Today is the last day of April, and Peter G. Peterson Foundation has released the latest result of its Fiscal Confidence Index. The Fiscal Confidence Index attempts to measure public opinion on fiscal sustainability based on polling data in three areas -- concern, priority, and expectations -- to produce a fiscal confidence index value between 0 and 200, with a "100" being neutral.

April's mark was a "44," showing that Americans feel very concerned about the state of our nation's finances. The index has remained in the low to mid 40s since January, where the index plummeted from December's 50 to 40, likely due to the failure of both parties to reach a significant fiscal cliff deal.

^{Source: Peter G. Peterson Foundation}

Besides the index, polling revealed some concern with important programs like Social Security and with the resources that would be available for education and high-value added research. From the report:

• With the future of Social Security at the center of public discussion, only 42% of Americans believe Social Security will have the money to provide benefits for their retirement. 47% believe Social Security will not be able to provide benefits.
• Views of Social Security’s ability to fund benefits vary significantly by age. Americans 65 and over are most confident (72%) that Social Security will provide for them. Americans 18-44 are least confident—just 25% believe Social Security will be able to provide for their retirement.
• 86% of Americans are concerned that, without reforms, Social Security and Medicare benefits will put too much of a financial burden on future generations.
• Voters place particularly high value on having resources to invest in education (75% important, 36% extremely important).
• Americans want to see the country build a strong foundation for future economic growth (77% important, 32% extremely important).
• Improving national security also rates highly (70% important, 32% extremely important).

We've seen time and time again that those outside of Washington would like our budget problems to be resolved, but in the nation's capital, progress has proceeded much more slowly. Hopefully, lawmakers will be able to put aside their differences and find a compromise that can put the nation's budget on a sustainable path.

Click here for the full results and more on the methodology.

Over the past few years, lawmakers have made the most progress in discretionary spending in the deficit reduction effort. Additional opportunities for finding efficiencies in the discretionary budget exist for defense and nondefense, but right now cuts are being done through sequestration, which imposes blunt, across-the-board reductions instead of targeting areas where resources could be allocated better. Simpson and Bowles seek to improve upon this approach in their new plan as evidenced by their principle, Replace Dumb Cuts with Smart Reforms. In their words:

The mindless, across-the-board cuts from sequestration would reduce the deficit, but represent the wrong approach to budgeting. These cuts should be replaced with targeted reforms that focus on the drivers of the debt while eliminating redundant, wasteful, ineffective, or unwarranted federal spending while preserving high-value investments.

In particular, Simpson and Bowles propose four changes to discretionary budgeting:

• Replace sequestration with tight discretionary caps through 2025 to require real but gradual spending controls.
• Establish a 67-vote point of order to enforce caps so future lawmakers cannot easily reverse the spending controls.
• Cap spending on overseas contingency operations to end the “war gimmick” and prevent policymakers from classifying normal defense spending as war spending
• Stop the abuse of emergency spending by adopting a formal definition of emergency and justifying disaster spending against that definition.

Of most significance, from a fiscal respective, is the replacement of sequestration with more gradual discretionary caps. Specifically, Simpson and Bowles would repeal 70 percent of the sequester cuts for FY2013 and then cap defense and non-defense spending levels through 2025 to grow at the rate of inflation (as measured by chained CPI). Because this change would build off of the levels under sequestration, this change would result in about $220 billion of defense savings and $165 billion of non-defense savings -- $385 billion total. This compares to the $690 billion of direct discretionary savings ($870 billion if levels are extrapolated) from the sequestration.

^{Source: Bipartisan Path Forward}

These caps will not be easy to abide by. Capping spending growth to the rate of inflation will require continuing to identify efficiencies and make tough decisions about what government should and shouldn’t be doing. However, using hard spending constraints to require these changes over time is far superior than allowing an abrupt across-the-board meat axe to cut spending indiscriminately in 2013 and require no efficiencies after 2021.

Erskine Bowles and former Senator Alan Simpson (R-WY), the two former co-chairs of the Fiscal Commission, have spent the last two and a half year talking to American citizens about the need to put our budget on a sustainable path and the recommendations put forward by the Fiscal Commission. But while the political landscape has changed over the last couple years, our debt problem remains far from solved.

