployment rate of 6.4 percent in 2011, while whites with the same degree had an unemployment rate of 4.3 percent (Table 1, top panel). The unemployment rate of those with an advanced degree was 3.6 percent for Asian Americans, compared with 3.0 percent for whites. The disparity also existed among those with some college but less than a college degree. In this group, the Asian American unemployment rate was 7.3 percent, compared with a white rate of 6.7 percent. In contrast, Asian Americans with a high school education or less fared better than similarly educated white workers.

Conclusion

As the issue brief explained, these patterns in unemployment rates and long-term unemployment shares are likely in part due to nativity (i.e., the fact that Asian Americans are more likely to be foreign born) and racial bias. In addition, Asian Americans’ high long-term unemployment shares are likely partially the result of geography; about one-third of the Asian American labor force resides in California, a state with high long-term unemployment rates (Kim 2012).

References

Current Population Survey basic monthly microdata. Various years. Survey conducted by the Bureau of the Census for the Bureau of Labor Statistics [machine-readable microdata file]. Washington, D.C.: U.S. Census Bureau. http://www.bls.census.gov/cps_ftp.html#cpsbasic

Kim, Marlene. 2012. Unfairly Disadvantaged? Asian Americans and Unemployment During and After the Great Recession (2007–10). Economic Policy Institute, Issue Brief No. 323. http://www.epi.org/files/2012/ib323.pdf

The 2012 budget season saw two competing proposals that were commonly described as spanning from the political right to left in their approach: the fiscal 2013 budget resolution proposed by House Budget Committee Chairman Paul Ryan (R-Wis.), which passed the U.S. House of Representatives on a party-line vote, and the Budget for All proposed by the Congressional Progressive Caucus (CPC). The most salient difference between these competing visions is their efficacy in addressing vital economic challenges, such as restoring full employment, rebuilding the middle class, curbing national health care expenditure, and stabilizing the long-term fiscal outlook. Simply put, the Ryan budget would largely exacerbate such challenges, whereas the Budget for All takes a grounded approach in diagnosing problems and proposing serious, evidence-based solutions.

A budget is much more than numbers and a bottom line; a budget should reflect national priorities, which first and foremost compel addressing joblessness. Unfortunately, the Ryan budget instead prioritizes sharply reducing spending and cutting taxes on the wealthy — at the expense of good economic stewardship. Roughly 10 million jobs are needed to restore pre-recession unemployment and labor force participation rates. The Ryan budget would nevertheless immediately enact aggressive spending cuts — particularly to the social safety net — which would reduce employment by 1.3 million jobs in fiscal 2013 and 2.8 million jobs in fiscal 2014, relative to current budget policies. The Budget for All instead proposes increasing spending for job creation and public investments over the next two and a half years (by $786 billion relative to current law). All told, the Budget for All would boost employment by 2.1 million jobs in fiscal 2013 and 1.2 million jobs in fiscal 2014, relative to current budget policies. Employment would be roughly 3.4 million jobs higher by the end of fiscal 2013 and four million jobs higher by the end of fiscal 2014 if Congress adopted the Budget for All instead of the Ryan budget. And by sacrificing near-term deficit reduction that would have gained them Beltway applause, the CPC prioritized economics and public welfare over the approval of Washington’s Very Serious People, who have abandoned job creation for deficit reduction.

Restoring full employment is paramount to rebuilding the middle class, but much more will be required. Median income for working-age households has fallen 10 percent over the last decade (after adjusting for inflation). This reflects not just the effects of the recession (though these were large), but also anemic income growth over the 2001-2007 economic expansion — the weakest income growth on record. To address the challenges facing middle-income families that were apparent even before the Great Recession, the Budget for All would finance $2.1 trillion worth of investments in the nondefense discretionary budget — areas including education, workforce training, infrastructure, and scientific research — to promote economic opportunity, mobility, and competitiveness. The Ryan budget would reduce nondefense discretionary spending — which houses 90 percent of nondefense public investments — to 2.1 percent of GDP by 2022, down from 2.7 percent projected under current policy, whereas the Budget for All would increase it to 3.5 percent, back toward the historical levels of investment needed to maintain the public capital stock.

Beyond defunding public investments, the Ryan budget would deeply cut economic security programs. Medicare’s guarantee of health coverage in old age would be replaced with a voucher, the value of which would not keep pace with spiraling health care costs. By 2050, federal spending on Medicaid, the Children’s Health Insurance Program, and targeted subsidies to expand insurance coverage would be cut by more than 75 percent. The Ryan budget would merely shift costs from the federal budget to households, businesses, and state governments — which would do nothing to lower overall health care costs and likely increase national health expenditure. Conversely, the Budget for All would honor existing commitments to ensure retirement and health security by strengthening Medicare, Medicaid, and the Affordable Care Act. Specifically, the Budget for All would harness the purchasing power of Medicare to negotiate lower pharmaceutical prices and establish a public insurance option, both of which would lower national health care expenditure — the real long-term fiscal problem facing the country.

Contrary to public perception, the $5.3 trillion in nondefense spending cuts proposed by the Ryan budget are not earmarked simply for deficit reduction; instead, they would effectively help finance tax cuts for upper-income households. The Ryan budget would continue all of the costly, regressive Bush-era tax cuts and then cut taxes by another $4.5 trillion over the next decade. Ryan’s plan claims that these additional cuts would be financed with unspecified (and implausibly hefty) broadening of the tax base, but much would necessarily be deficit financed. Millionaires would receive an average tax cut of $265,000 in addition to a $141,000 tax cut from extending current temporary tax policies. Overall, 71 percent of Ryan’s tax cuts would go to the 5 percent of households earning more than $200,000, while only 6 percent would go to households earning $75,000 or less (accounting for 71 percent of households). Lower-income households would see the only tax increase, relative to current policies, because refundable tax credits would be scaled back. (This is in addition to Ryan’s deep nondefense budget cuts, 62 percent of which would come from programs for low-income households, according to the Center on Budget and Policy Priorities.)

