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Response to Common Criticisms of the Simpson-Bowles Plan

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Responses to Common Criticisms of the Simpson-Bowles Plan

Criticism: The plan’s tax reform proposal would cut taxes for the wealthiest individuals and corporations by reducing rates while cutting or eliminating middle class tax breaks such as the mortgage interest deduction.

Response: The plan calls for comprehensive tax reform that broadens the base and lowers rates which would result in increased revenues to reduce the deficit (without counting any of the potential revenues from dynamic effects),  promote economic growth, and increase the progressivity of the tax code.

Currently, the United States spends over $1 trillion a year on tax expenditures, the various deductions, credits, and exclusions that are really just spending by another name. By scaling back or eliminating these expenditures, there is plenty of room to both reduce the deficit and reduce marginal rates.  Moreover, because tax expenditures disproportionately benefit those at the top, the Commission’s tax reform plan would actually increase the progressivity of the code. Under its illustrative plan, the bottom 20 percent of taxpayers would receive a small tax cut, while those in the middle paid 1 percent to 1.5 percent more of their income and those in the top 1 percent paid an extra 8 percent of income. This is hardly a tax cut for the wealthy.

While the Commission proposal called for tax reform which dramatically reduced the number of tax expenditures, it recognized that some tax expenditures serve important functions that should be preserved, and that elimination or reforms of other tax expenditures should be phased in gradually to avoid adverse consequences. In fact, the Commission called for tax reform to include provisions providing support for low income workers and families, mortgage interest for principal residences, employer-provided health insurance, charitable giving, and retirement savings in a manner that is better targeted and less expensive than the provisions in the current code.

Criticism: Capping federal revenues at 21% of GDP will make it impossible for the government to meet its obligations and fund important investments in the future.

Response: The Commission set out to close the unsustainable gap between spending and revenue, with the eventual goal of achieving balance. The Commission concluded that 21 percent of GDP (a level which has never been attained) was the highest revenue level consistent with robust long-term economic growth, and that 21 percent of GDP was the lowest level of spending that ambitious spending restraint could realistically expect to achieve in the next two decades.

Criticism: The plan would cut spending for critical investments necessary to promote economic growth and create jobs.

Response: The Commission’s proposal would maintain important funding for education, infrastructure, and high-value R&D while reducing wasteful and redundant spending. In fact, the plan calls for the establishment of a Cut-and-Invest Committee to explicitly replace low-priority spending and with high-priority investments. Reducing spending overall does not mean cutting every single program, but rather prioritizing spending appropriately.

Failing to act on the deficit now and leaving our debt to future generations will undermine rather than protect important investments. Growing levels of public debt will crowd out private investment, while increasing interest payments will leave less room for spending on important public investments. If we are forced to act – which we will be eventually if we remain on this unsustainable fiscal path – we will not have a choice and those programs and investments that are the most important to Americans will be jeopardized.

Criticism: The plan would result in less health care coverage and higher out of pocket health care costs by increasing the excise tax on high cost health care plans and taxing health care plans.

Response: The plan does not recommend increasing the excise tax on high costs plans established in the Affordable Care Act. In fact, the illustrative tax reform plan outlined in the Commission report suggested reducing the excise tax from 40% to 12% as part of a comprehensive reform which would cap the exclusion for employer provided health care at 75th percentile of health care premium levels in 2014.

Economists across the ideological spectrum agree that the full exclusion of employer provided health insurance distorts the health care market and that limiting the exclusion is one of the most effective steps the federal government could take to help reduce the rapid growth in health care costs. This proposal would therefore reduce health care costs for all Americans while primarily affecting more highly compensated workers with more generous health care plans.

In addition, the Medicare cost sharing reforms in the plan would provide seniors with greater protection from the burden of major medical expenses by reducing the co-insurance rate to 5 percent after costs exceed $5,500 and capping total cost sharing at $7,500.  This new catastrophic protection would result in a large reduction of out of pocket expenses for sicker individuals with higher medical expenses. A Kaiser Family Foundation analysis of a similar policy estimated that the tenth of the population with the highest costs each year would see an average reduction in annual out of pocket health care expenses of $4,500.  The savings would be somewhat lower under the policy in the Simpson-Bowles plan, but they would still provide substantial savings for seniors with greater health care needs.

Criticism: The plan would undermine the health care safety net by limiting the federal share of Medicaid costs.

Response: The plan does NOT include block granting Medicaid or otherwise limiting the federal share of Medicaid as costs grow, except for provisions restricting states’ ability to game the system. The federal government would continue to match state spending for Medicaid to keep pace with growth in a state’s Medicaid spending.

The plan does include a long term budget for the total federal contribution to health care setting a target of limiting growth to GDP+1 percent. If health care costs continue to grow  faster than GDP+1, the plan would require Congress and the President to consider further actions that make more substantial structural reforms, which could include block grants for Medicaid but  also  reforms such as a public option for the health care exchange or implementation of an all payer system. If the reforms in ACA are more successful in controlling costs than the estimates by CBO and the Medicare actuary suggest, and as some Commission members believe, spending growth should be within the targets and this process would not be triggered.

Criticism: The expansion of authority of the Independent Payment Advisory Board (IPAB) to hospital payments threatens to drive hospitals away from providing Medicare services. Don’t you worry that Medicare patients will find it hard to find healthcare?

Response:   The plan eliminated the hospital exemption from the Independent Payment Advisory  Board IPAB so  all health care providers are treated equally and to improve the ability of IPAB to successfully achieve its mandate of reducing Medicare spending through  the promotion of  more efficient, cost-effective delivery of care.  Because hospitals are such a major part of the overall health care system affecting all other parts of the system, this exemption will restrict the ability of IPAB to implement policies to improve coordination of care and other delivery system reforms that have the potential to reduce costs without reducing the quality or availability of care. .

