Mandatory Spending

Function 350 - Agriculture

Reduce Subsidies in the Crop Insurance Program

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Outlays  
  Reduce premium subsidies -0.3 -2.2 -2.3 -2.3 -2.3 -2.4 -2.4 -2.4 -2.5 -2.5 -9.4 -21.6
  Limit administrative expenses and the rate of return -0.2 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -3.4 -7.4
  Total -0.5 -3.0 -3.1 -3.1 -3.1 -3.2 -3.2 -3.2 -3.3 -3.3 -12.8 -29.0

This option would take effect in June 2021.

The federal crop insurance program protects farmers from losses caused by natural disasters and low market prices. Farmers can choose various amounts and types of insurance protection. The Department of Agriculture sets premiums for federal crop insurance so that they equal the expected payments to farmers for crop losses. The federal government pays about 60 percent of total premiums, on average, and farmers pay about 40 percent.

Private insurance companies sell and service insurance policies purchased through the program, and the federal government reimburses them for their administrative costs. The current Standard Reinsurance Agreement sets a limit for those administrative expenses (currently roughly $1.5 billion per year) and establishes the terms and conditions under which the federal government provides subsidies and reinsurance on eligible crop insurance contracts sold or reinsured by private insurance companies. Current law targets the rate of return for the private insurance companies at 14.5 percent.

This option would reduce benefits for both farmers and crop insurance companies. The federal government would subsidize 40 percent of crop insurance premiums, on average. The option would also limit the federal ­reimbursement to crop insurance companies for administrative expenses to an average of 9.25 percent of estimated premiums (or roughly $950 million each year from 2022 through 2030) and target the rate of return on investment for those companies at 12 percent each year.