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RIEDL: Deficit commission wants too much tax, too little reform

- The Washington Times - Tuesday, December 14, 2010

ANALYSIS/OPINION:

The National Commission on Fiscal Responsibility and Reform ("the Simpson-Bowles Commission") deserves credit for spotlighting the nation's unsustainable spending and deficit trends. This is, simply put, the greatest economic challenge of our era.

Although the report failed to win the necessary 14 of 18 member votes to send its recommendations to Congress, it still should be taken seriously. While the report contained some positive proposals, it ultimately depended too much on tax increases and not enough on spending reforms.

Before judging a solution, one must define the problem. The nation's long-term deficits are driven exclusively by rising spending, not declining tax revenues. Even if all tax cuts are made permanent, revenues will soon slightly exceed their historical average of 18 percent of the economy. Federal spending — rising from its historical average of 20 percent of the economy to a projected 26 percent by the end of the decade — is the moving variable.

Nearly all of this new spending will come from Social Security, Medicare, Medicaid and net interest on the debt. After costing $1.6 trillion in 2010, these four expenditures are set to cost a staggering $3.6 trillion by 2020. Over the long term, the Congressional Budget Office (CBO) projects, nearly all new debt will result from these four spending categories.

Although spending drives the deficits, the report relied heavily on tax hikes. Measured against a current-policy base line (which assumes todays tax rates and spending policies continue), the report proposed $3.3 trillion in tax increases, $3.5 trillion in spending reductions and $1.3 trillion in net interest savings through 2020. This would leave the highest federal tax burden in American history (21 percent of the economy), and still not balance the budget until 2035.

Despite some positive elements, the reports entitlement reforms were insufficient. They would merely reduce the annual growth rate of Social Security and health care spending from 6.5 percent to 6.2 percent over the first decade. Those programs still would cost $20 trillion combined over the decade.

On Social Security, the report would wisely raise the eligibility age to 69, adjust benefits downward for the wealthiest seniors and use a more accurate inflation measure. Unfortunately, it also recommended steeply raising the income cap for Social Security taxes. This large tax increase could devastate small businesses.

Health care is the largest driver of long-term spending and deficits. Yet here the report was disappointingly timid. It proposed retaining nearly all of Obamacare (while wisely proposing a repeal of the unsustainable CLASS long-term care program), and merely tweaking the financially unsustainable, government-heavy Medicare and Medicaid programs.

Commissioners should have proposed repealing Obamacare and opted for fundamental Medicare reform, such as the bipartisan approach championed by Rep. Paul D. Ryan, Wisconsin Republican, and Alice Rivlin, a former director of the Office of Management and Budget and of CBO. Rather than retain a one-size-fits-all, federally micromanaged Medicare program, Ryan-Rivlin would move future retirees into a defined contribution plan that allows them to choose among competing private health care plans using federally contributed dollars.

Not only would this approach provide seniors with more choices, but the CBO also projects significant cost savings from it. Yet, rather than fully embrace Ryan-Rivlin, the report recommended only a small pilot project of the plan.

Anti-poverty spending also was given a free pass. Since 1990, these programs have grown faster than Social Security, Medicare, defense and education combined, and now consume nearly 20 percent of the federal budget. Yet the $647 billion anti-poverty budget was not even scheduled for significant post-recession reforms. No one is proposing balancing the budget on the backs of the poor, yet positive reforms encouraging work and marriage can reduce the budget deficit and move families toward self-sufficiency.

After growing 79 percent faster than inflation over the past decade, the report wisely recommended reducing discretionary spending back to 2008 levels, with slight growth afterward. These spending limits — enforced by statutory spending caps — would bring discretionary spending levels closer to fiscal reality.

Unfortunately, however, the report proposed a fire wall requiring nearly equal cuts to security and non-security discretionary spending. This represents budgeting by pure math rather than a serious re-evaluation of U.S. priorities. Defense spending has already declined from 12 percent of the economy in the 1960s, to 6 percent in the 1980s, and less than 5 percent today.

Given that security is a primary focus of government, and the U.S. remains at war, Congress should not pretend there is a moral equivalence between defense and other discretionary spending. Body armor for the troops must trump PBS funding. Correct defense inefficiencies, yes, but keep national security a top priority.

The fiscal commission deserves credit for taking on the thankless job of proposing deficit reduction. Politicians have grown accustomed to playing Santa Claus, and saying no is politically difficult. Unfortunately, the reports recommendations lack a central theme. They achieved certain mathematical targets, yet their series of tax increases and spending tweaks fails to address fundamental questions regarding the proper responsibilities of the federal government, state governments and individuals.

Specifically on retirement security, the commissioners did not offer a vision delineating individual obligations, the role of government and how government should provide its role. These are questions Americans must grapple with as we bring the federal budget to 21st-century sustainability.

Brian Riedl is Grover M. Hermann fellow in federal budgetary affairs at the Heritage Foundation (www.heritage.org).

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