Saving the

AMERICAN dREAM

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, The Heritage Plan to Fix the Debt, and Restore Prosperity Cut Spending, and Restore Prosperity

Saving the

AMERICAN dREAM

In these pages, you will gain a new understanding of the steps

The crisis and restore prosperity we must take to fix our debtHeritage Plan to Fix the Debt,nationwide. Cut Spending, and Restore Prosperity Building on decades of Heritage research, Saving the American Dream presents a plan to unleash the creativity of our hard-working citizens and leave our children and grandchildren with a better life.

WHATS INSIDE
AMERICAS FISCAL CRISIS ............................................. page 2 THE HERITAGE PLAN ......................................................... page 4 TAX REFORM.............................................................................. page 6 HEALTH CARE & MEDICAID.......................................... page 8 MEDICARE.................................................................................. page 10 SOCIAL SECURITY ............................................................... page 12 GOVERNMENT SPENDING .......................................... page 14 CONNECT WITH HERITAGE ....................................... page 16

What Leaders are Saying About the Plan

Getting our countrys fiscal house in order is no easy task. Thankfully, our friends at The Heritage Foundation have done the hard work of thinking through and creating public policies that get government under control and save the American dream for this generation and the next. Senator Jim DeMint (R-SC) The analysis of our fiscal problems is compelling, and the proposed solution is bold and imaginative. Ambassador John Bolton The Heritage Foundations plan to save the American dream would create economic certainty for businesses by putting our nation on a more stable economic course and giving businesses the freedom to expand. Andrew F. Puzder CEO of CKE Restaurants Inc. (Hardees and Carls Jr.) and co-author of Job Creation: How It Really Works and Why Government Doesnt Understand It

The Heritage Plan offers a way out if politicians put the welfare of their country ahead of their own. Cal Thomas Americas #1 nationally syndicated columnist Comprehensive tax reform is an essential element of restoring fiscal sanity and spurring economic growth in the country.The Heritage Foundations proposal moves the countrys tax code in the right direction toward a more low-rate, flat tax. Arthur B. Laffer, Ph.D. The Father of Supply-Side Economics America does not have to be a country in decline. Do we have choices to make? Yes. And I encourage anyone who is serious about making the right choices to read The Heritage Foundations plan to fix the debt, cut spending, and restore prosperity. Steve Forbes Editor-in-Chief, Forbes magazine

Saving the American Dream

is our plan to fix the debt, cut spending, and, above all, restore prosperity.

Fellow Americans:
We have come to a time of decision. For far too long, Congress has been on an unsustainable binge of spending, taxing, and borrowing. Our nation is going broke, and we are passing the costs of these misguided policies to our children and their children. But this fate does not have to be our future. Saving the American Dream is our plan to fix the debt, cut spending, and, above all, restore prosperity. It balances the nations budget within a decadeand keeps it balanced. It eliminates government-mandated health care and fully funds our national defense. In order to get our fiscal house in order, we must address Social Security, Medicare, and Medicaid, the three so-called entitlement programs which together account for 43 percent of federal spending today. Far too many seniors still lack enough help to avoid poverty. Saving the American Dream therefore does not end these programs; instead it focuses them on those who need them. We have been here before, and every time the American people have always risen to the occasion. In 1776 we were told that no upstart colonists could defeat the strongest nation in the world, and we decided to change the course of history. In 1860 we were told the Union could not hold and that America was over, and we brought forth a new birth of freedom. In 1980 we were told that the American century was at an end, and we launched a great economic expansion, rebuilt our military, and revived our national spirit. All that is required, as my hero Ronald Reagan once said, is our best effort, and our willingness to believe in ourselves and to believe in our capacity to perform great deeds; to believe that together, with Gods help, we can and will resolve the problems which now confront us. Hard times demand tough choices. The future of our nation is at stake. Together, let us seize the moment, change our countrys course, and save the American Dream. Edwin J. Feulner President, The Heritage Foundation

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

America Faces a Fiscal Crisis

Decades ago, politicians promised Baby Boomers health and retirement benefits but provided no way to pay for them. Now we are faced with the consequences of their neglect. U.S. debt held by the public equals nearly 70 percent of GDP and is rapidly growing. Medicare and Social Security face nearly $40 trillion in longterm unfunded obligations over $200,000 for every American. We cannot leave these burdens for our children and grandchildren. We must begin now to solve these problems. And we all must share the burdens those solutions will entail.

endless borrowing imposes huge burdens on future generations.