In contrast, the Budget for All would adequately fund priorities with progressive tax reforms, largely by asking more from the highest-income households, who have enjoyed the lion’s share of income growth over the past decade. In light of growing inequality and concentration of wealth, the Budget for All would add new tax brackets for millionaires and billionaires, eliminate the preferential tax treatment of unearned income, and add a small surcharge on high-net-worth individuals (those with wealth exceeding $10 million). The Budget for All would also let the upper-income Bush tax cuts expire on schedule and phase out the middle two rate cuts as the economy strengthens, maintaining only those credits and provisions that predominantly aid working families. The budget would price carbon, thereby addressing global climate change, and tax financial speculation and leverage of “too big to fail” banks, thereby curbing systemic financial risk. Collectively, these policies would raise more revenue and restore a higher degree of progressivity to the tax code, pushing back against inequality and ensuring that deficit reduction is not shouldered by the poor.

The Budget for All and the Ryan budget purportedly reach the same debt level by the end of the decade, but Ryan only gets there with a $4.5 trillion budget gimmick. The Ryan budget would entrench Gilded Age-levels of inequality and double down on tax cuts for the affluent, exacerbating budget deficits and unemployment in the process. The Budget for All demonstrates that dismantling our commitments to the vulnerable is a policy choice rather than a necessity, but choosing an alternative course requires revitalizing progressive taxation and taking comprehensive approaches to real-world problems. Contrary to the claims of many pundits, the Ryan budget simply is not credible; the more intellectually rigorous and fiscally responsible Budget for All, on the other hand, offers serious solutions to the near- and long-term economic challenges we face.

• View the maps: Unemployment | Payroll employment

The number of states with unemployment rates greater than 10.0 percent remains at three – Nevada, Rhode Island and California – while a total of five states and the District of Columbia have rates greater than 9.0 percent.

The recovery of manufacturing jobs continues to be a bright spot, with 10 states seeing growth of manufacturing employment of five percent or more since January 2011. Strong manufacturing growth has contributed to the state of Michigan experiencing the most impressive reduction in its unemployment rate over the past year – down 2.2 percentage points since April 2011.

To avoid undermining their economic recovery, states should avoid pursuing policies that lead to a reduction in the size of their state and local government sectors. The states that have seen the greatest percentage reduction in employment over the past year – Wisconsin and Rhode Island – both have reduced the size of their public sector workforces significantly (-2.5 percent and -1.4 percent, respectively, compared to national average of -0.8%).

MORE: Sort through updated graphs and data for major economic indicators on EPI’s State of Working America

The 2012 budget season saw two proposals put forth that were commonly described as spanning from the political right to left in their approach: the fiscal 2013 budget resolution proposed by House Budget Committee Chairman Paul Ryan (and passed by the U.S. House of Representatives on a party-line vote), and the Budget for All proposed by the Congressional Progressive Caucus (CPC).¹ While these two proposals do indeed provide diametrically opposed views of budget priorities, the most salient difference between them is not political philosophy, but simple effectiveness in addressing our most pressing economic challenges.

The budget proposed by Rep. Ryan (R-Wis.) prioritizes vastly increasing the last decade’s already-large tax cuts for the highest-income households, expanding the size of the defense budget, privatizing Medicare, defunding Medicaid, repealing the Affordable Care Act, and shrinking other functions of government (such as funding for education, research, and income support). These budgetary priorities not only fail to address our major economic challenges, but would exacerbate them. Substantial near-term spending cuts would slow recovery and increase joblessness. Deep domestic spending cuts would starve public investments needed as the foundation for growth, and such cuts would impede economic opportunity and mobility. Greatly diminishing the public provision of health insurance would reduce cost controls and health insurance coverage, raising overall national health expenditure while reducing economic security for the disabled, elderly, and disadvantaged children. Trillions of dollars in additional unfinanced tax cuts targeted to upper-income households would swell budget deficits and widen income inequality.

The Budget for All, in contrast, starts with an evidence-based diagnosis of the problems facing the economy and proposes policy prescriptions clearly demonstrated by the weight of economic evidence to address these challenges. Significantly increasing near-term public investment and targeted job creation measures (thereby increasing near-term budget deficits) would meaningfully accelerate growth and reduce joblessness caused by insufficient economy-wide spending. Sustained public investments would help ensure acceptable productivity growth going forward (as productivity growth provides the potential for broad-based increases in living standards), and a more progressive tax code and stronger safety net would help reverse the pronounced trend of productivity growth disproportionately benefiting only a small slice of American households. Protecting health care reform and using government bargaining power to negotiate lower prices would slow the rise of per capita health care costs and ensure health and retirement security in the face of an unraveling employer-based provision system. And a combination of health reforms, revenue increases, and realigned discretionary spending would stabilize the long-run fiscal outlook without jeopardizing economic recovery.

Besides differing in their approach to addressing major economic challenges, the budgets also differ in their intellectual rigor. The Budget for All specifies where and how cuts will occur, and where and how revenue will be raised. The Ryan budget largely does not. It claims that large tax cuts for high-income households will be paid for by broadening the tax base, but does not say how. Given that literally trillions of dollars of new revenue would need to be raised in the Ryan budget through such base-broadening, this is a severe omission for what purports to be a serious budget.

