Competing Deficit Reduction Plans: Simpson-Bowles vs. Paul Ryan

Unlike the President's 2012 budget (which was rejected unanimously by both the House and Senate in May), both the 2010 Simpson-Bowles Deficit Reduction Commission plan and the 2012 House Budget Chairman Paul Ryan plan, called the Path to Prosperity, earned respect for their serious, bipartisan efforts to bring federal deficits under control. 

William Beach of The Heritage Foundation praised Simpson-Bowles for getting "the right conversation started."

Yes, the final report would have benefited from no tax hikes, more entitlement reform and bigger spending cuts. But it was encouraging to see political appointees and politicians finally engage in the necessary work to save this country from the future we see in France, Great Britain and Greece. As these and other nations are showing, when the government runs out of other people's money, it can be a very bad thing. This is particularly true if you are under 30 and have your entire economic life ahead of you...

And Erskine Bowles praised the Ryan plan and its author:

Transcript:

Have any of you met Paul Ryan? We should get him to come to the university. I’m telling you this guy is amazing, uh. I always thought that I was OK with arithmetic, but this guy can run circles around me. And, he is honest. He is straightforward. He is sincere.

And, the budget that he came forward with is just like Paul Ryan. It is a sensible, straightforward, serious budget and it cut the budget deficit by $4 trillion…just like we did.

The President came out with his own plan and the President came out, as you will remember, with a budget and I don’t think anyone took that budget very seriously. Um, the Senate voted against it 97 to nothing. He, therefore, after a lot of pressure from folks like me, he came out with a new budget framework and, in the new budget framework, he cut the budget deficit by $4 trillion over 12 years. And, to be candid, this $4 trillion cut was very heavily back-end loaded. So, if you looked at it on a 10 year basis and compared apples-to-apples, it was about a $2.5 trillion cut.”

Serious discussion about these plans are welcome news to those who worry about the fiscal cliff this country faces. Since it's likely that both these plans will be discussed in the coming months, below are highlights of both.

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Features of the Simpson-Bowles plan from CNN Money:

Spending

• Set targets: The report recommends that spending ultimately not exceed 21% of gross domestic product. It would also cap 2012 spending at 2010 levels, cut it 1% from there between 2013 and 2015 and then limit growth to inflation.
• Rein in spending: The report proposes close to $200 billion in domestic and defense spending cuts in 2015. That's a key way it would meet Obama's goal of working the annual deficit down to 3% of GDP by 2015. In fact, the final report would do one better, getting the deficit to less than 2.5%.
• Control health care costs: The report recommends capping growth in total federal health spending -- everything from Medicare to health insurance subsidies -- to the rate of economic growth plus 1% after 2020.
• It also proposes reforming physician payments, Medicare enrollee cost-sharing, malpractice law and prescription drug costs.

Taxes

• Set targets: The report recommends that taxes be capped at 21% of gross domestic product.
• Reform tax code: The report would lower income tax rates and simplify the tax code by significantly reducing or eliminating the hundreds of tax breaks in the federal code that reduce federal revenue intake by more than $1 trillion a year. It would abolish the Alternative Minimum Tax -- the so-called wealth tax. And it would tax capital gains and dividends as ordinary income.
• Raise gas tax: The report would raise the federal gas tax by 15 cents a gallon starting in 2013. It would dedicate the extra revenue to fund transportation and limit spending on projects to whatever has been collected by the increased tax that year.

Social Security solvency

• The report aims to make Social Security solvent over 75 years.
• Benefits: It would reduce initial benefits for high and medium-income retirees. And it would offer less generous annual cost-of-living adjustments for all retirees.
• Retirement age: The plan would slowly usher in an increase in the retirement age from 67 to 68 by 2050 and to 69 by 2075. Over the same period, the early retirement age would increase gradually from 62 to 64. There would, however, those who are unable to work past age 62 would be offered "hardship exemptions."
• Payroll tax: The report also recommends expanding over 40 years the amount of workers' income subject to the payroll tax, which funds Social Security. As a result, the amount of one's earnings subject to the payroll tax would rise to $190,000 in 2020, about $22,000 higher than it would be under current law.
• Protection against poverty: To prevent seniors from falling into poverty -- a key mission of the Social Security program -- the report proposes creating a new special minimum benefit.
• For low-income workers with 30 years of earnings, benefits could never fall below 125% of the poverty line in 2017, a level that would be indexed to wages thereafter. The formula would be reduced for workers with less than 30 years of earnings but more than 10. In addition, to reduce the risk that beneficiaries run out of funds if they live to a very old age or are disabled for a long time, the report proposes a "20-year benefit bump-up." After 20 years of collecting benefits, a beneficiary would receive a benefit increase equal to 5% of the average benefit paid.

Features of the Ryan Plan from the Wall Street Journal

1. It would spend $40.135 trillion over 10 years, compared with the $46.959 trillion the White House said its budget would spend over 10 years.
2. It would bring in $37.008 trillion in tax revenue over 10 years, compared with $40.274 trillion in the White House plan.
3. Lowers tax rates and cuts tax breaks. But the report doesn’t say which tax breaks would be targeted for new limits or elimination.
4. Overturns the White House’s health care law and replaces it with changes. New Medicare rules would not go into effect for those already using the program or about to qualify for benefits. They would be able to use the existing program.
5. On Medicare, it would give Americans a choice to enroll in a Medicare-type plan. The government would subsidize part of the payments for private-run insurance plans. Mr. Ryan believes this competition between firms “will help ensure guaranteed affordability.” For the poor or those with more health risks, Medicare would offer additional assistance.
6. The Medicare piece is perhaps the biggest flashpoint in the entire plan. The White House and Democrats have said it would gut benefits for seniors, and even former Massachusetts Governor Mitt Romney has kept some distance from it.
7. On Medicaid, the budget would turn it into a federal block grant program, “thus freeing states to tailor their Medicaid programs to the unique needs of their own populations.”
8. The plan offers no details for changes to Social Security, other than calling on Congress and the White House to pursue modifications to it.
9. On taxes, the plan calls for two individual income tax rates – 10% and 25%. It also proposes “clearing out the burdensome tangle of loopholes that distort economic activity,” but it doesn’t identify which ones should be cut.
10. It calls for overhauling the corporate tax code by gutting exemptions and lowering the top corporate rate from 35% to 25%.
11. The Ryan budget would reduce the deficit to just 3% of gross domestic product by fiscal year 2014, three years faster than the White House estimated its plan would reach that level. For comparison, the deficit is expected to be $1.2 trillion this year, 7.8% of GDP.
12. The Ryan budget would not, at least according to its 10-year window, balance the budget, as tax revenue would always lag behind spending.