Artiga Photo/Corbis

Saving the AMERICAN DREAM

Why the National Debt Matters

n

Adding up each years annual budget shortfall (deficits), the national debt has recently topped $14 trillionwith no end in sight. Mounting debt results in economic crisis, as countries like Greece and Portugal have learned the hard way. Because debt always has to be paid, endless borrowing imposes huge burdens on future generations.

CHART 1 The Current and Future Crisis: Runaway Federal Spending Will The Current and Spending Will Runaway Huge Budget Deficits Result inFederalFuture Crisis: Runaway Federal Spending Will

CHART 1

Result in Huge Budget Decits Result in Huge Budget Decits

35% 35% 30% 30% 25% 25% 20% 20% 15% 15%

Revenue and Spending as a Percentage of GDP Revenue and Spending as a Percentage of GDP

35.2% 35.2%

SPENDING SPENDING

REVENUE REVENUE

19.3% 19.3%

The Cause: Unlimited Government

n

10% 10% 2010 2010

43% of all tax dollars go to funding the three major entitlement programs: Social Security, Medicare and Medicaid. Entitlement spending will consume all tax revenue by 2049, leaving nothing for constitutional functions such as defense. As government spending has more than doubled since 1965, clearly Washington must be more efficient in every line of the budget or we all will face the consequences.

Surplus/Decit as a Percentage of GDP Surplus/Decit as a Percentage of GDP 0%

0%

2015 2015

2020 2020

2025 2025

2030 2030

2035 2035

-5% -5% -10% -10% -15% -15%

DEFICIT DEFICIT
15.9% 15.9% 2035 2035

-20% -20% 2010 2015 2020 2025 2030 2010 2015 2020 2025 2030 Source: Heritage Foundation calculations based on data from

Congressional Budget Ofce, Alternative Fiscal Scenario. from Source: Heritage Foundation calculations based on data Congressional Budget Ofce, Alternative Fiscal Scenario.

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

THE PLAN
Solve the national debt crisis, simplify taxes, reduce government spending, and make health care affordable.

Our plan transforms the main federal entitlement programsSocial Security, Medicare, and Medicaidinto real insurance programs. We provide financial security to retirees, guarantee assistance to people who need it, and reduce government payments to those who are truly prosperous. Obamacare is repealed and replaced with a system that gives consumers affordable choices among private, competing health care plans, much as federal employees have long enjoyed. The tax system is made simple and fair, with a single rate for all. Our reforms encourage businesses to invest, fueling economic growth. Complementing the aims of reforming entitlement programs (Medicare, Social Security, and Medicaid), our tax plan helps Americans to save throughout their working years and achieve economic security so they wont have to depend on government in retirement. Our plan permanently balances the budget within 10 years. By immediately reducing government benefits to the wealthiest Americans, our reforms immediately begin reducing deficits that threaten the economy. We reduce government where it has exceeded the powers authorized by the Constitution. And we responsibly address ruinous public debt that will otherwise overwhelm not only ourselves but also our children and grandchildren.

Saving the AMERICAN DREAM

CHART 4

The AlternativeSaving the American Dream By rapidly lowering total federal spending, The Heritage Plan the Heritage plan would keep it there By rapidly lowering total federal spending, the Heritage plan would balance the budget by 2021 andbalance the budget n Balances the federal budget permanently, without raising taxes. by 2021 and keep it there permanently, within a decade and keeps it without raising taxes. Plan Current Projections Heritage balanced forever at no more Revenue and Spending as a Percentage of GDP Revenue and Spending as a Percentage of GDP than 18.5 percent of GDP.
35%
n

30%

Reduces the debt to 30 percent of GDP within 25 years and puts it on track to continue falling thereafter. Cuts the federal government by about half within 25 years. Stops scheduled tax 19.3% REVENUE increases and replaces the complex, unfair tax code with a completely new tax system.
SPENDING

35.2%

35%

30%

25%
n

25%

20%

20%

SPENDING REVENUE

18.5% 17.7%

Protects America and its interests around the globe by ensuring full funding for 10% defense. 2010 national 2020 2025 2030 2035 2015
n

15%

15%

10% 2010

2015

2020

2025

2030

2035 0.8%

Surplus/Decit as a Percentage of GDP n Eliminates Obamacare

0%

and creates a health care system that is affordable for individuals and families. Redesigns Social Security and Medicare as sustainable programs that truly protect seniors and will still be around for our children and DEFICIT grandchildren.

