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First impressions on a hot topic

How we would cut America’s debt

With U.S. debt projected to grow more than 275 percent by 2035, the nonpartisan Peter G. Peterson Foundation asked six think tanks to find ways to address the nation’s long-term budget challenges. Below are details from plans that will be unveiled at a fiscal summit the foundation is hosting Wednesday in Washington.

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HERITAGE FOUNDATION

Stuart Butler

America must change course. Unless we act, Social Security, Medicare and Medicaid will consume all taxes in about four decades. We believe the key is to transform the relationship between the federal government and individuals in a way that restores individual opportunity and national prosperity.

That requires a single, flat-tax rate that collects revenue without economic distortions; that is simple and that encourages investment. This would give Americans greater control of their economic futures while promoting the capital formation needed for job creation.

Our plan refocuses Social Security and Medicare into real insurance programs that protect seniors from poverty while no longer debt-financing benefits for the rich. Over a five-year period, our plan transforms Medicare into a defined-contribution system, with stronger health security for the poor. Unlike today’s traditional fee-for-service Medicare, we would guarantee new protections against catastrophic costs for all enrollees.

Today, many low-income seniors apply for welfare because the Social Security benefit is too low. We propose moving toward a flat benefit greater than today’s average benefit; this would keep everyone well above poverty. At the other end of the scale, we phase down this flat benefit for the 9 percent of most affluent retirees, and end checks for the top 4 percent with the highest non-Social Security incomes.

This fairer, more focused income-adjusting of benefits replaces today’s unfair means testing — where the IRS taxes the benefits of half of all seniors, including those with incomes of as little as $15,000.

As for Medicaid, we empower recipients by helping able-bodied beneficiaries buy private insurance.

Heritage puts all three entitlement programs on real budgets. Our plan balances the federal budget within a decade. It shrinks the debt sharply and helps Americans build better retirement security.

AMERICAN ENTERPRISE INSTITUTE

Plan developed by Joseph Antos, Andrew Biggs, Alex Brill and Alan Viard; does not represent the institutional views of AEI

Our plan addresses the long-term fiscal imbalance while promoting limited government and economic growth. The plan fundamentally reforms the tax code while aggressively cutting federal spending to hold down the debt.

On health care, the plan restrains spending and promotes individual choice. Medicare is converted to a premium support program and the tax break for employer-provided health insurance is replaced by a refundable tax credit to buy insurance, with the largest subsidies going to those with greater financial need or higher health risks. Medicaid is converted to a block grant program, giving states greater flexibility, accompanied by greater responsibility.

The plan modifies Social Security to offer a flat, poverty-level benefit to all beneficiaries, regardless of earnings or years of work; this would guarantee that no retiree lives in poverty. This flat benefit rises over time with wages. To supplement the flat benefit, workers are automatically enrolled in savings plans to supplement Social Security. The plan also raises the early retirement age from 62 to 65 and eliminates the payroll tax on workers 62 and older. The plan focuses government action on reducing poverty, while encouraging middle and high earners to save more and work longer.

The plan eliminates tax penalties on saving and investment by adopting a progressive consumption tax to replace the individual and corporate income taxes and the estate tax. A carbon tax also replaces a host of inefficient regulations, credits and subsidies.

Although the plan requires difficult choices, it will ensure a vibrant economy and fiscal stability, now and in the future.

ECONOMIC POLICY INSTITUTE

John Irons, research and policy director

Recognizing that our nation faces an ongoing economic crisis, with unemployment near 9 percent and widespread economic insecurity, we believe a comprehensive approach to America’s future must focus on immediate job creation while achieving a sustainable debt path. Economists know that public investment in human and physical capital promotes long-run economic growth.

Our budget proposal finances front-loaded but sustained investments to create badly needed jobs in the near term while also pursuing a stronger economic future. Over the next decade, we would add $2.5 trillion worth of public investments in high-return areas that promote economic growth and prosperity, including education, infrastructure and basic research. We set aside about $100 billion over 10 years to fund health investment technology improvements and effectiveness research to help lower health-care costs and improve outcomes. These increases would start immediately with a $450 billion booster shot for the economy over the next two years. These kinds of investments will create jobs now across the economy, while yielding high returns for years.

Fiscal responsibility does not require immediate spending cuts or an abandonment of efforts to strengthen the recovery. In fact, a weak economy remains the biggest threat to the fiscal health of the country.

Our budget protects the middle class; modernizes the tax code (by targeting revenue increases at high-income individuals and limiting the value of tax expenditures); and strengthens health, income and retirement security. We also suggest following bipartisan recommendations from the Sustainable Defense Task Force to limit defense spending. With all this, our plan reaches primary budget balance in 2017 — after the economy has recovered — and stabilizes debt at safe levels (around 80 percent of the economy) over the next 25 years.

