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Bowles-Simpson 2.0: How Does It Compare to the Original?

December 3, 2010 at 8:53 AM

We praised the original proposal that the co-chairs of the President’s fiscal commission issued on November 10 for putting all parts of the budget on the table and outlining an array of hard choices.  But we concluded that the plan doesn’t represent a balanced approach to bringing deficits under control, and we listed six improvements that were particularly needed.  Now that co-chairs Erskine Bowles and Alan Simpson have issued a revised, final proposal, here’s a brief look at the degree to which it addresses those six needed improvements:

  1. Relax the revenue and expenditure targets. The new plan maintains the earlier plan’s proposal to cap revenues at 21 percent of gross domestic product (GDP), approximately the average for federal spending over the last 40 years.  As our analysis explained, this target is both unrealistic and unwise.  The aging of the population and rising health care costs will increase the cost of meeting longstanding commitments to seniors and people with disabilities in coming years.  Furthermore, federal responsibilities have grown in a number of areas, such as aid to veterans of the Iraq and Afghanistan wars, homeland security, prescription drug coverage for seniors, and education (with passage of the “No Child Left Behind” law).  Moreover, the United States could face unforeseen challenges that will require added expenditures.  For all of these reasons, mainstream budget analysts generally agree that adhering to a 21 percent limit in future decades would require draconian cutbacks and produce undesirable results.
  2. Address the imbalance between budget cuts and revenue increases. Like the earlier plan, the new plan is heavily skewed toward deep program cuts, which account for 77.5 percent of its proposed policy savings through 2015 and 69 percent of the savings through 2020. Because it fails to balance budget cuts and revenue increases more evenly, the plan calls for much deeper cuts in some program areas than would be wise — and likely would be sustainable — over time.
  3. Address the overly deep benefit cuts on Social Security beneficiaries of modest means. The new plan includes only minor changes here from the earlier version and continues to rely on benefit cuts for two-thirds of the Social Security solvency improvements over the next 75 years and four-fifths of the improvements in the 75th year.  It is not possible to rely so disproportionately on benefit cuts without doing significant damage to people who can’t afford to absorb them.  Under the new plan, for example, the benefit of a medium earner (someone earning about $43,000 today) would be cut by 13 percent below the currently scheduled amount in 2050 and by 19 percent in 2080.  The typical beneficiary could not easily afford such reductions.  A lifelong medium earner retiring at age 65 today receives a Social Security benefit of just $16,764 a year and is likely to rely on Social Security for the vast majority of his or her retirement income.
  4. Scale back excessive health care cuts, especially those that could harm vulnerable people or endanger health reform. On balance, the co-chairs’ health proposals are only slightly improved.  Some changes are for the better — unlike the original plan, for example, the new plan does not convert Medicaid payments for long-term care into a block grant and does not cut payments to hospitals that serve many uninsured patients.  Other changes move in the wrong direction, such as repeal of the new federal program to provide long-term care insurance (CLASS).
  5. Most importantly, however, the new plan retains the original proposal to limit the growth of total federal health spending (Medicare, Medicaid, and other programs) to GDP growth plus one percentage point.  That global limit falls well short of rising health care costs and doesn’t account for increases in the number of beneficiaries or changes in their demographic mix.  As a result, it would likely lead to cuts in federal health programs that could become severe over time, possibly including replacing Medicaid with a block grant and Medicare with a system of vouchers.

  6. Moderate the depth of the domestic discretionary cuts, particularly with an eye to ensuring that the federal government can function effectively. Here the new plan is more troubling than the original:  it assumes more than $200 billion in additional cuts through 2020.  In 2013, funding for non-security discretionary programs would have to be cut by 14 percent below the 2010 level, adjusted for inflation.  By 2020, funding would have to be cut by 22 percent below the 2010 level.  Policymakers simply won’t be able to reduce real funding for discretionary programs by more than one-fifth by 2020 — when national needs will be no smaller than they are now and the population will be significantly larger — without sharply affecting important programs that millions of Americans rely on.
  7. Avoid instituting cuts in fiscal year 2012 (which begins next October) in order to avoid impeding the fragile economic recovery. The new plan makes a nod toward the problem of starting budget cuts in 2012 by suggesting that Congress consider a modest payroll tax holiday for 2011, which would partly offset the negative economic impact of those cuts.  But a better approach would have been something similar to the much larger payroll tax holiday proposed by a bipartisan panel chaired by former budget director Alice Rivlin and former Senate Budget Committee chairman Pete Domenici, which would provide a $650 billion boost to the economy in both 2011 and 2012.

In fact, on five of these six issues, the Rivlin-Domenici report is distinctly superior.  It realistically envisions both expenditures and revenues ultimately rising above 21 percent of GDP, contains roughly equal contributions from budget cuts and revenues (both for the package as a whole and for Social Security), has discretionary cuts that — while very substantial — are more than one-third smaller than the deep cuts in the Bowles-Simpson plan, and as noted, provides a much larger immediate boost to the economy.  The Rivlin-Domenici plan achieves these improvements on a bipartisan basis.

As we concluded in Wednesday’s statement on the new Bowles-Simpson plan:

Bowles and Simpson have performed a valuable service in educating policymakers and the public about the need for tough medicine to tackle [the long-term deficit] problem, and for putting specific proposals on the table rather than empty rhetoric (and rather than hiding behind budget process changes instead of offering specific spending and tax changes). Unfortunately, their product remains seriously flawed.


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