The United States federal government is headed for a fiscal train wreck. It has made significant spending commitments primarily on defense, Social Security, Medicare and Medicaid but does not have a tax system that will produce enough revenue to meet these commitments in the future. Erskine Bowles and Alan Simpson, the co-chairs of President Barack Obama's Deficit-Reduction Commission, recently released a proposal that would avert fiscal catastrophe. Both political parties have rejected this plan. Unfortunately, neither party has been honest about what they would do instead.
Social Security and Medicare are the crux of the fiscal problem. There is no "locked box" for either program: The money that you and I will pay in taxes is not saved but rather used to pay for the benefits of current retirees. In the past, these entitlements were easily supported with a tax system that raised almost19 percent of GDP in taxes. Unfortunately, soon this will no longer be possible. Sixty years ago, there were 16 workers for every retired person. Today, there are three workers per retiree; in 20 years, there will only be two. This means that either government spending will have to be cut or taxes will have to rise.
Bowles and Simpson proposed both starting in 2012. However, the Republicans refused to consider the proposed tax increases or the cuts to military spending and the Democrats will not contemplate raising the age of eligibility for Social Security and Medicare or laying off 10 percent of the federal workforce. Does this mean that the Republicans would support cutting entitlements and that the Democrats want to raise taxes? No. Both parties have irresponsibly told voters that they can have both high spending and low taxes. The Republicans are gambling that when the fiscal train wreck arrives, voters will be forced to accept lower spending because they will be unwilling to pay higher taxes. The Democrats hope that voters will accept higher taxes because they will be unwilling to give up their entitlements.
I would much rather see the Bowles-Simpson plan implemented than see either party have their way. The Bowles-Simpson plan would raise the gasoline tax (a carbon tax in all but name), simplify the income and corporate tax codes by eliminating deductions while lowering rates, raise the payroll tax cap, cut defense spending, raise the age of eligibility for Social Security while creating a hardship exemption for those who cannot work past the age of 62, increase Social Security benefits for low-income retirees and decrease benefits for high-income retirees.
What would an honest Republican propose instead? Paul Ryan gave us an idea with his "Roadmap for America's Future." Rather than increase taxes or cut defense spending, the "Roadmap" would significantly cut Medicare over the course of several decades and means-test entitlement programs like Social Security meaning that rich people would no longer receive these benefits. Nonetheless, most Republicans refused to openly support the "Roadmap".
What would an honest Democrat propose? The Congressional Budget Office estimates that, without any spending cuts, federal government spending will be about 35 percent of GDP by 2035, which would require an increase in taxes of about 67 percent compared to current levels. Given that the Democrats not only refuse to contemplate cuts to entitlements but also want greater government spending on health care and education, these numbers would have to be adjusted upwards. Yet most Democrats still pretend that taxes will not be raised for 98 percent of Americans.
The Bowles-Simpson plan proposes about $2 in spending cuts for every $1 in tax increases. This is probably reasonable given that federal government spending increased significantly over the last two years. While the plan isn't perfect I would prefer farm subsidies completely eliminated and the age of eligibility for Social Security raised further than have the Earned Income Tax Credit reduced it is at least honest about the scale of the changes needed.
It is irrelevant which of these three options is chosen as along as the problem is addressed now. To avoid a fiscal crisis, either we cut Medicare and means-test Social Security, adopt Bowles-Simpson, or significantly raise taxes in the near future. If we don't, a fiscal crisis will eventually force us to do so anyway. The sooner the two parties are honest with the public, the better off the country will be.
