There’s a very basic problem built into the president’s mandate for his National Commission on Fiscal Responsibility and Reform. The commission is supposed to submit a plan to reduce the deficit, short-term, and shrink the national debt, long-term. But doing the one may actually make it harder to do the other.
Sometimes it seems like the deficit hawks – Pete Peterson, Sen. Kent Conrad, and other fiscal puritans – use the terms “deficit” and “debt” interchangeably. Both sound bad, unvirtuous, possibly un-American. And it makes sense that the larger the deficit, the more debt the government has to issue to pay for its activities. (As a refresher, the deficit is the difference between the government’s revenues and expenditures in any given year or set of years. The debt is the outstanding value of the bonds the government issues.) But shrinking the deficit doesn’t necessarily mean the debt will go down too.
The president’s instructions to his deficit commission say, in part, that it’s to make
recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers.
Will it, though? Take Social Security benefits, which the deficit commissioners keep threatening with a meat cleaver. First of all, unless the cuts are deep and fast-acting, it’ll be years before they have much impact on the deficit.
None of the benefit cut proposals known to be under discussion would go into effect in time to move the number by 2015. Former Sen. Alan] Simpson has suggested that people currently over 60 not be affected by any changes, while Rep. Paul Ryan’s “Ryan Roadmap” drops that to 55. So that even if Simpson applies 2011 legislation to people who are 59 or younger this year, the first year they could see savings (absent some early retirement adjustments) would be 2017. The Ryan Plan would push the savings out eve further.
Of course, the deficit hawks treat Social Security as more of a long-term problem. “Discretionary” programs, not “entitlements,” are expected to bear the brunt of short-term deficit reduction. The problem, in a perverse twist of budgetary math, is that cutting Social Security benefits, long-term, actually adds to the debt burden. That’s because, assuming payroll tax levels remain the same, less money will be going out. Instead, it’ll be used to buy Treasury bonds that will be added to the Social Security trust funds, at least in the middle decades of the 75-year period covered in the Social Security trustees’ estimates. On the other side of the ledger, those Treasury bonds will have to be added into the national debt total.
The Ryan Roadmap proposes to solve this problem by carving private investment accounts out of payroll taxes. That would reduce the amount of money going into the trust funds, eliminating any new obligations on the Treasury. So, less debt. The problem is, this would add to the deficit, long-term, by reducing the amount of funds available to pay Social Security benefits.
There’s one way to make a dent in both the deficit and the debt: raise taxes. Raising income tax levels back to their pre-Reagan heights would slash the deficit by 2015, just like the commission was ordered to do. The extra revenues could also be used to pay down the debt, throwing a bone to the bondholders who we’re told will otherwise dump their Treasury portfolios. As for Social Security, Congress could raise revenues by raising the cap on income subject to payroll tax, or simply raise the overall payroll – FICA – tax rate slightly. Either approach would increase the size of the trust funds in the middle years, adding to the debt: except that the extra revenues from ending Washington’s 30-year experiment with low income taxes for the affluent would offset it.
Note that all of this could be done without cutting anyone’s benefits.
I’m not optimistic that the deficit commission will think seriously about raising taxes. The commissioners are supposed to be considering benefit cuts and tax hikes equally – “everything on the table,” remember? But my sense of the statements from both Simpson and his co-chair, Erskine Bowles, is that their real focus is benefit cuts. In part, that’s because Republican members of the commission like Ryan have made clear that virtually any tax increase would be a deal-breaker, while many of the Democratic members have practically broadcast that they’ll accept significant benefits cuts.
A benefit cuts-only solution isn’t possible, however, for the reason explained above: it would operate in contradictory ways on the debt and the deficit. Likely result for the deficit commission: stalemate, or a proposal that pleases no one and quickly exits the public discussion.
Thanks to Social Security blogger Bruce Webb, who helped me with the budget math.