- The Fiscal
- What We're
- What You
This paper is part of an initiative from the Peterson Foundation to help illuminate and understand key fiscal and economic questions facing America. See more papers in the Expert Views: Fiscal Commission series.
The outsized U.S. national debt is now $33.6 trillion, and the excessive deficits have reached new highs at $1.7 trillion for the fiscal year — 5.8% of GDP. The cost of servicing this debt due to inflation and rising interest rates is also increasing by $162 billion, reaching $879 billion in FY 2023, approximately the size of the defense budget. The rise in the cost of servicing the debt is the significant challenge, often warned about in the past but now here to stay for at least some time, threatening to crowd out federal spending priorities.
The congressional debate this year over FY2024 spending levels has contributed to an historic collapse of governance in the U.S. Congress, a broken budget process, the brink of a national default, a looming government shutdown, and the potential downgrading of the U.S. credit rating. U.S. global leadership and national security are at risk.
The Debt Crisis is here — not down the road. As a nation, we must act now. An important step — establish a Bipartisan Congressional Committee on Fiscal Responsibility.
While commissions are not silver bullets, there are several main benefits that a bipartisan commission can bring to help address our national debt challenge.
The Commission should be structured to include:
The Commission’s strategic objective:
The three structural spending/revenue reforms to help achieve this objective address the biggest drivers of U.S. national debt: health care, social security, and tax revenue:
Strategic Objective — Reduce Debt-to-GDP Ratio to 70%: The debt-to-GDP ratio of 70% is a recognized stable level for advanced economies, which shows the burden of debt relative to the country’s total economic output and therefore its ability to repay it.
As the following analysis demonstrates, it would require a substantial realignment of fiscal policy and a multidecade plan to return debt to 70% of GDP, a more stable cap than the ratio today and those projected in the future, but still significantly above the much lower levels before the 2008 financial crisis, which were closer to 40%.
While it can be easy to expand debt rapidly, especially during a crisis, a plan for debt reduction will likely need to be more deliberate, sustained, and gradual to avoid sudden and large losses of income that can create recessions.
Figure 1 shows The Conference Board’s economic forecasting analysis of various scenarios of tax rate hikes and outlay cuts that can push debt-to-GDP to 70% (and lower) within 10, 20, and 30 years.
The 20-year pathway is recommended, which is the most feasible, nearer-term time frame to restore a debt-to-GDP ratio of 70%, with the least draconian fiscal hardship. The below chart illustrates the timing and policy tradeoffs inherent to meeting this goal. A combination of raising all taxes by 1.5% permanently, and a reduction in outlays of 8.2% (including spending cuts and interest cost reductions as a result of lower debt) would achieve the goal of debt-to-GDP to 70% in about 20 years.
To tackle this strategy, the most important role of the commission is to address the biggest drivers of deficits and the long-term debt: Medicare and Social Security. Both of these programs’ costs are increasing due to the aging of the population. Medicare costs are rising as well due to higher medical costs. Also adding to the urgency is that both of these programs have pending deadlines for action with their Trust Funds becoming insolvent (Medicare in 2031 and Social Security in 2033).
The third challenge the Commission must address in tandem is revenue. Tax policy is also on the congressional policy docket for action. At the end of 2025, almost all of the individual, estate, and pass-through provisions of the Tax Cuts and Jobs Act (TCJA) will expire. This pending debate provides a policy opening for increasing revenues through tax reform.
In order to facilitate the very urgent timelines that the commission will be operating under, the roadmap provided by the Simpson Bowles Commission should serve as a foundational guidepost.
Over 66 million seniors today receive Social Security payments, and with our aging population, that number is growing. The Social Security Trust Fund is projected to reach insolvency by 2033. Without adjustments, benefits will need to be slashed across the board by 25% or revenues increased by 33%. Otherwise, large transfers from general funds will be required — impacting more severely the deficit and changing the fundamental nature of the program from an earned benefit.
Several alternative approaches to save Social Security, which the commission should consider, include:
Reforming Medicare is a necessary condition for regaining fiscal health.
For the next 15 years, more people will convert to Medicare in America than people being born. Spending for health care programs is expected to exceed all other categories of federal spending by 2030. Aging of the population accounts for one-third of that growth; two-thirds is additional cost growth in the programs themselves, demonstrating the urgency of significant cost reforms.
