[Image] INFORMED BUDGETEER July 29, 1996 * Senate-Passed Welfare Reform Reconciliation * The Land of Opportunity Still: Income, Immigration, Public Assistance * Cuts in the Federal Workforce * How Long Does It Take To Get Your "Money's Worth" In Social Security Senator Domenici's Home Page Senate Budget Committee Home Page Previous Budget Bulletins [Image] Senate-Passed Welfare Reform Reconciliation * For the third time in less than a year, the Senate has passed a welfare reform plan, by a vote of 74 to 24, on July 23rd. * During the course of Senate consideration of the bill, the Senate adopted the following major amendments, among others: - Lott amendment to strike the Medicaid language (by voice vote); - Chafee amendment to continue Medicaid coverage under current law rules; - Conrad amendment to eliminate the optional State food stamp block grant; and -Shelby amendment to add the refundable adoption tax credit provisions. * In addition, Senator Exon raised the Byrd rule point of order against 26 provisions in the bill (see pages S8423-S8424 in the Congressional Record for July 22nd): - the Senate waived the point of order against one provision (section 2104, services provided by charitable or private organizations), and one provision was found not to violate the Byrd Rule (section 409(a)(7)(C) of the new title IV of the Social Security Act related to state performance). - the remaining provisions were stricken from the bill. * The Senate-passed bill has not yet been scored by CBO, but total savings over six years are expected to be around $56 to $57 billion. Total spending on the major non-health means-tested entitlements will increase from $99 billion in 1996 to $128 billion in 2002. * The original reconciliation bill contained $122 billion in savings, but after the Lott amendment striking Medicaid was adopted, the bill lost $70 billion in savings from reforming the Medicaid program. * Spending on Medicaid will continue increasing at current law, rising from $96 billion in 1996 to $165 billion in 2002, or at an average annual rate of 9.5%. State spending on Medicaid will rise from $72 billion in 1996 to $124 billion in 2002. (There are about $4 billion in Medicaid savings as a result of reforming welfare.) Budget effects of welfare Reconciliation Bill (As reported without Medicaid, Dollars in Millions) Prposed Changes 7- year total Family Support Payments 2,288 Food Stamp Program -23,821 Supplemental Security Income-22,700 Medicaid -4,832 Child Nutrition -3,332 Foster Care 196 Earned Income Tax Credit -4,180 TOTAL -56,382 [Image] The Land of Opportunity Still: Income, Immigration, Public Assistance * A recent study issued by The Urban Institute (Duleep and Regets) addresses the question of the "quality" of recent immigrants by examining immigration income data over the 1970- 1990 period. * Professor Borjas of Harvard (who testified before the Senate Budget Committee in the spring) has argued that because of changes in U.S. admission policies there has been a declining "quality" of immigrants over time as reflected in lower earnings of recent immigrants. If true, this might help explain some of the explosion in the cost of public benefits for these noncitizens. * The Duleep and Regets results (see table below) shed some light on this issue. Looking at immigrants in three cohorts (immigrants between 1965-1969, 1975-1979, and 1985-1989) and further segmented by education and age at time of entry, the researchers confirm that average earnings of new immigrants have substantially declined over time. * Example: an immigrant during the period 1965-1969 under age 40 with more than 13 years of education had an entry level earnings of $20,176. A similarly placed immigrant (age and education) 20 years later had entry level earnings of $13,000. (All in 1989 dollars.) * But Duleep and Regets have found a very strong inverse relationship between initial earnings and earnings growth after entry. The same entrant in 1965 saw an average growth in earnings over the next 10 years of 71 percent, while the later immigrant cohorts entering a decade later saw growth of 121 percent over a 10-year period. * Researchers' conclusion: entry earnings of immigrants are a poor predictor of immigrant economic success. * Budget Bulletin conclusion: immigrant's use of public assistance benefits may be higher than before, but immigrants may not contribute to long-term structural public assistance costs. It does remain a land of opportunity! [Image] Cuts in the Federal Workforce * The Congressional Budget Office recently released a report on "Changes in the Federal Workforce" that looks at Federal civilian employment over the last decade. Particular focus is also given to the outcome of the Federal Workforce Restructuring Act of 1994, which aims to reduce the government's workforce by more than 250,000 through 1999. * So far the government has exceeded the annual goals set in the legislation. To no one's surprise, Defense civilian jobs account for 63% of the positions eliminated since 1994. Most of this loss can be attributed to base closures and facilities consolidations. * What may be surprising is that between 1985 and 1995, Defense employment fell by 229,000 positions, more than the total governmentwide reduction of 150,000 