When Senate Republicans filibustered the extension of emergency unemployment benefits on January 14, there didn’t seem to be much hope that the sides to come to an agreement.
Here’s the back story:
Republicans are open to extending unemployment benefits, but are demanding a spending offset to any deal. Two weeks ago, Democrats offered to extend the Medicare provider cuts in sequestration until 2024. Since these cuts fell outside of the 10-year budget window, the Congressional Budget Office (CBO) scored it as increasing the deficit by $17 billion. Conservatives rejected this offer, believing the cuts would never materialise.
Senate Minority Leader Mitch McConnell (R-Ky.) then tried to force a vote on his irrelevant amendment to delay the individual mandate and the whole process descended into a partisan fight over procedural rules.
Now, however, Democrats have offered a new way to pay for a three month extension of unemployment benefits: pension smoothing. This would reduce the amount that companies have to pay into their pension funds each year. This gives companies higher profits in the short-term, boosting tax revenue for the government.
But in the long-term, companies will have to increase their pension contributions, which will reduce their profits and decrease future tax revenues. It also allows companies to underfund their pensions, increasing the risk they will need help covering them from the government. The Committee for a Responsible Federal Budget (CRFB) rightly labels this a gimmick. It doesn’t actually offset the cost of the unemployment extension and only makes the pension system more unstable.
Over the 10-year budget window though, pension smoothing saves money since its costs don’t fully materialise until more than a decade from now.
Here’s a chart from the CRFB showing this:
So, Republicans rejected the Democrats’ original proposal of future Medicare provider cuts on the grounds that they were uncertain to materialise. But now, they are close to accepting a “pension funding” gimmick in which the savings are certain not to materialise.
Why is the first one more acceptable to Senate Republicans than the latter? Because the CBO uses a 10-year budget window, meaning that the first deal is scored as increasing the deficit while the second one is deficit-neutral.
Undoubtedly, Senate Republicans understand all of this.
Here’s where the politics come in. Republicans agreed to extend the Medicare provider cuts in 2022 and 2023 as part of the budget deal. Conservatives were furious at this. If Republicans agreed to extend them yet another year for an extension of unemployment insurance (UI), with the cuts not falling within the 10-year budget window, conservatives would freak out. Instead, Senate Republicans can say they are offsetting the costs with “pension smoothing,” a meaningless term to nearly everyone. To top it off, the CBO will score it as deficit-neutral.
Effectively, Republicans are tricking their supporters into believing that the bill has a spending offset. In the process, they can avoid the political backlash of killing the UI extension. It’s great politics.
On policy, Republicans are getting nothing. They are extending unemployment benefits for imaginary cuts. Over the long-term, this deal would add to the deficit.
That’s great for Senate Democrats. It’s exactly what they wanted on policy grounds. Whether Senate Republicans ultimately go for it remains to be seen. Yesterday, Sen. Rob Portman (R-Ohio) said that the “reality is, we’re pretty close.” Then, it would have to pass the House, an even tougher task.
But for now, there is hope.
It just goes to show the absurdity of the Republican position that they rejected a deal with a real, if far-off, spending offset in return for one that is certain to increase the deficit. But if that’s what it takes to get a deal done, then I’m all for it.