Reviewing the Ryan Budget (Part 2): Details of the Ryan Plan

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In the short week since Mitt Romney announced his VP pick, Rep. Paul Ryan, much speculation has been made about whether or not Romney will adopt Ryan’s policies as his own, primarily his fiscally conservative budget plan. Ryan, a darling of the Tea Party movement and its subsequent offspring the “Young Guns,” has become known for his aggressively austere budget plan introduced as legislation in 2010 as the “Roadmap to America's Future”, and subsequently passed by the House of Representatives in a slightly different iteration as the 2013 House Budget Resolution, the “Path to Prosperity.” While pundits were quick to assume that Romney would necessarily adopt the budgetary positions of his running mate (after all, Romney has publicly lauded many of Ryan’s proposals), many are scrambling to figure out just what exactly is the Paul Ryan budget plan?

Why the House-passed “Path to Prosperity” is an imperfect gauge for what Ryan would do, and how it would affect the U.S. fiscal path

Part of the difficulty in discerning what Ryan’s budget “plan” is lies in the basic construction of a budget resolution. Although Ryan has publicly embraced the resolution, the resolution itself reveals little. First, budget resolutions are not law. They are resolutions between both houses of Congress and serve as a blueprint for spending for the year or years to come. Essentially, they represent Congress’s willingness to bind itself to a tax and spending plan for a series of future years. A budget resolution is never signed by the President and, as Congress has shown for the last several years, they aren’t strictly required each year.

Why does this matter? Because a budget resolution doesn’t change the law. It only sets top line numbers for spending and revenues; it does not go into detail on what changes are to be made in order to achieve those top line figures. So in a given year a budget resolution might set a top line revenue number telling the Congress to collect $2.734 trillion, but it doesn’t dictate HOW those revenues are to be collected. It’s up to Congress to enact further legislation (or in many cases just leave laws in place) to achieve that number. In fact congressional committees can do whatever they want to achieve those spending or savings numbers, within the budget rules. Savvy budgeteers make good (if unexciting) livings deciphering what is probably in that number by divining what laws are set to expire, what actions congressional committees are likely to take, and what majority prerogatives are, but the fact remains that the budget resolution doesn’t spell it out.

Which brings us to the “Ryan” budget. With the passage of the “Path to Prosperity,” Rep. Ryan helped the budgeteers out a bit by putting forward accompanying documents detailing some of his intentions and assumptions underlying the top line numbers contained in the House-passed budget resolution. It’s important to remember that his assertions don’t represent what Congress is required to do, and that they likely represent only the rosy sides of the picture. One can presume that he didn’t spend ink touting the possibly unpopular pieces of the plan. However, because Ryan himself put the assumptions forward in accompanying documents, it’s a fair starting point for what he would do to the budget in his perfect world.

What Would the “Ryan” plan do?

Medicare
The most detailed of Ryan’s budget proposals is his Medicare plan. Begun as a bipartisan effort with Senator Ron Wyden, the plan was subsequently adopted in the House-passed Budget Resolution. As the media has already been quick to identify, the “Path to Prosperity” would also repeal most of the Patient Protection and Affordable Care Act (PPACA). The “Path” would change Medicare to a premium-support program, though Ryan emphasizes that the Medicare program will remain as-is for those currently over the age of 55. For anyone younger, Medicare would convert to a premium-support payment in which each beneficiary would be given a payment to automatically apply to the plan of their choice, either the traditional fee-for-service plan or a different plan available on a newly-created Medicare Exchange. In order to keep costs down, health care plans would compete for the right to serve Medicare beneficiaries through an annual competitive bidding process that would determine the dollar amount of the federal contribution seniors would receive for standard premium support.

CBO did not issue a score of the “Path to Prosperity” (because CBO doesn’t score budget resolutions); however, they did issue calculations based on Ryan's specified path as compared to CBO's baseline scenarios at the request of Rep. Ryan in March 2012. In those calculations, CBO concluded that Ryan’s Medicare plan would substantially slow growth in Medicare spending compared to both the baseline scenario and the alternative fiscal scenario (incorporating changes to current law that are widely expected to occur). Under the Ryan plan, net Medicare spending on the average 66-year old in 2030 would be $7,400 in 2011 dollars compared to $9,600 under the alternative fiscal scenario. (Average net spending for 65-year olds in 2011 was $5,500 for comparison.) In 2050 the numbers get even more stark, with Ryan’s plan costing $11,100 per average 67-year old compared to $19,100 under the alternative fiscal scenario.

Essentially, health care plans would compete to underbid each other and the second-least expensive bid would set the annual benchmark for what an average (excluding low-income or high-risk) senior would receive toward their insurance premium each year. If a beneficiary decided to choose a less expensive or more expensive plan, they would be entitled to a rebate or would be responsible for the extra cost.

This competitive bidding process is important for keeping costs down because it utilizes choice and competition to control costs rather than the Independent Payment Advisory Board (IPAB) as established by the PPACA. Currently the growth rate in Medicare is established using a series of formulas to reduce spending if growth is projected to exceed nominal GDP growth plus 0.5 percent. As we have seen before, these formulaic adjustments to growth rates can often be delayed or overridden by Congress (as in the often-delayed “doc fix” which Congress votes for year after year rather than subjecting physicians to lower reimbursement rates). While GDP plus 0.5 percent is also the fall-back target that Rep. Ryan proposes to keep costs in line, it is accomplished through a competitive bidding process that is less likely to result in reduced access to health care, diminished quality of care and less investment in new technology.