positions. Increases in employment levels at other agencies in the 1980's, such as Treasury and Veterans, partially offset the defense reductions. * In addition the Justice department grew by nearly 60% over the 1985-1995 period, due to the increased emphasis Congress and the Administration have been putting on fighting violent and drug related crime. * The composition of the Federal workforce has changed as well. Blue-collar and white-collar clerical jobs have declined, while jobs classified as professional, administrative, or technical have increased. As a consequence, a larger proportion of the Federal workforce is in higher paying jobs. Under the General Schedule pay structure, where grade 1 is the lowest paid and grade 15 is the highest, over 50% of the workforce is at grade 11 or higher. * Will the Federal government actually save money by downsizing? If one looks only at personnel costs, we should save $61 billion over the 1994-1999 period. However, savings in personnel costs do not always translate into permanent deficit reduction, particularly when agencies achieve personnel targets by contracting out activities. On the other hand, if these tight discretionary caps continue, agencies will be forced to make budget reduction a priority. Reducation in Federal Workforce (Change 1985-1995, Numbers in Thousands) Number of Workers Percent Change Legislative Branch -5.0 -12.7 Judicial Branch 10.7 60.8 Executive Branch Agriculture -6.3 -5.5 Commerce 1.8 5.1 Defense -228.5 -21.2 Education -0.2 -3.9 Energy 3.2 19.0 HHS -14.2 -10.0 HUD 0 0 Interior -0.7 -0.9 Justice 37.6 59.8 Labor -1.8 -9.8 State 0 0 Transportation 1.4 2.2 Treasury 28.6 21.2 Veteran's Affairs 17.3 7.1 All Other Agencies 5.7 3.9 All Federal Civilian Workers -150.4 -6.7 [Image] How Long Does It Take To Get Your "Money's Worth" In Social Security * The Congressional Research Service (CRS) has recently updated an analysis of the value of Social Security benefits across generations (Social Security: The Relationship of Taxes and Benefits for Past, Present, and Future Retirees, Report 95-149 EPW). * The CRS study examines how long it has taken or will take retirees from various generations to get Social Security benefits equal to the value of the payroll taxes they paid into the system (taking into account interest that could have been earned on these taxes). * Many assumptions must be made in such "money's worth" calculations, including: real interest rate assumptions used to calculate the value of the payroll taxes; inclusion or exclusion of the employer share of payroll taxes in the calculation; the treatment of auxiliary benefits for spouses and dependents; and the implications of income taxes assessed on benefits. * Regardless of the assumptions, the general trend presented in the study is clear. -Future generations of retirees will get much less in return for their payroll taxes than current and prior generations of retirees. * The following table provides CRS' estimates assuming: -inclusion of both the employer and employee share of payroll taxes for Old Age and Survivors Insurance; -real interest rates equal to a portfolio of long-term U.S. government bonds; and -exclusion from the calculation of any income taxes paid on benefits. Number of Years Needed of Receiving Social Security Benefits Before Recovering Value of Social Security Taxes Paid Year of Retirement Low Wage Workers Average Wage High Wage Workers Workers 1940 less than 1 less than 1 less than 1 1960 1 2 2 1980 3 4 4 1996 14 21 29 2005 20 30 44 2015 22 34 58 2025 20 33 68 * Also, the calculations assume low wage workers earned at the minimum wage throughout their working years, average wage workers earned at the national average wages, and high wage workers earned the maximum wage subject to the payroll tax each year. * As shown in the table, a Social Security beneficiary with average wages got back the value of the taxes he paid into the system in 2 years if he retired in 1960, but got back his taxes in 4 years if he retired in 1980. -But an average wage worker retiring now must receive benefits for nearly 21 years before recovering the taxes they paid in. -And a worker retiring in 2025 (age 36 today) would have to live to 98 (33 years past age 65) to get back the value of the taxes paid. * Perhaps most alarming is the fact that high wage workers retiring in 2025 would have to live to 133 (68 years past age 65) to get back in benefits the value of the taxes they will pay in during their working years. * Although life expectancy at retirement has been increasing, it is not likely to be enough to make Social Security as good for future retirees as it has been for earlier generations. * According to Social Security actuaries, a male worker retiring in 1980 could expect to live about 14 years, on average. For the average wage worker, that meant they would get Social Security benefits for an additional 10 years after recovering the value of the taxes they paid in. * And for high wage workers retiring in 2025, they are likely to die more than a half a century before getting their money's worth from Social Security. [Image] Questions or commments about the Bulletin please contact: Amy Call or Diane Bath Senate Budget Committee 621 Dirksen Senate Office Building Washington D.C. 20510