CBO Analyzes Deficit Reduction Options

The numbers in the text and tables are in nominal (current year) dollars. Those numbers may not add up to totals because of rounding.

The baseline budget projections discussed in this report are those published in Congressional Budget Office, Updated Budget Projections: Fiscal Years 2013 to 2023 (May 2013), www.cbo.gov/publication/44172. Such projections over the longer term are those in Congressional Budget Office, The 2013 Long-Term Budget Outlook (September 2013), www.cbo.gov/publication/44521.

The estimates for the various options shown in this volume may differ from any previous or subsequent cost estimates for legislative proposals that resemble the options presented here.

The Affordable Care Act comprises the Patient Protection and Affordable Care Act; the health care provisions of the Health Care and Education Reconciliation Act of 2010; and, in the case of this report, the effects of subsequent related judicial decisions, statutory changes, and administrative actions.

The photographs on the cover, which come from Flickr's Creative Commons, are attributed to Matt Morgan (soldiers with Stryker vehicle), Ken Lund (truck on highway), Neovain (people on bench), Ernstl (stethoscope), Francois (wheat field), and Philip Taylor (tax form).

                               Contents

This volume presents 103 options that would decrease federal spending or increase federal revenues over the next decade (see Table 1-1 on page 5). Those options cover many areas -- ranging from defense to energy, Social Security, and provisions of the tax code. The budgetary effects identified for most of the options span the 10 years from 2014 to 2023 (the period covered by CBO's May 2013 baseline budget projections), although many of the options would have longer-term effects as well.

• Chapters 2 through 5 present options in the following categories:

• Chapter 2: Mandatory spending other than that for health-related programs,

• Chapter 3: Discretionary spending other than that for health-related programs,

• Chapter 4: Revenues other than those related to health, and

• Chapter 5: Health-related programs and revenue provisions.

Chapters 2 through 5 begin with a description of budgetary trends for the topic area. Then, entries for the options provide background information, describe the possible policy change, and summarize arguments for and against that change. As appropriate, related options in this volume are referenced, as are related CBO publications. The options included in this volume come from a variety of sources. Some are based on proposed legislation or on the budget proposals of various Administrations; others came from Congressional offices or from entities in the federal government or in the private sector. As a collection, the options are intended to reflect a range of possibilities, not a ranking of priorities or an exhaustive list. Inclusion or exclusion of any particular option does not imply endorsement or disapproval by CBO, and the report makes no recommendations. This volume does not contain comprehensive budget plans, although it would be possible to devise such plans by combining certain options in various ways (although some overlap with others).

In addition to the budget options examined here, CBO has presented many other options in various publications it has issued in recent years; Appendix A lists most of those other options. Appendix B lists this volume's options by budget function (the programmatic category used in the budget to sort spending according to the national interests being addressed). Appendix C lists the options by major program or category.

 

Figure 1-1.

 

 

Federal Debt, Spending, and Revenues, 2000 to 2038

 

 

 

Note: CBO's long-term projections, which focus on the 25-year period ending in 2038, generally adhere closely to current law, following its 10-year baseline budget projections through 2023 and extending that baseline concept into later years.

The Current Context for Decisions About the Budget

The economy's gradual recovery from the 2007-2009 recession, the waning budgetary effects of policies enacted in response to the weak economy, and various changes to tax and spending policies -- including the caps and automatic spending reductions put in place by the Budget Control Act of 2011 -- have resulted in the smallest budget deficit since 2008. The deficit in fiscal year 2013 was about 4 percent of gross domestic product (GDP), well below its peak of almost 10 percent in 2009 (see Figure 1-2). If current laws that govern taxes and spending remained generally unchanged -- an assumption that underlies CBO's 10-year baseline budget projections -- the deficit would continue to decline over the next few years, falling to 2.1 percent of GDP by 2015, CBO estimates. As a result, by CBO's estimates, federal debt held by the public also would decline, from 73 percent of GDP in 2013 to 68 percent in 2018.

However, budget deficits would gradually rise again under current law, CBO projects, mainly because of rising interest costs and increased spending for Social Security and the government's major health care programs (Medicare, Medicaid, the Children's Health Insurance Program, and subsidies to be provided through health insurance exchanges). The agency expects interest rates to rebound in coming years from their current unusually low levels, sharply increasing the government's cost of borrowing. In addition, the pressures of caring for an aging population, rising health care costs generally, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP. By 2023, CBO projects, the budget deficit would grow to 3.3 percent of GDP under current law, and federal debt held by the public would rise to 71 percent of GDP and would be on an upward trajectory (see Table 1-2 on page 8).

Looking beyond the 10-year period covered by its baseline projections, CBO has produced an extended baseline that extrapolates those projections through 2038.² Those extended projections show a substantial imbalance in the federal budget over the long run, with annual revenues consistently falling short of annual outlays. Budget deficits would rise steadily and, by 2038, would push federal debt held by the public to 100 percent of GDP -- close to the peak percentage, which was seen just after World War II -- even without factoring in the harm that growing debt would cause to the economy.

 

Figure 1-2.

 

 

Deficit or Surpluses, 1973 to 2023

 

 

 

Note: These data reflect recent revisions by the Bureau of Economic Analysis to estimates of gross domestic product (GDP) in past years and CBO's extrapolation of those revisions to projected future GDP. Although CBO's projections of deficits over the 2014-2023 period have not changed since they were issued in May, those amounts measured as a percentage of GDP are now lower as a result of BEA's revisions.

In fact, such high and rising amounts of federal debt would have significant negative consequences for both the economy and the federal budget. Those consequences include reducing the total amounts of national saving and income relative to what they would otherwise be; increasing the government's interest payments, thereby putting more pressure on the rest of the budget; limiting lawmakers' flexibility to respond to unexpected events; and increasing the likelihood of a fiscal crisis. With effects on the economy included, debt under the extended baseline would rise to 108 percent of GDP in 2038, CBO estimates.

The increase in federal debt would be even greater if certain policies that are now in place but that are scheduled to change under current law were instead continued and if some provisions of current law that might be difficult to sustain for a long period were modified. With such changes to current law, federal debt held by the public would reach 190 percent of GDP by 2038, CBO projects, after accounting for the harmful effects on the economy of the rapidly growing deficits.³

Choices for the Future

Current federal tax and spending policies present lawmakers and the public with difficult challenges because the United States is on track to have a federal budget that will look very different from budgets of the past. Under current law, spending for all federal activities other than the major health care programs and Social Security is projected to account for its smallest share of GDP in more than 70 years. At the same time revenues would represent a larger percentage of GDP in the future -- averaging 18.3 percent of GDP over the 2014-2023 period -- than they generally have in the past few decades. Despite those trends, revenues would not keep pace with outlays under current law because the government's major health care programs and Social Security would absorb a much larger share of the economy's output in the future than they have in the past.

To put the federal budget on a sustainable long-term path, lawmakers would need to make significant policy changes -- allowing revenues to rise more than would occur under current law, reducing spending for large benefit programs to amounts below those currently projected, or adopting some combination of those approaches.

Lawmakers and the public may weigh several factors in considering new policies that would reduce budget deficits: How much deficit reduction is necessary? What is the proper size of the federal government and what would be the best way to allocate federal resources? What types of policy changes would most enhance prospects for near-term and long-term economic growth? What would be the distributional implications of proposed changes -- that is, who would bear the burden of particular cuts in spending or increases in taxes and who would realize long-term economic benefits?

Moreover, lawmakers face difficult trade-offs in deciding how quickly to carry out policy changes that will make the path of federal debt more sustainable. On the one hand, waiting to cut federal spending or to raise taxes would lead to a greater accumulation of debt and would increase the magnitude of the policy adjustments needed. On the other hand, implementing spending cuts or tax increases quickly would weaken the economy's current expansion and would give people little time to plan for and adjust to the policy changes. The negative short-term effects of deficit reduction on output and employment would be especially large now because output is so far below its potential level that the Federal Reserve has been holding short-term interest rates close to zero. The Federal Reserve thus has no room to reduce those rates any further to offset the effects of any changes in spending or tax policies.

Caveats About This Report

The ways in which specific federal programs, the budget as a whole, or the U.S. economy will evolve under current law are uncertain, as are the possible effects of proposed changes to federal spending and revenue policies. Because a broad range of results for any change in policy is plausible, CBO's estimates are designed to fall at the middle of the distribution of possible outcomes.

The estimates presented in this volume could differ from cost estimates for similar proposals that CBO might produce at a later date or from revenue estimates developed later by the staff of the Joint Committee on Taxation. One reason is that the proposals on which those estimates were based might not precisely match the options presented here. Another is that the baseline budget projections against which such proposals would ultimately be measured might have changed and thus would differ from the projections used for this report.

Many of the options in this report could be combined to provide building blocks for broader changes. In some cases, however, combining various spending or revenue options would produce budgetary effects that would differ from the sums of those estimates as presented because some options would overlap or interact with one another in ways that would change their budgetary impact. Also, some options would be mutually exclusive.

To reduce deficits through changes in discretionary spending, lawmakers would need to reduce the statutory funding caps below the levels already established under current law or enact appropriations below those caps. The discretionary options in this report could be used to accomplish either of those objectives. Alternatively, some of the options could be implemented to comply with the existing caps on discretionary funding, which are $1.5 trillion lower over the 2014-2023 period than the amounts that would be required to continue the funding provided for 2013 in later years with increases for inflation.

The estimated budgetary effects of options do not reflect the extent to which those policy changes would reduce interest payments on federal debt. Those savings may be included as part of a comprehensive budget plan (such as the Congressional budget resolution), but CBO does not make such calculations for individual pieces of legislation or for individual options of the type discussed here.

Some of the estimates in this volume depend on projections of states' responses to federal policy changes, which can be difficult to predict and can vary over time because of states' changing fiscal conditions and other factors. CBO's analyses do not attempt to quantify the impact of options on states' spending or revenues.

Some options might impose federal mandates on other levels of government or on private entities. The Unfunded Mandates Reform Act of 1995 requires CBO to estimate the costs of any mandates that would be imposed by new legislation that the Congress considers. (The law defines mandates as enforceable duties imposed on state, local, or tribal governments or the private sector, as well as certain types of provisions affecting large mandatory programs that provide funds to states.) In this volume, CBO does not address the costs of any mandates that might be associated with the various options.

                                   Table 1-1.

² See Congressional Budget Office, The 2013 Long-Term Budget Outlook (September 2013), www.cbo.gov/publication/44521. CBO's long-term projections, which focus on the 25-year period ending in 2038, generally adhere closely to current law, following the agency's May 2013 baseline budget projections through the usual 10-year projection period and then extending the baseline concept into later years.

³ See Congressional Budget Office, The 2013 Long-Term Budget Outlook (September 2013), pp. 83-85, www.cbo.gov/publication/44521.

Nearly all mandatory outlays are for social insurance programs (in which most people who are eligible to participate do so and to which those participants have contributed at least part of the funding) or means-tested programs (which link eligibility to income). The largest mandatory programs are Social Security and Medicare. Together, CBO estimates, those programs accounted for about 65 percent of mandatory outlays in 2013 -- or roughly 40 percent of all federal spending. Medicaid and other health care programs accounted for about 15 percent of mandatory spending last year.

The rest of mandatory spending is for income security programs (such as unemployment compensation, the nutrition assistance programs, and Supplemental Security Income), certain refundable tax credits, retirement benefits for civilian and military employees of the federal government, veterans' benefits, student loans, and agriculture programs.³

Trends in Mandatory Spending

Relative to the size of the economy, mandatory spending varied between roughly 9 percent and 10 percent of gross domestic product (GDP) from 1975 through 2007. Such spending peaked in 2009 at 14.5 percent of GDP, before dropping to 12.6 percent of GDP in 2012. That decline reflects the economy's gradual recovery from the 2007-2009 recession and the waning budgetary effects of policies enacted in response to the recession. CBO estimates that mandatory outlays fell to about 12 percent of GDP in 2013; much of that decline was attributable to payments from Fannie Mae and Freddie Mac (see Figure 2-1).

If no new laws were enacted that affected mandatory programs, CBO estimates, mandatory outlays would remain fairly stable as a share of the economy, between 12.6 percent and 13.1 percent, from 2014 through 2021.⁴ Mandatory spending would accelerate in the final two years of the projection period, however, reaching 13.5 percent of GDP in 2022 and 2023, by CBO's estimate. By comparison, such spending averaged 11.5 percent of GDP over the past 10 years and 9.9 percent over the past four decades.

 

Figure 2-1.

 

 

Mandatory Spending, 1973 to 2023

 

 

 

Note: Data include offsetting receipts (funds collected by government agencies from other government accounts or from the public in businesslike or market-oriented transactions that are recorded as offsets to outlays).

CBO's projections for total mandatory spending mask diverging trends for different components of such spending. CBO projects that, under current law, spending for Social Security and the major health care programs, notably Medicare and Medicaid, would grow from 9.8 percent of GDP in 2014 to 11.2 percent by 2023, driven largely by the aging of the population, rising health care costs per person, and an expansion of federal subsidies for health insurance. At the same time, outlays for all other mandatory programs would decline relative to GDP, from 3.0 percent in 2014 to 2.3 percent by 2023. That projected decline reflects an anticipated economic expansion, which would reduce the number of people who are eligible for many income security programs, and scheduled changes to tax provisions, which would reduce outlays arising from some tax credits.

Methodology Underlying Mandatory Spending Estimates

The budgetary effects of the various options are measured relative to the spending that CBO projected in its May 2013 baseline. In creating its baseline budget projections, CBO generally assumes that existing laws will remain unchanged. That assumption applies to most, but not all, mandatory programs. Following long-standing Congressional procedures, CBO assumes that most mandatory programs that are scheduled to expire in the coming decade under current law will instead be extended. In particular, under CBO's baseline, all such programs that predate the Balanced Budget Act of 1997 and that have outlays in the current year above $50 million are presumed to continue; for programs established after 1997, continuation is assessed on a program-by-program basis in consultation with the House and Senate Committees on the Budget. CBO's projection of mandatory outlays is $135 billion (or 4 percent) higher in 2023 as a result of the assumption that expiring programs continue. (The Supplemental Nutrition Assistance Program accounts for more than half of that increment.)

Another of CBO's assumptions involves the federal government's dedicated trust funds for Social Security and Medicare.⁵ If a trust fund is exhausted and the receipts coming into it during a given year are insufficient to pay full benefits as scheduled under law for that year, the program has no legal authority to pay full benefits. In that case, benefits must be reduced to bring outlays in line with receipts. Nonetheless, in keeping with long-standing Congressional procedures, CBO's baseline incorporates the assumption that, in coming years, beneficiaries will receive full payments and all services to which they are entitled under Social Security or Medicare.

Options in This Chapter

The 23 options in this chapter encompass a broad range of mandatory spending programs, excluding those involving health care. (Options that would affect spending for health care programs are presented in Chapter 5, as are options affecting taxes related to health.) The options are grouped by program, but some are conceptually similar even though they concern different programs. For instance, several would shift spending from the government to a program's participants or from the federal government to the states. Others would redefine the population that is entitled to benefits or would reduce the amount of payments that beneficiaries receive.

Seven options in this chapter concern Social Security. Another four involve means-tested benefit programs (including nutrition programs and the Supplemental Security Income program). The remaining options focus on Fannie Mae and Freddie Mac; the Pension Benefit Guaranty Corporation; and programs that deal with education, the environment, veterans' benefits, federal pensions, and agriculture. Each option's budgetary impact is estimated independently, without consideration for potential interactions with other options.

² Unlike revenues, which are collected through the exercise of the government's sovereign powers (for example, in levying income taxes), offsetting receipts are generally collected from other government accounts or from members of the public through businesslike transactions (for example, in assessing Medicare premiums or rental payments and royalties for the extraction of oil or gas from public lands). In this introduction and in the options, spending for Medicare is reported net of offsetting receipts.

³ Tax credits reduce a taxpayer's overall tax liability (the amount owed), and when a refundable credit exceeds the liability apart from the credit, the excess may be refunded to the taxpayer and the refund is recorded in the budget as an outlay.

⁴ For a more detailed discussion of the components of mandatory spending and CBO's baseline budget projections, see Congressional Budget Office, Updated Budget Projections: Fiscal Years 2013-2023 (May 2013), www.cbo.gov/publication/44172.

⁵ Social Security's beneficiaries receive payments from the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. Medicare's Hospital Insurance Trust Fund pays for care in hospitals and other institutions under Part A; its Supplementary Medical Insurance Trust Fund pays for care by physicians and other providers under Part B and for prescription drugs under Part D. Both of those trust funds also pay benefits for people who join private Medicare Advantage plans under Part C.

This option would change several aspects of the federal oil and gas leasing programs. It would increase the acreage available for leasing by repealing the statutory prohibition on leasing in the Arctic National Wildlife Refuge (ANWR) and by directing the Department of the Interior (DOI) to auction leases for areas on the Outer Continental Shelf (OCS) that are unavailable for leasing under current administrative policies. The option also would eliminate payments of interest on overpayments of royalties by lessees. (Royalties are assessed on the value of oil and gas produced from leased areas.) Finally, the option would increase the federal government's share of the returns on leasing federal lands by imposing a fee on all new leases of tracts from which oil or gas is not being produced.

CBO estimates that implementing all of those changes would reduce net federal outlays by $6 billion from 2015 through 2023 by increasing offsetting receipts from oil and gas leasing. Of that total, $3 billion would result from leasing in ANWR and an increase in leasing on the OCS, $2 billion would result from eliminating interest payments on overpayments, and the remainder would result from the new fees.

