10 Budget Reforms Millennials Can Get Behind

Sensible proposals that address the biggest drivers of spending growth

Photo by Douglas Rissing on Getty Images

As federal debt continues to rise, younger generations will bear the brunt of today’s irresponsible deficit spending. Not all millennials are passive bystanders as Congress seals their fate. The Millennial Debt Foundation (MDF) recently released 10 recommendations to address the U.S. debt challenge over the next 30 years.

Founded in 2019 with the support of the late Senator Tom Coburn, MD, the Foundation convened millennial business leaders and members of Congress to devise a plan to reduce the growth in the federal debt. I am pleased to serve the organization as a senior advisor.

The latest Congressional Budget Office long-term outlook projects that debt will rise to an unprecedented 185 percent of gross domestic product (GDP) by 2052. Under the MDF proposal, debt would rise just shy of 129 percent of GDP. While a significant improvement to doing nothing, the fact that debt would still rise to such alarming levels demonstrates the severity of the U.S. fiscal challenge. Delay is making it even worse.

As the House Budget Committee, under the chairmanship of Jody Arrington (R-TX), prepares its budget proposal over the next few weeks, they should seriously consider adopting some if not all the MDF’s recommendations. Here are the MDF’s 10 proposals:

Increase federal benefits to keep pace with inflation by using a more accurate and modern cost-of-living measure: $200 billion in savings over 10 years 

Use the Chained CPI measure of inflation to calculate cost-of-living adjustments for federal spending programs (i.e., Social Security, means-tested programs, other federal retirement programs & health programs). The 2017 tax law adopted chained CPI for adjusting the tax code. It’s only sensible that federal benefit programs should follow suit. As I’ve argued previously:

“[T]he chained CPI is a more accurate measure of changes in the cost of living, it should be adopted across all federal benefit programs that are currently using the CPI‑W or the CPI‑U to make benefit adjustments.

Opponents of moving to this measure, argue that it would grow welfare beneficiaries’ benefits more slowly, leaving recipients with fewer resources over the long run. If proponents believe that welfare benefits are too low, they should address this issue directly; not perpetuate use of a less accurate inflation measure to achieve their ends.”

Increase Social Security’s initial benefits to keep pace with inflation: $50 billion in savings over 10 years 

When Social Security calculates recipients’ initial benefits it gives seniors a bonus increase based on average wage growth. This leads to more generous benefits than if ensuring benefits kept pace with the cost of living. Under the current approach, Social Security benefits grow more generous over time as workers become more productive.

The rationale for this method of calculating benefits was to ensure seniors’ incomes grew in line with workers’ incomes. Instead we have a system in which working Americans subsidize ever more generous retirements for seniors whose incomes and net worth far exceed their own.

MDF suggests calculating initial benefits based on changes in prices instead of wages, but only for high-income recipients. As laid out in the Cato Handbook for Policymakers:

“Perhaps the best way to reduce Social Security benefits would be to change the formula used to calculate the initial benefit so that benefits are indexed to price inflation rather than national wage growth. Since wages over the long run have tended to grow at a rate roughly 1 percentage point faster than prices, such a change would hold future Social Security benefits constant in real terms but would eliminate the benefit escalation that is built into the current formula.”

Reduce the growth of Social Security benefits for higher income beneficiaries: $40 billion in savings over 10 years 

MDF calls for adjusting Social Security’s benefit formulas to slow the growth in benefits for upper income recipients while maintaining benefits for lower income beneficiaries.

In general, I am supportive of changes that reduce Social Security spending by making the program more progressive. Targeting benefits toward those recipients who are most reliant on them is a commonsense way to protect seniors against poverty without saddling workers with higher taxes.

Unfortunately this proposal is so vague, it’s hard to say what exactly it would do. If I understand the proposal correctly, it will phase in other Social Security changes, like an increase in the retirement age, sooner for high-income beneficiaries than for others. More details would be welcome.

Grow Social Security’s eligibility age with increases in longevity: no savings over 10 years due to implementation delay.

MDF proposes to gradually raise the eligibility age for Social Security based on increases in life expectancy. I support this proposal though prefer a faster implementation. As I’ve argued:

“Congress should raise the early and full Social Security eligibility ages by 3 years each (to 65 and 70) and index both to increases in longevity. [This change is long overdue as] life expectancy at birth in the United States has increased by nearly 20 years. Yet, Social Security’s full retirement age has increased by only two years (from 65 to 67—to be fully phased in by 2027), and the early retirement age has not budged at all – despite significant improvements in health and lifespan.”

Adopt a Premium Support Plan for Medicare: no savings identified over the first 10 years due to a delay in implementation

MDF proposes that Medicare beneficiaries use the dollars provided to them by federal taxpayers to choose among competing health care plans. As Cato’s Michael Cannon has written:

‘“Premium support” would give enrollees a fixed subsidy they could apply toward either traditional Medicare or the private health plan of their choice. A fixed subsidy would encourage enrollees to choose less wasteful coverage.