In the end, the two budgets claim the same level of public debt by the end of the coming decade. But they take very different paths to this level: One path is rigorous and evidence-based, and the other is not. One would meaningfully address our most pressing economic challenges, while the other would exacerbate them. This paper compares the Ryan budget and the Budget for All across five major areas of economic and budget policy: job creation and economic recovery, discretionary spending priorities and public investments, economic security and opportunity, health care costs and coverage, and tax policy. Comparisons are made with both the Congressional Budget Office’s (CBO) March 2012 current law baseline (CBO 2012a) and with a current policy baseline, which assumes certain legislative provisions slated to expire are instead continued.²

Key findings include:

• Job creation and economic recovery: By decreasing near-term aggregate demand, the Ryan budget would reduce employment by 1.3 million jobs in fiscal 2013 and 2.8 million in fiscal 2014. In contrast, by increasing near-term aggregate demand, the Budget for All would increase employment by 2.1 million jobs in fiscal 2013 and 1.2 million in fiscal 2014.
• Discretionary spending priorities and public investments: The Ryan budget would ramp up defense spending despite wars ending in Iraq and Afghanistan, while slashing nondefense discretionary spending (NDD). In contrast, the Budget for All recognizes the economic imperative for public investment and would take advantage of the opportunities afforded by the ending of wars in Iraq and Afghanistan to reorient discretionary spending toward high-return investments.
• Economic security and opportunity: The Ryan budget would cut deeply into the social safety net and scale back tax credits for lower-income households, while calling for steep reductions in tax rates for upper-income households. In contrast, the Budget for All would protect the social safety net that has been vital to so many since the Great Recession began, while also targeting tax cuts toward low- and middle-income families.
• Health care costs and coverage: The provisions in the Ryan budget regarding health security fail to recognize that, in the absence of social insurance, market failures will keep the private sector from ever adequately covering large portions of the population. The Budget for All, conversely, recognizes the value of existing health security programs and also realizes that even more must be done to ensure health security for all Americans and to use government purchasing power to slow national health expenditure growth.
• Tax policy: The Ryan budget would maintain all of the Bush-era tax cuts and would even expand them for most households, while offering an implausibly large offsetting revenue gain from broadening the tax base (via eliminating unspecified tax expenditures). In contrast, the Budget for All determines what is needed to fund its spending priorities and aims to finance these needs by raising revenue from those households that have the highest incomes and have captured most of the overall income gains generated in recent decades.

Job creation and economic recovery

The labor market remains distressed, and U.S. economic output remains well below potential nearly three years after the official end of the worst downturn since the Great Depression. The CBO projects the unemployment rate will remain near 7 percent even at the end of 2015—eight years after the start of the recession (CBO 2012b). Currently, roughly 10 million additional jobs are needed to return to pre-recession unemployment and labor-force participation rates (Shierholz 2012). Underutilization of labor and productive resources has a steep cost, both in terms of foregone national income and longer-term economic scarring, which decreases potential growth (Irons 2009). In the first quarter of 2012, economic output remained $853 billion (5.2 percent) below potential—the level of output associated with full employment and non-inflationary resource utilization—and the CBO projects this output gap will persist through 2017 (CBO 2012c; Department of Commerce 2012).

Because this shortfall is clearly the result of insufficient aggregate demand, and because this demand shortfall has persisted even after the Federal Reserve has exhausted conventional (and even tried some unconventional) monetary support, expansionary fiscal policy remains the single best policy lever with which to lower unemployment and close the output gap (Bivens 2011a)—and at present is largely self-financing (DeLong and Summers 2012). Conversely, government spending cuts will have a particularly adverse impact on economic growth while large output gaps persist (Auerbach and Gorodnichenko 2012).

This economic context is crucial for evaluating competing budget proposals. The Budget for All fully recognizes this context, while the Ryan budget does not. In the near term, this means the Ryan budget would clearly lead to higher unemployment, while the Budget for All would reduce joblessness.

Ryan budget

• The Ryan budget would immediately reduce primary budget deficits (i.e., revenue less non-interest spending) relative to both the current policy and current law baselines (House Budget Committee 2012).³ Relative to current policy, primary spending cuts of $125 billion in fiscal 2013 would reduce GDP by 1.1 percent, and primary spending cuts of $279 billion in fiscal 2014 would reduce GDP by 2.4 percent.⁴
• This rapid fiscal contraction would decrease near-term aggregate demand and economic growth, which would decrease employment. The Ryan budget would reduce employment by 1.3 million jobs in fiscal 2013 and 2.8 million in fiscal 2014 (Pollack 2012).
• More than 70 percent of these near-term primary spending reductions would come from mandatory programs—particularly from income security programs—which would be particularly damaging for economic recovery (Zandi 2011).
• The Heritage Foundation Center for Data Analysis’s accompanying economic analysis of Ryan’s fiscal 2012 budget resolution—which was remarkably similar to his fiscal 2013 proposal—showed an increase in GDP resulting from government spending cuts via an implausibly large interest rate reduction and investment boom. However, the “expansionary austerity” hypothesis backing such claims has been discredited both in the economics literature and by the ongoing experience with austerity across much of Europe (Macroeconomic Advisers 2011; Guajardo, Leigh, and Pescatori 2011).⁵

Budget for All

• The Budget for All would accommodate bigger primary budget deficits over fiscal 2012–13 relative to current policy (Fieldhouse and Thiess 2012).⁶
• Targeted near-term job creation measures include $227 billion for a direct job creation program (the Emergency Jobs to Restore the American Dream Act), $106 billion for reinstating the refundable Making Work Pay tax credit, and (slightly less well-targeted) $39 billion in business tax credits, all over fiscal 2012–14.⁷
• The Budget for All would also increase nondefense discretionary spending by $380 billion over fiscal 2012–14, bringing total job creation and public investments to $786 billion over the next two-and-a-half years relative to current law.
• Relative to current policy, these and other policy proposals would increase primary spending by $259 billion in fiscal 2013, which would increase GDP by 2.3 percent. Primary spending increases of $261 billion in fiscal 2014 would increase GDP by 2.2 percent.⁸ Even net of the fiscal drag from phasing in permanent tax increases called for in the Budget for All—which have a much lower multiplier than direct spending—the budget would boost GDP by 1.8 percent in fiscal 2013 and 1 percent in fiscal 2014.
• By increasing near-term aggregate demand, the Budget for All would increase employment by 2.1 million jobs in fiscal 2013 and 1.2 million in fiscal 2014 (Fieldhouse 2012a).

The difference between these two budgets for near-term economic recovery is sizable. Nonfarm payroll employment would be increased by roughly 3.4 million jobs in fiscal 2013 and four million in fiscal 2014 if Congress enacted the Budget for All relative to enacting the Ryan budget (Fieldhouse 2012a). Simply put, this is the difference between a robust recovery and a renewed labor-market recession. This difference is a further sign that the Budget for All is much better grounded in economic reality. Given the current debate over federal budget deficits, every political incentive is to develop medium-term budget plans that show as much deficit reduction as possible. For the CPC’s budget to move in the opposite direction for the first couple of years and allow for larger budget deficits to support a weak economy shows a noteworthy degree of pragmatism. Pushing for large deficit cuts right away would garner much applause among political observers, but it would be bad economics.