In today's Washington Post, Bowles and Simpson offer their take on our fiscal outlook, what progress has been made, and what lawmakers need to do going forward:

Unfortunately, in Washington, the past two years have been defined by fiscal brinksmanship. Policymakers have lurched from crisis to crisis, waiting until the last moment to do the bare minimum to avoid catastrophe without addressing the fundamental drivers of our long-term debt.

To be sure, some progress has been made the past two years. Policymakers have enacted about $2.7 trillion in deficit reduction, primarily through cuts in discretionary spending and higher taxes on wealthy individuals. Yet what we have achieved so far is insufficient. Nothing has been done to make our entitlement programs sustainable for future generations, make our tax code more globally competitive and pro-growth, or put our debt on a downward path. Instead, we have allowed a “sequestration” to mindlessly cut spending across the board — except in those areas that contribute the most to spending growth.

But there are seeds of hope that a bipartisan agreement might be achievable.

Our fiscal problem will not be solved unless Congressional leaders and the President can guide their parties to a principled compromise. Political reality dictates that Democrats and Republicans cannot stick to their preferred positions wholeheartedly. Bowles and Simpson recently released a new plan, "A Bipartisan Path Forward to Securing America's Future," showing where a possible "grand bargain" might lie. Bowles and Simpson break down the details of their plan.

The plan we propose would achieve $2.5 trillion in deficit reduction through 2023, replacing the immediate, mindless cuts of the sequester with smarter, more gradual deficit reduction that would avoid disrupting a fragile economic recovery while putting the debt on a clear downward path relative to the economy over the next 10 years and beyond. Importantly, the plan would achieve this deficit reduction while respecting the principles and priorities of both parties.

Our proposal contains concrete steps to reduce the growth of entitlement programs and make structural changes to federal health programs, such as reforming the health-care delivery system to move away from the fee-for-service model and gradually increasing the eligibility age for Medicare. At the same time, it would provide important protections and benefit enhancements for low-income and vulnerable Americans, such as an income-related Medicare buy-in for seniors affected by the increase in Medicare’s eligibility age and greater protections against catastrophic health-care costs for low-income seniors.

Our proposal recognizes that additional revenue must be part of a comprehensive deficit-reduction plan for both substantive and political reasons. Our plan raises revenue through comprehensive tax reform that lowers rates, improves fairness and promotes more vibrant economic growth.

These structural reforms are accompanied by spending cuts in all parts of the budgets put forward by both parties, including cuts to defense and non-defense programs. The plan also includes a shift to the chained consumer price index to provide more accurate indexation of provisions throughout the budget, with a portion of the savings devoted to benefit enhancements for low-income populations. Together, these policies would put the debt on a downward trajectory as a share of gross domestic product — and would keep it declining for the long term.

The "Bipartisan Path Forward" is not intended to be a replacement for the original Fiscal Commission plan but rather a guide showing where a possible compromise may be if both parties are willing to put aside their sacred cows. Write Bowles and Simpson:

Our proposal is not our ideal plan, and it is certainly not the only plan. It is an effort to show that a deal is possible in which neither side compromises its principles but instead relies on principled compromise. Such a deal would invigorate our economy, demonstrate to the public that Washington can solve problems and leave a better future for our grandchildren.

Click here to read the full op-ed.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Among the principles outlined by former Fiscal Commission co-chairs Senator Al Simpson and Erskine Bowles in their new plan A Bipartisan Path Forward is that a reasonable debt reduction plan must protect the disadvantaged. They argue that while additional spending cuts and reforms of entitlement programs will be necessary as part of a plan to put the budget on a fiscally sustainable course, low income programs should not harmed and entitlement reforms should include protections for vulnerable populations who rely on those programs most.

We must ensure that our nation has a robust, affordable, fair, and sustainable safety net. Benefits should be focused on those who need them the most, and low-income programs should not be cut simply for the sake of deficit reduction. Broad-based entitlement reforms should either include protections for vulnerable populations or be coupled with changes designed to strengthen the safety net for those who rely on it the most.

Importantly, the specific policies in their plan demonstrate that it is possible to meet the principle of protecting low-income and vulnerable populations in developing a comprehensive deficit reduction plan. The plan protects low-income programs by including a number of targeted benefit enhancements and low-income protections to accompany the entitlement reforms in the plan while still improving the solvency of Medicare and Social Security and achieving significant deficit reduction.