Surplus/Decit as a Percentage of GDP

0%

SURPLUS DEFICIT

-5%
n

-5%

-10%

-10%

-15%
n

-15%

15.9% Provides powerful incentives for working Americans to save -20% be 2010 and invest so that they will 2035 2015 2020 2025 2030 less dependent on government programs.

-20% 2010

2015

2020

2025

2030

2035

Sources: Current projections: Heritage Foundation calculations based on data from Congressional Budget Ofce, Alternative Fiscal Scenario. Heritage Plan: Calculations by the Center for Data Analysis, The Heritage Foundation, based on baseline data in the current projections, data provided by the Peter G. Peterson Foundation, and CDA policy models.

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

TAX REFORM
The Heritage Plan spurs economic growth with a tax that is simple, flat, and fairand prevents future tax increases.

A truly flat tax

We replace todays complex mosaic of tax systems and rates with a single rate for all. The current payroll tax on workers and employers funding Medicare and Social Security is folded in. And we cap the governments take to no more than 18.5 percent of the economythe historical average.

A truly simple tax system

Under the Heritage plan, youre taxed only once and only on income that you spend on consumer goods and services. Money you save is not taxed until you spend it, like a giant IRA but without the complicated rules.

Protection for working households

No more payroll tax (for Social Security and Medicare) that hits low-income workers hardest. A health insurance tax credit provides tax relief for health care costs. And the Earned Income Tax Credit is preserved to help families with low incomes.

Saving the AMERICAN DREAM

Our plan means, unlike today where seniors with as little as $15,000 in income have their benefits taxed, low-income retirees pay no taxes on Social Security benefits. Also, any senior who works beyond retirement age pays no taxes on the first $10,000 in earnings.

Business taxes that free up investment and fuel growth

Our plan substantially reduces barriers to business investment and makes businesses more competitive. Businesses are taxed only on domestic income. Our plan repeals the estate tax so family businesses can pass from one generation to the next.

The Heritage Plan Simplifies the Tax System and Lowers Taxes
Under current law, the typical Americans taxes will go up in 2013. But absent spending reform, income taxes would have to rise dramatically after that. The Heritage Plan eliminates the need for tax hikes, and reforms the tax system by replacing all income and payroll taxes with a simple, flat tax with one rate for everyone.
INDIVIDUAL TAX RATES
75% Marginal income tax rates Heritage at tax Total payroll tax rates

62.3%
50%

40.3% 15.3% 25%

43.3% 15.3%

15.3% 28% 28% 2050 (projected) Saving the American Dream

25%

47% 28% 2013 (current law)

0%

Current Rates

Sources: Congressional Budget Ofce, Tax Foundation. Heritage Plan: Calculations by the Center for Data Analysis.

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

TAX REFORM
7

Security for low-income seniors

HEALTH CARE & MEDICAID REFORM

Tax credits, premium assistance for low-income workers, and tax-free savings are all part of health care reform that expands consumer choices.

Repeal Obamacare
This ill-conceived law adds trillions of dollars in government spending to a health care system that is already unaffordable. It also increases federal controls and imposes heavy costs on states, businesses, and households. The Heritage plan repeals Obamacare and replaces it with a consumer-centered health care system that America can afford.

A new tax credit for health insurance

The Heritage plan provides a tax credit of $2,000 for individuals and $3,500 for familiesfar more tax help than under current law. This can go towards a plan your employer offers you, or you can use it to buy insurance outside your workplace.

Direct assistance for lower-income workers

If your income is in the lower brackets, you receive premium support to buy the same health insurance as those with higher incomes canallowing those on Medicaid a better quality option. Very low-income families with children receive total assistance worth as much as $9,000.

Saving the AMERICAN DREAM

Under our plan, your savings for health care (or other purposes) no longer face double taxation. If you do not use all of your health credit or premium assistance for insurance, you can put the remainder in a special savings account with tax-free withdrawals.