ROOSEVELT INSTITUTE

Zachary Kolodin, Roosevelt Institute Campus Network

Our plan reflects the views of a cross-section of some 3,000 millennials. It was created democratically, through our network’s model of student engagement, and is the only citizen-produced deficit reduction plan. We address the causes, not just the symptoms, of the federal debt and strengthen the social safety net by making it more responsive to crisis and recession through automatic stimulus and stronger worker retraining programs. Furthermore, we propose essential investments in education, health care, infrastructure and green energy to ensure a robust economy while reducing the federal debt to a sustainable level.

When we surveyed the causes of the debt, we identified four key drivers: rising health-care costs, the Bush-era tax cuts, wars of occupation in Iraq and Afghanistan, and financial-sector instability. What stood out about problems in the financial sector was that the Congressional Budget Office didn’t care. Stock market crashes that wipe out trillions in savings and jobs? Not scoreable by the CBO. Unprecedented bailouts costing hundreds of billions of dollars? Not scoreable. Although you won’t see financial-sector reform in the agendas of most budget hawks — Paul Ryan’s budget even rolls back the Dodd-Frank reforms — we know that we can’t claim a responsible federal budget until we stop promising to bail out the big banks.

To the challenge of big banks being too powerful to be effectively regulated, we suggest making “too big to fail” unprofitable. Roosevelt proposes a 25 percent financial activities tax on financial institutions whose assets exceed $200 billion. This tax would affect the top 12 largest financial institutions in the United States, forcing them to split up their activities into new companies. These new companies would pose significantly less risk to the global financial system.

BIPARTISAN POLICY CENTER

Everything must be on the table. On their own, economic growth, tax increases or spending cuts are not enough. Only a balanced approach to our looming fiscal catastrophe, looking at every aspect of federal fiscal policy, will stabilize our debt.

The policy center’s 19-member task force recommended fundamental changes in spending and revenue, as well as entitlement reform. We would rein in federal health-care spending by capping and phasing out the tax exclusion for employer-provided health insurance, transitioning Medicare to a premium support system while maintaining traditional Medicare as an option, and empowering the Independent Payment Advisory Board to recommend changes to traditional Medicare’s benefit structure. In Medicaid, separating and delineating federal and state responsibilities would incentivize cost control.

To ensure that Social Security can pay benefits for the next 75 years, our recommendations include adjusting the benefit formula for longer life expectancy without raising the retirement age, raising the level of income that is subject to the payroll tax, and increasing the minimum benefit to help keep low-wage workers out of poverty in their later years.

We found savings in other entitlement programs, reformed pension programs, and recommended a freeze on both defense and non-defense discretionary spending. On the revenue side, we would raise additional revenue by simplifying the income tax and lowering rates while adding a broad-based consumption tax.

To enforce all of these savings, we recommend strict budget rules, including a save-as-you-go budget enforcement mechanism. Save-go requires Congress to set in statute the year-by-year amount of budgetary savings that are necessary to reach a specified debt-reduction goal (e.g., a 60 percent debt-to-GDP ratio within a decade). Annual dollar amounts of savings would be required in each of three areas: annually appropriated domestic and defense spending, health care, and other entitlement spending and revenue. If Congress failed to comply in any year, across-the-board spending cuts and/or revenue increases would achieve the mandated savings in that category.

CENTER FOR AMERICAN PROGRESS

Americans face a monumental challenge: How can we restore fiscal sanity while respecting American values? Our answer is to balance the budget and invest in our middle class, which is key to a vibrant economy and American competitiveness in the 21st century.

Our plan is fair and focused, effective and efficient. We achieve primary balance by 2015 and a fully balanced budget by 2030. To get there, we focus on reducing health-care costs for everyone, not just those in Medicare and Medicaid. Costs are contained through the extension of best practices in health management and health provision, making the system more efficient while improving care. We also include a fail-safe to guarantee that savings in health spending are achieved.

We rebuild our middle class by investing in education, science, energy, infrastructure and essential public services while cutting unnecessary spending and outdated tax entitlements. We strengthen Social Security while ensuring its solvency, without raising the retirement age. We address the realities of our modern national security challenges by creating a unified security budget that includes the Pentagon, homeland security and diplomacy, and then capping national security spending at peak Cold War levels. We overhaul the tax code — getting rid of dozens of special interest subsidies such as those to the oil and gas industry — to make it simpler, fairer and more efficient, and we do so without handing the bill to the middle class.

The center’s plan restores fiscal discipline, cutting our debt burden by nearly half, while building a prosperous American economy so that we will remain the most innovative and imaginative country on Earth.

 
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