One rationale for offering leases in ANWR and additional leases on the OCS is that increasing oil and gas production from federal lands could boost employment and economic output, especially in the affected regions. Additional leasing also could raise revenues for state and local governments; the amounts would depend on state tax policies, the quantity of oil and gas produced in each area, and the existing formulas for distributing portions of federal oil and gas proceeds to states. The primary argument against expanded leasing is that oil and gas production in environmentally sensitive areas like the coastal plain in ANWR or other coastal areas could pose a threat to wildlife, fisheries, and tourist economies. Moreover, increased development of resources in the near term would reduce the oil and gas available for production in the future, when prices might be higher and the products might be valued more highly by households and businesses.

A rationale for eliminating interest payments on overpayments of royalties is that doing so would stop the federal government from paying a higher return on funds it receives through such overpayments than on funds it borrows through selling securities. Under current law, DOI is required to pay interest on overpayments at a rate that is 2 percentage points higher than the short-term interest rate the Treasury pays on securities that represent borrowing from the public. In a different context, the Treasury also pays interest that is the same amount higher than its borrowing rate for overpayments of federal corporate taxes, but provisions in the tax code limit the amount of money eligible to earn such interest, and no such provisions apply to overpayments on oil and gas leases. One result is that the amount of overpayments by lessees and the corresponding interest payments by DOI have grown in recent years. In 2012, overpayments exceeded $3 billion, which was equivalent to more than 30 percent of the $9 billion due as royalties on production from all federal lands. One argument against eliminating the incentive to overpay royalties, from lessees' point of view, is that it would increase the risk of underpaying the amounts due and then being liable for paying interest on the difference. Alternative approaches that would generate smaller savings include reducing the interest rate on overpayments or limiting the volume of overpayments eligible to earn interest.

Besides increasing federal offsetting receipts, a rationale for imposing a new fee on all "nonproducing" oil and gas leases -- pegged at $6 per acre per year for the purpose of this option -- is that doing so would give firms a financial incentive to be more selective in acquiring leases and to explore and develop those leases more quickly. Firms holding nonproducing leases, which currently account for about 85 percent of offshore leases and about 70 percent of onshore leases, have the option to pursue production on those tracts but may postpone making any investment until conditions become more favorable -- for example, if oil or gas is discovered on leases nearby or if the price of oil or gas rises more than expected. Although oil and gas resources might be more valuable in the future than they are today, if leasing does occur, the federal government's return would tend to be larger if firms that acquired leases began production quickly.

An argument against assessing higher fees prior to production is that they would cause some firms to bid less for the leases they acquire or to acquire fewer leases, which would reduce federal proceeds from the sale of new leases -- although by only a small amount, CBO expects. In auctions, the amount that firms are willing to pay for a lease depends on a number of factors, including expected future drilling costs, trends in oil and gas prices, the quantity of oil or gas resources that may be covered by the lease, and the probability that other firms will compete to acquire the lease. Firms strive to set bids at levels that are lower than the value they assign to leases but higher than what they expect other firms to pay. Although imposing an annual fee of $6 per acre paid by leaseholders until leased areas produce oil or gas would reduce the expected value of the leases (because production rarely begins in the first year of a lease), the effect of the fees would generally be small relative to other factors affecting firms' bids and, in CBO's view, would have only a small effect on bids and, therefore, offsetting receipts. Moreover, leases that were not acquired would be those with the lowest expected economic value and the lowest likelihood for development, so the production of oil and gas and the federal revenues from leases and royalties that would be given up because of the higher fees would probably also be quite small.

RELATED OPTION: Revenues, Option 25

RELATED CBO PUBLICATIONS: Potential Budgetary Effects of Immediately Opening Most Federal Lands to Oil and Gas Leasing (August 2012), www.cbo.gov/publication/43527; and Energy Security in the United States (May 2012), www.cbo.gov/publication/43012

Under the Conservation Reserve Program (CRP), landowners enter into contracts to stop farming on specified tracts of land, usually for 10 to 15 years, in exchange for annual payments and cost-sharing grants from USDA to establish conservation practices on that land. One type of tract used in the program is a "conservation buffer" -- a narrow strip of land maintained with vegetation to intercept pollutants, reduce erosion, and provide other environmental benefits. Acreage may be added to the CRP through general enrollments, which are held periodically for larger tracts of land, or through continuous enrollments, which are available at any time during the year for smaller tracts of land. Current law caps total enrollment in the CRP at 32 million acres; in 2013, USDA spent $2.0 billion on the roughly 27 million acres enrolled.

The first part of this option would prohibit new enrollment in the Conservation Stewardship Program beginning in 2015. Land currently enrolled -- and therefore hosting new or existing conservation activities -- would be eligible to continue in the program until the contract for that land expired. By the Congressional Budget Office's estimates, the prohibition on new enrollment would reduce federal spending by $8 billion from 2015 through 2023.

The second part of this option would prohibit both new enrollment and reenrollment in the general enrollment portion of the Conservation Reserve Program beginning in 2015; continuous enrollment would remain in effect under the option. That prohibition on general enrollment would reduce spending by $5 billion from 2015 through 2023, CBO estimates. The amount of land enrolled in the CRP would drop to about 10 million acres by 2023.

One argument for prohibiting new enrollment in the Conservation Stewardship Program and thus phasing out the program is that some provisions of the program limit its effectiveness. For example, paying farmers for conservation practices they have already adopted may not enhance the nation's conservation efforts. Moreover, the criteria used by USDA to determine whether improvements in existing conservation practices have been made are not clear, and the absence of such objective measurements could result in higher payments than necessary to encourage the adoption of new conservation measures.

An argument against phasing out the CSP is that it may offer a way to support farmers that provides more environmental benefits than traditional crop-based subsidies do. Furthermore, conservation practices often impose significant up-front costs, which can reduce the net economic output of agricultural land, and CSP payments help offset those costs.

One argument for scaling back the Conservation Reserve Program is that the land could become available for other uses that would provide greater environmental benefits. For example, reducing enrollment could free up more land to produce crops and biomass for renewable energy products.

An argument against scaling back the CRP is that studies have indicated that the program yields high returns -- in enhanced wildlife habitat, improved water quality, and reduced soil erosion -- for the money it spends. Furthermore, USDA plans to enroll only the most environmentally sensitive land in the CRP in the future, perhaps thereby providing an especially cost-effective way to protect fragile tracts.

RELATED OPTIONS: Mandatory Spending, Options 3 and 4

This option would reduce the federal government's subsidy to 40 percent of the crop insurance premiums, on average. In addition, it would limit the federal reimbursement to crop insurance companies for administrative expenses to 9.25 percent of estimated premiums (or to an average of $915 million each year from 2015 through 2023) and limit the rate of return on investment for those companies to 12 percent each year. Under current law, by the Congressional Budget Office's estimates, federal spending for crop insurance will total $78 billion from 2015 through 2023. Reducing the crop insurance subsidies as specified by this option would save $27 billion over that period, CBO estimates.

An argument in favor of this option is that cutting the federal subsidies for premiums would probably not have a substantial effect on participation in the program. Private lenders increasingly view crop insurance as an important way to ensure that farmers can repay their loans, which encourages participation. In addition, the producers who dropped out of the program would generally continue to receive significant support from other federal farm programs.

Current reimbursements to crop insurance companies for administrative expenses (around $1.3 billion per year) were established in 2010, when premiums were relatively high. Recent reductions in the value of the crops insured (due, in part, to lower average commodity prices) have resulted in lower average premiums for crop insurance. However, administrative expenses have not shown a commensurate reduction. A cap of 9.25 percent, or about $915 million, is close to average reimbursements during the years prior to the run-up in commodity prices in 2010. Furthermore, a recent USDA study found that the current rate of return on investment for crop insurance companies, 14 percent, was higher than that of other private companies, on average.

An argument against this option is that cutting the federal subsidies for premiums would probably reduce the amount of insurance that farmers purchase. If the amount of insurance declined significantly, lawmakers might be more likely to enact special relief programs when farmers encountered significant difficulties, which would offset some of the savings from cutting the premium subsidies. (Such ad hoc disaster assistance programs for farmers have cost an average of about $700 million annually over the past five years.) In addition, limiting reimbursements to companies for administrative expenses and reducing the targeted rate of return to companies could add to the financial stress of companies in years with significant payouts for covered losses.

RELATED OPTIONS: Mandatory Spending, Options 2 and 4

This option would eliminate those direct payments beginning in 2015. However, if producers did not receive direct payments, they would probably increase their participation in other federal programs that provide payments to farmers, such as the Average Crop Revenue Election (ACRE) program (which makes payments when farms' actual revenues are less than their expected revenues). CBO estimates that eliminating direct payments would result in an increase in ACRE payments of $13 billion between 2015 and 2023. In addition, because USDA takes direct payments into account when it calculates countercyclical payments (which are payments made when market prices are below legislated target levels), eliminating direct payments would probably boost countercyclical payments by $3 billion. With savings of $41 billion in direct payments and partly offsetting costs of $16 billion, this option would reduce overall spending on farm programs by $25 billion between 2015 and 2023, CBO estimates.

The primary rationale for eliminating direct payments to agricultural producers is that continued significant subsidies to the farm sector that are made regardless of the perceived need of producers have become less defensible given recent high commodity prices and record farm income. Because of structural changes that have occurred in commodity markets -- for example, increased use of corn for ethanol production -- few analysts expect the prices of most agricultural commodities to return to their lower levels of the past.

An argument against this option is that reducing certain other payments to farmers might increase efficiency in the farm sector more than would eliminating direct payments. For example, USDA payments in the form of price supports essentially guarantee minimum prices for certain crops and therefore distort market signals more than direct payments do.

RELATED OPTIONS: Mandatory Spending, Options 2 and 3

In September 2008, the federal government took control of Fannie Mae and Freddie Mac in a conservatorship process, after falling house prices and rising mortgage delinquencies threatened the GSEs' solvency and impaired their ability to ensure a steady supply of financing to the mortgage market. Because of that shift in control, the Congressional Budget Office concluded that the institutions had effectively become government entities whose operations should be reflected in the federal budget. By CBO's projections under current law, the mortgage guarantees that the GSEs issue from 2015 through 2023 will cost the federal government $22 billion. That estimate reflects the subsidies inherent in the guarantees at the time they are made -- that is, the up-front payments that a private entity would need to receive (in an orderly market and allowing for the fees that borrowers pay) to assume the federal government's responsibility for those guarantees.

This option includes two approaches for reducing the federal subsidies provided to Fannie Mae and Freddie Mac. In the first approach, the average guarantee fee that Fannie Mae and Freddie Mac assess on loans they include in their MBSs would increase by 10 basis points (100 basis points are equivalent to 1 percentage point), to 60 basis points, beginning in October 2014. In addition, to keep guarantee fees constant after 2021 -- when an increase of 10 basis points that was put in place in 2011 is scheduled to expire -- the average guarantee fee would be increased, relative to the amount under current law, by 20 basis points after 2021. The increased collections of fees, which the GSEs would be required to pass through to the Treasury, would reduce net federal spending by $19 billion from 2015 through 2023, CBO estimates.

In the second approach, the maximum size of a mortgage that Fannie Mae and Freddie Mac could include in their MBSs would be reduced to $150,000 nationally, beginning with a drop to $500,000 in October 2014, followed by a series of reductions averaging less than $50,000 a year. (Guarantee fees would remain as they are under current law.) This reduction in loan limits would save $3 billion from 2015 through 2023, CBO estimates. Because the GSEs would lose their most profitable customers first as loan limits fell, lowering limits would initially raise federal costs slightly.

Taking both approaches together would lower federal subsidies for Fannie Mae and Freddie Mac by $19 billion from 2015 through 2023, according to CBO's estimates. Because raising guarantee fees by 10 basis points would eliminate most of the federal subsidies for the GSEs, taking the additional step of lowering loan limits would have very little effect on subsidies. For consistency, similar changes could be made to the limits on loans guaranteed by the Federal Housing Administration (FHA). The effects of lower limits on FHA loans, which would affect discretionary spending subject to appropriations, are not included in the estimates presented here.

Because some of the subsidies provided to Fannie Mae and Freddie Mac flow to mortgage borrowers in the form of lower rates, both approaches in this option would raise borrowing costs. The higher guarantee fees would probably pass directly through to borrowers in the form of higher mortgage rates. The lower loan limits would push some borrowers into the so-called jumbo mortgage market, where loans exceed the eligible size for guarantees by Fannie Mae and Freddie Mac and where rates are likely to be 20 to 50 basis points higher, on average.

The major advantage of those approaches for reducing federal subsidies for Fannie Mae and Freddie Mac is that they could restore a larger role for the private sector in the secondary mortgage market, which would reduce taxpayers' exposure to the risk of defaults. CBO estimates that raising fees as specified here would cause new guarantees by Fannie Mae and Freddie Mac to fall by around 45 percent, on average, between 2015 and 2023 and that lowering loan limits to the level described here would cause new guarantees to fall by about 35 percent. Combining the approaches would result in a drop in new guarantees of about 60 percent. Lessening subsidies would also help address the current underpricing of mortgage credit risk, which encourages borrowers to take out bigger mortgages and purchase more expensive homes. Consequently, the option could shift the allocation of some capital away from housing and toward more productive activities.

A particular advantage of lowering loan limits, rather than raising fees, is that many moderate- and low-income borrowers would continue to benefit from the subsidies provided to the GSEs. More-affluent borrowers generally would lose that benefit, but they typically can more easily find alternative sources of financing. The $150,000 limit would allow for the purchase of a home for about $190,000 (with a 20 percent down payment), which was roughly the median price of an existing single-family residence in April 2013; thus, most moderate- and low-income borrowers would not be affected by lowering loan limits as specified here.

One disadvantage of reducing subsidies for the GSEs and thereby increasing the cost of mortgage borrowing is that doing so could weaken the housing market, which is currently recovering only slowly from its sharp drop several years ago. That concern is particularly salient because mortgage delinquency rates remain high, and many borrowers are still "underwater," which is to say that they owe more than their homes are worth. Posing another drawback, the slightly higher mortgage rates resulting from lower subsidies would limit some opportunities for refinancing -- perhaps constraining spending by consumers, which is currently growing only slowly, and thereby hampering the economic recovery. If those were the only concerns about this option, they could be addressed by phasing in the specified changes more slowly, although that approach would reduce the budgetary savings as well.

Finally, this option affecting the GSEs would make FHA loans more attractive to some borrowers (in the absence of corresponding changes to the rules governing FHA loans), which could increase risks for taxpayers because FHA guarantees loans with lower down payments than do the GSEs.

RELATED OPTION: Revenues, Option 5

RELATED CBO PUBLICATIONS: Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness (May 2013), www.cbo.gov/publication/44115; The Budgetary Cost of Fannie Mae and Freddie Mac and Options for the Future Federal Role in the Secondary Mortgage Market (June 2011), www.cbo.gov/publication/41487; Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market (December 2010), www.cbo.gov/publication/21992; CBO's Budgetary Treatment of Fannie Mae and Freddie Mac (January 2010), www.cbo.gov/publication/41887; and An Overview of Federal Support for Housing (November 2009), www.cbo.gov/publication/41219

Unsubsidized loans accrue interest from the date of disbursement; they are available to students regardless of need. PLUS loans also accrue interest beginning at disbursement; they are available to parents of dependent students and to graduate students. The program's rules cap the amount that students may borrow through subsidized and unsubsidized loans, with both annual limits and lifetime limits; no such cap applies for PLUS loans.

This option includes two possible changes to subsidized loans, which, by the Congressional Budget Office's estimates, will constitute about half of the dollar volume of federal direct loans to undergraduate students for the 2013-2014 academic year. In the first alternative, access to subsidized loans (and the associated interest subsidies) would be restricted to students eligible for Pell grants. The Federal Pell Grant Program provides grants to help finance postsecondary undergraduate education; to be eligible for those grants, students and their families must demonstrate financial need. Under current law, fewer students are eligible for Pell grants than are eligible for subsidized loans, so this change would reduce the number of students who could take out subsidized loans. Specifically, CBO projects that about 45 percent of students who would borrow through subsidized loans under current law would lose their eligibility for those loans -- and would instead borrow almost as much through unsubsidized loans. As a result, federal costs would be reduced by $18 billion from 2014 to 2023, CBO estimates.

In the second alternative, subsidized loans would be eliminated altogether. In this case, CBO also expects that students would borrow almost as much through unsubsidized loans as they would have borrowed through subsidized loans, and federal costs would be reduced by $41 billion from 2014 to 2023.

Under either alternative, borrowers who lost access to subsidized loans would pay interest on unsubsidized loans from the date of loan disbursement, which would raise their costs. If a student who would have borrowed $23,000 (the lifetime limit) through subsidized loans over five years beginning with the 2014-2015 academic year instead borrowed the same amount through unsubsidized loans, that student would leave school with additional debt of about $3,800 because of the accrued interest costs. Over a typical 10-year repayment period, the student's monthly payment would be $43 higher than if he or she had borrowed that same amount through subsidized loans.

Perspectives on those higher borrowing costs vary. According to an argument in favor of this option, postsecondary educational institutions might respond to increases in costs faced by their students by slowing tuition increases. If institutions responded in that way, then the effect of higher borrowing costs would be offset at least partially by lower tuition than would otherwise be charged. Also, higher costs might encourage students to pay closer attention to the economic value to be obtained from a degree, particularly in the form of increased earnings, and to increase the speed with which they complete a postsecondary program.