Criticism: The plan cuts health care benefits for veterans and military families

Response: The plan does not include any changes in health care benefits for veterans returning from combat or military families.  It does however propose a change in the health care benefits for military retirees. Specifically, it would eliminate first dollar coverage under TRICARE for Life, the health insurance program that was established in 2002 to provide military retirees and their families free Medigap-style plans to cover Medicare cost-sharing. TRICARE for Life covers virtually all deductibles and copays faced by its beneficiaries and in doing so helps to drive up utilization and costs.

Criticism: Social Security does not contribute to the deficit and therefore should not be included in a deficit reduction plan

Response: The executive order creating the Fiscal Commission directed us to make recommendations for deficit reduction in the near term to achieve primary balance by 2015 and additional reforms to “meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending.” The decision to include Social Security reforms in the plan had nothing to do with the first goal of reducing the deficit in the near term and everything to do with the second goal of improving our long-term fiscal outlook. No responsible plan to deal with the long-term fiscal outlook could ignore that the nation’s largest government program is headed towards insolvency.

The Social Security reforms were completely excluded from the Fiscal Commission’s calculations for short term deficit reduction and meeting the goal of primary balance by 2015. The Commission’s recommendations regarding Social Security were made to ensure that Social Security remains financially sound for future generations. Social Security is now in permanent deficit, and by 2033 its trust fund will run dry. This would result in an unacceptable 25 percent cut in benefits for all Social Security recipients. Experts from across the political spectrum agree that prompt but gradual action is the best way to avoid this abrupt cut.

Criticism:  Raising the retirement age will represent a hardship for older workers who are unable to find jobs or are physically unable to work.

Response: When Franklin Roosevelt signed Social Security into law, average life expectancy was 64 and the earliest retirement age in Social Security was 65. Today, Americans on average live 14 years longer and retire nine years earlier.  To account for increasing life expectancy, the Commission recommends indexing the retirement age to gains in longevity. The effect of this is roughly equivalent to adjusting the retirement ages by one month every two years after the normal retirement age (NRA) reaches age 67 under current law. At this pace, the NRA would reach 68 in about 2050 and 69 in about 2075. Even with this modest increase in the eligibility age, future retirees will still spend more years in retirement and receive substantially higher lifetime benefits in inflation adjusted terms than current retirees.

The plan recognizes that an increase in the eligibility age would pose a hardship for workers with physically demanding jobs. The plan sets aside funds to provide a hardship exemption for up to 20% of retirees to protect those who may not qualify for disability benefits, but are physically unable to work beyond the current earliest eligibility age (EEA).  A recent RAND analysis conducted for AARP reported that 19 percent of early retirees claimed a work-limiting health condition that would have limited their ability to continue in the paid labor force.  The plan provides protections for this population while gradually increasing the eligibility age for the 80% of workers who are able to work beyond the current eligibility age.  The plan directs the Social Security Administration with designing a policy over the next ten years that best targets the population for whom an increased EEA poses a real hardship, and considering relevant factors such as the physical demands of labor and lifetime earnings in developing eligibility criteria

Criticism: The plan would make deep cuts in Social Security benefits for middle class workers

The plan would move to a more progressive benefit formula that slows future benefit growth, particularly for higher earners. This benefit formula change will be phased in very slowly, beginning in 2017 and not fully phasing in until 2050. Because all bend point factors will continue to be wage-indexed, future beneficiaries will continue to have inflation-adjusted benefits larger than those received by equivalent beneficiaries today.

Without action, the benefits currently pledged under Social Security are a promise we cannot keep. The do-nothing plan would lead to an immediate 25 percent across-the-board benefit cut for all current and future beneficiaries in 2033, regardless of age or income.

Under the Fiscal Commission plan, the highest earners would be asked to contribute the most to Social Security’s solvency – both through higher contributions and through a targeted reduction in the benefit formula. Middle-income workers would be asked to contribute more – mainly by working longer – but they will still see benefits far higher than what they make today and far better than what current law allows after the trust funds run dry.

At the same time, many low-income workers would be better off due to a new enhanced minimum benefit.

Criticism: Using chained CPI for Social Security benefits would be unfair to seniors who have less ability to substitute cheaper alternatives and face higher cost of living than the rest of society.

Response: There is a broad consensus among economists that the measure of inflation currently used (CPI) overstates inflation, and that chained CPI is a more accurate measure of cost of living. Supporters of this measure span the political spectrum, including experts from the right-leaning Heritage Foundation and the left-leaning Center for Budget and Policy Priorities.

Some argue that Social Security and other age-related programs should calculate COLAs using the CPI-E – a measure that attempts to estimate inflation for a market basket that more accurately reflects the items purchased by the elderly.

The chained-CPI has been developed and refined over more than a decade and is now widely accepted as a more accurate measure of inflation. By contrast, the CPI-E is still an experimental measure, and many questions remain about the methodology used in calculating the CPI-E and the accuracy of the measure. In a recent issue brief discussing the options for using alternative measures of inflation for indexing government programs and the tax code, the Congressional Budget Office said that “it is unclear….whether the cost of living actually grows at a faster rate for the elderly than for younger people” and cited research suggesting that the CPI-E may overstate inflation.

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May 25, 2012
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"Failing to act on the deficit now and leaving our debt to future generations will undermine rather than protect important investments. Growing levels of public debt will crowd out private investment, while increasing interest payments will leave less room for spending on important public investments."