[Even better if] enrollees could receive “Medicare checks” at the same time they receive their Social Security checks. […] Enrollees could use those funds to purchase the health plan of their choice at actuarially fair rates. Enrollees who want more expensive health insurance could supplement their subsidy with private funds, just as they do now with Medicare Advantage and Medigap plans. Alternatively, seniors who choose a lower‐​cost plan could save their extra health care dollars in a tax‐​free health savings account.”

Increase Medicare’s eligibility age to 67: $15 billion in savings over 10 years 

MDF recommends to slowly (in two-month increments) increase the Medicare eligibility age to 67; aligning it with current policy on Social Security.

This is another commonsense reform that would fix a current policy flaw. Medicare’s current eligibility age encourages some older Americans to retire earlier than they otherwise would. It makes sense that Social Security and Medicare, which target the same population, should be aligned when it comes to the timing when recipients first become eligible for benefits.

Extend the $10K cap on the Deduction for State and Local Taxes (SALT): $600 billion in revenue over 10 years 

MDF calls for permanently extending the Tax Cuts and Jobs Act of 2017 policy that capped the federal tax deduction for state and local taxes (SALT) at $10,000. As Cato’s Chris Edwards has written:

“The new SALT limit is a long-needed reform. […] The prior SALT deduction mainly benefited higher earners. […] The deduction favored higher-income and higher-tax states over other states. In California, 96 percent of state and local deductions that exceeded $10,000 were taken by households with incomes above $100,000.”

Reform the Tax Exclusion for Employer-Sponsored Health Insurance: $250 billion in revenue over 10 years 

Instead of excluding employer-sponsored health insurance from federal taxation, MDF calls for capping the exclusion, replacing it with tax credits, or ending it entirely. 

As Cato’s Michael Cannon has explained: “tax credits are the functional equivalent of ObamaCare’s individual mandate.” Ending the tax exclusion entirely would be most beneficial in the long run. Elsewhere Cannon has written:

“The exclusion has increased medical prices, thrown workers out of their coverage after they have fallen ill, and generated so much dissatisfaction with the U.S. health sector that Congress has spent decades trying to fix the problems it creates. Replac[ing] the current exclusion with an exclusion for contributions to larger, more flexible health savings accounts [is] the most desirable and politically feasible option.”

Adopt Additional Medicare Reforms

MDF proposes several changes to administrative rules that increase Medicare’s costs, and which in combination would save $200 billion over 10 years. These include:

• decreasing overpayments by the Centers for Medicare and Medicaid Services (CMS) to Medicare Advantage (MA) based on population risk factors. It’s worth noting that a 2019 Congressional Budget Office report estimated this change would save about $50 billion over 10 years. More recent proposals that feature larger changes to MA risk coding could generate $200 to $400 billion in savings over the next decade. 

• changing provider reimbursements for Medicare part B to incentivize the selection of low-cost drugs in line with recommendations by the Committee for a Responsible Federal Budget. Adopting clinically comparable drug pricing could reduce Medicare spending by $122 billion over 10 years.

• cancelling rules suggested by the Department of Health and Human Services (HHS) regarding drug manufacturer rebates as part of Medicare Part D. 

• no longer adjusting Medicare Part B and D beneficiary income brackets for inflation when determining premiums, leading to small increases in collected premiums from higher income beneficiaries. 

Adopt Other Healthcare Reforms

MDF proposes additional reforms affecting federal health care payments, including:

• removing the safe harbor that limits state taxes on Medicaid providers to 6% of the provider’s net patient revenues.

• removing the safe harbor that requires states to default to existing tax limits made by Congress in the 1990s, that artificially increase the federal match. $400 billion in savings over 10 years. 

• lowering spending on medical malpractice insurance, capping awards for non-economic damages to $250,000 and capping punitive awards either at $500,000 or twice the amount of economic damages, whichever is greater. $60 billion in savings over 10 years. This may seem like a good reform on the surface but comes with unintended consequences. As Cato’s Michael Cannon explains:

“[C]aps on damages could expand access to health care by reducing payouts and liability insurance premiums, but at the cost of leaving some injured patients with uncompensated losses. […] making any single set of rules mandatory and codifying them in statute makes removing harmful rules extremely difficult. A more patient‐​friendly and liberty‐​enhancing approach would allow patients and providers to write their own medical malpractice reforms into legally enforceable contracts.”

In combination, MDF’s 10 recommendations would reduce deficits by about $2 trillion over the next 10 years. That’s short of the $3 trillion in revenue-driven deficit reduction the President proposed in his latest budget proposal. It’s also short of the $3 trillion in spending-based deficit reduction that the Freedom Caucus put out a day after the President’s Budget. And it falls far short of the $8 trillion in deficit reduction required to stabilize the debt at the current too-high and economically damaging level of 97% of gross domestic product.

On the flip side, MDF’s proposals address the biggest drivers of spending growth with sensible reforms that will make a real difference over the 30-year time horizon and beyond: health care and old-age entitlements, like Medicare and Social Security. Tackling these programs is a feather in their cap. As is taking the long-term view and demonstrating how their proposals would curb the growth in the debt outside the 10-year budget window.

Congress should take note of these commonsense reforms that thoughtful millennials can get behind.