Replacing the Sequester: 3 Ways to Save $1+ Trillion Without Raising Taxes or Gutting Programs

Today, the horribly named “sequester” goes into effect, forcing $85 billion in spending cuts over the course of the rest of 2013 all because Congress failed to enact an alternative bill. The cuts are divided evenly between defense and non-defense items, including discretionary spending on everything from unemployment benefits to education funding. Medicare will also be targeted but not Social Security. The economic impact of these cuts is not yet clear but with anemic GDP growth and a stagnant job market, any cuts in government spending in the United States would put a dent in the economy.

So what could Congress do to replace the automatic spending cuts? Well, for one, they have the power to restore all funding without instituting any cuts or tax increases at all, but aside from that, there are a number of ways for the government to save money that would make a whole lot of sense, yet encounter political resistance for a variety of self-interested reasons.

1. Medicare Buy-in

One of the easiest ways for government to raise revenue without raising taxes is by instituting a Medicare buy-in program. An estimate by the non-partisan Congressional Budget Office pegged the savings over ten years at a substantial $110 billion. By itself, it solves one-tenth of the sequester.

What does a Medicare buy-in plan mean, though, you ask? It means that the federal government would allow individuals on the open market to buy into Medicare. Currently, the program only accepts citizens over the age of 65, which is financed through payroll taxes that you pay over the course of your life. The problem with this is pretty obvious: senior citizens are an extremely high risk pool compared to someone who is, say, thirty years old.

Basically a Medicare buy-in program would work like this: anyone under the age of 65 could get a plan by paying for a premium based on a specific set of conditions (age, whether they’re a smoker, etc.). You would get all of the benefits of Medicare, the country’s most efficient health insurer in terms of cost, without breaking the bank. Since Medicare is not a for-profit venture, the plans would also be cheaper than private insurance.

So what’s preventing Medicare buy-in from taking effect? That one is pretty simple: private insurance companies killed it in the Senate in 2009 because the price efficiencies of a Medicare buy-in program threatened their profit margins. However, any discussion about deficit reduction should include it.

2. Closing military bases overseas and ending wasteful programs

Any serious deficit reduction has to start at the root of the problem: military spending. Between fiscal year 2001 and 2010, the military budget increased a staggering 81%. The United States spent $768 billion on defense spending in fiscal 2011. This is more than we spend on either Medicare or Social Security. When you add on top of that the $141 billion for veterans benefits, defense-related spending tops $900 billion a year. That does not even include the cost of the wars in Afghanistan and Iraq, which alone amounted to over a trillion dollars!

This is not to suggest that we should cut veterans benefits or the pay of our fine men and women in uniform, which account for only about a quarter of military spending. Our fighting forces are relatively lean compared to the top-heavy leadership. The ratio of officers and flag officers to uniformed personnel (per 10,000) is at a historically high 7. This is up from around 6 in 2001 and fewer than 2 during World War II.

As the New York Times put it in 2010, “there are now 963 generals and admirals leading the armed forces, about 100 more than on Sept. 11, 2001. Meanwhile, the overall number of active duty personnel has declined to some 1.5 million from 2.2 million in 1985, even though the Army and Marine Corps have grown since the Sept. 11 attacks, to carry out the wars in Iraq and Afghanistan.”

However, the bulk of military spending is on expensive equipment that we do not even need or use, overseas military bases, and on research and design for future weapons. To give you an idea of how overstretched the U.S. military really is, consider the fact that we have active duty military personnel stationed in a ridiculous 148 countries. Let that sink in: 148 countries.

This includes nearly 55,000 stationed in Germany and 35,000 in Japan, over sixty years after World War II ended. Likewise, Korea has nearly 30,000 military personnel as well. The problem is that once we start a conflict, we never leave these countries. The same would have been true of Iraq (where there were plans for permanent bases) if the American people had not demanded an exit.

3. Financial transaction fee

An interesting proposal from Senator Tom Harkin of Iowa would raise $352 billion over ten years for the federal government without even touching income tax rates. The idea is pretty straightforward: charge a three penny fee for each $100 of a trade on stocks, bonds, derivative contracts, options, and other complex Wall Street instruments. Initial public offerings are exempt.

Importantly, the fee would target high-risk speed traders who threaten the financial system with their erratic behavior and short-term gain outlook. Those looking for long-term investments in solid companies, rather than speculative trading based on events, would be minimally impacted by such a fee. It would also have a decidedly small effect on the poor and middle class (for example, $50,000 worth of trades would come to a measly $15), whereas the sequester cuts target these groups almost exclusively.

Combined with the Medicare buy-in, a financial transaction fee would save the government the equivalent of roughly half of the sequester. The other half could easily come from reductions in military spending by closing unneeded bases, winding down the war in Afghanistan, eliminating wasteful weapons programs and counting the interest saved on the debt (which is substantial when you’re talking about over $900 billion in defense-related spending per year). The only thing stopping Congress from doing any of this is the political will to do what is right.

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