Discretionary spending priorities and public investments

The two budget alternatives differ greatly in their approach toward discretionary spending. The Ryan budget meets long-standing conservative commitments by ramping up defense spending despite wars ending in Iraq and Afghanistan, while slashing NDD spending. The Budget for All instead recognizes the opportunities afforded by the ending of wars in Iraq and Afghanistan to reorient discretionary spending toward public investments.

The NDD portion of the budget accounts for only 17.4 percent of government expenditure (CBO 2012a) but encompasses most public investments undertaken to boost human and physical capital (Pollack 2011). It houses spending on everything from education to workforce training, from child nutrition to scientific research, from energy to the basic operations of government. Ryan’s proposal would radically shrink this portion of the budget—in fact, in later years there would be literally no room for any NDD spending given his budget’s priorities. Conversely, the Budget for All would finance front-loaded but sustained investments to support economic growth during the years in which unemployment is projected to remain elevated. Over the longer term, the Budget for All would support targeted investments critical to raising potential output—a policy fully in line with what empirical research argues about key drivers of productivity growth (Bivens 2012).

Ryan budget

• Relative to current policy, the Ryan budget would cut the domestic (i.e., non-defense) budget by $5.3 trillion over ten years while simultaneously increasing defense spending by about $200 billion (Horney and Merrick 2012). Almost one-quarter of the domestic spending cuts called for in the Ryan budget, or roughly $1.2 trillion, would come from the NDD budget. These cuts would be layered on top of the steep reductions to the NDD budget already scheduled as a result of the spending caps legislated in the Budget Control Act (BCA), i.e., the debt ceiling deal.
• NDD spending as a share of GDP would fall to 2.1 percent in fiscal 2022, down from 2.7 percent projected under current policy and a 3.9 percent historical average over fiscal 1962–2011, as shown in Figure A (OMB 2012). This would reduce NDD spending by 20.4 percent relative to current policy.
• Over the longer term, the Ryan budget would sharply reduce combined nondefense, defense, and “other mandatory” spending (excluding Social Security, Medicare, Medicaid, and other health programs) from 12.5 percent of GDP in 2011 to 5.75 percent of GDP by 2030 and 3.75 percent of GDP by 2050. This compares with 8.5 percent of GDP by 2030 and 8.25 percent in 2050 projected under CBO’s current policy baseline (CBO 2012d).⁹ The basic government functions—everything but Social Security, Medicare, Medicaid and other health programs, and interest on the debt—would be cut by roughly one-third over the next 20 years and by more than half by 2050, relative to projected levels.
• Since Ryan favors increasing defense spending, it is likely that NDD and “other mandatory” spending would be crowded out of existence, and/or primary spending and budget deficits would be considerably higher than the levels projected by the CBO.¹⁰ The Ryan budget maintains defense spending at an average of 3.1 percent of GDP throughout fiscal 2013–22. If this level were maintained through the long-term budget window, by 2050 spending on the nondefense discretionary portion of the budget would be almost completely eliminated.

Figure A

Figure A (continued)

Historical nondefense discretionary (NDD) spending (1962–2011) and projected levels (2012–2022) Note: For CPC Budget for All, Highway Trust Fund outlays remain classified as discretionary for the sake of historical comparison. Sources: Authors' analysis of OMB and CBO data and other sources

Budget for All

• The Budget for All would repeal the deep cuts to NDD spending enacted in the BCA, reinstating $583 billion in NDD spending through fiscal 2022 (Fieldhouse and Thiess 2012). Beyond repealing the BCA cuts, the Budget for All would finance an additional $1.6 trillion in NDD budget outlays through fiscal 2022. These investments, along with front-loaded job creation measures, would exceed $300 billion per year over fiscal 2013–15, providing a substantial fiscal boost in those years when the economy is projected to remain below potential output.
• The Budget for All would also finance a $556 billion, six-year surface transportation reauthorization bill that would increase transportation investments by $247 billion over fiscal 2012–22, relative to current law (Fieldhouse and Thiess 2012).¹¹
• NDD spending in the Budget for All would essentially match the historical average share of GDP over the past half-century—averaging 4 percent of GDP over fiscal 2013–22 compared with 3.9 percent since 1962.
• These investments would substantially blunt the steep cuts in NDD spending projected under current policy and current law, and proposed by the Ryan plan (as shown in Figure A).
• The Budget for All would help finance these investments with savings from the Department of Defense, as the war in Iraq has ended and the war in Afghanistan would be drawn to a close on an accelerated timeframe. Ending overseas contingency operations would save over $1.1 trillion relative to current law and $336 billion relative to the president’s budget request (Fieldhouse and Thiess 2012). Spending cuts to non-emergency spending by the Department of Defense would be gradually phased in, effectively replacing the imprudent (and unlikely to materialize) front-loaded automatic spending cuts from the BCA with feasible and less economically harmful reforms.

The Ryan budget would greatly diminish the NDD budget over the next few decades, stunting government’s ability to perform basic services, invest in public education, protect the environment, monitor financial markets for fraud and excess, maintain national parks, or invest in grants for scientific research. The Budget for All not only protects the NDD budget from the pending automatic reductions scheduled under the BCA, but also restores funding toward the historical levels needed to maintain the public capital stock. While the job creation measures in the budget would largely phase out as the economy recovers, NDD investments would be sustained throughout the entire 10-year budget window to support the physical infrastructure and human capital investments necessary to keep unemployment low and the economy globally competitive.

