Yesterday, the National Commission on Fiscal Responsibility and Reform released a proposal for reducing the national debt. The full report can be found here and relies on five key pillars. These are:
- Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.
- Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.
- Address the “Doc Fix” not through deficit spending but through savings from payment reforms, cost-sharing, and malpractice reform, and long-term measures to control health care cost growth.
- Achieve mandatory savings from farm subsidies, military and civil service retirement.
- Ensure Social Security solvency for the next 75 years while reducing poverty among seniors.
I will review each of these topics in turn.
Cut Discretionary Spending
To cut discretionary spending, the Commission proposes rolling discretionary spending back to FY2010 levels for FY2012, and requiring a 1% cut in discretionary budget authority every year from FY2013 though 2015. This includes $100 billion in discretionary military spending such as: freezing noncombat military pay at 2011 levels for 3 years, reducing procurement by 15%, modernize TRICARE, and reducing overseas bases by one-third. The other $100 billion in goes for non-military discretionary spending. Some of these cuts include: freezing federal salaries at non-Defense agencies for three years, cut the federal workforce by 10%, eliminate 250,000 non-defense service and staff augmentee contractors, slow the growth of foreign aid, and eliminating all earmarks. All of these suggestions are entirely reasonable.
Tax Code Reform
The tax reform is based on eliminating large tax expenditures while also lowering marginal tax rates. The overall effect will be an increase in tax rates, especially for the richest and poorest who receive the largest shares of tax expenditures. However, the simplification of the tax code is a key benefit. The key aspects of the plan include:
- Consolidate the tax code into three individual rates and one corporate rate
- Eliminate the AMT, Pease, and PEP
- Eliminate all $1.1 trillion of tax expenditures
- Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
Key tax expenditures proposed to be cut include: the mortgage interest, health insurance, retirement savings, the state & local tax deduction, the child tax credit, and the EITC. In addition, the proposal would treat capital gains and dividends as ordinary income, repeal the Alternative Minimum Tax (AMT). Of these tax expenditures, I would support keeping the child tax credit and EITC as deduction, but would eliminate the tax deductibility of mortgage interest, state and local taxes, health insurance, and 401(k)/IRA contributions.
The National Commission also would gradually increase gas tax by $0.15 to fund transportation spending. I agree with this tax increase as well as it will incentivize citizens to cut back on their gas consumption and thus pollution will decrease.
Decrease Health Care Spending
- Pay doctors and other providers less, improve efficiency, and reward quality by speeding up payment reforms and increasing drug rebates
- Pay lawyers less and reduce the cost of defensive medicine by adopting comprehensive tort reform
- Expand cost-sharing in Medicare to promote informed consumer health choices and spending
- Expand successful cost containment demonstrations
- Strengthen Independent Payment Advisory Board (IPAB)
Currently, the Sustainable Growth Rate as it is on the books would cut Medicare physician compensation by about 25% if it were not to be repealed by Congress. This is, of course, a very steep discount. The Commission sensibly proposes to replace cuts required by SGR through 2015 with modest reductions. However, reducing overall physician spending is not the answer; physicians who spend time visiting patients are not compensated generously. Physicians who perform procedures, however, receive lucrative compensation. Thus, not only is reducing physician compensation needed, but also changing the distribution of how physicians are paid. The cuts could reduce the quality of care physicians provide or the number of physicians who want to accept Medicare coverage. Allowing for balance billing would allow physicians to earn more money and would allow beneficiaries choose between high quality and low cost.
The authors also call for increased Medicare cost-sharing. In particular, they call for “replacing existing cost-sharing rules with universal deductible, single coinsurance rate, and catastrophic cap for Medicare Part A and Part B.” Increased cost sharing will help decrease the moral hazard problem, while the catastrophic cap will ensure that very sick individuals are not bankrupted by their illnesses.
Paying lawyers less and capping non-economic and punitive damages may sound like a good idea, but (as I mention here), this provision will likely have little impact on overall healthcare spending.
In the long-term, the Commission also calls for Congress to contain growth in total federal health spending to GDP+1% after 2020 by establishing a process to regularly evaluate cost growth. If health care spending growth exceeds GDP+1% over the previous five years, the Commission calls for options such as: increasing premiums (or further increase cost-sharing), overhauling the fee-for-service system, develop a premium support system for Medicare. Without a doubt, if Medicare costs continue to climb, something must be done.
The mandatory savings provisions include:
- Shifting to chain-weighted CPI for all indexed programs in order to account for substiution bias towards cheaper goods,
- Reduce farm subsidies by $3 billion per year,
- Savings from military and civil service retirement (e.g., asking workers to contribute 50%–rather than 7%–of retirement costs; )
- Eliminate in-school interest subsidies for student loans;
- Index all fixed-dollar user fees to inflation; and
- End payments to states and tribes for abandoned mines (who knew we were making these payments?!?!).
All these savings measures all seem reasonable to me.
Social Security Reform
Reforming Social Security, in the eyes of the Commission, does not simply involve cutting benefits. Benefits for the poorest Americans would actually increase under their plan as a special minimum benefit would be established. Additional details are as follows:
- Overall Social Security Benefits would be indexed to chained-CPI, but the special minimum benefit would be indexed to wages.
- The plan would make Social Security benefits even more progressive than they are now, effectively cutting benefits to richer retirees.
- The retirement age would also be indexed to longevity. Thus, the retirement age would likely be 68 by 2050 and 69 by 2075.
- Broaden the tax base by gradually increasing the taxable maximum
As the tax base increase and benefits are cut for richer workers, Social Security will function more like a flat guaranteed benefit than–as it is perceived by many today–a retirement account.