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Peter G. Peterson
As the supercommittee gets ready to report to Congress next week, many people are correctly clamoring for members to “go big.” Just as important, however, the panel – or any policymakers who want real solutions to our long-term fiscal challenges – must “go long” by reforming policies that are projected to fuel skyrocketing debt well beyond the next decade.
The basic test of any long-term fiscal plan is whether it stabilizes debt at an affordable level relative to the economy over the long term.
The supercommittee’s target is clearly insufficient on this point, according to new projections from our foundation . If Congress reduces deficits by another $1.2 trillion through sequesters or through a similar agreement that fails to address the drivers of long- term debt, the report shows, public debt would reach a startling 134 to 164 percent of gross domestic product in 2035.
This is only modestly better than the 187 percent now projected by the Congressional Budget Office. Debt would still be on track to reach 187 percent of GDP, just three to eight years later. History shows us that any debt above 90 percent of GDP is risky and significantly slows economic growth.
The effect would be minimal — largely because you can’t tackle the long-term debt problem if you’re looking only at the next 10 years. Here are some reasons why.
First, the U.S. debt-to-GDP ratio doesn’t really start skyrocketing until after 2021. On our current path, it will grow from about 70 percent today to about 100 percent by 2021. While high, our debt level is then predicted to double again in less than 20 years — reaching an astonishing 200 percent by 2040.
By then, we’ll be choking on interest payments, spending 13 percent of GDP on interest alone – more than four times what we spend each year on education, research and development and infrastructure. A nation that’s spending four times as much on its past as it does on its future will likely be one with a diminished and underfunded economy.
Second, the savings from the toughest and most important decisions about our fiscal future don’t show up in the 10-year window. One-hundred percent of the growth in federal non-interest spending over the long term comes from entitlements — driven primarily by skyrocketing health care costs. Yet most of the savings from entitlement reform won’t kick in until after 2021, because many agree that reforms should not affect the most vulnerable, current retirees, or those 10-15 years from retirement.
Even House Budget Committee Chairman Paul Ryan’s Medicare reform plan, generally viewed as the most revolutionary proposal, would produce virtually no savings in the next 10 years.
You can’t measure a first down with a yardstick. We need a longer view to show the fiscal rewards of making these tough choices.
That brings us to third — people need time to adjust. The only fair way to reform Medicare and Social Security is to give younger workers plenty of time to prepare. For example, a higher eligibility age or lower benefit levels for future retirees will require advanced planning — most likely in the form of more personal savings.
In addition, we will likely need time to reform the most important driver of our long-term debt — our nation’s inefficient health care system. Today America spends twice as much per capita on health care as all other advanced nations, with outcomes that are often far worse.
The causes here are many and complex. They center on a system that has perverse incentives for more volume, rather than better value and care. While we all agree that this challenge must be addressed, the truth is that developing and implementing measures to improve health care value will likely take a long time.
It is crucial for Congress to set long-term health spending targets now, so that we have adequate time to develop strategies to lower health costs without compromising quality.
Fourth, a long-term fiscal fix will help our short-term economic recovery. What today’s economy needs most is confidence. Businesses and banks with trillions in capital are sitting on the sidelines, waiting for a reason to be optimistic about America’s future. Agreeing to a small amount of savings over a short period of time won’t put America on a sustainable fiscal path, and will therefore do little to improve confidence.
Conversely, bipartisan agreement on a major long-term plan that shows America is finally getting its fiscal house in order would be a game-changer for confidence. And delaying the reform implementation until the economy recovers will ensure the plan does no harm.
We’ve tried various other arrows to stimulate this economy. Boosting confidence with a viable long-term fiscal plan is one we still haven’t shot.
The good news is that many long-term fiscal solutions exist. Adding to the good work of Simpson-Bowles and the Gang of Six, our foundation recently gave grants to six public policy organizations across the ideological spectrum to develop long-run fiscal plans . Using a variety of approaches, each one was able to stabilize debt-to-GDP at reasonable levels over the next 25 years.
The only thing lacking now is leadership, political courage and a focus on the right goals. Supercommittee members will need strength to confront powerful vested interests in order to control health care costs, reduce other spending, and reform the tax code.
But they now have an historic opportunity to accelerate action on one of our nation’s most enduring problems. They need to find some common ground on a bipartisan set of solutions from the many existing policy options. By “going big” and “going long,” they can help us out of our current slow recovery — and build a foundation for a robust and competitive economy for years to come.