Put the Bowles-Simpson Plan on Ice

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

December 3, 2010

The president’s fiscal commission formally votes Friday on co-chairmen Erskine Bowles’s and Alan Simpson’s deficit reduction plan. The plan would need a 14-vote supermajority to be sent to the floor of Congress, which it won’t likely get, nor deserve. Among other reasons, I would vote “no” because:

1) The discretionary spending caps would dramatically undercut the capacity of government to provide basic services; for example, payroll of the Social Security Administration would be slashed and staff members would be cut at the very time when workload is dramatically increasing because of the retirement of the baby-boom generation.

2) The restructuring of Social Security is poorly designed. For example, it cuts benefits by progressively more the longer one has been on the rolls, a change that would be devastating for the long-term disabled and the very old. Social Security restructuring has also been unbalanced. That is, two-thirds of the changes are benefit cuts, including on people with quite modest earnings.

3) The overall plan is unbalanced, as somewhere between two-thirds and 70 percent of the plan consists of spending cuts. In contrast, previous deficit reduction plans have been nearer to 50-50.

4) Even if Congress took up the plan, which remains doubtful, it would be voted on piecemeal, which would mean that highly undesirable changes (the discretionary cap, set a devastatingly low level) might pass. Meanwhile, other elements would almost certainly fail (the tax reform provisions), leaving remnants that are jointly even worse than the package that the commission has drafted.

5) The proposed cap on federal health care spending is unrealistic in its severity. It is also phony, as there is no indication of how it would be met—it is a classic “magic asterisk.”

6) The overall goal of holding federal spending to 21 percent of GDP is much too low. It also happens to be lower than actual spending has averaged over the last thirty years when baby-boomers had yet to qualify for Medicare, Medicaid and Social Security. Additionally, health care prices were lower relative to the prices of other goods than they are today, and much lower than they are projected to be in the future.

All that said, some elements of the plan merit support—the tax provisions, if enacted en bloc, are revolutionary. Most of the individual near-term proposed changes in Medicare are desirable, though a major exception is the penny-wise, billions-of-dollars-foolish proposed cutback in federal support for state administration of Medicaid. This cut would be imposed just as the states are asked to gear up for 16 million new enrollees.

It is a pity that the commission did not have the good sense to embrace fully, rather than merely flirt with, the idea advanced by the Rivlin-Domenici commission for a one-year payroll tax holiday to stimulate economic recovery. It is also a pity that the commission did not recognize, as the Rivlin-Domenici commission did, that a new source of revenue will be necessary in the years ahead to provide adequate levels of public services as the population ages.