By 2052, according to CBO, federal spending on health care programs will rise to 10.2% of GDP, compared to 6.6% in 2022. Spending on Medicare is projected to account for more than four-fifths of the increase in spending on major health care programs over the next 30 years as a percentage of GDP.
Medicare’s Hospital Insurance (HI) Trust fund is expected to end full payment of benefits in 2031. In the event of insolvency of the HI fund, mandatory spending cuts would occur beginning at 11%.
Approaches for a bipartisan commission to consider to Reform Medicare include:
As our debt-to-GDP model demonstrates, Congress will need to implement revenue increases. At the end of 2025, Congress will be determining whether the provisions of the Tax Cuts and Jobs Act (TCJA) will be extended. This upcoming congressional debate creates an important opportunity for a third structural reform: Tax Reform. Given the high-charged and hyper-polarized debate on taxes, increasing revenue through tax reform may be a more politically viable alternative than a divisive, deadlocked debate on maintaining the cuts versus raising taxes.
The nation has never, in years generally characterized by peace, experienced the debt explosion that we have had since 1981. The danger of this explosion has been sidestepped, obscured, or excused over the past several years due to low interest rates. But high debt levels, which are rapidly rising as a percentage of GDP, slow the growth of economic output and recovery, lowering living standards over a period of years. Public debt diverts investment dollars away from the private sector and toward U.S. Treasury bonds, which are used to finance existing obligations of the government, not new private-sector initiatives. A growing debt burden could undermine confidence in the U.S. dollar, challenging the U.S. global leadership role, and making it more costly to finance public and private activity in international markets.
The Debt Crisis is here. The time is now for a bipartisan Fiscal Responsibility Commission to develop viable comprehensive solutions.
Dana M. Peterson is the Chief Economist and Leader of the Economy, Strategy & Finance Center at The Conference Board. Prior to this, she served as a North America Economist and later as a Global Economist at Citi, the world’s largest investment bank. Her wealth of experience extends to the public sector, having also worked at the Federal Reserve Board in Washington, D.C. Dana’s wide-ranging economics portfolio includes analyzing global themes having direct financial market implications, including monetary policy; inflation; labor markets; fiscal and trade policy; debt; taxation; ESG; consumption, and demographics. Her work also examines myriad US themes leveraging granular data. Peterson's research has been featured by US and international news outlets, both in print and broadcast. Publications and networks include CNBC, FOX Business, Bloomberg, Thomson-Reuters, CNN Finance, Yahoo Finance, TD Ameritrade, Barron’s, the Financial Times, and the Wall Street Journal. She is member of the Board of Directors of NBER, NABE, and the Global Interdependence Center, President of the New York Association for Business Economics (NYABE), and a member of NBEIC, the Forecasters Club, and the Council on Foreign Relations. She received an undergraduate degree in Economics from Wesleyan University and a Master of Science degree in Economics from the University of Wisconsin-Madison.
Dr. Lori Esposito Murray is President of the Committee for Economic Development of The Conference Board. Murray brings to CED extensive experience at the highest echelons of domestic and international policy. She most recently served as an adjunct senior fellow at the Council on Foreign Relations’ (CFR). Prior to her role at CFR, she held the distinguished national security chair at the U.S. Naval Academy. She also is president emeritus of the World Affairs Councils of America, the largest non-partisan, non-profit, grassroots organization dedicated to educating and engaging the U.S. public on global issues.
Murray's work in government crosses political parties and extends to both ends of Pennsylvania Avenue. Her multiple roles have included serving as special advisor to President Clinton on the Chemical Weapons Convention and as the assistant director for multilateral affairs at the State Department’s U.S. Arms Control and Disarmament Agency. Prior to that, Murray worked as executive director of the Department of Defense’s Federal Advisory Committee on Gender-Integrated Training in the Military and Related Issues. She also headed the congressionally mandated U.S.-China Security and Economic Review Commission, and was a consultant to President George W. Bush’s Commission on Weapons of Mass Destruction and U.S. Intelligence Capabilities.
Murray worked for almost a decade as national security advisor to Senator Nancy Landon Kassebaum (R-KS), a senior Republican member of the Senate Foreign Relations Committee. Her responsibilities included the full spectrum of U.S. national security: foreign policy, defense, intelligence, and trade issues. Earlier in her career, Murray served as the professional associate to the National Academy of Sciences, Committee on International Security and Arms Control.
Dr. Murray received her BA from Yale University and her PhD from The Johns Hopkins School of Advanced International Studies.