But by an argument against this option, students faced with a higher cost of borrowing for education might cut back on spending for education, by, for example, deciding not to attend college, leaving college before completing a degree, or applying to schools with lower tuition but educational opportunities not as well aligned with their interests and skills. Those decisions eventually could lead to lower earnings. Moreover, for any given amount borrowed, raising interest costs would require borrowers to devote a larger amount of their future income to interest payments. That, in turn, could strain their ability to make other financial commitments, such as buying a home.

RELATED OPTIONS: Revenues, Option 16; Mandatory Spending, Option 7; and Discretionary Spending, Option 20

RELATED CBO PUBLICATIONS: The Pell Grant Program: Recent Growth and Policy Options (September 2013), www.cbo.gov/publication/44448; and Options to Change Interest Rates and Other Terms on Student Loans (June 2013), www.cbo.gov/publication/44318

Pell grants are funded through a combination of discretionary spending (which must be appropriated by the Congress every year) and mandatory spending (which is authorized in law permanently). Awards for this academic year will be based on a maximum grant of $4,860 set in appropriations and a $785 "add-on" based on mandatory funding; the sum of those figures is the overall maximum grant of $5,645. Under current law, the add-on is indexed to inflation through the 2017-2018 academic year (when, by CBO's estimates, it will equal $1,240) and remains constant thereafter.

This option would eliminate the add-on to Pell grants. Over the next decade, this option would cause about 3 percent of people who will be eligible for Pell grants under current law to lose that eligibility, because eligibility is determined, in part, by the overall maximum grant, which would be reduced. In addition, grants to the 97 percent of people who would maintain eligibility would be smaller -- by the full amount of the add-on for each full-time student. CBO estimates that this option would result in a reduction of $76 billion in mandatory spending over the 2014-2023 period.

A few studies suggest that some institutions have responded to past increases in the size of Pell grants by raising tuition or shifting more of their own aid to students who did not qualify for Pell grants -- providing a rationale for reducing the maximum Pell grant. In addition, spreading the reductions in grants across all recipients would, for any given amount of federal savings, minimize the impact on any individual recipient.

But an argument against reducing the maximum Pell grant is that, even with the grant at its current amount, most recipients attending public four-year colleges have unmet financial need -- and attending most private colleges is well beyond the means of many of those recipients. Moreover, among students who remained eligible for Pell grants under this option, grant amounts would be reduced uniformly regardless of students' financial need, preparation for postsecondary education, or academic progress. By comparison, targeted reductions in grants might be more effective in protecting some of the program's goals, including maximizing the effectiveness of the grants in boosting the educational attainment of students from the lowest-income families.

RELATED OPTIONS: Revenues, Option 16; Mandatory Spending, Option 6; and Discretionary Spending, Option 20

RELATED CBO PUBLICATIONS: The Pell Grant Program: Recent Growth and Policy Options (September 2013), www.cbo.gov/publication/44448; and Options to Change Interest Rates and Other Terms on Student Loans (June 2013), www.cbo.gov/publication/44318

Individual employers that offer defined benefit pension plans pay PBGC annual premiums that are equal to a flat-rate payment ($42 in 2013) for each participant (worker or retiree) in the plan and, for underfunded plans, a variable payment equal to $9 for each $1,000 by which the plan is underfunded (capped at $400 per participant). Those premium rates are adjusted each year to account for growth in average wages; additionally, they increase by set amounts specified in law. In 2015, the flat-rate premium is scheduled to rise to $49 per participant, and the variable-rate premium is set to increase to $19 for each $1,000 of underfunding; by 2023, the flat-rate premium will rise to $70, and by 2022, the variable-rate premium will increase to $25 per $1,000 of underfunding (variable-rate premiums due for 2022 are paid in 2023). In 2012, PBGC collected $1.1 billion in fixed-rate premiums and $1.0 billion in variable-rate premiums. Those amounts are recorded in the federal budget as offsetting receipts, which are credits against direct spending.

The first part of this option would increase collections from the flat-rate premiums by about 15 percent. That increase could occur either by maintaining the current system and boosting the charge from $49 to $57 per participant in 2015 and by rising amounts that would reach $80 per participant in 2023, or by changing the way that premiums are assessed (for example, by making premiums a percentage of insured benefits) and setting premiums such that collections would be 15 percent higher than those projected under current law. This component of the option would increase offsetting receipts (that is, reduce direct spending) by $3 billion through 2023, the Congressional Budget Office estimates.

The second part of this option would increase collections from the variable-rate premiums by about one-third. That increase could occur either by maintaining the current system and upping the rate from $19 to $25 per $1,000 of underfunding in 2015 and by rising amounts that would reach $34 by 2022 (with adjustments each year to account for growth in average wages), or by creating a new formula based on a broader range of risk factors (like the financial condition of the sponsors and the share of a plan's assets allocated to risky securities, for instance) that yields the same overall increase. This component of the option would increase offsetting receipts by $3 billion through 2023, CBO estimates.

Combining both parts of the option would increase offsetting receipts, and thereby reduce direct spending, by $5 billion through 2023, CBO estimates.

A principal advantage of increasing premiums is that doing so would improve PBGC's financial condition in the long run. For the first component of the option, changing the assessment base for the flat-rate premiums rather than increasing the charge per participant could more directly relate premiums to insured benefits. In particular, that change would help younger companies that have many employees who have not yet accumulated significant pension benefits. Raising premiums for riskier plans, as in the second component of the option, would align premiums more closely with the financial risk posed to PBGC; currently, premiums increase only with under-funding, even though other factors can also generate greater risk for PBGC. By raising the cost of maintaining riskier plans, that change would boost the incentive for employers to fully fund their plans and reduce the risks of their plans in other ways.

A disadvantage of increasing premiums is that the higher costs of underfunding might lead more businesses to restrict growth in the benefits offered in their pension plans. Also, increasing premiums would raise the risk that financially weak employers would terminate their plans. A disadvantage of simply increasing variable-rate premiums as they are currently structured is that the charges limit only one risk factor (underfunding), and changing the formula to incorporate additional risk factors (such as the financial condition of the firms sponsoring the plans) would add complexity.

RELATED CBO PUBLICATIONS: A Guide to Understanding the Pension Benefit Guaranty Corporation (September 2005), www.cbo.gov/publication/17179; and The Risk Exposure of the Pension Benefit Guaranty Corporation (September 2005), www.cbo.gov/publication/17160

Until 2003, military retirees who were eligible for disability compensation could not receive both their full retirement annuity and their disability compensation. Instead, they had to choose between receiving their full retirement annuity from DoD or receiving their disability benefit from VA and forgoing an equal amount of their DoD retirement annuity; that reduction in the retirement annuity is generally referred to as the VA offset. Because the retirement annuity is taxable and disability compensation is not, most retirees chose the second alternative.

As a result of several laws, starting with the National Defense Authorization Act for 2003, two classes of retired military personnel who receive VA disability compensation (including those who retired before the enactment of those laws) can now receive payments that make up for part or all of the VA offset, benefiting from what is often called concurrent receipt. Specifically, retirees whose disabilities arose from combat are eligible for combat-related special compensation (CRSC), and veterans who retire with 20 or more years of military service and who receive a VA disability rating of 50 percent or more are eligible for what is termed concurrent retirement and disability pay (CRDP). CRSC is exempt from federal taxes, but CRDP is not; some veterans would qualify for both types of payments but must choose between the two.

This option would eliminate concurrent receipt of retirement pay and disability compensation beginning in 2015: Military retirees currently drawing CRSC or CRDP would no longer receive those payments, nor would future retirees. As a result, the option would reduce federal spending by $108 billion between 2015 and 2023, the Congressional Budget Office estimates.

In 2012, of the roughly 2 million military retirees, about half were subject to the VA offset; about 40 percent of that latter group -- or 420,000 retirees -- got concurrent receipt payments totaling $7 billion. Spending for concurrent receipt, which was just over $1 billion in 2005, has climbed sharply because of both an expansion of the program and an increase in the share of military retirees receiving disability compensation. In particular, the share of military retirees receiving a longevity-based retirement annuity who also receive disability compensation rose from 33 percent in 2005 to 45 percent in 2012.

One argument for this option is that disabled veterans would no longer be compensated twice for their service, reflecting the reasoning underlying the creation of the VA offset. However, military retirees who receive VA disability payments would still receive higher after-tax payments than would retirees who are not disabled and who have the same retirement annuity because VA disability benefits are not taxed.

An argument against this option is that the DoD retirement system and the VA disability program compensate for different characteristics of military service: rewarding longevity in the former case and remunerating for pain and suffering in the latter. In addition, a determination of disability by VA is a gateway to receiving other VA services (such as health care or vocational training), yet many veterans consider the disability-rating process onerous. If fewer retirees applied for VA disability compensation because concurrent receipt was no longer available, some veterans might bypass other VA services for which they would be entitled otherwise. Moreover, some retirees would find the loss of income financially difficult.

RELATED OPTIONS: Mandatory Spending, Options 21 and 22

RELATED CBO PUBLICATION: Costs of Military Pay and Benefits in the Defense Budget (November 2012), www.cbo.gov/publication/43574

This option would use a five-year average for civilian retirees and a 60-month average for military retirees -- instead of the three-year and 36-month averages used under current law -- to compute benefits for federal workers who retire beginning in January 2015. That change would reduce annuities by about 3 percent, on average, for new retirees, saving the federal government $6 billion from 2015 through 2023, the Congressional Budget Office estimates. Because annuities are typically larger for civilian retirees in CSRS and military retirees than for civilian retirees in FERS, the former groups of retirees would tend to see the largest reductions in benefits. In 2015, this option would affect new retirees in roughly these numbers: 67,000 in FERS, 28,000 in CSRS, and 60,000 in the military's system.

One rationale for using the longer period for determining average earnings is that doing so would better align federal practices with practices in the private sector, where pensions are commonly based on a five-year average of earnings. More broadly, this option would shift the ratio of deferred compensation to current compensation in the federal government toward the ratio in the private sector. Although a substantial number of private-sector employers no longer provide health insurance benefits for retirees and have shifted from defined benefit pension plans to defined contribution plans that require smaller contributions from employers, the federal government has not substantially reduced the retirement benefits it provides. As a result, federal employees receive a much larger portion of their compensation in retirement benefits than private-sector workers do, on average. Consequently, reducing pensions might be less harmful to the federal government's ability to compete with the private sector in attracting and retaining highly qualified personnel than a reduction in current compensation would be.

A rationale against this option is that cutting retirement benefits would reduce the attractiveness of the overall compensation provided by the federal government, which would discourage some people from entering federal service and hamper the ability of the government to retain its current workforce. This option would have a particularly large impact on the compensation available to military personnel and civilians in CSRS. Whereas federal employees participating in FERS also receive government contributions to the 401(k)-like Thrift Savings Plan, military personnel and civilians in CSRS do not. This option would encourage some younger service members to leave the military after several years rather than remain for an entire career and receive retirement benefits, and it would cause some federal civilian employees to retire earlier than they otherwise would because additional federal service would result in smaller increases in their retirement benefits.

RELATED OPTION: Revenues, Option 36

RELATED CBO PUBLICATIONS: Comparing the Compensation of Federal and Private-Sector Employees (January 2012), www.cbo.gov/publication/42921; Justin Falk, Comparing Benefits and Total Compensation in the Federal Government and the Private Sector, Working Paper 2012-04 (January 2012), www.cbo.gov/publication/42923; and Costs of Military Pay and Benefits in the Defense Budget (November 2012), www.cbo.gov/publication/43574

Among categorically eligible households, the majority -- almost three-quarters in 2011 -- qualify for benefits under what is termed broad-based categorical eligibility. Namely, all household members receive or are authorized to receive noncash benefits from the Temporary Assistance for Needy Families (TANF) program (such as child care, transportation assistance, or even a token benefit such as a pamphlet describing TANF). The remaining categorically eligible households -- roughly one-quarter in 2011 -- are ones in which all members receive cash assistance from TANF, Supplemental Security Income (SSI), or certain state programs that serve people with low income.¹

Households that receive SNAP benefits but are not categorically eligible for the program -- about 10 percent of all participating households in 2011 -- qualify by meeting certain income and asset tests set by law that vary depending on households' characteristics. For households that do not include an elderly or disabled person, total income must be less than or equal to 130 percent of the federal poverty guidelines (commonly known as the federal poverty level, or FPL), and cash assets must be less than or equal to $2,000. For households that include an elderly or disabled person, different tests apply.

This option encompasses three approaches for reducing SNAP spending. The first approach would apply the standard income and asset requirements to people who would otherwise be entitled to benefits through broad-based categorical eligibility. The Congressional Budget Office estimates that this approach would yield federal savings of $10 billion from 2015 to 2023.

The second approach would lower the income limit for households that are not categorically eligible for benefits and that have no elderly or disabled members. For those households, the approach would lower the limit from 130 percent of the FPL to 100 percent. The approach would yield federal savings of $2 billion from 2015 to 2023, CBO estimates.

The third approach would modify how net income -- the measure used to determine benefit amounts -- is calculated for some households. Under current law, net income is calculated by deducting certain amounts from a household's gross income, including a portion of earnings and certain expenses for shelter, dependent care, and medical care. This approach would modify those deductions from income by changing how receiving energy assistance payments (such as those through the Low Income Home Energy Assistance Program, or LIHEAP) affects the deductible amount. Under current law, households qualify for a heating and cooling standard utility allowance (HCSUA), which is typically worth several hundred dollars a month, if they pay heating or cooling expenses or if they receive any assistance through LIHEAP. The number of households claiming the utility allowance through LIHEAP has increased in recent years, in part because some states now send token LIHEAP benefit amounts (typically between $1 and $5 and typically only once per year) to SNAP participants so they can qualify for the allowance. This approach would eliminate that automatic qualification for the allowance, thereby allowing only households that pay heating or cooling expenses to claim the related deductions. The approach would yield federal savings of $11 billion over the 2015-2023 period, CBO estimates.

CBO expects that implementing all three approaches simultaneously would yield savings of $50 billion through 2023, considerably more than the sum of the effects of the three approaches taken one at a time. When considered alone, lowering the income limit for eligibility for SNAP from 130 percent to 100 percent of the FPL would not affect participants who were eligible for benefits through broad-based categorical eligibility. However, if broad-based categorical eligibility was eliminated and the income limit for eligibility was lowered to 100 percent of the FPL simultaneously, eligibility for people who are not elderly and not disabled would be based on the lower income limit. As a result, the savings from implementing those two approaches together would be larger than the sum of the savings from implementing either of them separately. By contrast, eliminating SNAP participants' ability to automatically qualify for the utility allowance because they receive assistance through LIHEAP would produce smaller federal savings if implemented together with the other two approaches: Because those approaches would reduce the number of recipients of SNAP benefits, the changed treatment of LIHEAP assistance would affect fewer people.

A rationale for eliminating broad-based categorical eligibility or for lowering the income limit for eligibility is that doing so would focus SNAP benefits on those most in need. A rationale for eliminating the automatic utility allowance based on participation in LIHEAP is that doing so would end a practice that artificially inflates deductions from income. Moreover, some of the households receiving token LIHEAP benefits have their heating and cooling costs included in their rent, and their rent is already considered in the deductions of expenses for shelter. Finally, eliminating broad-based categorical eligibility or the automatic utility allowance would make the eligibility for and benefits from SNAP more consistent across states because states currently have different policies regarding other assistance programs and LIHEAP.

An argument against eliminating broad-based categorical eligibility or eliminating the automatic utility allowance is that doing so would increase the complexity and time involved in verifying information on SNAP applications, which would probably result in more errors and greater administrative costs. Adopting either of those approaches would also increase the paperwork for applicants. An argument against eliminating broad-based categorical eligibility or lowering the income limit for eligibility to 100 percent of the FPL is that doing so would eliminate benefits for some households in difficult financial situations.

RELATED OPTIONS: Mandatory Spending, Options 12 and 13

RELATED CBO PUBLICATION: The Supplemental Nutrition Assistance Program (April 2012), www.cbo.gov/publication/43173

This option would eliminate the subsidies for meals served to students from households with income greater than 185 percent of the FPL beginning in July 2014. The Congressional Budget Office estimates that the option would reduce federal spending by $10 billion through 2023.

Under current law, federal subsidies for meals served to students from households with income greater than 185 percent of the FPL can include base cash subsidies, certain commodities, and, for those schools in compliance with federal nutrition guidelines, an additional cash subsidy. In the 2013-2014 school year, the base cash subsidies for meals served to students from households with income greater than 185 percent of the FPL are $0.28 per lunch and $0.28 per breakfast; for after-school snacks provided to such students, the amount is $0.07. All participating schools also receive commodities -- food from the Department of Agriculture, such as fruit and meat -- with a value of $0.23 per lunch. Schools do not receive commodities for breakfasts or snacks. Schools that are in compliance with federal nutrition guidelines receive an additional cash subsidy of $0.06 per lunch. (Schools in Alaska and Hawaii and schools with large numbers of meals served to students from households with income at or below 185 percent of the FPL receive additional subsidies.)

The primary rationale for this option is that it would target federal subsidies to those most in need. No clear justification exists for subsidizing meals for students who are not from low-income households, and because the subsidies for meals served to students from households with income greater than 185 percent of the FPL are small, the effect of the option on those students and the members of their households would probably be minimal.

A rationale against this option is that schools would probably offset part or all of the loss of the subsidies by increasing the prices they charge higher-income students for meals. In addition, schools that incur costs to administer the programs that are greater than the subsidies they receive for meals served to students from households with income at or below 185 percent of the FPL might leave the programs. Eligible students at such schools would no longer receive subsidized meals, and the meals served at those schools would no longer have to meet any of the other requirements of the programs (including the nutrition guidelines).