Economic security and opportunity

The Ryan budget and the Budget for All reflect vastly different priorities for promoting economic opportunity and security for the middle class. The Ryan budget calls for steep reductions in tax rates for upper-income households, essentially directing substantial new public resources toward those households that have already ensured their own economic security and reaped the lion’s share of economic growth in recent decades (Piketty and Saez 2012). In addition, the deep cuts to income security programs called for in the Ryan budget would take a hefty toll by reducing economic security for low- and middle-income American households—precisely those that have struggled to improve their living standards for much of the past 30 years. Given the clear underlying trends in income data, this is a questionable allocation of public resources. Further, past evidence indicates clearly that the binge of tax cuts for high-income households in the 2000s did not translate into a healthy economy—even before the Great Recession hit (Bivens and Irons 2008).

In contrast, the Budget for All would protect the social safety net that has been vital to so many since the Great Recession began, while also focusing tax cuts on low- and middle-income families. In short, the Budget for All uses evidence in determining budgeting priorities and identifying where public resources would do the most good in helping to remedy the wider economy’s failure to deliver living standards growth.

Ryan budget

• Despite rising poverty and high unemployment, the Ryan budget would cut deeply into the social safety net: According to the Center on Budget and Policy Priorities (CBPP), 62 percent of the nondefense cuts proposed by the Ryan budget would come from programs for lower-income households (Horney and Merrick 2012).
• For example, the Supplemental Nutritional Assistance Program (SNAP, formerly known as food stamps) would see cuts of $134 billion—or more than 17 percent—over the next decade (Rosenbaum 2012). A cut this deep would necessitate reducing benefits substantially or cutting the number of people receiving benefits. If reductions were to come solely from decreasing SNAP eligibility, more than eight million people would need to be cut from SNAP rolls in order to achieve the magnitude of cuts laid out in the Ryan budget (Rosenbaum 2012). According to CBPP, SNAP kept roughly four million Americans—including two million children—out of poverty in 2010 (CBPP 2012).
• CBPP estimates that the Ryan budget would cut $463 billion from programs that specifically serve lower-income Americans (other than Medicaid and SNAP), provided cuts to these lower-income programs were made proportionately by spending category (Horney and Merrick 2012).
• The Ryan budget specifically identifies the Pell Grant program (which provides need-based grants for low-income students wishing to attend college or receive vocational training) as unsustainable and in need of reform, implying that Pell Grants would be slated for a hefty spending cut.¹² CBPP estimates the Ryan budget would make $166 billion in mandatory cuts to the Education, Training, Employment, and Social Services budget function, and surmises that cuts to Pell Grants would constitute a good portion of those reductions (Horney and Merrick 2012).

Budget for All

• The Budget for All would protect the social safety net and promote economic mobility by increasing discretionary outlays in the Education, Training, Employment, and Social Services budget function by $234 billion; the Income Security budget function by $312 billion; and the Community and Regional Development budget function by $78 billion over the next decade.
• The Budget for All would enact the Unemployment Insurance Solvency Act to strengthen the unemployment compensation system—which has been under great financial distress during this period of high unemployment and near-record long-term unemployment—at both the federal and state level. A critical component of the social safety net, unemployment compensation kept 3.2 million Americans out of poverty in 2010 (Census Bureau 2011).
• The Budget for All would permanently extend the expansion of refundable tax credits enacted in the American Recovery and Reinvestment Act (ARRA), which would increase mandatory outlays by $131 billion over fiscal 2013–22. Specifically, this would extend the third Earned Income Tax Credit (EITC) tier for larger families, the lower $3,000 earnings threshold for the refundable portion of the child tax credit, and the partially refundable American Opportunity Tax Credit for college tuition. When added to the resource measurement for poverty, the expanded EITC effectively kept 5.4 million Americans out of poverty in 2010 (Census Bureau 2011).
• Additionally, the Budget for All would maintain the family and education incentives included in the 2001 and 2003 tax cuts, including the increased child tax credit and “marriage penalty” relief for the EITC, standard deduction, and 15 percent tax bracket.

The Ryan budget would roll back programs that help millions of Americans maintain decent living standards. Not only would the Budget for All invest in the budgeting categories supporting workforce training, child nutrition programs, and Pell Grants, it would also extend the refundable tax credits included in the ARRA. In that respect, the Budget for All charts a far different path than the Ryan budget, which would demand blunt austerity measures asking the most from those least able to afford it. Importantly, the Budget for All’s alternative path invests public resources in areas that evidence shows would do the most good for the most households.

Health care costs and coverage

The American health system suffers from two interrelated problems, especially when compared with advanced-country peers: health care costs that rise unusually rapidly, and a large share of the population that lacks health insurance. America spends significantly more on health care per capita than every other developed nation, yet achieves similar-at-best health outcomes—and costs are projected to continue to increase unsustainably fast. The main driver of this cost growth has been the provision of health care itself, which is provided almost exclusively by the private sector. This system of private care provision has generated consistently large annual increases in costs for both private insurers and public insurance programs (mostly Medicare and Medicaid), taking a toll on household budgets and federal and state budgets alike. Furthermore, nearly 50 million Americans currently remain without health insurance coverage.

The Affordable Care Act (ACA) takes a large step toward solving both problems, but further reforms will be needed even after it is fully phased in. By the end of the decade, even after the ACA is phased in and its provisions expand coverage to an additional 30 million non-elderly Americans, there will remain an estimated 27 million Americans without insurance (CBO 2012e). A lack of health insurance raises the chance of bankruptcy, poor health, or even premature death. Further, the effects of uninsurance are borne not just by the uninsured themselves, but by the nation as a whole. As the uninsured seek treatments at emergency rooms, they push their costs onto hospitals, which tend to be reimbursed either from public insurance programs like Medicare and Medicaid or by passing costs onto privately insured patients. The provisions in the Ryan budget regarding health security are perhaps its most misguided, as they ignore the reality that, in the absence of social insurance, market failures will keep the private sector from ever adequately covering large portions of the population. The Budget for All, conversely, recognizes the value of existing health security programs and also realizes that even more must be done to ensure health security for all Americans.

