Simpson-Bowles II and the Cost of Deficit Inaction

Feb. 19 (Bloomberg) -- With Congress in no hurry to prevent across-the-board spending cuts starting next week, President Barack Obama again urged lawmakers to cobble together a smaller package of tax and spending changes to avert the first $85 billion in reductions.

“Not to kick the can down the road,” Obama said at the White House, but to give Congress “time to work together on a plan that finishes the job of deficit reduction in a sensible way.”

Yet a new proposal out today from deficit hawks Alan Simpson and Erskine Bowles shows how Washington’s affinity for small deals that tackle the deficit incrementally are deepening the nation’s fiscal hole.

Simpson and Bowles are calling for an additional $2.4 trillion in deficit reduction over the next decade -- on top of the $2.7 trillion that’s already been achieved through various legislative efforts such as the 2011 Budget Control Act and 2012 American Taxpayer Relief Act. All told, that amounts to $5.1 trillion in deficit reduction -- about $1.1 trillion more than what the Simpson-Bowles fiscal commission called for in 2010.

Back then, Simpson-Bowles said $4 trillion in deficit reduction would be enough to put the U.S. on a sustainable fiscal path and get its debt below 70 percent of gross domestic product -- the level most economists believe necessary. Now, the deficit duo has upped the ante -- far outpacing the roughly $1.5 trillion in trimming Obama has said he will seek over the next decade.

The plan -- which is actually just an outline -- doesn’t exactly explain why the tab has swelled but the answer undoubtedly stems from failure to tackle entitlement programs such as Medicare, Medicaid and Social Security. Outlays for those are already beginning to outpace dedicated revenue and the rate of growth will only increase, courtesy of an aging population and a declining ratio of workers to retirees.

As Simpson told MSNBC, when he was in college (in the 1950s) there were 16 workers paying into Social Security for every retiree. Today there are three workers for every retiree and that will fall even further, to about 2-to-1 by 2030.

Net outlays for Medicare slowed last year, growing by just 3 percent in 2012 -- the slowest rate of growth since 2000. But that trajectory won’t last. The Congressional Budget Office said earlier this month that spending for major health-care programs will equal almost 5 percent of GDP in 2013 and grow to 6.2 percent in 2023.

It’s a fair bet that any plan to curb entitlement spending won’t affect current retirees, or even those near retirement age. What’s more, the fiscal burden has only grown over the past two years -- and will grow more until serious reforms are enacted.

The new Simpson-Bowles plan is light on details but identifies about $600 billion in health-care spending reductions and calls for changing how the government measures inflation when calculating Social Security benefits, which will reduce costs.

At his press conference, Obama repeated his pledge to tackle entitlement reform and said he’s outlined changes that “can achieve the same amount of health care savings by the beginning of the next decade as the reforms that were proposed by the bipartisan Simpson-Bowles commission.”

Given that Republicans also want entitlement reform -- and view it as the crux of any deficit reduction deal -- an agreement should be within reach.

Yet the problem is larger than entitlements and discretionary spending -- something Simpson, Bowles and Obama again acknowledged today. To fix the debt, taxes must also factor into the mix -- in particular, ending certain tax breaks for wealthier individuals and businesses.

Republicans are so far resisting any additional revenue, saying the tax increases they allowed during the fiscal-cliff deal are as far as they’re willing to go. Obama tried to shame the GOP away from that position today, telling the American public that Republicans are willing to compromise education, health care and national security “just to protect a few special interest tax loopholes that benefit only the wealthiest Americans and biggest corporations.”

Whether such rhetoric will do anything other than help the White House deflect blame if damaging spending cuts go into effect is hard to say. What is clear is that the cost of inaction is making an already bleak fiscal picture even gloomier.

As Simpson and Bowles write in Politico today it’s possible to reach a deal “if both sides are willing to go beyond their comfort zones and come to a principled compromise.” Before lawmakers rule that out, they should look at today’s numbers and realize that failure to reach a deal now will only make the task that much harder -- and more expensive -- in the future.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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