• Sequester repeal: The plan repeals most of the sequester, which calls for across-the-board cuts in discretionary spending, which disproportionately affects programs in housing, education, child care, nutrition, and energy assistance. Instead, it has discretionary spending caps which allow appropriators to target cuts where they deem most appropriate.
• Means-tested programs and UI benefits untouched: The plan does not make any direct changes to means-tested programs like Supplemental Security Income, food stamps (SNAP), and cash welfare (TANF). In addition, unemployment insurance is left untouched. The only changes are anti-fraud measures and the chained CPI switch, both of which reflect the intentions of current law rather than a new policy.
• Medicaid benefits untouched: A Bipartisan Path Forward leaves Medicaid alone for the most part.  One exception is a change that phases out the gimmick of states taxing medical providers to pay for Medicaid expansions, which then leads to higher federal government spending.
• Benefit enhancements for the chained CPI: To protect vulnerable populations who would be affected by the chained CPI switch, the plan would provide a flat dollar benefit bump-up to those receiving Social Security, Supplemental Security Income (SSI), and veterans benefits and have been in these programs for 20 years. Within the SSI program, they propose indexing the $20 income disregard and asset limits to inflation measured by the chained CPI.
• Income-related catastrophic protections: The Medicare cost-sharing proposal provides for the first time an income-related out-of-pocket maximum, thus concretely limiting beneficiaries' potential exposure to health care cost-sharing. In addition, the cost-sharing reforms include an income-related deductible, lowering the deductible for lower-income seniors. While the exact level of out-of-pocket caps and reduced deductibles of the proposal would need to be fleshed out to hit the savings target, the plan would seek to hold average out-of-pocket costs constant from year to year and would likely reduce out-of-pocket costs for the poorest and sickest seniors and offer much greater protection from financial risk.
• Medicare buy-in with income-related premiums: The plan's gradual raising of the Medicare eligibility age is combined with a Medicare buy-in to ensure that low and moderate income seniors affected by the increase in Medicare eligibility age have access to affordable health insurance through Medicare. As we discussed on Tuesday, Simpson and Bowles would offer seniors affected by the age increase the option to buy into Medicare with an income-related premium. The biggest assistance would be for those below 100 percent of poverty who would receive a full subsidy for their Medicare premium. Seniors between 100 and 400 percent of poverty would pay an income-related premium similar to the way the subsidies work in the Affordable Care Act’s health insurance exchanges.
• Strengthening Pell Grants: A Bipartisan Path Forward eliminates the Pell Grant funding shortfall through savings from reforms of provisions that do not target education resources nearly as well. Without new funding to fix the shortfall, Congress would be forced to either reduce the Pell grant award amount and eligibility for assistance or cut other discretionary programs more deeply to cover the shortfall in future appropriations bills.
• Progressive tax reform: The proposal calls for tax reform that makes the code at least as, if not more, progressive. The original Simpson-Bowles Illustrative plan, which is one of the models the proposal cites, included a small tax cut for the bottom quintile.
• Social Security protections: The original Simpson-Bowles plan would have increased benefits for low-income workers and reduced poverty among seniors by making the benefit formula more progressive, including a hardship exemption from their proposal to index the retirement age to longevity, establishing a new minimum benefit of 125 percent of poverty for those with 25 years of work, and establishing a flat dollar bump up for beneficiaries who have received benefits for twenty years and are at greater risk of poverty. Simpson and Bowles now recommend further strengthening the Commission’s low-income protections to eliminate any benefit reduction in the bottom quintile by increasing the bottom replacement factor from 90 percent to 95 percent and phasing up the minimum benefit faster for those with less work history.
• Fixing the fiscal situation: The Bipartisan Path Forward puts the debt on a sustainable path over the medium and long term, thus precluding the possibility of a debt crisis. Such a debt crisis would likely involve severe and immediate cuts, and low-income programs would likely have to be a part of those cuts. Making targeted changes that protect the most vulnerable while putting the debt on a downward path avoids this possibility.

As the reforms in their plan show, Simpson and Bowles follow the principle of protecting the disadvantaged by including numerous protections for low-income individuals who depend the most on certain entitlement programs. Any responsible plan for deficit reduction must include significant spending cuts and reforms to control the growth of entitlement programs. Simpson and Bowles have made a valuable contribution to the debate by demonstrating that it is possible to slow the growth of entitlement programs through smart, targeted reforms that preserve the safety net and protect low-income individuals and other vulnerable beneficiaries.

