As Published in the Holiday 2012 Edition of NJ Lifestyle
This past week, while attending a national investment advisor conference Schwab Impact 2012 in Chicago, we had the privilege of hearing a speech from former Senator Alan Simpson (Republican) and former Chief of Staff for President Clinton Erskine Bowles (Democrat) on the fast approaching fiscal cliff our nation faces (See Spring 2012 Issue for our analysis of the fiscal cliff) and the need for comprehensive federal budget reform.
In 2010, President Obama created the National Commission on Fiscal Responsibility and Reform to identify policies to improve the fiscal situation in the medium term, and to achieve fiscal responsibility over the long run. The bi-partisan commission included nineteen appointees, including six Senators and six members of the House of Representatives. They came up with a report, which is commonly referred to as the “Simpson-Bowles Plan” that included comprehensive budgetary reforms that would cut our federal debt by $4 trillion over a ten year period.

The Plan was subsequently rejected by the Senate in January 2011. Now, with the fiscal cliff quickly approaching, many have called for the Simpson-Bowles Plan, or something similar, to be enacted by Congress to allow our fragile recovery to continue, while also addressing our longer term budgetary problems. With almost $17 trillion in federal debt and just having completed the second consecutive $1 trillion dollar annual deficit, we are on the path to fiscal ruin.
We believe the Simpson-Bowles Plan is a sensible one because it addresses both sides of the ledger and includes both significant spending cuts that Republicans in Congress are pushing, as well as additional tax revenues that Democrats in Congress have advocated. What makes this plan sensible is, as with all compromises, it has things that both parties like and things that both parties dislike.
Simpson and Bowles have summarized their plan as a ten year one that will eliminate $3 trillion in spending and raise an additional $1 trillion in new tax revenues. It does so by addressing what they call the Five Big Challenges: Healthcare, National Defense, the Internal Revenue Code (Tax Code), Social Security, and Interest on the National Debt. They argue that you cannot fix our fiscal house without including each and every one of these items.This is why we see it not only as a sensible plan, but a realistic plan. Many politicians and advocacy groups want fiscal reform without touching Medicare or Social Security, and Simpson and Bowles are quick to point out that it can’t be done.
Healthcare — When politicians make references to federal healthcare spending, they are talking mainly about Medicare and Medicaid. In 1981, the federal government spent about 10% of its budget on healthcare.Today the United States spends about 25% of the budget on healthcare and it is estimated to soar to 33% by 2020. We spend twice as much on healthcare as any other nation, whether measured on a per capita basis or as a percent of GDP. Our outputs don’t justify the amount we are spending. Medicare and Medicaid have to be reformed or balancing the budget will not be possible.
National Defense — The United States not only spends more on defense than any other nation, we spend more on defense than the next 17 countries combined (including Russia and China). Simpson and Bowles have looked at the entire defense budget and have two conclusions. First, they believe we are bearing an unreasonable share of policing the rest of the world. Secondly, they believe that there is room to cut that defense number dramatically without endangering national security.
Tax Code — They believe our present tax code is inefficient, ineffective, and globally uncompetitive.They recommend throwing out $1.1 trillion dollars in tax earmarks and deductions (broadening the base) and taking 92% of that savings and using it to lower the individual and corporate tax rates across the board and leaving 8% of those additional revenues (or $100 billion per year / $1 trillion over 10 years) for deficit reduction. Under this plan, the top individual rate would go from 35% down to 23%, and the top corporate rate would go from 35% presently to 26%.
Social Security — Over the next 10 years, Social Security will be $900 billion cash negative. Social Security tends to be another sacred cow and organizations like AARP have said they don’t want any changes to Social Security. This is just not realistic. Two of the fixes that Simpson-Bowles proposed were expanding the taxable base and raising the full retirement age from 67 to 68 by the year 2050. If it helps to make the program solvent, we believe these are prudent changes.
Interest on Debt — We currently spend about $230 billion annually on debt service, which is more than we spend on the Departments of Commerce, Energy, Education, Homeland Security, Justice and State Departments’ combined. If we do nothing about our debt, by 2020 the Committee estimates that we will be spending almost $1 trillion on interest alone. This will most certainly strangle our country and relegate us to a second rate world power. If we address the first four major problems and begin to reduce our deficits over the next ten years, the interest will become less of a problem because surpluses achieved will be used to pay down our debt.
Finally, if you, like us, are extremely frustrated and concerned about our Nation’s fiscal health, we urge you to visit and put all elected officials on notice once and for all that doing nothing is not an option we will stand for this time!