How Ryan balanced his budget

Call it Paul Ryan’s 0.5 percent solution.

In a little-noticed but vital change last spring, the House Budget Committee chairman cut half a point from the annual growth rate he had allowed for Medicare spending. It gave him the extra margin needed to pay for tax cuts and still placate the right by getting to balance in 2040. But it meant breaking with Ryan’s fellow Medicare reformer, Sen. Ron Wyden (D-Ore.), and raised this question that echoes now in the presidential campaign:


Did Ryan cut corners with seniors to pay for tax cuts just as he accuses President Barack Obama of doing to finance health care reform?

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Indeed, calculations by POLITICO — drawn from a Congressional Budget Office analysis commissioned by Ryan in March — show that without the half-point cut, the House Republican budget would still be in the red in 2040. And Ryan’s small adjustment compounds greatly over time: lowering spending for Medicare by hundreds of billions from 2030 to 2040 and well over $1 trillion from 2040 to 2050.

Now, as Mitt Romney’s running mate, Ryan has pushed hard on the Medicare raid theme.

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“Mitt Romney and I know the difference between protecting a program and raiding it,” Ryan told GOP delegates in Tampa, Fla. Returning to the same attack line before AARP in New Orleans last week, Ryan told the seniors lobby, “The law turned Medicare into a piggy bank for Obamacare.”

But Maryland Rep. Chris Van Hollen, the Budget Committee’s ranking Democrat and the man chosen to play Ryan in prepping Joe Biden for the Oct. 11 vice presidential debate, answered in kind. Ryan is the true Medicare raider, Van Hollen said, squeezing seniors to make room for the GOP’s tax cuts.

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“There’s no doubt that the additional cost to seniors is used to provide a tax break for people like Mitt Romney,” Van Hollen told POLITICO. “I think you’re going to hear the president make the argument even more … that asking seniors to pay a lot more on Medicare is being done to finance tax cuts for people like Mitt Romney.”

In Ryan’s case, the CBO analysis in March best illustrates the math. And because all the spending and revenue lines converge in 2040, it’s an intriguing snapshot of the choices Ryan was willing to make to get to balance.

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The 17-page report first assumes enactment of his full 10-year Republican budget plan and then attempts to measure the impact if it were extended forward several decades along a path dictated by Ryan. A variety of different inflation indices are assigned to entitlement accounts by Ryan and at his instruction, revenues capped — below Obama — at 19 percent of GDP.

Ryan’s Medicare reforms were central to this exercise because they kick in only outside the 10-year budget window. No longer was he seeking to do away with the Great Society legacy entirely — an idea that had proved political catnip for Democrats. Instead, the young Wisconsin Republican wanted to test a more bipartisan plan worked out with Wyden that promised a level field competition between the government-run health care program and new private alternatives.

As outlined by the two men, seniors would be free to choose between public and private plans, both of which would get equal premium support that would grow at an annual rate of per capita GDP plus 1 percent. And to allow for some transition, millions of elderly already enrolled in Medicare or near 65 in age would be exempted from the change. In Ryan’s budget, for example, the reform is delayed a full decade and begins with only the latter portion of the baby boom generation — those born in 1958 and turning 65 in 2023 or later.

In making its projections, CBO was allowed to use its own higher spending baseline to score the cost of caring for the elderly already in Medicare. But for the new enrollees, Ryan’s instructions to CBO were to assume net spending of $7,500 per 65-year-old in 2023 dollars — a significantly lower starting point than the rest of Medicare. And this would be allowed to grow at a rate of per capita GDP plus 0.5 percent — not the extra 1 percent discussed with Wyden.

The impact is small at first but then accelerates for two reasons: The annual half point adds up with time, and it applies to an ever greater share of the Medicare population. For example, in 2030, CBO estimates that fewer than 40 percent of Medicare’s enrollees would be under the new Ryan system. By 2050, that would double to more than 90 percent.

All such long-range projections are prone to error, and POLITICO leaned toward caution in working with the CBO numbers. The compounding effect of 0.5 percent each year was estimated after discussions with independent budget analysts. And its impact on total Medicare spending was then adjusted downward according to the proportion of elderly enrolled in the new reform system.

But by 2040, that half point would be a 9 percent to 10 percent difference. If that were added back to the CBO projections, Medicare spending in 2040 would go from 4.75 percent of GDP – with the Ryan cut — to 5.2 percent under the original Wyden-Ryan formula.

When adjusted downward to reflect the mix of enrollees in Medicare in 2040, a conservative estimate of the difference still would be one-third of 1 percent of GDP — more than enough to wipe out the narrow surplus that CBO credits Ryan with that year.

Tables in the March report bear this out. With all of Ryan’s Medicare reforms and other domestic spending cuts, federal outlays would be down to 18.75 percent of GDP in 2040. That’s a huge drop from 24 percent of GDP in 2011. But given Ryan’s cap on revenues, his surplus is only one-quarter of 1 percent of GDP.

Thus, if his Medicare numbers were adjusted upward to reflect the initial Wyden-Ryan formula, he would be back in the red.

Translating these percentages into dollars is always risky because GDP projections are so large — and by definition, swing with the economy. But to get some rough order of magnitude, POLITICO worked with relevant CBO long-range economic forecasts for 2030, 2040 and 2050. Again, the impact is small at first — about $17 billion in annual savings in 2030. But that grows five-fold to about $100 billion a year in 2040, and then it more than doubles again to more than $230 billion by 2050.

As seen last week before AARP, Ryan — as a vice presidential candidate — is less the numbers guy of old and steers clear of details when discussing his Medicare reforms these days. And while Romney very much supports the same premium-support concept as the Wyden-Ryan plan, his campaign gives a still wider berth to specifics.

“Mitt continues to work on refining the details of his plan,” reads a Romney campaign fact sheet. “And he is exploring different options for ensuring that future seniors receive the premium support they need while also ensuring that competitive pressures encourage providers to improve quality and control costs.”

In Ryan’s defense, his campaign and Budget Committee staff would argue that Obama himself opened the door for the chairman to break with Wyden and adopt the tighter funding formula. In fact, the president did propose last winter an equivalent Medicare formula for his 15-member Independent Payment Advisory Board in tandem with new deficit-reduction proposals.

“They’ve always tried to show a consistent connection between two approaches that have similar numeric goals achieved through vastly different means,” explained Michael Steel, former press aide to Speaker John Boehner who now assists Ryan.

The administration would counter that the IPAB — which has yet to be created and which Ryan strongly opposes — is only empowered to deal with the provision of Medicare services: payments to providers, like hospitals. By comparison, the White House says, the practical effect of the bidding structure favored by Ryan will tilt in the opposite direction: putting pressure on what seniors pay for their benefits in the future.

But most important, perhaps, to the consistency argument is that Ryan is not just using a lower growth formula but applying it to a significantly lower starting point for Medicare benefits in 2023 than Obama.

Measured in 2011 dollars, Ryan began by allowing about $5,900 in net Medicare spending for the average 65-year-old, for example. This was $400 or 6 percent below the cheaper of the two CBO’s Medicare baselines — which is roughly equivalent to Obama’s budget. But it was done without any apparent agreement with his partner, Wyden.

By 2040, the CBO analysis estimates, that $400 gap per 65-year-old would grow to $3,300, a 26 percent difference. But many health care experts would argue that these savings are unrealistic because Medicare spending per enrollee is already growing at a much slower rate than private health plans.

An August article in the New England Journal of Medicine makes this point. And when the numbers are broken down, nearly half the projected cost growth for Medicare over the next decade is simply attributed to the fact that there will be more older Americans enrolled.

Too late for any formulas to change that.