What Is the Simpson-Bowles Plan?

Definition: The Simpson-Bowles deficit reduction plan is a 2010 bi-partisan report on the best way to fix the U.S. National Debt.  It offered six steps that would have reduced the budget deficit to 2.3% of GDP (Gross Domestic Product) by 2015, thus lowering the debt by $3.8 trillion by 2020. It was never adopted, thus triggering sequestration and the 2013 fiscal cliff crisis.

Opponents reacted to necessary reductions in Social Security and Medicare benefits, defense spending and the mortgage interest tax deduction. Why such painful cuts? Because the U.S. government must borrow $.37 for every dollar it spends. The monstrous $18 trillion debt forced the Fed to buy $4 trillion in Treasury notes under Quantitative Easing. This is rather like the snake eating its own tail. For more, see Does the Fed Monetize the Debt?

Summary

The plan recommends the following six steps:

1. Cap overall government spending at 21% of GDP.
2. Reduce mandatory spending.
3. Reduce federal healthcare spending.
4. Make Social Security sustainable.
5. Eliminate $1.1 trillion in tax loopholes, thus increasing government revenue to 21% of GDP while lowering tax rates.
6. Various process reforms.

The Committee suggested waiting for two years, until the economic recovery was in full swing, before cutting spending or raising taxes.

Details

The report gave many clear, direct and realistic recommendations to achieve deficit reduction.

Most of these ideas are familiar, well-regarded policies that have been advocated by economists for years. They haven't been adopted because they are politically difficult.

1. Cap government spending at 21% of GDP: All federal agencies reduce discretionary spending to 2008 levels, adjusted for inflation, by 2013. After that, spending increases are capped at half the rate of inflation. This includes military spending, which no lawmaker wants to touch. It also includes a separate limit for spending on wars, as needed. Emergency and disaster spending, which is being abused, would be budgeted at recent annual averages. The Transportation Trust Fund would be paid for by a $0.15/gallon gas tax. The report spares no one, as it goes on further to say cut the White House budget by 15%, freeze all government worker pay (including military), and cut the federal workforce by 10% through attrition.

2. Reduce mandatory spending: Reduce federal retirement benefits (including military) by $70 billion (over ten years). Reduce farm subsidies, school loans, and the State Abandoned Mine Fund. Allow the Post Office to run as a profitable business, the Pension Benefit Guarantee Corporation to raise premiums, and the Tennessee Valley Authority to charge market rates for its electricity. No changes to SSI, food stamps or unemployment benefits. 

3. Reduce federal healthcare spending: Reform Medicare payments to physicians to focus on quality of care instead of quantity. Until then, freeze physician payments through 2013, and institute a one percent cut in 2014. Increase funding to reduce Medicare fraud. The report has many specific recommendations to reduce excess Medicare payments, coordinate Medicaid and Medicare benefits, and reduce medical malpractice costs. Many of these suggestions are being implemented under the Affordable Care Act.

4. Make Social Security sustainable: Change the payout after retirement so that higher income earners receive a lower percent of lifetime earnings. Increase the normal retirement age to 69 by 2075.  All workers must pay Social Security taxes on the first 90% of income, up to $190,000 by 2020 (it's $168,000 now). Workers who have paid into the system for at least 25 years will be guaranteed a minimum of 125% of the poverty level. Cover newly hired state and local workers after 2020.

5. Eliminate $1.1 trillion in tax loopholes, thus increasing government revenue to 21% of GDP while lowering tax rates: Lower the income tax rates to 12%, 22% and 28%, and lower the corporate tax rate to 28%. To achieve these rates, tax capital gains and dividends as ordinary income, eliminate the Alternative Minimum Tax and itemized deductions, and tax state and municipal bonds. In addition, it suggests these following exclusions be taxed at various cut-off points: health insurance benefits, retirement accounts, charitable giving, and mortgage interest. It keeps the following credits: Earned Income Tax Credit, Child Tax Credits, 12% tax credit for principal residence only, and standard deductions. At least 150 other income tax loopholes are eliminated. Many corporate tax subsidies and deductions would also be eliminated. 20. Use chained-CPI to measure cost-of-living increases for current recipients.

6. Various Process Reforms: Use the chain-weighted Consumer Price Index (CPI) for all government cost-of-living payments. The President's budget must show no deficit by 2015, unless there is a recession. Calibrate extended unemployment benefits to a general unemployment rate. (Source: National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010; Tax Policy Center, Bowles-Simpson Brief)

Would the Plan Work?

The Simpson-Bowles plan would achieve its goal of reducing the deficit and debt with a carefully considered list of detailed recommendations. Although many critics are concerned about the tax hikes, this would not deter economic growth once GDP reaches a healthy 2-3% rate. Why? Tax cuts only spur growth when rates are above the 50% level according to the theoretical underpinning of supply-side economics, the Laffer Curve.

The plan also protects those who are most vulnerable, the very poor and elderly. This is good economics, because they are most likely to spend any income they receive. In addition, it emphasizes automatic benefit increases for the unemployed, one of the best ways to stimulate demand and increase jobs.

Simpson-Bowles recommends that all agencies reduce spending the same percent. This forces agency heads, who are best qualified, to find savings in their own departments. The plan also suggests elimination of some spending that is obviously outdated and unnecessary, like the Abandoned Mine Fund. All in all, it is a workable plan from an economics perspective.

History

The final report was submitted by the National Commission on Fiscal Responsibility and Reform on December 1, 2010. It was named after its co-chairmen, former Wyoming Republican Senator Alan Simpson and Democrat Erskine Bowles, President Bill Clinton's chief of staff.

The Commission was formed by President Barack Obama on February 18, 2010, to find a bipartisan way to lower the annual Federal budget deficit to three percent of GDP. In addition, Obama specifically requested that the budget be balanced by 2015 (not counting interest payments). He also required a solution to the long-term Social Security and Medicare deficit. The idea of a bi-partisan Commission was to find a solution to the U.S. debt crisis that would be acceptable to both parties.

On November 10, 2010, co-chairmen Simpson and Bowles pre-released their proposal to much controversy. It proposed a mix of spending cuts (generally favored by Republicans) and tax increases (generally favored by Democrats) that would reduce the budget deficit to 2.2% of GDP, slightly lower than the final report.

Moment of Truth

The Commission released its final report on December 1, entitled "The Moment of Truth."  By cutting the deficit as mentioned in the first paragraph, it would lower the debt-to-GDP ratio to a very healthy 60% by 2023 and 40% by 2035.

Despite its bi-partisan appeal, the plan failed to gain the support of enough of its own Commission members to make it any further. It needed 14 Commission members to approve it, and only received 11 votes. The divisiveness within the Commission itself meant that Congress wouldn't touch it with a ten-foot pole. Many Republicans had signed a "no new taxes" oath, which left them no room to compromise. (Source: Washington Post, Deficit Panel Leaders Propose Curbs, November 11, 2010)

However, in 2012 Congress realized it had no other bipartisan plan to reduce the deficit. Faced with mandated spending cuts and tax increases that threatened to throw the economy off a fiscal cliff in 2013, it began to reconsider the Simpson-Bowles plan. However, no one had the courage in an election year to support the painful steps required. (Source: Bloomberg View, "Simpson Bowles: It's Back, and Better Than Ever," June 14, 2012) Article updated July 20, 2015.