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Can Federal Commission Really Close the Budget Deficit?

Public anger may prompt concrete action, but "every decision is going to be painful"

Now that the federal budget deficit is poised to eat the U.S. economy alive, it’s got our attention.

Economists and policy wonks—those who dissect consumer price indexes and look at government spending as a percentage of gross domestic product—have long warned that the federal government needs drastic action to address debt and avoid a budget meltdown.

But now even people who don’t know a CPI from a GDP are paying attention. And they’re mad.

Tea Party grassroots demonstrators have struck up a noisy chorus against the deficit in protest to a federal government that has added to the red ink. People polled by Gallup in March ranked the federal budget deficit as the nation’s most important long-term problem. The sudden interest came after not even cracking the top-three list of problems for more than a decade.

“It is like a cancer. It just destroys the country from within,” said Erskine Bowles, co-chairman of President Obama’s new fiscal commission, which meets next week.

The deficit ballooned to $1.4 trillion last year because of the stimulus and financial bailout laws, war spending, lower tax revenue during the recession and soaring health care costs. Financial collapses in Europe have helped focus public attention on the issue. And Bowles is hopeful that will lead to action.

“When the public is angry, politicians respond,” he said in an interview with the Bulletin.

Obama has warned of a coming “day of reckoning” on the deficit and debt. Federal spending of $3.6 trillion far exceeds the $2.13 trillion in tax receipts this year.

“This is going to require people of both parties to come together and take a hard look at the growing gap between what the government spends and what the government raises in revenue,” Obama said when he convened the National Commission on Fiscal Responsibility and Reform in April. “And it will require that we put politics aside—that we think more about the next generation than the next election. There is simply no other way to do it.”

The public is angry

“Public anger is helping to set the table for the commission. But they are the ones who are going to determine which foods are served,” said Larry Sabato, director of the Center for Politics at the University of Virginia. And once the commission sets that menu—comes up with a list of recommendations—it will be up to Congress to decide what to swallow.

“Everyone agrees we have a problem,” Sabato said. ”The rub is Republicans don’t want to raise any tax and Democrats don’t want to reduce much, if any, domestic spending. That’s why we are in the mess we are in.”

Bowles’ forecast? “Every single decision is going to be painful,” he said.

The commission is led by former Sen. Alan Simpson, a Wyoming Republican, and Democrat Bowles, who was chief of staff in the Clinton White House. Six lawmakers from each party sit on the panel, as do four presidential appointees from the private sector.

They are looking at options like raising taxes or changing the tax code, reducing spending, and changing entitlement programs like Social Security. The panel’s charge is to improve the long-term picture and in the short term to put the federal budget back in balance by 2015, with the exception of payments on the debt.

Without changes, a demographic influx of retirees and spiraling health costs mean Social Security and Medicare will “eat the entire economy over the next 50 years,” said Jeffrey Miron, director of undergraduate studies in economics at Harvard University and a senior fellow at the libertarian Cato Institute.

Economic dynamics force action

Here are some of the economic realities that have moved the debt and deficit issue to the front burner:

  • Just two years ago the federal debt held by the public equaled about 40 percent of the nation’s economic output, which was about average. The figure shot up to 62 percent this year—the highest level since World War II. Under current law it will jump to 80 percent by 2035, a figure that worries economists because it could lead to higher interest rates for consumers and businesses, and to financial instability.

And if Congress doesn’t stick to politically unpopular plans like allowing tax cuts to expire at the end of the year and slashing Medicare repayments to doctors, debt will amount to 185 percent of the economy by 2035. That’s like a family owing nearly twice as much on its credit cards as the whole town earns in a year.

  • Interest payments on the debt will quadruple, as a percentage of the economy, by 2035 and take up one-sixth of every dollar the government can spend.

  • Without changes, federal spending on mandatory health care programs will grow from 5 percent of the entire economy to 10 percent in 2035.

The options for solving the deficit involve some combination of raising more money and spending less. Government critics often complain that cutting waste, fraud and abuse, and foreign aid should solve the problem.

But Bowles said that only amounts to about 5 percent of the issue. Budget cuts alone won’t solve the problem. Neither will tax increases. Even double-digit growth for the next decade wouldn’t do the trick. Obama has consistently told the commission that everything is on the table.

“It’s going to take some of both” higher taxes and budget cuts, Bowles said.

Health care dilemma

One complication is that health care spending is a major culprit of the future spending imbalance.

“Medicare is the whole enchilada,” Miron said.

Miron said health spending is growing at about 8 percent a year while the economy grows just 2 percent. But the bruising battle over Obama’s health care reform bill makes it unlikely the panel will recommend major changes before that program is even fully put into effect, many experts say.

Social Security risks

Cuts to Social Security also are on the table. Barbara Kennelly, head of the National Committee to Preserve Social Security and Medicare, worries that the commission will try to solve the deficit problem by raiding the Social Security program.

“All of a sudden some of these people feel this is a place to go to solve the deficit problem. Not one dime from Social Security caused this problem,” said Kennelly, who was a lawmaker last time Social Security needed major changes to shore up its finances, in 1983. “Americans don’t believe Social Security is responsible for the deficit.”

AARP’s John Rother agrees that Social Security’s funds shouldn’t be used to balance the federal budget. But a more comprehensive look at Social Security’s own imbalance would be welcome, he said. Because of the influx of boomers into the retirement system, Social Security is insolvent after 2037.

“Social Security is going to be all or nothing,” he said. “You have to take enough steps to keep the program solvent or else you have to focus elsewhere [for deficit solutions],” he said.

One option the commission is likely to consider is raising the retirement age to 68 or 70. Kennelly said that will cause hardship for older Americans who can’t find a job in their 60s and have to retire early with smaller Social Security checks.

Rother said the commission also may look at changing the way the consumer price index is figured. The CPI is used to figure Social Security inflation adjustments as well as changes to a wide range of other federal programs. A switch to a “chained” CPI formula would reduce annual CPI increases by about 0.3 percent. So a Social Security recipient with a monthly check of $1,000 who would have gotten a $30 cost-of-living increase would get a $27 bump instead, he said.

Changes to the retirement age likely would be phased in so that anyone near retirement isn’t affected. But Rother said a change to the CPI could affect retirees.

Are taxes an option?

Rother said the commission also may look at tax code changes that might be of interest to older Americans, such as whether to continue deductions for mortgage interest and health care expenses.

Miron said some of the commissioners are interested in a value-added tax, or VAT—a sort of national sales tax on each stage of an item’s creation. But that’s unlikely to get enough support, he said.

The panel is bipartisan—with 10 Democrats and eight Republicans. Any recommendation will need the support of 14 of the 18 commissioners. But the commission lacks the congressional mandate that might help it in pushing through the tough medicine that both sides say is needed to cure the unbalanced books.

The commission’s recommendations are due Dec. 1—less than a month after midterm congressional elections that could move control of the House and or Senate into Republican hands and about as far from the 2012 presidential election as possible.

“At least we can have two weeks of policy discussions before people start throwing spitballs across the partisan aisle,” Sabato said. The challenge for the commission is to propose changes that include a variety of tax increases and spending cuts.

“They have to find a way the pain is felt equally across the population,” he said.

Tamara Lytle is a veteran Washington-based political correspondent.

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