A new Medicaid safety net

In 2014, the Heritage plan caps federal Medicaid spending at 2007 levels. States receive block grants and are given greater latitude to develop innovative ways to reduce costs and improve health care for the poor elderly and disabled. Based on agreed goals, this approach gives states the right incentive to pursue high-quality, innovative care.

The Impact of Obamacare

What does the new health care law mean for me? Whether youre a mom, an employer, or a doctor, this series provides the answerwith the latest analysis and compelling stories of Americans affected by Obamacare.

AFP/Getty Images

Experience videos, reports and more at:

heritage.org/ImpactOfObamacare

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

HEALTH CARE & MEDICAID REFORM

9

Tax-free savings for health needs

MEDICARE REFORM
The most costly and least efficient federal entitlement, Medicare needs fundamental changes to provide truly highquality, affordable health care.

A defined contribution adjusted by income

The Heritage plan provides retirees with premium support payments from the government, similar to what federal employees now receive. This support is decreased for the most affluent 9 percent of retirees. Seniors may choose to use their premium support for Medicares fee-for-service plan or private health plans.

Protection against bankruptcy from medical bills

In addition to the option of keeping your current health coverage or choosing a better policy, the Heritage plan includes new protection against catastrophic health care expenses to ensure that you cannot be bankrupted by huge medical bills.

Medicare, at last, operates on a budget

Medicare currently faces an unfunded liability of over $30 trillion. Under the Heritage plan, premium support is set based on the principle that when health plans compete, you winresulting in

10

Saving the AMERICAN DREAM

Eliminate restrictions on doctor-patient arrangements

Current law restricts arrangements that doctors and patients might wish to make outside of the Medicare program. The Heritage plan abolishes those restrictions so doctors are free to provide care beyond Medicare limitswithout Washington in the middle.

New retirees can keep their existing plans

During the five-year transition to full premium support, our plan requires Medicare to provide defined contributions for any retirees who want to remain in their current health plan, including employer-based coverage or other health plans.

The Heritage Plan Would Rein in Mandatory Entitlement Spending The Heritage Plan Would Rein in Mandatory Entitlement Spending
CHART 7

Current Projections
Spending as a Percentage of GDP
20% 20%

Heritage Plan
Spending as a Percentage of GDP

17.1%
15% 15%

10%

10%

Medicare, Medicaid, Obamacare Subsidies, CHIP

5% 5%

9.1%

Medicare, Medicaid, CHIP

Social Security
0% 2010 0% 2010

Social Security
2030 2035 2015 2020 2025 2030 2035

2015

2020

2025

Sources: Current projections: Heritage Foundation calculations based on data from Congressional Budget Ofce, Alternative Fiscal Scenario. Heritage Plan: Calculations by the Center for Data Analysis, The Heritage Foundation, based on baseline data in the current projections, data provided by the Peter G. Peterson Foundation, and CDA policy models.

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

MEDICARE REFORM
11

better quality at lower costs. Our plan also caps total Medicare spending to prevent runaway costs. This gives competing plans an incentive to control their costs.

SOCIAL SECURITY REFORM

The Heritage Plan transforms Social Security into true insurance that retirees can rely on, with a guarantee against poverty in retirement.

A flat benefit with a guarantee against poverty

The centerpiece of the Heritage plan is a flat Social Security benefit which guarantees that no retiree will ever fall into poverty. The current system offers no such guarantee.

Preserving Social Security for future generations

For workers born after 1985, the flatbenefit will be phased in slowly. These workers will also have greater flexibility to plan for retirement. To keep the system solvent, benefits for the wealthiest 9 percent of retirees will be reduced. This transparent reduction gives upper-income Americans more clarity than todays surreptitious tax on their benefits.

The fairness and stability of a true insurance program

Our plan halts the unsustainable promise of benefits to all regardless of need. We convert Social Security into true insurance that supplements income for retirees who need it. For the more affluent, benefits will be quickly restored in cases of sudden reversals.

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Saving the AMERICAN DREAM

Over a two-year period starting in 2014, first 3 percent and then 6 percent of your income will go into a retirement savings account that you own and control, like an IRA or 401(k) plan. You may save more or less, or even opt out if you choose. The money you put into these accounts will not be double-taxed.