Ryan budget

• The Ryan budget would repeal the ACA, denying over 30 million Americans coverage and increasing out-of-pocket costs for millions of seniors. This would raise drug costs by an average of $723 per senior in 2013 and $1,847 per senior by 2021 (CBO 2012e; HHS 2012).
• It would cut Medicaid by nearly half by 2022 (a cut of over one-third against a pre-ACA baseline), causing another 14–27 million Americans to lose coverage in addition to the 17 million who would lose Medicaid with the repeal of the ACA (Holahan et al. 2011). On net, the Ryan budget would cut Medicaid and other health programs by $2.4 trillion by fiscal 2022 (Horney and Merrick 2012).
• The Ryan budget would raise the eligibility age for Medicare, convert the program into a subsidized voucher model, and cap its growth, ensuring that it could not protect beneficiaries’ financial security from rapidly rising health costs. More specifically, the Ryan proposal would raise the Medicare eligibility age from 65 to 67, replace the current guaranteed Medicare system with a flat premium-support voucher system in which beneficiaries could purchase either private health insurance or traditional Medicare, and cap spending increases to just half a percentage point above overall GDP growth—a growth rate that, given underlying health care cost trends, is guaranteed to expose beneficiaries to ever-increasing out-of-pocket costs.
• Further, because the Ryan budget would fracture the current large pool of Medicare beneficiaries, the traditional program could also lose bargaining power vis-à-vis providers—bargaining power that has enabled Medicare to hold down per-beneficiary cost growth better than the private sector nearly since its inception. Medicare was estimated to be 11 percent cheaper than an actuarially equivalent private insurance plan in 2011 and is projected to be 28 percent cheaper by 2022 (CBO 2011b).
• By 2050, Medicare spending for new enrollees would be cut by over one-third, and spending on all public health insurance programs other than Medicare would be cut by over 75 percent (CBO 2012d).

Budget for All

• The Budget for All would implement a public insurance option, which would be allowed to compete with private insurers in the health insurance markets that will be established in 2014 as part of the ACA. The CBO estimated that premiums for the public insurance option would be 5–7 percent cheaper than equivalent private insurance (CBO 2011c).
• The Budget for All would harness the purchasing power of Medicare to negotiate drug prices with, and/or rebates from, pharmaceutical companies (as is currently done for Medicaid and the Veterans Health Administration).
• The Budget for All would also adopt the administration’s reforms for drug development and take steps to reduce fraud and waste in Medicaid.
• Additionally, the Budget for All would crack down on Medicare Hospital Insurance (HI) payroll tax avoidance and would promote health by ending subsidies for junk- and fast-food advertising to children.
• Cumulatively, these reforms to slow the rate of national health care expenditure would save $306 billion over ten years beyond the savings projected from the implementation of the ACA.

The Ryan budget would undoubtedly reduce the federal government’s spending on health care, but it would achieve this by shifting costs to states, businesses, and households. Such cost shifting solves the accounting problem of health care by removing many health expenditures from the government’s budget ledger. But problematically, the Ryan budget does not address the underlying economic problem of higher health care costs eroding the living standards of American households. The Ryan budget would also cost tens of millions of Americans their insurance coverage by the end of the decade by repealing the expansion of coverage enacted by the ACA. In contrast, the Budget for All would build on the efficiencies of the ACA, which is already projected to reduce deficits by $210 billion through 2021 (CBO 2011d), to ensure health security for Americans in a sustainable way. It builds on what the evidence says works in American health care (the guaranteed coverage and bargaining power provided by the large public programs) and tries to fix what does not (fractured coverage in the private insurance market that keeps effective cost control from occurring).

Tax policy

The Ryan budget doubles down on the George W. Bush vision of economic policymaking, which holds that what the economy needs most is lower tax rates on the already well-off. However, the supply-side experiment of the last decade resulted in the worst economic expansion since World War II—as measured by growth in GDP, non-residential fixed investment, employment, and compensation (Bivens and Irons 2008)—and ended in the worst recession in 75 years.¹³

Besides being ineffective in spurring economic growth, the tax cuts were simply unfair, lavishing disproportionate benefits on a small sliver of upper-income households that had already received the lion’s share of income gains over recent decades (Fieldhouse and Pollack 2011). When fully phased in, the top 1 percent of households measured by income received 38 percent of the tax cuts, while the top 10 percent of households received 55 percent of their benefit (TPC 2008).¹⁴ The top 1 percent of households by income also captured 65 percent of total income growth during the 2002–2007 economic expansion (Piketty and Saez 2012). In short, tax cuts were targeted to those households least in need of more disposable income.

The Ryan budget would maintain all of the Bush-era tax cuts and would even expand them for most households, while offering an implausibly large offsetting revenue gain from broadening the tax base (via eliminating unspecified tax expenditures). The Budget for All adopts a more pragmatic approach: It determines what is needed to fund its spending priorities and aims to finance these needs by raising revenue from those households that have the highest incomes and have captured most of the overall income gains generated in recent decades.