RELATED OPTIONS: Mandatory Spending, Options 11 and 13

SNAP, formerly known as the Food Stamp program, provides benefits to low-income households to help them purchase food. Federal outlays for the program were $83 billion in 2013, CBO estimates. SSI provides cash assistance to people who are disabled, aged, or both and who have low income and few assets; spending (most of it mandatory) for that program totaled an estimated $54 billion that year. Child nutrition programs subsidize meals provided to children at school, at child care centers, in after-school programs, and in other settings; in 2013, spending for those programs was an estimated $19 billion, most of it for the National School Lunch Program and the School Breakfast Program.

This option would convert SNAP, SSI, and the child nutrition programs into separate, smaller block grants to the states beginning in 2015. Each of the three block grants would provide a set amount of funding to states each year, and states would be allowed to make significant changes to the structure of the programs. The annual funding provided would equal federal outlays for each program in 2007, increased to account for inflation for all urban consumers since then. (The 2007 starting values would include outlays for both benefits and administrative costs and, for child nutrition programs, would represent total spending for that set of programs.)

By CBO's estimates, this option would reduce spending on SNAP by $281 billion from 2015 through 2023 -- or by 41 percent of the amount that would be spent under current law. For SSI, mandatory spending during that period would decline by $49 billion, or by 9 percent. For child nutrition programs, the reduction would be $74 billion, or 33 percent. In addition, funding for the administration of SSI is provided annually in discretionary appropriations; this option would eliminate those appropriations, which would result in $42 billion in discretionary savings during the 2015-2023 period provided that appropriations were adjusted accordingly.

The budgetary effects of switching SNAP, SSI, and child nutrition programs to block grants would depend heavily on the formulas used to set the amounts of the grants. For this option, the inflation-adjusted value of the grants would remain at 2007 amounts. If, instead, the grants were fixed in nominal dollars (as is, for example, the block grant for Temporary Assistance for Needy Families), savings would be larger (and increasingly so) each year. By contrast, if the grants were indexed for both inflation and population growth -- that is, if they were allowed to grow at faster rates than specified -- savings would be smaller (and increasingly so) each year. Savings would also be less if the starting values for the grants were based on higher amounts than the outlays in 2007 -- for example, the outlays of those programs in more recent years. And savings would be less if spending in 2015 and the following few years was adjusted downward from CBO's current-law projections more slowly, rather than immediately reverting to the 2007 amounts adjusted for inflation.

Although the formula used to set the amount of each block grant in this option is the same, the effects on spending for the programs would differ. For SNAP, the effect on projected spending would be larger early on, whereas for the child nutrition programs and, in general, for SSI, the effects would be larger in the later years.

For SNAP, the estimated reduction in federal spending from converting to the specified block grant would decline over time, both in dollar terms and as a share of projected spending under current law. CBO projects that, under current law, spending on SNAP will decline over the 2015-2023 period because the number of people receiving benefits will decline as the economy improves and the effect of the decline in the number of participants will outweigh the increase in per-person benefits (SNAP benefits are adjusted annually for changes in food prices). By contrast, under the option, spending on SNAP would increase over time. Under current law, spending on SNAP will be $79 billion in 2015, CBO projects; this option would reduce that amount by an estimated $38 billion, or by about one-half. In 2023, spending on SNAP under current law is projected to be $73 billion; the option would cut that figure by an estimated $24 billion, or by about one-third.

For SSI, the estimated reduction in mandatory outlays from converting to the specified block grant would generally increase over time, both in dollar terms and as a share of projected spending under current law. (The reduction in spending would bounce up and down in a few years because, as scheduled under current law, benefit payments in October shift to the previous fiscal year when the first day of the month falls on a weekend.) The option would result in greater reductions in the later years primarily because, by CBO's estimates, participation in the program will increase. Under current law, mandatory spending on SSI will be $52 billion in 2015, CBO projects; this option would reduce that spending by $3 billion, or by 6 percent. In 2023, mandatory spending on SSI under current law is projected to be $66 billion; the option would cut that figure by an estimated $7 billion, or by 11 percent.¹

For child nutrition programs, the estimated reduction in federal spending from converting to the specified block grant would increase over time, both in dollar terms and as a share of projected spending under current law. In 2015, the estimated reduction in spending would be $6 billion, or 28 percent; and in 2023, the estimated reduction would be $11 billion, or 37 percent. The savings would be greater in the later years of the period because most spending for the programs under current law is indexed to an inflator that adjusts benefits for changes in the price of food away from home -- which CBO projects will be larger than the changes in prices to which the specified block grant is indexed -- and because, by CBO's expectations, participation in the programs will grow.

A rationale for this option is that block grants would make spending by the federal government more predictable. The programs affected by this option are currently legally obligated to make payments to people who meet the eligibility criteria. Therefore, spending increases or decreases without any legislative changes. For example, outlays for SNAP benefits more than doubled between 2007 and 2011, primarily because of an increase in the number of participants that stemmed in large part from the deterioration in labor market conditions. And even if the number of participants in a program does not change, the benefits paid per person can change if the income of participants changes.

Another rationale for the option is that state programs might better suit local needs and might be more innovative. States could define eligibility and administer benefits in ways that might better serve their populations. Moreover, allowing states to design their own programs would result in more experimentation, and some states could adopt approaches that had been successful elsewhere.

A rationale against this option is that, from 2015 to 2023, it would cut mandatory federal spending for programs that support lower-income people by $404 billion (with an additional cut of $42 billion in discretionary spending, if appropriations were reduced as specified). Who was affected by that cut in spending and how they were affected would depend on how states structured their programs and how state spending changed. But such a cut -- amounting to 28 percent of the projected mandatory spending on SNAP, SSI, and child nutrition programs during those years -- would almost certainly eliminate benefits for some people who would have otherwise received them, as well as significantly reduce the benefits of some people who remained in the programs.

Another rationale against this option is that block grants would not be as responsive to economic conditions as the current federal programs are. The automatic changes in spending on benefits under current law help stabilize the economy, reducing the depth of recessions during economic downturns. Those stabilizing effects would be lost under the option. Furthermore, if federal spending did not increase during a future economic downturn and the number of people eligible for benefits increased, states that could not increase their spending (probably at a time when their own revenues were declining) would have to reduce the benefits received by each participant or tighten eligibility, perhaps adding to the hardship for families just when their need was greatest.

RELATED OPTIONS: Mandatory Spending, Options 11, 12, and 14; and Health, Option 1

RELATED CBO PUBLICATIONS: The Supplemental Nutrition Assistance Program (April 2012), www.cbo.gov/publication/43173; and Supplemental Security Income: An Overview (December 2012), www.cbo.gov/publication/43759

This option would eliminate SSI benefits for children. The Congressional Budget Office estimates that making this change would reduce mandatory spending by $103 billion through 2023. The administrative costs of SSI are paid through annual discretionary appropriations; by eliminating the need to administer the program for children, the option would generate an additional $10 billion in discretionary savings over the same period if appropriations were adjusted accordingly.

One rationale for limiting SSI to adults is to refocus the program on replacing earnings for people who cannot work, which was the objective stated in the legislation that established SSI in 1974. Policymakers might choose to make this change to SSI and leave other programs unchanged. Alternatively, if policymakers wanted to continue to provide support for disabled children, they could create a new program to do so or they could increase funding for other existing programs. For example, states could be given grants to provide educational, medical, and social services to disabled children and their families. That approach might help to ensure that the appropriate services are effectively integrated with one another, and it might increase policymakers' confidence that government spending directly benefits disabled children -- whereas SSI benefits are usually paid to children's parents or guardians, without a way to ensure that the money is used in ways that help the children. As other examples, federal funding for Temporary Assistance for Needy Families (TANF) could be expanded, or federal funding for states' education programs could be expanded. To the extent that funds that would have been used to provide SSI benefits for children were instead used for a new program or to increase the resources of other existing programs, federal savings from this option would be correspondingly reduced.

One rationale for maintaining SSI benefits for children, and against this option, is that the benefits are generally well targeted to needy people. Parents of disabled children -- especially mothers -- tend to work less than other parents, which lowers their income, and even parents who receive government-provided educational and medical services for disabled children still face other costs associated with those disabilities. According to one study, forgone work by mothers with a disabled child reduces their families' earnings by roughly $5,000 per year, on average, and the direct cost of treatments for disabled children is around $1,000 per year, on average.¹ (Those treatments include health care; therapeutic, behavioral, and educational services; transportation; services by care-givers; and other special needs services.) However, that study did not attempt to estimate how much of the reduction in mothers' work results from SSI itself; because SSI benefits are reduced by 50 cents for each dollar of recipients' monthly wages and self-employment income after the first $65, the availability of SSI reduces the incentive to work.

RELATED OPTION: Mandatory Spending, Option 13

RELATED CBO PUBLICATION: Supplemental Security Income: An Overview (December 2012), www.cbo.gov/publication/43759

One approach to constrain the growth of Social Security benefits would be to change the computation of initial benefits so that the real (inflation-adjusted) value of average initial benefits did not rise over time. That approach, often called "pure" price indexing, would allow increases in average real wages to result in higher real Social Security payroll taxes but not in higher real benefits. The first alternative in this option takes that approach. It would link the growth of initial benefits to the growth of prices (as measured by changes in the consumer price index for all urban consumers) rather than to the growth of average wages, beginning with participants who became eligible for benefits in 2015.

That alternative would reduce federal outlays by $93 billion through 2023, the Congressional Budget Office estimates. By 2038, scheduled Social Security outlays would be reduced by 18 percent relative to what would occur under current law; when measured as a percentage of total economic output, the reduction would be 1.1 percentage points, as outlays would decline from 6.2 percent to 5.1 percent of gross domestic product.

Under pure price indexing, the reduction in payments relative to those that are scheduled to be paid under current law would be larger for each successive cohort of beneficiaries; the extent of the reduction would be determined by the growth of average real wages. For example, if real wages grew by 1.4 percent annually (approximately the rate underlying CBO's long-term Social Security projections), workers who were newly eligible for benefits in the first year the policy was in effect would receive about 1.4 percent less than they would have received under the current rules; those becoming eligible in the second year would receive 2.8 percent less; and so on. The actual incremental reduction would vary from year to year, depending on the growth of real earnings. Under pure price indexing, people newly eligible for benefits in 2038, CBO estimates, would experience a reduction in benefits of about one-third relative to the benefits scheduled under current law.

Another approach, called "progressive" price indexing, would retain the current benefit formula for workers who had lower earnings and would reduce the growth of initial benefits for workers who had higher earnings. Currently, the formula for calculating initial benefits is structured so that workers who have higher earnings receive higher benefits, but the benefits paid to workers with lower earnings replace a larger share of their earnings.

Under the alternative with progressive price indexing in this option, initial benefits for the 30 percent of workers with the lowest lifetime earnings would increase with average wages, as they are currently slated to do, whereas initial benefits for other workers would increase more slowly, at a rate that depended on their position in the distribution of earnings. For example, for workers whose earnings put them at the 31st percentile of the distribution, benefits would rise only slightly more slowly than average wages, whereas for the highest earners, benefits would rise with prices -- as they would under pure price indexing. Thus, under progressive price indexing, the initial benefits for most workers would increase more quickly than prices but more slowly than average wages. As a result, the benefit formula would gradually become flatter, and after about 60 years, everyone in the top 70 percent of earners would receive the same monthly benefit. A partially flat benefit formula would represent a significant change from Social Security's traditional structure, under which workers who pay higher taxes receive higher benefits.

Progressive price indexing would reduce scheduled Social Security outlays less than would pure price indexing, and beneficiaries with lower earnings would not be affected. Real annual average benefits would still increase for all but the highest-earning beneficiaries. Benefits would replace a smaller portion of affected workers' earnings than they would under current law but a larger portion than they would under pure price indexing.

A switch to progressive price indexing would reduce federal outlays by $58 billion through 2023, CBO estimates. By 2038, outlays for Social Security would be reduced by 10 percent; when measured as a percentage of total economic output, the reduction would be 0.6 percentage points, as outlays would fall from 6.2 percent to 5.6 percent of gross domestic product.

Under both approaches, the reductions in benefits relative to those under current law would be greatest for beneficiaries in the distant future. Those beneficiaries, however, would have had higher real earnings during their working years and thus a greater ability to save for retirement.

An advantage of both approaches in this option is that, although they would reduce outlays for Social Security compared with those scheduled to be paid under current law, average inflation-adjusted benefits in the program would not decline over time. If the pure price-indexing approach was adopted, future beneficiaries would generally receive the same real monthly benefit paid to current beneficiaries, and they would, as average longevity increased, receive larger total lifetime benefits.

But because benefits would no longer be linked to average wages, a disadvantage of both approaches is that affected beneficiaries would no longer share in overall economic growth. As a result, benefits would replace a smaller portion of workers' earnings than they do today. Moreover, relative to currently scheduled benefits, reductions would be largest during periods of high wage growth.

RELATED OPTIONS: Mandatory Spending, Options 16, 17, and 18

RELATED CBO PUBLICATIONS: Social Security Policy Options (July 2010), www.cbo.gov/publication/21547; letter to the Honorable Paul Ryan providing CBO's analysis of the Roadmap for America's Future Act of 2010 (January 27, 2010), www.cbo.gov/publication/41860; and Long-Term Analysis of S. 2427, the Sustainable Solvency First for Social Security Act of 2006 (attachment to a letter to the Honorable Robert F. Bennett, April 5, 2006), www.cbo.gov/publication/17701

Under this option, the full retirement age would increase to 67 more quickly and would then increase further. Specifically, the full retirement age would increase in two-month increments for six years, rising to 66 years and 2 months for workers born in 1953 (who turn 62 in 2015) and reaching 67 for workers born in 1958 (who turn 62 in 2020). Thereafter, it would continue to increase by two months per year until reaching 70 for workers born in 1976 or later (who turn 62 in 2038 or later). As under current law, workers could still choose to begin receiving reduced benefits at 62, but the reductions would be larger. The benefits for workers who qualify for disability insurance would not be reduced under this option.

This approach would reduce lifetime Social Security benefits. Depending on the age at which a worker claims benefits, a one-year increase in the full retirement age is equivalent to a reduction in the monthly benefit of between 5 percent and 8 percent. Workers could maintain the same monthly benefit by claiming benefits at a later age, but then they would receive benefits for fewer years. Because many workers retire at the full retirement age, increasing that age is likely to result in beneficiaries' remaining employed longer and claiming Social Security benefits later than they would if a policy with identical benefits at each age was implemented through adjustments in the benefit formula. The additional work would increase total output and boost federal revenues from income and payroll taxes. It would also result in higher future Social Security benefits, although the increase in benefits would be smaller than the increase in revenues. The estimates shown here for this option over the next decade do not include those effects of additional work.

This option would shrink federal outlays by $58 billion from 2015 through 2023, the Congressional Budget Office estimates. By 2038, the option would reduce Social Security outlays relative to what would occur under current law by 6 percent; when measured as a percentage of total economic output, the reduction would be 0.4 percentage points, as outlays would fall from 6.2 percent to 5.9 percent of gross domestic product.

A rationale for this option is that people who turn 65 today will, on average, collect Social Security benefits for significantly longer than retirees did in the past, and the average life span in the United States is expected to continue to lengthen. In 1940, life expectancy at age 65 was 11.9 years for men and 13.4 years for women. Life expectancy has risen by more than five years for 65-year-olds, to 17.9 years for men and 20.2 years for women, and CBO projects that by 2038, those figures will increase to 20.2 years and 22.5 years, respectively. Therefore, a commitment to provide retired workers with a certain monthly benefit beginning at age 65 in 2038 will be significantly more costly than is that same commitment made to today's recipients.

A disadvantage of this option, like any proposal to reduce retirement benefits but not disability benefits, is that it would increase the incentive for older workers nearing retirement to apply for disability benefits. Under current law, workers who retire at age 62 in 2038 will receive 70 percent of their primary insurance amount (what they would have received if they had claimed benefits at their full retirement age); if they qualify for disability benefits, however, they will receive 100 percent of that amount. Under this option, workers who retired at 62 in 2038 would receive only 55 percent of their primary insurance amount; they would still receive 100 percent if they qualified for disability benefits. (The estimates of the budgetary effects of this option account for the effect on the Social Security Disability Insurance program.) To eliminate that added incentive to apply for disability benefits, policymakers could narrow the difference by also reducing scheduled disability payments. For example, disability benefits could be reduced for people age 53 or older, or eligibility for disability benefits could be limited to people younger than 62 (as discussed in detail in the first related publication cited below). However, that additional change would adversely affect people who would no longer qualify for disability benefits.

Some proposals to increase the full retirement age would also increase the early eligibility age, when participants may first claim retirement benefits, from 62. Increasing only the full retirement age would reduce monthly benefit amounts and would increase the risk of poverty at older ages for people who did not respond to the increase in the full retirement age by delaying the age at which they claimed benefits. Increasing the early eligibility age along with the full retirement age would make some people wait longer to receive retirement benefits, so their average monthly payments would be higher; that outcome would help people who lived a long time. However, for people who would depend on benefits at age 62, increasing the early eligibility age could cause financial hardship, even if, over their lifetime, the total value of benefits would be generally unchanged. Increasing the early eligibility age together with the full retirement age would cause federal spending to be somewhat lower in the first few decades of the policy and higher in later decades than if only the full retirement age was increased.

