Reducing the Deficit Through the No COLA Year

By Edward Zelinsky

Today we are all budget hawks. After the stunning victory of Massachusetts Senator Scott Brown and the emergence of the Tea Party movement, federal officials, Republican and Democratic alike, proclaim their determination to reduce budget deficits. With the exception of unemployment, the budget deficit is the central domestic political issue of 2010. Reflecting this reality, President Obama has established a National Commission on Fiscal Responsibility and Reform “to meaningfully improve the long-term fiscal outlook.”

If ending budget shortfalls were easy, it would already have happened. The central dilemma is that we as taxpayers want lower deficits, lower taxes – and generous public services. Budgetary sacrifice is for the other guy. Moreover, last year’s health care debate reinforced this self-regarding tendency as well as the suspicion that the budgetary sacrifices we make will not be matched by our neighbors. Central to the health care debate were the much publicized deals for Senators Nelson of Nebraska and Landrieu of Louisiana, as well as the Obama Administration’s agreement that the “Cadillac” tax on expensive medical plans will not apply to union plans until 2018, even though that tax will apply to other plans earlier. With good reason, these special deals convinced an increasingly skeptical population that the watchword in today’s Washington is “no special interest left behind.”

In this sour situation, it is unrealistic to talk about a permanent solution to the problem of the federal deficit. What is both feasible and necessary is a step towards rebuilding public confidence in the federal government and its ability to reduce the nation’s budgetary shortfalls in a way that is fair to all Americans. Such confidence rebuilding will require a demonstration that fiscal restraint can be achieved in an equitable manner which requires sacrifice by all Americans.

I propose that we designate 2011 as the No COLA year.

Under this proposal, in 2011 no cost-of-living adjustments would be implemented in the federal budget or tax law. When COLAs resume for 2012, any inflation which occurred in 2010 will be permanently disregarded. In a spirit of universal sacrifice, the suspension of COLAs in 2011 would be across-the-board.

Thus, on the tax front, there would be no COLA adjustments in the Internal Revenue Code in 2011. Consequently, there would for 2011 be no calibration to the Code’s income tax brackets to recognize 2010 inflation. All of the Code’s other COLA modifications would similarly be suspended for 2011. To take another example, the maximum permitted 401(k) contribution for 2011 would stay at 2010 levels and would not be increased to reflect 2010 inflation. When inflation adjustments resume for 2012, the 2010 increase in the cost-of-living will be permanently omitted from these calculations.

Similarly, on the spending front, all COLA adjustments would be suspended for 2011. Thus, social security payments for 2011 would not be increased to reflect 2010 inflation. When COLA increases resume in 2012, 2010’s inflation would be permanently omitted from the Social Security base.

By the same token, federal outlays which are not explicitly geared to the cost-of-living would stay flat for 2011. This would apply to everyone and everything including defense, Medicare, Medicaid, and farm subsidies.

To those who object that the No COLA year increases federal taxes, the answer is: yes, it would. There is no way to reduce the federal deficit without increasing taxes. To those who object that the No COLA year puts financial pressure on those dependent on federal entitlements, the answer is: yes, it would. There is no way to reduce the deficit without restraining entitlement spending including Social Security and Medicare. To those who object that the No COLA year constrains important spending like defense outlays, the answer is: yes, it would. There is no way to reduce the deficit without belt tightening across the board.

To all of these objections, there is a simple and compelling response: The alternative of doing nothing is worse and will, in the long run, result in greater taxes and more disruption to entitlement and other spending programs. We must quickly restore the public’s confidence that the federal government can reduce deficits in a way that requires sacrifice by all Americans.

Some might argue that, because we are now in a relatively low inflation environment, the No COLA year will achieve only modest budgetary savings. That, however, is a virtue of the No COLA year since, in the current political setting, the best we can accomplish is an initial, limited step to strengthen fiscal restraint.

Hopefully, with public confidence restored, the federal government might then effect more robust, permanent deficit reduction strategies. Among these, we should consider switching to “Diet COLAs,” cost-of-living adjustments which ignore the first two percent of each year’s inflation and instead adjust tax and spending formulas annually only for price increases above a two percent floor.

The No COLA year would not be easy to implement nor would it be without its costs and disruptions. It would not be a panacea for our budgetary problems. However, the No COLA year would, modestly but firmly, point us in the direction of fiscal sanity while requiring sacrifice from all Americans. Under the current circumstances, that would be no small accomplishment.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of ” target=”_blank”>The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America.