Ryan budget

• The Ryan budget would maintain the Bush-era tax cuts and more recent estate and gift tax cuts, and the parameters of the alternative minimum tax (AMT) would be adjusted for inflation (i.e., the AMT would be “patched”), at a total cost of roughly $5.4 trillion over the next decade relative to current law (CBO 2012b).
• The Ryan budget would reduce the number of tax brackets to just two—10 percent and 25 percent (which would be the lowest top tax rate since the early 1930s)—repeal the AMT, repeal the Medicare Hospital Insurance and excise taxes included in the Affordable Care Act, cut the top corporate income tax rate from 35 percent to 25 percent, and exempt all foreign earnings of U.S. multinational corporations from taxation. The nonpartisan Tax Policy Center (TPC) estimates these measures would reduce revenue by an additional $4.7 trillion over fiscal 2013–22 (TPC 2012a).¹⁵
• The Ryan budget would, however, end the Recovery Act expansion of refundable tax credits—thereby raising taxes on 11 percent of households with under $30,000 in income on average (TPC 2012b). Net of this lower-income tax increase, the Ryan budget proposes $4.5 trillion in unfunded tax cuts.
• Ryan’s additional tax cuts would be significantly skewed toward the top of the income distribution, with 71 percent of their benefit going to the 5 percent of households with income above $200,000 a year (TPC 2012b).¹⁶ Households with income below $75,000 a year (representing 71 percent of all households) would, in contrast, receive only 6 percent of Ryan’s proposed tax cuts.
• Households with over $1 million in annual income would receive an average tax cut of $265,000 relative to current policy in addition to the $141,000 tax cut afforded by maintaining the Bush-era tax cuts and other current tax policies (TPC 2012b; TPC 2012c).¹⁷ The average effective tax rate for these top 0.4 percent of households by income would be cut to 23 percent, down 27 percent from current policy and down 37 percent relative to current law.
• From their current policy baseline, TPC estimates that Ryan’s proposed $4.5 trillion in additional tax cuts would lower revenue to just 15.5 percent of GDP over the next decade (TPC 2012a). The Ryan budget, however, ignores the cost of the tax cuts it proposes and assumes they would be offset by the unspecified elimination of tax expenditures. It sets revenue levels to average 18.3 percent of GDP over fiscal 2013–22, up from 17.8 percent of GDP under current policy and down from 20.5 percent of GDP under current law.¹⁸
• A recent analysis by Jane Gravelle and Thomas Hungerford of the Congressional Research Service concluded that “given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening” (Gravelle and Hungerford 2012). This range of estimates implies that somewhere between $2.6 trillion and $3.2 trillion of the Ryan tax cuts would necessarily be deficit-financed (Fieldhouse 2012b). (The continuation of the Bush-era tax cuts and other current tax policies would effectively be financed by some $5.3 trillion of spending cuts, relative to current policy.)

Budget for All

• The Budget for All would gradually roll back the Bush-era reductions in the top four marginal tax brackets and enact tax increases on high incomes.
• The upper-income Bush-era tax cuts—those for households with adjusted gross income exceeding $200,000 ($250,000 for joint filers)—would be allowed to expire on schedule as proposed in the president’s budget.¹⁹ The 28 percent bracket would be temporarily extended until reverting to 31 percent in 2017, and the 25 percent bracket would be temporarily extended until reverting to 28 percent in 2019.
• The Budget for All would also add tax brackets ranging from 45 percent to 49 percent at taxable income thresholds of $1 million up to $1 billion (Fieldhouse and Thiess 2012).
• The preferential treatment of unearned income relative to earned income would be repealed, as would be the step-up basis for capital gains.
• In addition to restoring a greater degree of progressivity to the individual income tax code, the Budget for All would raise significant revenue from “Pigovian” taxes on economic externalities, including pricing carbon to address global climate change and taxing financial transactions and the leverage of large banks to curb systemic financial risk.
• As a result of these and other tax changes, revenue would average 21.7 percent of GDP over fiscal 2013–22, up 3.9 percentage points from current policy and 1.2 percentage points from current law.

The Ryan budget would continue down the path of costly and regressive tax cuts, conferring large benefits to upper-income households that would come at the expense of lower- and middle-income households through a combination of lost tax preferences and eventual spending cuts. The Budget for All would instead restore fairness to the tax code, particularly at the top of the income distribution, by eliminating tax preferences for unearned income and raising taxes on wealth. The Budget for All would also use tax policy to improve economic efficiency by taxing economic “bads” like pollution and financial speculation.

Conclusion

All too often, prominent policymakers espouse the view that “we’re broke” to justify cutting spending programs that benefit low- and middle-income Americans. We are not broke—income per capita has risen by 66 percent between 1980 and 2010, and is projected to grow another 61 percent over the next 30 years (Mishel 2011). But these income gains have become increasingly concentrated at the top of the income distribution, while tax policy has been increasingly focused on decreasing effective tax rates for those at the top. The Budget for All recognizes these empirical realities in crafting economically and socially sustainable budget policy.

The Ryan budget, by contrast, takes no account of current or future economic circumstances in advancing its policy priorities. Further, it does not add up. The Budget for All, on the other hand, addresses real-world economic problems head-on, pragmatically, and fairly. It provides near-term support to reduce joblessness, it fills in the shortfall in public investment that has harmed productivity growth, and it helps ensure economic opportunity and security at a time when the employer-based system providing health and retirement security for most American workers is unraveling. Importantly, it does this in a transparent manner that respects the laws of arithmetic and does not engage in simple cost-shifting from the federal budget to family budgets.

—Andrew Fieldhouse is a federal budget policy analyst at the Economic Policy Institute and The Century Foundation, Rebecca Thiess is a federal budget policy analyst at the Economic Policy Institute, and Ethan Pollack is a senior policy analyst at the Economic Policy Institute.

—The Economic Policy Institute is a nonprofit, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy. EPI stresses real-world analysis and a concern for the living standards of working people, and it makes its findings accessible to the general public, the media, and policymakers through books, studies, and popular education materials. The Century Foundation conducts public policy research and analyses of economic, social, and foreign policy issues, including inequality, retirement security, election reform, media studies, homeland security, and international affairs. With offices in New York City and Washington, D.C., The Century Foundation is nonprofit and nonpartisan and was founded in 1919 by Edward A. Filene.

Endnotes

1.  The CPC solicited the assistance of the Economic Policy Institute (EPI) Policy Center in analyzing and scoring the specific policy proposals in the Budget for All and modeling their cumulative impact on the federal budget over the next decade. The policies in the Budget for All reflect the decisions of the CPC leadership and staff, not those of EPI. Many of the policies included in their budget, however, overlap with policies in Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Reasonability, a progressive budget plan released by Our Fiscal Security (OFS), a partnership of The Century Foundation, Demos, and the Economic Policy Institute (see Fieldhouse and Thiess 2010).