RELATED OPTIONS: Mandatory Spending, Options 15, 17, 18, and 19; and Health, Option 8

RELATED CBO PUBLICATIONS: Policy Options for the Social Security Disability Insurance Program (July 2012), www.cbo.gov/publication/43421; Raising the Ages of Eligibility for Medicare and Social Security (January 2012), www.cbo.gov/publication/42683; "Raise the Earliest Eligibility Age for Social Security," in Reducing the Deficit: Spending and Revenue Options (March 2011), www.cbo.gov/publication/22043; Social Security Policy Options (July 2010), www.cbo.gov/publication/21547; and Jae Song and Joyce Manchester, Have People Delayed Claiming Retirement Benefits? Responses to Changes in Social Security Rules, Working Paper 2008-04 (May 2008), www.cbo.gov/publication/19575

This option would lengthen the AIME computation period to 36 years for people who turn 62 in 2015, to 37 years for people who turn 62 in 2016, and to 38 years for people who turn 62 in 2017 and beyond. Extending the computation period would generally reduce benefits by requiring that additional years of lower earnings be factored into the benefit computation. The option would not change the number of years used to compute AIME amounts for disabled workers; only retirement benefits would be affected.

The option would have the largest effect on people who worked for fewer than 38 years, because they would have additional years with no earnings included in the calculation of their benefits. However, the option would reduce benefits even for people who worked 38 years or more, because almost all of those people would have lower average earnings in the additional computation years than they would have in their highest 35 years of earnings.

Lengthening the period by three years would reduce federal outlays by $43 billion through 2023, the Congressional Budget Office estimates. By 2038, Social Security outlays would be reduced by 2 percent; when measured as a percentage of total economic output, the reduction would be 0.1 percentage point, as outlays would fall from 6.2 percent to 6.1 percent of gross domestic product.

An argument in support of expanding the computation period is based on people's increased life expectancy: Because people generally live longer than they used to and are expected to live longer in the future, lengthening the computation period would encourage them to remain in the labor force longer. That additional work would increase total output. It would also extend the amount of time that people pay into the Social Security system, boosting federal revenues from income and payroll taxes, and it would result in higher future Social Security benefits (although the increase in benefits would be smaller than the increase in revenues). The estimates shown here for this option over the next decade do not include those effects of additional work.

Extending the computation period also would reduce the advantage currently enjoyed by workers who postpone entering the labor force -- while they pursue advanced education, for instance. People with more education generally earn more than their counterparts who enter the labor force sooner; because a number of years of low or no earnings can now be ignored in calculating the AIME amount, the former group experiences little or no loss of benefits for any additional years spent not working and thus not paying Social Security taxes.

An argument against this option is that it would adversely affect some beneficiaries who were not able to continue working for 38 years because of circumstances they could not control, such as poor health. Other disproportionately affected workers would be parents who interrupted a career to raise children or workers who experienced long stretches of unemployment. On average, the benefit reduction would be larger for women than for men, because women tend to spend more years out of the workforce.

RELATED OPTIONS: Mandatory Spending, Options 15, 16, and 18

RELATED CBO PUBLICATION: Social Security Policy Options (July 2010), www.cbo.gov/publication/21547

This option would adjust the benefit formula to reduce Social Security benefits for people who become eligible in calendar year 2015 or later. Benefits would be permanently reduced by 3 percent for people newly eligible in 2015, 6 percent for people newly eligible in 2016, and so on, up to 15 percent for people newly eligible in 2019 or later. Federal savings from that change in the formula would continue to grow in later years as more beneficiaries were subject to the cuts. The Congressional Budget Office estimates that federal outlays would be reduced by $188 billion through 2023. By 2038, this option would reduce Social Security outlays by about 12 percent relative to what would occur under current law; when measured as a percentage of total economic output, the reduction would be 0.7 percentage points, as outlays would fall from 6.2 percent to 5.5 percent of gross domestic product.

Only future beneficiaries would be affected, so the option would not affect payments to people who turned 62 or became entitled to disability benefits before 2015. Nor would this option affect the annual cost-of-living adjustments for current or future beneficiaries.

An advantage of this option is its simplicity. The current benefit structure would be retained, and equal percentage reductions would be applied to all benefits, including those paid to survivors and dependents, which are based on the same formula used to compute workers' benefits.

Because the same benefit reductions would apply to all beneficiaries, a disadvantage is that people with lower benefits would generally experience a larger percentage reduction in total income. In particular, such people are less likely than others to have savings and sources of income outside of Social Security, such as pensions, so a reduction in Social Security benefits would result in a larger reduction in total income for that group and a greater decline in their standard of living. An alternative approach would reduce Social Security benefits by larger percentages for people with higher benefits.

Another disadvantage of this option is that reductions would be applied fairly soon. An alternative approach is to reduce Social Security benefits only for people becoming eligible for benefits 5 or 10 years in the future. That approach would give people more time to adjust to the change, but it would also reduce the budgetary savings over many years.

RELATED OPTIONS: Mandatory Spending, Options 15, 16, and 17

RELATED CBO PUBLICATION: Social Security Policy Options (July 2010), www.cbo.gov/publication/21547

That difference in benefits encourages some people between age 62 and their full retirement age to apply for DI at the same time that they apply for Social Security retirement benefits. If their DI application is approved, they receive higher benefits for the rest of their life than if they had applied only for retirement benefits. (Some people claim retirement benefits during the five-month waiting period that the DI program imposes on applicants. If they receive retirement benefits during the waiting period and then are approved for the DI program, their DI benefits and subsequent retirement benefits are reduced a little; for example, if they receive retirement benefits for five months, their future DI and retirement benefits are generally reduced by 2 percent.)

Under this option, workers would not be allowed to apply for DI benefits after their 62nd birthday or to receive DI benefits if they became eligible for benefits after that date. Under such a policy, individuals who would have become eligible for DI benefits at age 62 or later under current law would instead have to claim retirement benefits if they wanted to receive any Social Security benefits. Benefits for those people over their lifetime would be as much as 30 percent lower than the DI and retirement benefits they are scheduled to receive under current law. (The actual reduction in lifetime benefits would depend on their year of birth, the age at which they claimed retirement benefits, and their life span.) Workers who begin receiving benefits before age 62 could continue to receive those benefits until they reach the full retirement age.

By 2023, this option would affect about 450,000 disabled worker beneficiaries. The option would reduce federal outlays by $11 billion between 2015 and 2023, the Congressional Budget Office estimates. Those savings would be the net result of a $53 billion reduction in DI outlays and a $42 billion increase in Social Security retirement benefits as people shifted from the DI program to the retirement program. By 2038, Social Security outlays (including both DI and retirement benefits) would be reduced by roughly 1 percent relative to what they would be under current law. (Those estimates do not include any effects of this option on spending for other federal programs, such as Medicare, Medicaid, and the Supplemental Security Income [SSI] program.)

A rationale for this option is that it eliminates the incentive for people who are applying for retirement benefits to apply for disability benefits at the same time in hopes of an outcome that advantages them financially. Moreover, workers who became disabled between age 62 and the full retirement age would still have access to Social Security retirement benefits, although those benefits would be less than the disability benefits available under current law. In addition, some beneficiaries with low income and few assets would qualify for SSI, which provides benefits for people with limited resources who are age 65 or older or who are younger than 65 and are disabled. Thus, some disabled workers could receive SSI benefits beginning at age 62 and then claim Social Security retirement benefits at the full retirement age.

An argument against this option is that it would substantially reduce the support available to older people who, under current law, would be judged to be too disabled to perform substantial work. In 2011, 8 percent of workers who became newly entitled to disability benefits were age 62 or older. Those people would have received significantly lower benefits from Social Security if they had been ineligible for DI and had applied for retirement benefits instead. In addition, they also usually would have lost coverage by Medicare because that program's benefits are generally not available to people under age 65, whereas most recipients of DI become entitled to Medicare benefits 24 months after their DI benefits begin.

The option's net effect on older people's participation in the labor force is unclear. On the one hand, the option would induce some people to work longer than they will under current law: Although DI benefits are available only to people who are judged unable to perform substantial work, some of those people could, in fact, work in a sufficiently supportive environment. If DI benefits were not available, some of them would work longer than they would under current law. On the other hand, the option would induce some people who were planning to work until age 62 or later to leave the labor force at age 61 so that they could apply for DI benefits. (The estimates presented here do not include any effects of changes in labor supply.)

RELATED OPTIONS: Mandatory Spending, Options 16 and 20

RELATED CBO PUBLICATIONS: Policy Options for the Social Security Disability Insurance Program (July 2012), www.cbo.gov/publication/43421; Social Security Disability Insurance: Participation Trends and Their Fiscal Implications (July 2010), www.cbo.gov/publication/21638; and Supplemental Security Income: An Overview (December 2012), www.cbo.gov/publication/43759

This option would raise that threshold for recent work by requiring disabled workers older than 30 to have earned 16 quarters in the past six years, which is usually equivalent to working four of the past six years. The change in policy would apply to people seeking benefits in 2015 and later and would not affect blind applicants. It would reduce the number of workers who received DI benefits by 4 percent by 2023, the Congressional Budget Office estimates, and would reduce federal outlays for Social Security by $35 billion from 2015 through 2023. By 2038, outlays for Social Security would be about 1 percent lower than those projected under current law. (Those estimates do not include any effects of this option on spending for other federal programs, such as Medicare, Medicaid, and the Supplemental Security Income program.)

An argument in favor of this option is that it would probably target benefits more narrowly toward people who leave the workforce because of their disability. To qualify for disability benefits, applicants must be judged to be unable to perform "substantial" work because of a disability -- but there is no way to know whether applicants would have worked if they were not disabled. Under current law, even people who have not worked for five years can qualify for disability benefits. By comparison, the tightening of work requirements under this option would ensure that only people with a substantial record of recent work qualified for benefits, and those people would be more likely to work if they were not disabled than would people without a substantial record of recent work.

A reason to retain the existing work requirement is that the option could reach well beyond denying benefits to people who left the workforce for reasons other than their disability. In particular, some people might not meet the new requirement for recent work but would be working if they did not have a disability. For example, some people who left the workforce temporarily to care for children or pursue additional education and then became disabled while out of the workforce or shortly after returning to work could qualify for disability benefits under current law but not under the option. Similarly, some people who were searching for work for an extended time before becoming disabled would become ineligible for benefits under the option.

RELATED OPTION: Mandatory Spending, Option 19

RELATED CBO PUBLICATIONS: Policy Options for the Social Security Disability Insurance Program (July 2012), www.cbo.gov/publication/43421; and Social Security Disability Insurance: Participation Trends and Their Fiscal Implications (July 2010), www.cbo.gov/publication/21638

Some medical conditions and injuries that are deemed to be service-connected disabilities were incurred or exacerbated in the performance of military duties, but others were not. For example, a qualifying injury can be something that occurred when a service member was at home or on leave, and a qualifying medical condition can be something, such as diabetes, that developed independently of military activities while the service member was on active duty. In 2012, VA paid 520,000 veterans a total of $2.9 billion, the Congressional Budget Office estimates, to compensate for seven medical conditions that, according to the Government Accountability Office (GAO), are generally neither caused nor aggravated by military service. Those conditions are chronic obstructive pulmonary disease, arteriosclerotic heart disease, hemorrhoids, uterine fibroids, multiple sclerosis, Crohn's disease, and osteoarthritis.

This option would cease veterans' disability compensation for the seven medical conditions identified by GAO. Under the option, veterans currently receiving compensation for those conditions would have their compensation reduced or eliminated following a reevaluation, and veterans who applied for compensation for those conditions in the future would not be eligible for it. The option would not alter DoD's disability compensation system, which focuses on fitness for military duties rather than compensation for disabilities.

By CBO's estimates, this option would reduce outlays by $20 billion from 2015 to 2023. About 80 percent of the savings in the last year of that period (and an even larger share in earlier years) would result from curtailing payments to current recipients of disability compensation. A broader option could eliminate compensation for all disabilities unrelated to military duties, not just the seven conditions identified by GAO. For a condition such as arthritis, for instance, which may or may not result from military duties, the determination of whether the condition was related to military activities could be left up to VA. An option with that broader reach would generate significantly larger savings but would be more difficult to administer.

An argument in support of this option is that the disability compensation system for military veterans should be more comparable to civilian systems. Few civilian employers offer long-term disability benefits, and among those that do, benefits do not typically compensate individuals for all medical problems that developed during a period of employment.

An argument against this option is that military service is not like a civilian job; instead, it confers unique benefits to society and imposes extraordinary risks on service members. By that logic, the pay and benefits provided to service members should reflect the hardships of military life, including compensating veterans who become disabled in any way during the period of their military service.

RELATED OPTIONS: Mandatory Spending, Options 9 and 22

However, VA may supplement the regular disability compensation payments for veterans whom it deems unable to engage in substantial work. To qualify for those supplemental benefits, termed individual unemployability (IU) payments, veterans may not earn more than the federal poverty guidelines (commonly referred to as the federal poverty level) and generally must be rated between 60 percent and 90 percent disabled. A veteran qualifying for the IU supplement receives a monthly disability payment equal to the amount that he or she would receive if rated 100 percent disabled. In 2012, for those veterans who received the supplement, it boosted monthly VA disability payments by an average of about $1,500. The largest increases were paid to veterans rated 60 percent disabled: For them, the supplement raised the monthly payment by about $1,800, on average. In 2012, nearly 300,000 veterans received IU payments.

Under this option, VA would no longer make IU payments to veterans who are past Social Security's full retirement age, which varies from 65 to 67 depending on beneficiaries' birth year. Therefore, at the full retirement age, VA disability payments would revert to the amount associated with the rated disability level. By the Congressional Budget Office's estimates, the savings from this option between 2015 and 2023 would be $15 billion.

VA's regulations require that IU benefits be based on a veteran's inability to maintain substantial employment because of the severity of a service-connected disability -- and not because of age, voluntary withdrawal from work, or other factors. Consequently, a veteran may begin to receive IU payments, or continue to receive them, after the full retirement age for Social Security. In 2005 (the most recent year for which VA reports such statistics), more than 80,000 veterans who received the IU supplement, or about one-third of the total number in that year, were over the age of 65.

One rationale for this option is that most veterans who are older than Social Security's full retirement age would not be in the labor force because of their age, so for those veterans, a lack of earnings would probably not be attributable to service-connected disabilities. In particular, in 2010, about 35 percent of men who were 65 to 69 years old were in the labor force, and that number dropped to 10 percent for those age 75 or older. In addition, most recipients of IU payments who are over age 65 would have other sources of income: They would continue to receive regular VA disability payments and might collect Social Security benefits as well. (Most recipients of the IU supplement begin collecting it in their 50s and probably have worked enough to earn Social Security benefits.)

An argument for retaining the current policy is that IU payments should be determined solely on the criterion of a veteran's ability to work and that having age be a consideration would be unfair. In addition, some disabled veterans would find it difficult or impossible to replace the income provided by the IU supplement. If they had been out of the workforce for a long time, their Social Security benefits might be small, and they might not have been able to accumulate much in personal savings.

RELATED OPTIONS: Mandatory Spending, Options 9 and 21

This option would use the chained CPI for indexing COLAs for Social Security and parameters of other programs beginning in 2015. The chained CPI has grown an average of about 0.25 percentage points more slowly per year over the past decade than the traditional CPI has, and the Congressional Budget Office expects that gap to persist. Therefore, the option would reduce federal spending, and savings would grow each year as the effects of the change compounded. Outlays would be reduced by $162 billion through 2023, CBO estimates, and the net effect on the deficit would be about the same. (This option would not change the measure of inflation used for indexing parameters of the tax code, as would be done in the related option cited below; the small revenue effects estimated here stem from changes in the revenue portion of refundable tax credits for health insurance purchased through exchanges, as well as other effects on revenues of the Affordable Care Act's provisions related to insurance coverage.)

COLAs for Social Security and the pensions that the government pays to retired federal civilian employees and military personnel are linked to the CPI, as are outlays for veterans' pensions and veterans' disability compensation. In most of those programs, the policy change would not alter people's benefits when they are first eligible to receive them, either now or in the future, but it would reduce their benefits in subsequent years because the annual COLAs would be smaller, on average. The impact would be greater the longer people received benefits (that is, the more of the reduced COLAs they experienced). Therefore, the impact would ultimately be especially large for the oldest beneficiaries as well as for some disabled beneficiaries and military retirees, who generally become eligible for annuities before age 62 and thus can receive COLAs for a longer period.

Growth in the CPI also affects spending for Supplemental Security Income, Medicare, Medicaid, the health insurance exchanges established under the Affordable Care Act, Pell grants, student loans, the Supplemental Nutrition Assistance Program (SNAP), child nutrition programs, and other programs. The index is used to calculate various eligibility thresholds, payment rates, and other factors that affect the number of people eligible for those programs and the benefits they receive. Therefore, switching to the chained CPI would reduce spending by both decreasing the number of people who are eligible for certain programs and reducing the average benefits that eligible people receive.

One argument for switching to the chained CPI in Social Security and other federal programs is that that index is generally viewed as a more accurate measure of overall inflation than the traditional CPI, for two main reasons. First, the chained CPI more fully accounts for the way that people tend to respond to price changes. Consumers often lessen the impact of inflation on their standard of living by purchasing fewer goods or services that have risen in price and more goods or services that have not risen in price or have risen less. Measures of inflation that do not account for such substitution overstate growth in the cost of living -- a problem known as substitution bias. BLS's current procedures for calculating the traditional CPI account for some types of substitution, but the chained CPI fully incorporates the effects of changing buying patterns.

A second reason to believe that the chained CPI is a better measure of inflation is that it is largely free of an error known as small sample bias. That bias, which is significant in the traditional CPI, occurs when certain statistical methods are applied to price data for only a small portion of the items in the economy.