Making the Call – The NFL Draft kicks off Thursday. Unlike previous drafts, there is much uncertainty as to who will go where. Washington is in a similar situation where it is unclear what direction policymakers will take. There’s no clear # 1 pick – immigration, terrorism, economy, budget, tax reform are all vying for the top spot on the agenda. Who will get the call next?

Sequestration Rises Up the List – It didn’t make a good impression at the combine when it officially took effect on March 1 without much noticeable effect and most businesses reported that it had minimal impact so far, but the across-the-board spending cuts of sequestration have been getting a second look this week as furloughs of some federal employees have begun. Namely, furloughs of air traffic controllers have been blamed for airline delays around the country, prompting policymakers to revive efforts to improve or eliminate it. Of course, there is still not much agreement on how to do so as senators blocked competing bills this week. Republicans were unable to move a bill that would grant President Obama more flexibility in how the cuts are made while Senate Majority Leader Harry Reid (D-NV) failed to advance his bill to replace sequestration and pay for it with savings from the drawdown of U.S. military operations in Afghanistan. The war savings offset is a gimmick since the drawdown is already scheduled to occur. CRFB spoke out against using this gimmick in a statement, “We should certainly replace the mindless, across-the-board cuts in the sequester -- but with an intelligent deficit reduction plan, not phantom savings from a drawdown that is already taking place.” President Obama said he supports the Reid approach as a temporary measure to buy time to find agreement on a more balanced package to replace sequestration. The sequester should be replaced by a comprehensive approach that deals with all parts of the budget and is phased in over time as to not disrupt the economic recovery. Learn more on our Sequestration Resource Page. 

Simpson and Bowles Redraft – Fiscal Commission co-chairs Alan Simpson and Erskine Bowles last week offered up an example of the type of approach that is needed to replace sequestration. They released a detailed version of the framework they offered earlier this year, “A Bipartisan Path Forward to Securing America’s Future,” that would save $2.5 trillion over the next decade by tapping all areas of the budget including entitlements and tax reform. In the preamble, Simpson and Bowles say of sequestration, “We believe there is a better way, and we believe it is politically possible to get there.” The plan draws on areas that can achieve bipartisan support and is designed to protect the most vulnerable and to promote long-term growth while not derailing the short-term recovery. See our analysis of the plan, a summary of the plan and the full report.

Budget on the Clock – The House and Senate passed vastly different budgets for the next fiscal year that will be difficult to reconcile, but the process has not formally begun yet as lawmakers bicker. Sen. Reid tried to force the issue this week by naming members to the conference committee to reconcile the two bills, but Republicans in the Senate blocked his effort. They want to set some ground rules in advance before the conference committee starts its work. The budget conference process could be the vehicle for negotiations on a larger deficit reduction plan and if the House and Senate can agree on a budget/deficit reduction plan House Republicans are said to be considering using the budget reconciliation rules to pass a debt ceiling increase that can’t be filibustered. Moving forward with the budget process could pave the way to a deal that reins in the national debt. 

Building a Deficit Deal Team – In addition the budget process, efforts to advance a bipartisan deficit deal are proceeding on multiple fronts. President Obama continued his outreach to lawmakers with a dinner with the 20 women in the Senate where he encouraged them to be active in the deficit discussion. Meanwhile, the White House is trying to recruit Republican senators who could work on a “grand bargain” addressing the debt. As a part of the effort, top Obama Administration officials met with some GOP senators on Thursday.  

Tax Reform Stock Rises – Senate Finance Committee chair Max Baucus (D-MT) announcing his retirement this week could mean a boost for efforts to fundamentally reform the tax code as the key player will be unfettered by reelection concerns and will be seeking a legacy. Meanwhile, Republicans in the House are beginning their tax reform efforts in earnest with meetings to get members of the caucus on board. Reform that deals with tax expenditures is critical to a comprehensive deficit approach and could help facilitate a grand bargain. 