2. Our current policy baseline assumes that the automatic enforcement spending cuts scheduled to take effect in fiscal 2013 by the Budget Control Act (i.e., the debt ceiling deal) do not occur, overseas contingency operations (OCO, or funding for overseas military operations) are gradually wound down, the scheduled reduction in Medicare physician payments is prevented (i.e., the “doc fix” is maintained), the 2001 and 2003 income tax cuts are continued, the American Recovery and Reinvestment Act (ARRA) expansion of refundable tax credits is maintained, the 2011–12 estate and gift tax cuts are continued, the 2011 parameters of the alternative minimum tax (AMT) are indexed for inflation, and the business tax extenders (routinely extended credits such as the research and experimentation credit) are continued. These policy adjustments are found in Tables 1–6 of CBO’s January 2012 Budget and Economic Outlook (CBO 2012b). Debt service is adjusted accordingly, increasing interest outlays by $1.1 trillion. The only temporary tax provision assumed to expire is the two-percentage-point employee-side payroll tax cut, which is scheduled to expire at the end of 2012.

3. This takes the Ryan budget path for deficits and debt at face value.

4. These calculations assume a government spending multiplier of 1.4, which is Mark Zandi’s most recent general government spending multiplier (Zandi 2011). Primary spending has been adjusted to exclude assumptions regarding emergency outlays for Overseas Contingency Operations (OCOs), which has a relatively small impact on domestic output. See Bivens (2011b) for methodology on translating fiscal impulses to changes in GDP and employment.

5. Interest rates are already at historically low levels, and there is little scope for further rate reductions while the federal funds rate remains at the zero lower bound for nominal interest rates.

6. Primary budget deficits would be increased over fiscal 2012–15 relative to the smaller deficits projected under current law.

7. Spending changes are measured in outlays rather than budget authority.

8. These calculations assume a government spending multiplier of 1.4 and a multiplier of 0.35 for permanent income tax changes (Zandi 2011). Primary spending has again been adjusted to exclude emergency OCO outlays.

9. The “other mandatory” budget includes income security programs (SNAP, Supplemental Security Income, unemployment compensation, child nutrition programs, and the refundable portion of tax credits, among other programs), federal civilian and military retirement, veterans’ compensation and pensions, agriculture programs, support for Fannie Mae and Freddie Mac, student loans, and deposit insurance, among other programs. CBO’s current policy baseline, known as the “alternative fiscal scenario,” assumes that Medicare physician payments are indexed to inflation, that scheduled Medicare and insurance exchange subsidy cost controls from the ACA cease to exist beyond 2021, that overseas troop deployments (OCO) are gradually wound down, and that discretionary spending is held constant as a share of GDP beyond 2021 (CBO 2011a).

10. The CBO’s long-term analysis is also predicated on the assumption that revenue would hold at 19 percent of GDP in fiscal 2025 and beyond (CBO 2012d), which does not square with the Ryan budget’s tax proposals. See the section entitled “Tax policy.”

11. The Budget for All would also reclassify surface transportation outlays from the highway trust fund as mandatory spending rather than discretionary spending. This reclassification is, however, excluded from projections of NDD outlays as a share of GDP to make for an apples-to-apples comparison with the Ryan budget, current policy, and historical outlays (see Figure A).

12. The Ryan budget does not specify spending cuts at the programmatic level within the major budget functions, so assumptions are necessary to assess how the sizable spending cuts would be distributed.

13. The Bush-era tax cuts refer to the 2001 EGTRRA and the 2003 Jobs and Growth Tax Relief and Reconciliation Act, and other (more minor) policies enacted between 2001 and 2008, unless otherwise noted. The American Reinvestment and Recovery Act of 2009 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 have recently modified and extended these tax cuts. The modified and extended Bush-era tax cuts are scheduled to expire December 31, 2012.

14. Tax Policy Center distributional analysis is measured by tax units for tax year 2010.

15. TPC’s revenue estimate assumes that the 15 percent bracket is reduced to 10 percent and all brackets above 25 percent are reduced to 25 percent (TPC 2012a). The Ryan budget does not specify the taxable income cutoff between the two brackets.

16. Tax Policy Center distributional analysis is measured by tax units for tax year 2015. Cash income and percentile breaks are measured in 2011 dollars (TPC 2012b).

17. Tax Policy Center distributional analysis is measured by tax units for tax year 2015. Cash income and percentile breaks are measured in 2011 dollars. Tax units with cash income exceeding $1 million would see a tax cut of $264,970 relative to current policy and $406,327 relative to current law, the difference between which is $141,357 (TPC 2012b; TPC 2012c).

18. Unlike our current policy baseline, the Ryan budget revenue baseline does not assume the business tax extenders will be continued. The extenders include roughly 80 temporary tax provisions that are typically extended on an annual basis; if continued, they will reduce revenue by $839 billion, adding $1.0 trillion to budget deficits after adjusting for debt service (CBO 2012a).

19. These include the 33 percent and 35 percent income tax brackets, the 15 percent rates on capital gains and dividends, the temporary repeal of the personal exemption phase-out (PEP), and the temporary repeal of the limitation on itemized deductions (Pease).

References

Auerbach, Alan J., and Yuriy Gorodnichenko. 2012. Fiscal Multipliers in Recession and Expansion. University of California, Berkeley. http://emlab.berkeley.edu/~auerbach/FMRE-2012-Jan.pdf

Bivens, Josh, and John Irons. 2008. A Feeble Recovery: The Fundamental Economic Weaknesses of the 2001–07 Expansion. Economic Policy Institute, Briefing Paper No. 214. http://www.epi.org/page/-/old/briefingpapers/214/bp214.pdf

Bivens, Josh. 2011a. Abandoning What Works (and Most Other Things, Too): Expansionary Fiscal Policy Is Still the Best Tool for Boosting Jobs. Economic Policy Institute, Briefing Paper No. 304. http://www.epi.org/page/-/old/briefingpapers/BriefingPaper304%20%284%29.pdf

Bivens, Josh. 2011b. Method Memo on Estimating the Jobs Impact of Various Policy Changes. Economic Policy Institute, Briefing Paper No. 304. http://www.epi.org/page/-/old/briefingpapers/BriefingPaper304%20%284%29.pdf

Bivens, Josh. 2012. Public Investment: The Next ‘New Thing’ for Powering Economic Growth. Economic Policy Institute, Briefing Paper No. 338. http://www.epi.org/files/2012/bp338.pdf

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