One argument against using the chained CPI, and thereby reducing COLAs in Social Security and other federal retirement programs, is that the prices faced by Social Security beneficiaries and other retirees generally rise faster than prices faced by the population at large. That issue may be of particular concern because Social Security and pension benefits are the main source of income for many older people. BLS computes an unofficial price index that reflects the purchasing patterns of older people, called the experimental CPI for Americans 62 years of age and older (CPI-E). Since 1982 (the earliest date for which that index has been computed), annual inflation as measured by the CPI-E has been 0.2 percentage points higher, on average, than inflation as measured by the traditional CPI. That difference mainly reflects the fact that a larger percentage of spending by the elderly is for items whose prices tend to rise especially quickly, such as medical care. However, whether the cost of living actually grows at a faster rate for the elderly than for younger people is unclear, because measuring the prices that individuals actually pay for health care and accurately accounting for changes in the quality of that care are difficult.

Another potential drawback of this option is that a reduction in COLAs would ultimately have larger effects on the oldest beneficiaries and on those who initially become eligible for Social Security on the basis of a disability. For example, if benefits were adjusted every year by 0.25 percentage points less than the increase in the traditional CPI, Social Security beneficiaries would face a reduction in retirement benefits at age 75 of about 3 percent compared with what they would receive under current law, and a reduction at age 95 of about 8 percent. To protect vulnerable people, lawmakers might choose to reduce COLAs only for beneficiaries whose income or benefits were greater than specified amounts. Doing so, however, would reduce the budgetary savings from the option.

Finally, policymakers might prefer to maintain current law because they want benefits to grow faster than the cost of living, so that beneficiaries would share some of the benefits of economic growth. An alternative option would be to link benefits to wages or gross domestic product. Because those measures generally grow faster than inflation, such a change would increase outlays.

RELATED OPTION: Revenues, Option 4

RELATED CBO PUBLICATIONS: Testimony of Jeffrey Kling, Associate Director for Economic Analysis, before the Subcommittee on Social Security, House Committee on Ways and Means, Using the Chained CPI to Index Social Security, Other Federal Programs, and the Tax Code for Inflation (April 18, 2013), www.cbo.gov/publication/44083; Using a Different Measure of Inflation for Indexing Federal Programs and the Tax Code (February 2010), www.cbo.gov/publication/21228; and "Technical Appendix: Indexing With the Chained CPI-U for Tax Provisions and Federal Programs" (supplemental material for Using a Different Measure of Inflation for Indexing Federal Programs and the Tax Code, February 2010), www.cbo.gov/publication/21228

The discretionary budget authority (that is, the authority to incur financial obligations) provided in appropriation acts results in outlays when the money is spent. Some appropriations (such as those for employees' salaries) are spent quickly, but others (such as those for major construction projects) are disbursed over several years. Thus, in any given year, discretionary outlays include spending both from new budget authority and from budget authority provided in earlier appropriations.²

Trends in Discretionary Spending

A distinct pattern in the federal budget since the 1970s has been the diminishing share of spending that occurs through the annual appropriation process. Between 1973 and 2013 discretionary spending fell from 53 percent to about 35 percent of total federal spending. Relative to the size of the economy, discretionary spending declined from 9.6 percent of gross domestic product (GDP) in 1973 to a low of 6.0 percent in 1999 before rising back to about 7 percent in 2013, CBO estimates (see Figure 3-1).

Most of the decline over that period involved spending for national defense. In 1973, discretionary spending for defense was 5.7 percent of GDP. By the late 1970s, it dropped below 5.0 percent, but it rose again during the defense buildup from 1982 to 1986, when it averaged 5.9 percent. After the end of the Cold War, outlays fell relative to GDP, reaching a low of 2.9 percent at the turn of the century. Such outlays began climbing again shortly thereafter, reaching an average of 4.6 percent of GDP from 2009 through 2011. Roughly half of the growth in defense spending over the 2001-2011 period resulted from spending on operations in Iraq and Afghanistan; in 2011 such spending was equal to 1.0 percent of GDP. In 2012, discretionary spending for defense fell to 4.2 percent of GDP, and CBO estimates that it declined further in 2013.

Nondefense discretionary spending funds an array of federal activities in areas such as education, transportation, income security, veterans' health care, and homeland security. Over the past four decades, spending in that category has generally ranged from about 3 percent to 4 percent of GDP. One exception was from 1975 to 1981, when such spending averaged almost 5 percent of GDP. Another exception was from 2009 through 2011, when funding from the American Recovery and Reinvestment Act of 2009 (ARRA) and from other sources associated with the federal government's response to the 2007-2009 recession helped push nondefense outlays above 4 percent of GDP. Like defense discretionary spending, nondefense discretionary outlays as a share of GDP fell in 2012, to 3.8 percent, and CBO estimates that they declined further in 2013.

 

Figure 3-1

 

 

Discretionary Spending, 1973 to 2023

 

 

 

In 2012 and 2013, discretionary outlays declined not only relative to GDP but also in nominal terms. That decline stemmed largely from a waning of spending from ARRA, reduced funding for military operations in Afghanistan and Iraq, and constraints imposed by the Budget Control Act of 2011. Through 2021, most discretionary appropriations will be constrained by the caps and automatic spending reductions put in place by that act; in its baseline projections for 2022 and 2023, CBO assumed that discretionary appropriations would equal the 2021 amount, with increases for projected inflation. Under that assumption, outlays from discretionary appropriations are projected to decline from about 7 percent of GDP in 2013 -- already below the 40-year average of 8.4 percent -- to 5.3 percent in 2023. That would be the lowest amount relative to GDP at least since 1962 (the first year for which comparable data are available). Under those projections, in 2023, defense and nondefense discretionary spending would each equal 2.6 percent of GDP -- the smallest share of the economy for either category in at least five decades.

Methodology Underlying Discretionary Spending Estimates

For the most part, the budgetary effects described in this chapter were calculated relative to CBO's baseline projections, which depict paths for discretionary spending of different types over the next 10 years as directed by section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985. That law states that current appropriations should be assumed to continue in later years, with adjustments to keep pace with projected inflation. (Although CBO follows that law in constructing baseline projections for individual components of discretionary spending, CBO's baseline projections of overall discretionary spending incorporate the caps and automatic spending reductions put in place by the Budget Control Act.) The measures of inflation that CBO uses for its baseline are those specified in the law: the employment cost index for wages and salaries (applied to spending for federal personnel) and the GDP price index (for other spending).

The budgetary effects of options involving military force structure (Option 1) and acquisition (Options 4 through 9) were measured on a different basis. Because the baseline projections do not reflect programmatic details for force structure and specific weapon systems, the effects of those options are calculated relative to the Department of Defense's (DoD's) 2014 Future Years Defense Program (FYDP). That plan includes a comprehensive outline of DoD's intended funding requests for the 2014-2018 period that is based on the Administration's plans for the number of military and civilian personnel, procurement and maintenance of weapon systems, and operational intensity. Through 2018, therefore, the budgetary effects considered in those options are based on DoD's estimates of the costs of its plans. From 2019 through 2023, they are based on DoD's estimates, if such estimates are available (for example, the Navy prepares an annual 30-year shipbuilding plan), and on CBO's projections of price and compensation trends for the overall economy if they are not. For an option that would cancel the planned acquisition of a weapon system, for example, the potential savings reported in this volume reflect DoD's estimates of the cost and purchasing schedule of that system, often netting out the costs to continue purchasing and operating existing systems in lieu of the system that would be canceled. The text of each acquisition option discusses the effects of the option on DoD's ability to perform its missions -- and other consequences -- apart from budgetary cost.

Because the costs of implementing the FYDP would exceed CBO's baseline projections for defense spending, the options involving military force structure and acquisition are not necessarily ways to reduce the deficits projected in CBO's baseline. At least in part they represent options for reducing DoD's planned spending to the amounts projected in the baseline.

In many instances, CBO would have estimated higher costs for DoD's planned programs than the amounts budgeted either in DoD's FYDP or in an extension of the FYDP that relies primarily on DoD's cost estimates.³ However, the savings from an option relative to DoD's budget request are better represented by the program's costs embedded in the FYDP and its extension than by CBO's independent cost estimates. If lawmakers enacted legislation to cancel a planned weapon system, for instance, DoD could delete the amounts budgeted for that system from its FYDP and add amounts for operating some existing systems in lieu of the canceled system in order to bring the department's budget request closer to the funding that could be provided within the limits specified by the Budget Control Act.

Options in This Chapter

The 28 options in this chapter encompass a broad range of discretionary programs, excluding those involving health care. (Options that would affect spending for health care programs are presented in Chapter 5, as are options affecting taxes related to health.) Nine options in this chapter would affect defense programs, and the rest are for nondefense programs. Some envision broad cuts -- such as Option 1, which would reduce the size of the military to meet the caps specified by the Budget Control Act, or Option 25, which would reduce federal civilian employment. Others focus on specific programs, such as Option 12, which concerns the Department of Energy's programs for research and development in energy technologies. Some options would change the rules of eligibility for certain federal programs, such as for Pell grants (Option 20). Option 26 would impose fees to cover the cost of enforcing regulations and providing certain services.

To reduce deficits through changes in discretionary spending, lawmakers would need to reduce the statutory funding caps below the levels already established under current law or enact appropriations below those caps. The options in this chapter could be used to accomplish either of those objectives (although the savings shown for some of the defense options are measured relative to DoD's plans rather than CBO's baseline projections).

Alternatively, some of the options could be implemented to comply with the existing caps on discretionary funding rather than to reduce projected deficits. For example, as discussed above, savings from some of the defense options might bridge part of the gap between DoD's plans and the existing caps. The savings from specific reductions in appropriations like those presented here also could be used to create room for an increase in appropriations for other, higher-priority purposes -- while keeping total discretionary appropriations at or very close to the current statutory caps.

Overall, under the caps on budget authority established by the Budget Control Act, discretionary appropriations are projected to be $1.5 trillion lower over the 2014-2023 period than they would be if the funding provided for 2013 was continued in later years with increases for inflation; that difference would mean an 11 percent decrease during the decade as a whole in real (inflation-adjusted) outlays for a large collection of government programs and activities. The reduction in discretionary budget authority that would be accomplished by implementing all of the options presented in this chapter other than those involving military force structure or acquisition (which CBO measured relative to DoD's plans rather than to its baseline) would account for less than half of that $1.5 trillion difference.

Under this option, the size of the military would be reduced so that, by 2017, DoD's budget would satisfy the BCA cap for that year and average funding per military unit would remain commensurate with 2012 amounts (including adjustments for anticipated cost growth in areas such as pay, military health care, and new weapon systems). Further force reductions would be taken each year to stay within the caps between 2018 and 2021 as cost growth continued to compound. The size of the military would remain unchanged thereafter. Relative to DoD's current plans (and under the department's cost assumptions), the force cuts would reduce the need for budget authority by $552 billion from 2015 through 2023. The initial cuts would be phased in over three years to provide time for an orderly drawdown and to avoid sudden disruptions while substantial military forces remain in Afghanistan. As a consequence, this option alone would not satisfy the BCA caps between 2014 and 2016.

If reductions were spread evenly across DoD's four military services and among all full-time (active) and part-time (reserve and Guard) units, those reductions might eliminate, for example, the following forces by 2021: 10 Army brigade combat teams (out of a planned force of 66 in 2017); 34 major warships (out of 244 in 2017); 2 Marine regiments (out of 11 in 2017); and 170 Air Force fighters (out of about 1,100 in combat squadrons in 2017). (As a comparison, in 2013 the Army had 73 BCTs, the Navy had 214 major warships, the Marines had 11 regiments, and the Air Force had about 1,100 fighter aircraft in combat squadrons.) Reductions in similar proportions would be made to the other types of units in each service and support organizations across DoD.

This option would not, however, reduce spending and deficits below those projected in CBO's baseline, which reflects the BCA caps. Reducing the size of the military to obtain savings relative to the baseline would require larger force reductions.

An advantage of this option is that it would avert the risk of having a so-called hollow force -- one sized to satisfy the current national security strategy but with inadequate equipment or training to be effective -- because units would, in the long term, receive support equivalent to what they had in 2012, an amount that has produced the highly capable forces of today's military. (Staying within the BCA caps from 2014 to 2016 might require short-term reductions in funding per unit, however, much like the cuts resulting from sequestration in 2013.) Also, unlike reductions that merely postpone costs, savings from the force-structure reductions under this option would continue to accrue after 2021 and for as long as forces were held at the smaller size.

The disadvantage of this option is that the size and number of military operations that could be simultaneously conducted and the duration for which they could be sustained would be reduced if the size of the force was cut.

Under Army policy, for example, three active BCTs (or five National Guard BCTs) are required to support the rotation of a single BCT in and out of a combat zone. Therefore, if three (or five) BCTs were eliminated, the service would lose the ability to continuously deploy one BCT.

RELATED CBO PUBLICATIONS: Approaches for Scaling Back the Defense Department's Budget Plans (March 2013), www.cbo.gov/publication/43997; and Long-Term Implications of the 2014 Future Years Defense Program (forthcoming)

² For some major transportation programs, budget authority is considered mandatory, but the outlays resulting from that authority are discretionary. The reason is that such programs receive budget authority through authorizing legislation, but annual appropriation acts limit the amount of that budget authority that the Department of Transportation can obligate. Those obligation limitations are treated as a measure of discretionary budgetary resources, and the resulting outlays are classified as discretionary.

³ For CBO's estimates of the cost of DoD's plans, see Long-Term Implications of the 2014 Future Years Defense Program (forthcoming).

During most of the 1990s, lawmakers set the annual increase in basic pay for service members to be equal to the percentage increase in the employment cost index (ECI) for wages and salaries of workers in private industry or to 0.5 percentage points below that amount. From 2000 to 2010, lawmakers approved raises -- including across-the-board increases and, in some cases, additional amounts for personnel at specific seniority levels -- that, on average, exceeded the ECI by 0.5 percentage points. (Since 2004, the law has established the percentage change in the ECI as the default pay raise, but from that year through 2010, lawmakers overrode that specification via the annual defense authorization and appropriation acts and continued to enact pay raises equal to the increase in the ECI plus 0.5 percentage points; they have not done so since.) Starting in January 2015, this option would cap basic pay raises at 0.5 percentage points below the increase in the ECI. The Congressional Budget Office estimates that this option would reduce discretionary outlays by $25 billion from 2015 through 2023 compared with what personnel costs would be if the raises were equal to the percentage increase in the ECI.¹

The military services' year-to-year continuation rates (which measure the proportion of active-duty personnel in one year who are still in active-duty status in the next) since 2010 are among the highest recorded since 2000. Although the prospect of smaller basic pay raises could make it harder to retain personnel, CBO anticipates that the effect of such an option would be minor and the military services would not need to offer additional incentives to service members (in the form of enlistment or reenlistment bonuses, for example).

For this estimate, CBO assumed that the number of military personnel in each service branch would remain at the current level throughout the decade. The Department of Defense (DoD) has announced plans to reduce the size of the Army and Marine Corps through 2017. If those plans are realized, the savings from this option would be smaller. However, the reductions in force size would make it easier for the Army and Marine Corps to tolerate small declines in retention and still fill out their (smaller) force structures, in turn making it less likely that they would need to enhance other forms of compensation.

One rationale for this option is that DoD has consistently exceeded its goal of ensuring that the average cash compensation for military personnel -- including the tax advantage that arises because military food and housing allowances are not subject to federal taxes -- exceeds the wages and salaries received by 70 percent of civilians with comparable education and work experience. According to the department's most recent analysis, cash compensation for enlisted personnel is greater than the wages and salaries of 90 percent of their civilian counterparts; the corresponding figure for officers is 83 percent. Furthermore, the annual increase in the ECI might not be the most appropriate benchmark for setting pay raises over the long run. The comparison group for the ECI includes a broad sample of civilian workers who, on average, are older than military personnel and more likely to have postsecondary education. Historically, pay raises for those workers have been larger than for younger or less educated workers, who more closely match the demographic profile of military personnel.

An argument against this option is that, over the next decade, military recruiting and retention could be compromised unless basic pay raises keep pace with the ECI. Capping raises also would constrain the amount service members received in other benefits, such as the retirement annuities that are tied to a member's 36 highest months of basic pay over the course of a military career.

RELATED OPTION: Discretionary Spending, Option 24

RELATED CBO PUBLICATIONS: Costs of Military Pay and Benefits in the Defense Budget (November 2012), www.cbo.gov/publication/43574; and testimony of Carla Tighe Murray, Analyst, before the Subcommittee on Personnel, Senate Committee on Armed Services, Evaluating Military Compensation (April 28, 2010), www.cbo.gov/publication/21430

Under this option, over four years DoD would replace 70,000 of the more than 500,000 uniformed military personnel in commercial jobs with 47,000 civilian employees and, as a result, decrease military end strength (the number of military personnel on the rolls as of the final day of a fiscal year) by 70,000. By the Congressional Budget Office's estimate, those changes could reduce the need for appropriations by $20 billion and for discretionary outlays by $19 billion from 2015 through 2023. The reductions would occur primarily because fewer civilians would be needed to replace a given number of military personnel (civilians have fewer collateral duties and do not generally rotate among positions as rapidly as military personnel do) and because the cost of employing a civilian is, on average, less than that for a military service member.¹

Although there is precedent for such conversions (between 2004 and 2010, DoD converted about 48,000 military positions to 32,000 civilian jobs), only a small percentage of all military positions have been reviewed for that purpose. Moreover, the approach to using military or civilian employees to perform various commercial functions differs from branch to branch. For example, the Army fills 5 percent of its contract administration jobs with military personnel, whereas the Air Force has 63 percent of those jobs staffed with military personnel. The Navy employs military personnel for 49 percent of its jobs in retail supply operations; the Air Force, 70 percent. If each service adopted the personnel mix with the lowest percentage of military personnel in commercial occupations, up to 140,000 military positions could be opened to civilians, CBO estimates. Under this option, civilians would carry out the responsibilities for about half of those positions.