Moving the Chained CPI – Some Democrats in Congress continue to push back against switching to a more accurate measure of inflation known as chained CPI as proposed in President Obama’s budget. This week Sens. Bernie Sanders (I-VT) and Tom Harkin (D-IA) introduced a resolution opposing the switch for Social Security and some Democrats in the House voiced opposition in a letter to the White House. CRFB’s Maya MacGuineas argued that “It is irresponsible and counterproductive to take a common sense and bipartisan option off the table” in a statement. Meanwhile, the Center on Budget and Policy Priorities analyzed the President’s chained CPI proposal and the Congressional Budget Office found that another inflation index supported by some needs more work. The pressure to take a modest, technical fix off the table without considering its merits illustrates why it is so difficult to address the mounting national debt. To learn more about the topic, check out our Chained CPI Resource Page and watch this video.

OMB Drafts New Director – Sylvia Mathews Burwell was confirmed by the Senate this week to be the new director of the Office of Management and Budget (OMB). She takes over at a critical time and will be a key part of negotiations over the federal budget and reducing the deficit.

Debt Limit Declares – Not to be left out, the debt ceiling is jumping back on the agenda. The House Ways and Means Committee approved of a bill supported by Republican leaders that would direct the Department of the Treasury to prioritize making payments to service the debt and Social Security benefits in the case the statutory debt limit is reached. The legislation is intended to prevent a U.S. default in case the debt ceiling is not raised when it is reached, which is expected this summer. The bill is a part of the Republican positioning ahead of an expected fight over raising the limit. Republicans plan to seek spending cuts at least equal to any debt limit increase. The best scenario is for policymakers to agree on a comprehensive debt plan well ahead of reaching the debt ceiling to avoid the costly brinksmanship of the last debt showdown.

Key Upcoming Dates (all times are ET)

April 26

• Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.

May 3

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 employment data.

May 16

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.

May 19

• The debt limit is re-instated at an increased amount to account for debt issued between the signing of the suspension bill and this date. After re-instatement, the Treasury Department will be able to use "extraordinary measures" to put off the date the government hits the debt limit potentially for a few months.

May 30

• Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP. 

Recent reports from Capitol Hill show momentum for tax reform is building.  Both the House Ways and Means and Senate Finance Committees have been compiling options and draft reports on different aspects of tax reform, demonstrating a commitment from both tax-writing committees to examine the tax code. With the possibility of a conference committee for the budget resolutions that passed each chamber earlier this session, tax reform may be critical to a budget agreement.

With that in mind, we continue our series on A Bipartisan Path Forward by turning to the tax side of the budget to discuss the reforms proposed in Simpson and Bowles's new plan. Overall, they propose $740 billion in revenue over ten years, with $585 billion from tax reform. So how do they do it?

The plan would advance comprehensive tax reform that lower rates and broadens the tax base to raise revenue. It specifically mentions five parameters for reform:

• Lower rates, broaden the base, and reduce deficits.
• Start from zero, a tax system with no tax expenditures, and raise rates accordingly when tax expenditures are added back in.
• Maintain or increase progressivity of the tax code.
• Move to a territorial tax system.
• Promote economic growth and competitiveness.

Many of these points are familiar ones from the original Simpson-Bowles plan. In order to hit its revenue target, the plan started with a clean slate of zero tax expenditures, three tax rates of 8, 14, and 23 percent, a repeal of the Alternative Minimum Tax, and a corporate rate of 26 percent (see what it would take to get to a 26 percent corporate rate with our tax calculator). The Illustrative Plan in the original Simpson-Bowles then added back preferences like the Earned Income Tax Credit and child tax credit, while retaining the employer health insurance exclusion, mortgage interest deduction, charitable deduction, and retirement savings preferences in more limited forms. It raised the individual rates to 12, 22, and 28 percent and the corporate rate to 28 percent to compensate. Due to changes in the tax code, economic forecasts, and revenue targets since the original Simpson-Bowles plan came out, a plan modeled on the Illustrative Plan would differ somewhat from the one described above.

To enforce the revenue targets in case tax reform does not come to fruition and to incent lawmakers to take up reform, the plan calls for an enforcement mechanism to raise the $585 billion of revenue. One approach the report cites is to have a broad limitation on tax expenditures. It estimates that a rate limit (similar to one in the President's budget) of 27 percent applied to all itemized deductions, certain above-the-line deductions, the standard deduction, the health insurance exclusion, the foreign income exclusion, and the municipal bond exclusion would roughly raise the revenue targeted. An alternate failsafe which would more closely mimic actual tax reform would have a different limit on tax expenditures, such as the Feldstein-Feenberg-MacGuineas cap, that raised more revenue, with half the revenue used to hit the revenue target and the other half applied to rate reduction. This is very similar to a tax reform failsafe proposed by Washington Post columnist Charles Krauthammer, using the logic of a "50 percent solution" that splits the difference between revenue-neutral 1986-style reform and the President's reforms that would go solely to deficit reduction. Certainly, lawmakers could make individual changes in the tax code in addition to the mechanisms mentioned in the report.