CHART 3

Discretionary Spending Cuts Alone Are Not an Adequate Substitute for Entitlement Reform
Annual spending on entitlement programs is massive Adequate Substitute for Entitlement Reform compared to other federal spending priorities. Cutting Annual spending on entitlement necessary step, but cuts to discretionary spending is aprograms is massive compared to other federal spending priorities. Cutting discretionary foreignforeign aid alone pulling out ofspending is awill not close the but aid alone or or pulling out of Afghanistan necessary step, deficit. Afghanistan will not cuts to close the decit. Entitlement spending must be reined in. Entitlement spending must be reined in.

Discretionary Spending Cuts Alone Are Not an

Spending in 2011

Global War on Terrorism

Foreign Aid $28.6 billion

NASA $19.5 billion

$2.4 trillion

$159.3 billion

Note: Figure for entitlements includes net interest. Without net interest, the total is $2.2 trillion. Source: White House Ofce of Management and Budget.

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

SOCIAL SECURITY REFORM

13

A new savings plan to supplement Social Security

GOVERNMENT SPENDING REFORM

To reduce the size of government and national debt, first the plan deals with entitlement reform then sets priorities in every line of the budget.

Rolling back spending to 2008 levels to save trillions

Government is on track to consume onethird of the economy by the time todays newborns graduate from college. Our plan rolls back non-defense discretionary spending to 2008 levels, leaving most programs larger than they were in 2000. Maintaining this freeze through 2015 helps balance the budget in 10 years.

Get serious about the national debt

At current spending levels, within a generation the national debt will equal 90 percent of Americas economic output and it will continue rising. Under the Heritage plan, the debt falls to 30 percent within 25 yearsand it continues falling thereafter.

Restrict the federal government to its Constitutional functions

Some federal programs, such as maintaining highways and managing education, cannot be capably run from Washington. Our plan moves such state and local functions back to the states and communities where they belong.

14

Saving the AMERICAN DREAM

Provide for the common defense with effectiveness and efficiency

The most important role of the federal government is national security; it is vital to maintain sufficient military defenses. At the same time, we can cut waste from defense spending by combining duplicative programs and streamlining complex logisticsthen reinvesting these savings to modernize our forces. These reforms can make our military stronger, more modern, and more effective.

Sell government assets to help retire debt

The federal government owns huge swaths of commercial land, power generation facilities, valuable parts of the electromagnetic spectrum, underused buildings, and financial assets. Under our plan, these kind of federal assets would be sold over 15 years an integral part of our strategy to balance the budget, reduce the national debt, and focus government on its core roles.

The Heritage Plan Would Reverse Trajectory of Unsustainable Debt

Without significant spending reforms, the national debt is projected to reach 185 percent of GDP by 2035. Under the Heritage plan, federal spending would be reduced by about half, which would dramatically lower our debt to 30 percent.

Publicly Held Debt as a Percentage of GDP

200%

185%

150%

CURRENT PROJECTIONS
2023: 100%
Sources: Current projections: Heritage Foundation calculations based on data from Congressional Budget Ofce, Alternative Fiscal Scenario. Heritage Plan: Calculations by the Center for Data Analysis, The Heritage Foundation, based on baseline data in the current projections, data provided by the Peter G. Peterson Foundation, and CDA policy models.

100%

50%

HERITAGE PLAN
2015 2020 2025 2030

30% 2035

0%

2010

Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

GOVERNMENT SPENDING REFORM

15

Some federal programs, such as air traffic control, would be privatized. Still others, like public broadcasting subsidies, are ended altogether.

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Saving the AMERICAN DREAM

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Highlights from the Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity

17

Inheritance?

Her share of our debt is $200,000. We can fix the debt, cut government spending, and restore prosperity. Together, we can save the American Dream for all of us.

18

Saving the AMERICAN DREAM

SavingTheDream.org
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The Heritage Foundation is a research and educational institutiona think tankwhose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Our vision is to build an America where freedom, opportunity, prosperity, and civil society flourish. As conservatives, we believe the values and ideas that motivated our Founding Fathers are worth conserving. As policy entrepreneurs, we believe the most effective solutions are consistent with those ideas and values.

This product is part of the Entitlements and Health Care Initiatives, two of 10 Transformational Initiatives making up The Heritage Foundations Leadership for America campaign. For more products and information related to these Initiatives or to learn more about the Leadership for American campaign, please visit heritage.org.

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