An argument for converting military to civilian positions is that civilians require, on average, less job-specific training over their careers because they are not subject to the frequent transfers that military personnel are. Replacing military with civilian personnel also would increase efficiency and save money if, as CBO anticipates, fewer workers could provide services of the same quantity and quality. However, if DoD did not reduce military end strength but simply reassigned military personnel to other duties, total personnel costs would increase by an amount reflecting the costs of the civilian replacements. In that case, this option would still free some military personnel to fulfill their primary mission of training for and, if necessary, engaging in combat.

An argument against this option is that, even though many service members might spend part of their careers in jobs that could be performed by civilians, most are trained fighters who could be deployed if needed. Replacing such military personnel with civilians could reduce DoD's ability to respond quickly if called upon to do so. Moreover, despite the potential cost savings, the military services try to avoid converting certain types of positions because it could lead to reductions in effectiveness or morale. For example, the Navy must provide shore positions for sailors -- so that they do not spend their entire careers at sea -- even if some of those positions could be filled by civilians.

Under this option, DoD would cancel the F-35 program and instead purchase the most advanced versions of fighter aircraft already in production: the Lockheed Martin F-16 for the Air Force, and the Boeing F/A-18 for the Navy and Marine Corps. By the Congressional Budget Office's estimates, the option would save $37 billion in outlays from 2015 through 2023 if the F-16s and F/A-18s were purchased on the same schedule as that planned for the F-35s. An additional $60 billion in savings, roughly, would accrue from 2024 through 2037 as the F-35s planned for those later years were also replaced with F-16s and F/A-18s.

An argument in favor of this option is that new F-16s and F/A-18s would be sufficiently advanced -- if equipped with upgraded modern radar, precision weapons, and digital communications -- to meet the threats that the United States is likely to face in the foreseeable future. The extreme sophistication of the F-35 and the additional technical challenge of building three distinct types of aircraft with a common airframe and engine have resulted in significant cost growth and schedule delays, and additional cost growth and schedule delays remain a possibility. As a result of the delays that have already occurred, the Air Force and the Navy are incurring substantial costs to maintain their force sizes by extending the service life of fighters currently in the force. Further delays in F-35 deliveries could increase those costs as well. The cost of new upgraded F-16s and F/A-18s also could escalate, but their lesser technical challenges (relative to those of the F-35) would make comparable cost growth unlikely.

A disadvantage of this option is that F-16 and F/A-18 aircraft lack the stealth design features that would help the F-35 evade detection and hence operate more safely in the presence of enemy air defenses. The armed services would maintain some stealth capabilities, however, with the B-2 bomber and F-22 fighters already in the force. Any greater need for stealth capabilities that might arise in the future would have to be addressed with a new system -- for example, stealthy unmanned attack aircraft or long-range bombers that the services also plan to develop. Another potential disadvantage of this option is that substituting F/A-18s for the F-35B -- the Marine Corps' STOVL version of the F-35 -- would remove that service's capability to operate fixed-wing fighters from the amphibious assault ships in naval expeditionary strike groups, a capability currently provided by the AV-8B Harrier. Those strike groups would have to rely on armed helicopters (which lack the range, speed, payload, and survivability of the F-35) or on other forces, such as aircraft from aircraft carrier strike groups.

RELATED CBO PUBLICATIONS: Long-Term Implications of the 2014 Future Years Defense Program (forthcoming); Strategies for Maintaining the Navy's and Marine Corps' Inventories of Fighter Aircraft (May 2010), www.cbo.gov/publication/25077; and Alternatives for Modernizing U.S. Fighter Forces (May 2009), www.cbo.gov/publication/41181

Under this option, the Army would cancel the GCV program but develop and purchase upgrades for Bradley IFVs, decreasing outlays on net by $11 billion between 2015 and 2023, the Congressional Budget Office estimates. The bulk of those savings -- about $9 billion -- would be realized after 2018. Additional net savings of $16 billion would be realized between 2024 and 2036. Because the GCV program is in its early stages, the estimated savings are less certain than those that could be estimated for canceling an acquisition program already in production. In particular, CBO cannot predict what trade-offs in cost, schedule, and vehicle performance the Army would make within the GCV program if it continued with the acquisition process. Any trade-offs that might be made could affect the overall cost of the program and, thus, the amount of savings from cancellation.

An argument in favor of this option is that the GCV, although more capable than existing vehicles when operating in an open battle space, is too large and heavy to operate effectively in congested areas with limited space to maneuver; such conditions were common in Iraq and Afghanistan and are likely to occur in the future. In contrast, the Bradley IFV is significantly smaller and lighter than the GCV and could be a better choice for potential future conflicts. Furthermore, because the Army plans to replace less than 20 percent of its armored vehicles with GCVs, it will continue to rely on vehicles that it currently uses to equip its forces -- including various versions of the Bradley fighting vehicles and Abrams tanks -- for decades to come. In fact, the Army has invested $14 billion since 2004 to upgrade its Bradley fighting vehicles and Abrams tanks, and it plans to retain and continue upgrading them for several decades. By keeping the infantry version of its Bradley fighting vehicles, rather than replacing them with GCVs, the Army would avoid the risk and expense associated with developing and purchasing a fleet of new vehicles.

An argument against this option is that it would prevent the fielding of a combat vehicle with greater capabilities than those currently available and better able to meet the demands of future operations. For instance, the Bradley IFV cannot carry its own crew and a full infantry squad at the same time -- but keeping a squad together, which the GCV would allow, would facilitate tactical planning while the force was moving. That capability would allow a squad to better synchronize its actions when it left the vehicle. In addition, the greater protection afforded by the GCV -- especially against improvised explosive devices -- would enhance the safety of soldiers who conduct the types of close operations among civilian populations that are becoming increasingly common. By contrast, Bradley vehicles do not have modular armor kits that can be adapted to meet a range of threats, and they lack extra capacity to accept new systems that might improve survivability or capability.

A further argument against this option is that the Army has not fielded a new combat vehicle since the early 1990s. Canceling the GCV program would mean that expensive process. (Such costs are not included in the would require that newer components be integrated into older frames, which can be a difficult and potentially the Army would continue to use systems originally developed in the 1980s or earlier (although those systems have been updated several times since then). Improving the data processing and connectivity of those older systems would require that newer components be integrated into older frames, which can be a difficult and potentially expensive process. (Such costs are not included in the above estimates.) Finally, retaining old systems might eventually cause the Army to lose its technological edge and compromise the service's dominance on the battlefield.

RELATED CBO PUBLICATIONS: The Army's Ground Combat Vehicle Program and Alternatives (April 2013), www.cbo.gov/publication/44044; and Long-Term Implications of the 2014 Future Years Defense Program (forthcoming)

Under this option, the Navy would stop building new aircraft carriers after completion of the U.S.S. John F. Kennedy, which lawmakers authorized in 2013. Thus, the next aircraft carrier the Navy intends to purchase under its shipbuilding plan, the U.S.S. Enterprise in 2018, would be canceled, as would future carriers, which the Navy plans to buy at the pace of one every five years. (Because those ships take a long time to build and are so expensive, the Congress allows the Navy to purchase them over six years. Funding for the Enterprise would have begun in 2016.)

Savings under this option would result exclusively from not buying new carriers; those savings would be offset somewhat by higher costs for nuclear-powered submarines and for refueling the Navy's existing carriers. (The same commercial shipyard that builds and overhauls aircraft carriers also builds parts of submarines; some overhead costs for that yard would now be charged instead to submarine programs.) Overall, this option would save $10 billion in outlays from 2016 through 2023, the Congressional Budget Office estimates. Additional savings would be realized beyond 2023, because of reduced costs to construct aircraft carriers and because the Navy would need to buy fewer aircraft to put on its slowly shrinking carrier fleet. Those additional savings would be offset, however, if the Navy decided that it had to buy other weapon systems to replace the lost capability and capacity of the canceled carriers.

One argument in favor of this option is that the existing fleet and the carriers under construction would maintain the current size of the carrier force for a long time because the ships are designed to operate for 50 years. Replacements for two carriers in the current fleet are already under construction, and by 2030, the Navy would still field 10 carriers under this option. The size of the carrier force would decline thereafter, however, and by 2040, the force would fall to 7 ships. If stopping production did not accord with perceived national security interests in the future, the Navy could start building new carriers again. But doing so would be a more expensive and complex process than building new carriers is today, and those large ships take years to construct. Building new designs of small warships is a challenge; relearning how to build the largest warship ever built would pose much greater challenges for the shipyard tasked with the job.

Another argument in favor of this option is that, at some point in the future, the large aircraft carrier may no longer be an effective weapon system for defending U.S. interests overseas as new technologies designed to threaten and destroy surface ships are developed and spread to many countries. Among the technologies that might threaten the future survivability of the carrier are long-range supersonic antiship cruise missiles, antiship ballistic missiles, very quiet submarines, and satellite tracking systems and other sensors. The risk to the carrier force is not great today, but the future is much more uncertain. As those technologies are developed and improved in the decades to come and as more countries acquire them, the Navy's large surface warships may be at greater risk if U.S. defensive capabilities do not keep pace. If in 20 years the technologies to detect, track, and attack the U.S. Navy's aircraft carriers advanced such that the Navy could not effectively defend against them, then the Navy's large investments in new carriers today would not be cost-effective.

An argument against this option is that it could hamper the Navy's fighting ability. Since World War II, the aircraft carrier has been the centerpiece of the U.S. Navy. According to the Navy, today's Nimitz class ships can sustain 95 strike sorties per day and, with each aircraft carrying four 2,000-pound bombs, deliver three-quarters of a million pounds of bombs each day. That firepower far exceeds what any other surface ship can deliver.

Another argument against this option is that carriers may prove adaptable to a future environment that includes more sophisticated threats to surface ships -- perhaps through the development of new weapon systems on the carriers. Since World War II, carriers have taken on board many different types and generations of aircraft. The Navy is now developing long-range unmanned aircraft that would be capable of striking an enemy's shores while allowing the carrier to operate outside the range of air and missile threats. Equipping long-range unmanned aircraft with long-range precision, perhaps stealthy munitions could extend the life of the aircraft carrier as an effective weapon system for decades to come. Furthermore, the Navy is developing new technologies that may make the defense of large surface ships economically and tactically effective. Energy-based weapons designed to shoot down incoming missiles would be far more cost-effective than today's ship defenses in which the missiles used to defend a ship cost more than the missiles that prospective opponents would use to attack the ship. In short, if either of those technological developments bears fruit, then the large aircraft carrier could remain a potent weapon system into the distant future.

RELATED OPTIONS: Discretionary Spending, Options 7 and 8

RELATED CBO PUBLICATIONS: Long-Term Implications of the 2014 Future Years Defense Program (forthcoming); and An Analysis of the Navy's Fiscal Year 2014 Shipbuilding Plan (October 2013), www.cbo.gov/publication/44655

This option would reduce the Navy's SSBN force to eight submarines in 2020 by retiring one Ohio class submarine a year over the 2015-2020 period. That number would be maintained through the 2040s and beyond by delaying the start of the Ohio Replacement program from 2021 to 2024 and reducing the number of SSBNs purchased under that program to eight. The savings under this option would total $11 billion in outlays from 2015 through 2023. During the 2030s, this option would save an additional $30 billion by avoiding the purchase of four more Ohio Replacement submarines.

An advantage of this option is that reducing the SSBN force to eight submarines would still provide a robust strategic deterrent at sea. Although the force would carry a smaller complement of missiles, the option would not dramatically reduce the total number of warheads that could be deployed at sea. To achieve the missile-reduction goals under New START, the Administration is expected to allocate 1,050 to 1,100 warheads to the SSBN force of 14 submarines. The Administration's preferred allocation would place 20 missiles on each deployed submarine with four or five warheads per missile. (Only 12 of the Ohio class submarines, and thus 240 missiles, would be considered deployed under the treaty, because two boats would be in long-term maintenance at any given time over the 10-year life of the treaty.) With an eight-boat Ohio class force called for under this option, the Navy could still deploy roughly the maximum number of warheads at sea consistent with New START using a different allocation -- 24 missiles on each submarine (for a total of 192 missiles), with five or six warheads per missile Furthermore, if the deployed warhead requirement for strategic submarines had not changed by the time the Ohio Replacement program was completed, the Navy could continue to deploy similar numbers of warheads: Eight submarines, each carrying 16 missiles (for a total of 128) with eight warheads per missile, would carry a total of 1,024 deployed warheads. Another advantage of this option is that some costs of extending the service lives of missiles and warheads would be avoided because the SSBNs would be carrying fewer of them.

This option has the disadvantage of making the Navy's nuclear forces less effective and somewhat more vulnerable. With a force of 8 SSBNs -- instead of 12 -- the Navy would have fewer boats at sea and available for quick deployment in a crisis. Fewer submarines would give the Navy a smaller area in which to operate, thus making it more difficult to be sure that a sufficient number of warheads were in position to implement a war plan. Moreover, loading more warheads on a smaller number of missiles and submarines would substantially reduce their flexibility in range and in targeting in the event they needed to be used. Fewer submarines would also make it easier for a potential adversary to track and target U.S. forces; the operating areas for those submarines would be more predictable because missiles must fly a certain trajectory to hit key targets.

Another disadvantage of the option is that it would disrupt development of the missile compartment for the Ohio Replacement submarines, a project being undertaken jointly between the U.S. Navy and the British Navy. Both navies are contributing to the design, development, and production of the portion of the submarine that houses and launches ballistic missiles. Delaying production of the Ohio Replacement for three years would mean that the British Navy -- in order to meet its schedule for replacing its own strategic submarines -- would need to have the missile compartment completed years before the U.S. Navy would need it. In that case, shared costs, planning, and scheduling for those activities would need to be renegotiated.

By phasing in the reduction of the Ohio class SSBNs and by delaying the purchase of the Ohio Replacement class, the Navy would preserve the ability to build more submarines if the future security environment changed. For example, if policymakers decided that they needed to retain 10 SSBNs by the time New START has been fully implemented (in 2018), the last two retirements could be canceled. Likewise, the Navy could purchase additional Ohio Replacement submarines in 2025 and 2026 and reduce to just two years the period over which the force might be at greater risk because of having only eight boats.

RELATED OPTIONS: Discretionary Spending, Options 6 and 8

RELATED CBO PUBLICATIONS: Long-Term Implications of the 2014 Future Years Defense Program (forthcoming); and An Analysis of the Navy's Fiscal Year 2014 Shipbuilding Plan (October 2013), www.cbo.gov/publication/44655

This option would limit purchases of the LCS to the 24 now built or under contract, canceling the program thereafter. Doing so would reduce outlays by $12 billion from 2016 through 2023 (and $6 billion more beyond 2023) as a result of not purchasing additional LCSs as well as purchasing fewer mission packages, the Congressional Budget Office estimates.

Since the LCS program began in November 2001, the ship has been criticized for its cost, design, construction, and mission effectiveness. The program's first four ships cost more than twice what the Navy originally estimated. Since then, the costs of those ships (as set in two contracts for 10 ships each) have declined considerably and are on course to satisfy per-vessel cost caps for the LCS program established by the Congress, but production remains behind schedule.

One rationale for canceling the program is that early reviews of both variants of the LCS raised questions about the ships' performance in conducting missions as defined in the Navy's overall strategy document, A Cooperative Strategy for 21st Century Seapower. The Navy's core missions are forward presence (routinely operating ships overseas), deterrence, sea control, power projection, maritime security, humanitarian assistance, and disaster response. Internal Navy assessments and the LCS's concept of operations -- a document that explains how the ship will perform its missions -- currently rate the LCS poorly for being able to contribute to forward presence and for sea control and power projection using its primary mission packages. Those core missions differ somewhat from the three primary LCS missions, but some critics argue that if the LCS cannot contribute effectively to the missions outlined in the Navy's strategy document, then the program should be canceled.

Also, in contrast to some comparably sized ships in foreign navies, the LCS does not carry much firepower. In addition, the Department of Defense's Office of Operational Test and Evaluation has raised concerns about the ability of the LCS to continue to perform its missions after being hit in a hostile environment, even though the LCS's concept of operations states that the ships can operate independently in a high-density, multithreat environment. Testing has also indicated problems with reliability and performance in some key systems, such as the ships' guns, particularly when operating at high speeds (as would be likely in engagements with small, fast attack boats). Finally, other Navy assessments indicate that the greatest need for the LCSs is for the ones that perform countermine missions; with 24 ships in the fleet, the Navy will already have substantially more counter-mine capability than today's fleet provides.

Canceling the LCS program would have several disadvantages, however. Both variants of the LCS represent innovative additions to the future force at a price much lower than that of other shipbuilding programs, and thus far no alternatives have been put forth that could perform its three types of missions more effectively and at a lower cost. Virtually every new class of surface combatant over the past 30 years -- Spruance destroyers, Oliver Hazard Perry frigates, Ticonderoga cruisers, and Arleigh Burke destroyers -- was initially criticized over its capabilities and costs but, when the construction was finished and the problems fixed, was regarded as a valuable component of the Navy's fleet. Also, the ship's sea frame (the ship itself) and interchangeable mission packages give it considerable flexibility to adapt as the security environment evolves over the ship's 25-year service life. In addition, canceling the program would not eliminate the missions the LCSs would be needed to perform; other existing ships or newly designed ships would have to perform any missions that the 24 LCSs could not.