The details in Ryan’s accompanying document go on to explain that health plans that participate in the Medicare Exchange would be required to offer insurance to all seniors regardless of age and health status, eliminating the concern for coverage of those with preexisting conditions or disparate costs based on age. In addition, federal contributions would be risk-adjusted to account for a senior’s health status and age, low-income seniors (those also eligible for Medicaid) would receive additional funds for out-of-pocket expenses, and means-testing thresholds would apply for high-income seniors similar to Medicare Parts B and D.

Many have been quick to point out that, while the Path to Prosperity calls for the repeal of the ACA, Ryan’s budget retains certain cuts to Medicare that were part of the legislation—the now fabled $716 billion. While much has been made on this point, it’s important to remember that the “Path to Prosperity” does to Medicare exactly what President Obama ALREADY did to Medicare. The “cuts” that are scheduled to take place under the PPACA (mostly a slowing in the growth rates of payments to hospitals and insurers) have already passed as part of the PPACA, so Ryan’s retention of those savings isn’t as earth-shattering as some in the press would contend. Rather than using the potential savings to fund new health care entitlements in the PPACA, Ryan would retain the funds as part of the Medicare trust fund in an effort to restore solvency to the fund. As e21’s Jim Capretta points out, the specific cuts to Medicare made by President Obama in the PPACA are potentially much more harmful than those included in the Ryan budget. Although the savings figures are the same, the PPACA prescribes cuts which are “of the worst kind. They are arbitrary and across the board.” Capretta goes on to detail the specific PPACA cuts to Medicare:

Medicaid
The “Path to Prosperity” would convert the federal share of Medicaid spending into a block grant system to the states. Growth in the spending would be capped at a rate indexed for inflation and population growth. This idea has been proposed by a variety of sources who contend that block grants will give each state the flexibility necessary to address their own changing needs and populations rather than the rigid approach currently imposed by the federal bureaucracy. Proponents argue that block granting funds to states will permit for more innovative coverage options which could lead to substantial savings.

Currently the federal government pays an average of 57 cents of every Medicaid dollar used. States have little incentive to find an additional dollar of Medicaid savings if it only results in 43 cents in savings for the state itself. Block grants will incentivize innovative savings while combating the decline in quality of care predicted over the next decade. Through the repeal of the PPACA, Ryan would also reverse requirements for states to retain all beneficiaries who received Medicaid in 2010 through 2014 and reverse the other scheduled expansions of Medicaid under the health care law.

CBO calculated that the plan would reduce federal spending on Medicaid and CHIP in coming decades rather than the sharp increase that would otherwise occur under the baseline and alternative fiscal scenarios. In fact, federal spending would be 78 percent below what it would otherwise be in 2050 under the alternative fiscal scenario.

Social Security
The “Path to Prosperity” acknowledges the need for reform in order to keep the Social Security trust fund solvent, as well as the complications arising from the retirement of the baby boomers, longer life expectancies, and increased health care costs. However, it stops short of suggesting a specific plan for addressing those complications. Rather than suggest a specific reform to Social Security, Ryan’s white paper establishes a requirement for the President and the Board of Trustees to submit a plan for restoring balance to the social security trust fund. The paper seems to indirectly support the plan created by the Simpson-Bowles commission which would create a more progressive benefit structure and increase the retirement age. However, it stops short endorsing that plan, noting only that the Commission “made positive steps forward on bipartisan solutions to strengthen Social Security. This budget builds upon the Commission’s work, forcing action to solve this pressing problem by requiring the President and Congress to work together to advance solutions.”

Taxes
As discussed above, the House-passed Budget Resolution doesn’t have the power to affect specific changes in tax policy. A resolution can set top-line revenue figures and through reconciliation instructions it can instruct the appropriate authorizing committee to make changes in laws resulting in overall increases or decreases in revenues collected, but it can’t prescribe what those changes should be. With that in mind, Rep. Ryan detailed his preferred ideas for tax reform in the accompanying report to the resolution. Above all Ryan emphasizes that his tax reforms would be focused on pro-growth policies, rejecting the President’s call to raise taxes. Instead, Ryan’s goal is to maintain revenue growth at a level consistent with historic norms.

Rep. Ryan’s ideas for pro-growth tax reform are bold compared with some other mainstream GOP proposals. Ryan favors a simpler tax code with lower rates while broadening the tax base. His proposal would reduce the current six individual income tax brackets to two brackets of 10 percent and 25 percent, though he has backed off previous statements on exactly where those rates would apply. In order to accomplish these lower rates and remain revenue neutral, Ryan would eliminate most tax expenditures (tax credits and deductions) to recover the roughly $1 trillion in revenue lost on tax expenditures each year.

Along with repealing most tax expenditures, Ryan would abolish the Alternative Minimum Tax and lower the corporate tax rate to 25 percent along with moving to a system of territorial taxation.

The sum goal of Ryan’s tax proposals is to keep revenues between 18-19 percent of GDP, close to the historic norm. As e21 has previously discussed, straying very far from this level of taxation quickly leads to tax scenarios vastly out of step with what Americans have considered tolerable and equitable for the last century.

Jennifer Pollom is the Chief of Staff at e21 and was the Appropriations and Budget Counsel for the Senate Republican Policy Committee.