Moreover, in an era of tight funding, the LCS represents a relatively inexpensive way to increase the fleet's size to reach the Navy's goal of more than 300 ships. Although the LCS may not be able to perform some missions as effectively as larger and more-expensive ships, it is a key component of the Navy's planned force structure: The Navy will be able to make use of the ships for maritime security operations and other, noncore missions such as engagement with allies. At $550 million, the average cost of an LCS with a mission package is one-third as expensive as an Arleigh Burke destroyer and cheaper than what it would cost to build a new Oliver Hazard Perry frigate today.

RELATED OPTIONS: Discretionary Spending, Options 6 and 7

RELATED CBO PUBLICATIONS: Long-Term Implications of the 2014 Future Years Defense Program (forthcoming); and An Analysis of the Navy's Fiscal Year 2014 Shipbuilding Plan (October 2013), www.cbo.gov/publication/44655

Under this option, development of a new bomber would be deferred until after 2023, reducing the need for new budget authority by $32 billion through that year. Those savings include $8 billion the Air Force has budgeted for 2015 through 2018 in the most recent Future Years Defense Program, plus $24 billion for 2019 through 2023. Outlay savings would total $24 billion from 2015 through 2023, the Congressional Budget Office estimates. CBO based its estimate of savings for the latter period on its analysis of the projected funding for bombers in the Annual Aviation Inventory and Funding Plan that the Department of Defense issued in 2013.

An advantage of this option is that it would free up budgetary resources for other priorities during the coming decade. Funding would not have to be provided for full bomber production at the same time the Air Force is also planning to purchase up to 15 KC-46A tankers per year and 80 F-35A fighters per year. (Production of those aircraft is expected to end in 2027 and 2037, respectively, although the Air Force will probably continue purchasing tankers after 2027.) Another advantage of this option is that a bomber program that begins later might be able to take advantage of general advances in aerospace technology that might be made in the coming years. Such technologies might make possible an even more capable bomber or might lead to other types of weapons that would make a new bomber unnecessary or reduce the number of bombers needed. Taking advantage of future technological developments can be particularly valuable for weapon systems that are expected to be in use for several decades. Even with a 10-year delay, a new bomber would still be available by about the time today's bombers are nearing the end of their service life.

A disadvantage of this option is that it would run the risk that a new bomber would not be available if estimates of the service life of today's bombers are incorrect and some of them need to be retired sooner than expected. By 2035, the B-52Hs will be almost 75 years old, the B-1Bs about 50 years old, and the B-2As about 40 years old. Expecting those aircraft to perform reliably at such advanced ages may prove to be overly optimistic. Similarly, a gap in capability could arise if the new bomber is deferred and ends up taking significantly more time to field than expected (as was the case for the F-35 fighter program). Another disadvantage is that the Air Force's inventory of stealthy bombers able to fly in defended airspace would remain limited to the B-2A, which makes up only about 12 percent of today's bomber force. Larger numbers of stealthy bombers might be useful for operations against adversaries that employ advanced air defenses. A third disadvantage is that the recent shift in strategic focus toward the western Pacific Ocean -- with its long distances and limited basing options -- will make long-range aircraft particularly important should a conflict arise in that region.

This option would reduce the total international affairs budget by 25 percent. That change would save $114 billion from 2015 through 2023, the Congressional Budget Office estimates.

An advantage of this option is that reducing federal spending on international affairs would allow lawmakers to redirect resources toward critical domestic programs or to avoid some reductions in those programs. Such a shift could also encourage the private sector to take a larger role in providing foreign assistance. Private organizations already provide significant resources for various international initiatives, such as HIV/AIDS research and financial development assistance. Diversifying funding sources for international initiatives could increase their overall success. In addition, some studies have argued that some U.S. foreign assistance is wasted because it is ineffective at promoting growth and reducing poverty. Although some projects and programs are generally considered successful, the Congressional Research Service concludes that "in most cases, clear evidence of the success or failure of U.S. assistance programs is lacking, both at the program level and in the aggregate."¹

The primary disadvantage of this option is the potentially far-reaching impact of reducing funding for advancing the international and ultimately the domestic policy agendas of the United States. International affairs programs, which encompass many activities in addition to foreign aid, are key to establishing and maintaining positive relations with other countries. Those relationships contribute to increased economic opportunities at home, better international cooperation, and enhanced national security. Significant reductions in federal funding for international affairs programs would hinder humanitarian, environmental, public health, economic, and national security efforts.

This option would terminate NASA's human space exploration and space operations programs, except for those necessary to meet space communications needs (such as communication with the Hubble Space Telescope). The agency's science and aeronautics programs and robotic space missions would continue. Eliminating those human space programs would save $73 billion between 2015 and 2023, the Congressional Budget Office estimates.

The main argument for this option is that increased capabilities in electronics and information technology have generally reduced the need for humans to fly space missions. The scientific instruments used to gather knowledge in space rely much less (or not at all) on nearby humans to operate them. NASA and other federal agencies have increasingly adopted that approach in their activities on Earth, using robots to perform missions without putting humans in harm's way. For example, NASA has been using remotely piloted vehicles to track hurricanes over the Atlantic Ocean at much longer distances than those for which tracking aircraft are conventionally piloted.

Eliminating humans from spaceflights would avoid risk to human life and would decrease the cost of space exploration by reducing the weight and complexity of the vehicles needed for the missions. (Unlike instruments, humans need water, air, food, space to move around in, and rest.) In addition, by replacing people with instruments, the missions could be made one way -- return would be necessary only when the mission required it, such as to collect samples for further analysis -- thus eliminating the cost, weight, and complexity of return and reentry into the Earth's atmosphere.

A major argument against this option is that eliminating human spaceflight from the orbits near Earth would end the technical progress necessary to prepare for human missions to Mars (even though those missions are at least decades away). Moreover, if, in the future, robotic missions proved too limiting, then human space efforts would have to be restarted. Another argument against this option is that there may be some scientific advantage to having humans at the International Space Station to conduct experiments in microgravity that could not be carried out in other, less costly, ways. (However, the International Space Station is currently scheduled to be retired in 2020, postponed from an earlier decommissioning in 2015.)

This option would reduce spending for technology development in the fossil, nuclear, and EERE R&D programs to 25 percent of their 2013 amounts stepwise over three years. The Congressional Budget Office estimates that, in total, those reductions would reduce discretionary outlays by $9 billion from 2015 through 2023. This option would eliminate DOE's efforts to support the later stages of technology development and demonstration of commercial feasibility while leaving untouched DOE's support of basic and early applied research. (This option would not affect funds for technical assistance and financial assistance, such as weatherization services for low-income families; for such an option, see Option 28.)

An argument for this option is that some of DOE's activities are better undertaken by the private sector, which has an advantage in the development, demonstration, and deployment of new energy technologies. Generally, the direct feedback that the markets provide to private investors has proven more cost-effective than the judgment of government managers in selecting which technologies will be commercially successful. The limits on the government's ability to foster new energy technologies are illustrated by federal efforts to commercialize technology to capture and store carbon dioxide. For example, although DOE has offered financial incentives to firms to build that technology into new commercial power plants, it has found few firms willing to do so. Overall, DOE has long sought to introduce new energy technologies for coal through expensive technology demonstration plants that have often failed to deliver commercially useful knowledge or attract much private interest.

Furthermore, the Government Accountability Office (GAO) has long been critical of DOE's project management, pointing to inadequate oversight of contractors and to projects that failed to meet expectations for costs or schedules. For example, despite DOE's attempts at reform, GAO concluded in 2007 that DOE's performance had not improved substantially because new management processes had not been applied consistently.

Other arguments focus on the merits of specific programs. Regarding R&D related to nuclear energy in particular, electric utilities -- the intended recipients -- have not built much new nuclear capacity that would make use of such technology in many years. Since many state policymakers moved to deregulate the electricity-generation market in the 1990s, investors have generally shied away from building capital-intensive generating facilities, preferring to rely on less expensive natural gas facilities instead. Recent developments suggest that the natural gas required to power those new generators will remain cheap and plentiful for the foreseeable future, casting further doubt on the financial viability of nuclear-powered generators.

In the EERE area, which includes energy conservation as well as solar, wind, and other sources of renewable energy, the federal government provides support through other means. Many of the technologies whose development is supported by the EERE programs also receive support from the tax credit for renewable electricity production or conservation-related tax credits. Furthermore, several of the EERE industries already have high rates of growth. Given the tax preferences and the high level of market penetration, it may be time to begin withdrawing federal commitments for further technology development in those areas.

An argument against this option is that federal support may be needed because the prices businesses and consumers pay for energy do not compensate for the potentially large long-run costs of climate change. Reducing emissions of greenhouse gases would diminish those costs, but, because those costs are not reflected in current energy prices, producers and consumers have little incentive to manufacture or purchase products that reduce energy consumption or produce energy with minimal greenhouse gas emissions. Thus, some observers argue that DOE's energy technology development programs fill a gap left by the market by providing the resources and incentives necessary to develop new technologies to produce and conserve energy.

In addition, energy is one of the many sectors in which investors do not receive all the benefits of investment in R&D because others also benefit from the knowledge gained. That result suggests a possible need for federal support to ensure that adequate R&D takes place. Because society gains even if the original investor does not capture all the benefits, it is argued, the federal government should invest in R&D to compensate for the gap between all the benefits that accrue to society and those that the original investors receive.

Finally, some analysts assert that DOE's technology development programs are a worthwhile activity on their own merits. Panels convened by the National Academy of Sciences have estimated that some of DOE's technology development programs, especially in the area of energy efficiency, have provided substantial benefits that exceed their costs.

RELATED CBO PUBLICATIONS: Testimony of Terry M. Dinan, Senior Advisor, before the Subcommittee on Energy, House Committee on Science, Space, and Technology, Federal Financial Support for Fuels and Energy Technologies (March 2013), www.cbo.gov/publication/43993; Federal Efforts to Reduce the Cost of Capturing and Storing Carbon Dioxide (June 2012), www.cbo.gov/publication/43357; and Federal Climate Change Programs: Funding History and Policy Issues (March 2010), www.cbo.gov/publication/21196

This option would eliminate the Forest Service's programs in Forest and Rangeland Research and in State and Private Forestry. Doing so would save $5 billion from 2015 through 2023, the Congressional Budget Office estimates.

One argument in favor of this option is that it is not efficient for the federal government to extend support to private industry because doing so distorts decisions about investments when the costs of developing new products -- for example, fuels and chemicals derived from plant materials, and new durable composite materials and papers made from wood -- do not have to be weighed against the potential gains from production. Similarly, in a well-functioning market, the domestic and international demand for forest and rangeland products and services would compensate resource managers for investing appropriately in the sustainable production of those goods and services.

One argument against this option is that the benefits of those programs are so widely dispersed that only the federal government has sufficient incentive to provide them. Accordingly, it would be appropriate, for example, for the federal government to conduct research and disseminate information on the resiliency of forest and rangeland resources to changes in climate. Similarly, because the benefits that forests and rangelands provide in terms of improved air quality, water quality, and habitat are not compensated through well-functioning markets, addressing forest health and the maintenance of environmentally sensitive lands could be an appropriate role for the federal government.

This option would eliminate ITA's trade promotion activities. That change would reduce discretionary outlays by $3 billion from 2015 through 2023, CBO estimates.

One rationale for this option is that such business activities are usually better left to the companies and individuals that would be expected to benefit rather than to a government agency. Another rationale is that the cost to taxpayers to provide those services at the federal level probably exceeds the benefit to U.S. businesses; because those costs are not reflected in the prices of the goods and services sold abroad, a portion of the benefits are passed on to consumers and firms in other countries in the form of lower prices for U.S. exports. In addition, trade promotion activities that are developed by an industry are probably more efficient than those developed by government agencies because they can be better tailored to meet the particular needs of the businesses involved. Several private-sector entities already provide trade promotion services that target particular industries or regions. For example, TradePort, a joint venture of the Bay Area Council Economic Institute and the Los Angeles Area Chamber of Commerce, is a repository of free information and resources for businesses seeking to increase international trade to and from California.

An argument against eliminating ITA's trade promotion activities is that those activities may be subject to economies of scale, so having a single entity (the federal government) develop the expertise to counsel exporters about foreign legal and other requirements, disseminate information about foreign markets, and promote U.S. products abroad might be more effective. In addition, the cut could curtail efforts that are under way to increase U.S. exports. The National Export Initiative, established by Executive Order 13534 in March 2010, presented a strategy for doubling U.S. exports that relies in part on ITA's trade promotion programs. According to the 2012 National Export Strategy published by the Trade Promotion Coordinating Committee, ITA's trade promotion efforts supported $73 billion in U.S. exports from January 2010 through September 2012.

Historically, most of the funding for highway programs has come from the Highway Trust Fund, which has two accounts. In 2012, $42 billion was spent from the fund's highway account and $35 billion in revenues and interest was credited to that account. The fund also includes a mass transit account. Revenues credited to both accounts are generated by the federal taxes on gasoline and diesel fuels, as well as other federal taxes related to highway transportation. Since 2001, revenues credited annually to the highway account have consistently fallen short of outlays from that account. Since 2008, lawmakers have addressed the funding shortfall by supplementing revenues dedicated to the trust fund with multiple transfers totaling $41 billion from the Treasury's general fund. (In 2012, an additional $2 billion was transferred from the Leaking Underground Storage Tank Trust Fund.) MAP-21 authorizes a transfer of about $12 billion more from the general fund in 2014.

This option would reduce federal funding for the highway system, starting in fiscal year 2015, by lowering the obligation limitations for the Federal-Aid Highway program to the amount of projected revenues going to the highway account of the Highway Trust Fund. The federal taxes that directly fund the Highway Trust Fund would not change. The Congressional Budget Office estimates that this option would reduce resources provided for the highway program by $85 billion from 2015 through 2023, relative to the obligation limitations in CBO's baseline projections. Outlays would decrease by $65 billion over those years, CBO estimates.

A key rationale for this option is that funding federal spending on highways with revenues obtained from highway users, rather than from general taxpayers, is fairer (because those who benefit from the highways would pay the costs of the program) and tends to promote a more efficient allocation of resources (because use of highways would better reflect the costs of building and maintaining them). That argument suggests that it would be appropriate to increase the taxes that are credited to the Highway Trust Fund if current revenues are too low to fund a desired level of federal support for highways.

A related argument is that it is fairer and more efficient to have local or state tax revenues pay for highway projects that primarily benefit people in a particular area and to reserve federal revenues for projects that have true interstate significance. Another rationale for this option is that it would reduce the extent to which differing amounts of federal support distort the spending choices states make between highways and other priorities and among highway projects, perhaps resulting in projects that do not yield the greatest net benefits. It could also reduce the substitution of federal spending for spending by state and local governments. (The Government Accountability Office reported in 2004 that the existence of federal highway grants has encouraged state and local governments to reduce their own spending on highways and to use those funds for other purposes.)

A general argument against reducing federal spending on highways is that doing so would increase the economic and social costs associated with aging roads and bridges and increased traffic on them. In addition, the road network as a whole supports interstate commerce and thus strengthens the national economy.

A specific argument against reducing federal spending on highways by funding it solely through the current federal taxes on highway users is that the existing federal taxes give motorists only weak incentives to use highways efficiently -- that is, to avoid contributing to traffic congestion and to minimize pavement damage by heavy trucks. Another argument for using general revenues is that money from the Highway Trust Fund is spent on nonhighway projects and purposes, such as public transit, sidewalks, bike paths, recreational trails, scenic beautification, and preservation of historic transportation structures.

RELATED CBO PUBLICATIONS: Statement for the record by Sarah Puro, Analyst for Surface Transportation Programs, for the House Committee on the Budget, Status of the Highway Trust Fund (April 24, 2013), www.cbo.gov/publication/44093; Alternative Approaches to Funding Highways (March 2011), www.cbo.gov/publication/22059; and Spending and Funding for Highways (January 2011), www.cbo.gov/publication/22003

This option would eliminate the AIP's grants to large and medium-sized airports but would continue to provide grants to smaller airports in amounts that match funding in 2012. That year, smaller airports received $2.3 billion, more than two-thirds of the $3.3 billion available under the program. Retaining only that portion of the program would reduce federal outlays by $8 billion from 2015 through 2023, the Congressional Budget Office estimates.

The AIP, like some other transportation programs, is treated in an unusual way in the budget. The program's budget authority is provided in authorization acts as contract authority, a mandatory form of budget authority. But because the spending of contract authority is subject to obligation limitations contained in appropriation acts, the resulting outlays are categorized as discretionary.

The main rationale for this option is that federal grants substitute for funds that larger airports could raise from private sources. Those airports have financed many investments by using bond issues to leverage funds collected from passenger facility charges and other fees, although federal law limits the collection and use of such funds. Smaller airports may have more difficulty raising funds for capital improvements, although some have been successful in tapping the same sources of funding as their larger counterparts. By eliminating grants to larger airports, this option would focus federal spending on airports that appear to have the fewest alternative sources of funding.

One argument against ending federal grants to large and medium-sized airports is that those airports would be unable to substitute private sources of funding for reduced federal grants unless the current federal limits on the collection and use of passenger facility charges were eased. Another argument against ending such grants is that they allow the FAA to retain greater control over how those airports spend their funds by imposing conditions for aid.

RELATED CBO PUBLICATIONS: Issues and Options in Infrastructure Investment (May 2008), www.cbo.gov/publication/19633; and Financing Small Commercial-Service Airports: Federal Policies and Options (April 1999), www.cbo.gov/publication/11482