Tax reform may be the key to getting bipartisan agreement on a budget deal, and "A Bipartisan Path Forward," like the original Simpson-Bowles plan, presents a bold, pro-growth approach to accomplishing it.

Some commentators have criticized deficit reduction plans like "A Bipartisan Path Forward" for, in their opinion, promoting austerity at a time when we should be promoting economic recovery. Missing from their analysis is that many deficit reduction plans -- the recent one by Erskine Bowles and Al Simpson included -- would actually reduce short-term austerity when the economy is weak and implement the vast majority of its deficit reduction in later years when the economy is stronger.

Indeed, just behind putting the debt on a downward path, the second principle put forward by Erskine Bowles and Al Simpson is to "Promote, Don't Disrupt, Economic Growth." They write:

The United States must pursue a growth agenda. As the economy recovers, one of the best ways to promote economic growth is to bring our debt under control to encourage private investment and mitigate the risk of a fiscal crisis. However, sharp austerity could have the opposite effect by tempering the still fragile economic recovery. In order to protect the recovery and promote long-term growth, deficit reduction should be phased in gradually and reforms should be designed to strengthen current economic conditions, promote work, encourage innovation, improve productivity, and bolster investment in our future. Encouraging investment also means finding additional savings from wasteful or low-priority spending throughout the budget to make resources available for critical investments in education, high-value research and development, and infrastructure to meet the demands of the future.

And while most of the policies in the plan begin in 2014, they are phased in quite gradually. Of the $2.5 trillion of total deficit reduction, only about 5 percent of it takes place before 2016 when the economy is still expected to be relatively weak. By comparison, a full 20 percent of the sequestration savings occur before 2016. As a result of these differences, the Bipartisan Path Forward actually represents less of a hit on the economy in 2013, 2014, and 2015 -- even as it reduces the deficit by more than twice as much over ten years.

Relative to the Congressional Budget Office current law baseline, the fact that the Simpson-Bowles plan repeals much of the sequester should lead to a larger economy in 2013 and 2014, likely in the range of 0.2 or 0.3 percent. The larger deficit reduction over the decade would lead to additional growth as the economy recovers (with a small possible hit to the economy in the middle of the decade), as would pursuing comprehensive tax reform.

In Appendix E of the report is an attempt to analyze the potential growth effects of the Simpson-Bowles plan and the resulting "fiscal dividend" -- essentially the additional revenue generated by faster economic growth. Whereas the plan would reduce debt levels to 69 percent of GDP under traditional scoring, the report finds that assuming a faster war drawdown and applying some conservative dynamic scoring would result in debt levels falling to 65 percent of GDP.

^{Source: A Bipartisan Path Forward}

How do they reach this result? First, they assume $380 billion less in spending on the wars in Iraq and Afghanistan over the next decade, consistent with the Senate budget resolution, to reduce the debt from 69 percent of GDP to 68 percent of GDP.

Next, they attempt to measure the economic effect of less deficit reduction now and more in the future using CBO's report, Macroeconomic Effects of Alternative Budgetary Paths (we blogged on it earlier this year) which finds a generic $2.3 trillion deficit reduction plan would increase GDP by 0.5 percent and GNP by 0.9 percent by 2023.

Finally, they attempt to estimate the effects of comprehensive tax reform on economic growth. The Joint Committee on Taxation has estimated that the combined effect of generic base-broadening reforms to both the corporate and individual code could increase output by anywhere from 1.2 percent to 2.0 percent in the second five years after enactment. The analysis conservatively assumes a one percent increase in the latter half of the ten-year macrodynamic projection.

These economic adjustments, taken together, would likely increase revenue by about $375 billion and generate another $120 billion of interest savings. Combined with the higher GDP level in the denominator, this would be enough to bring debt levels down to 65 percent of GDP by 2023.

The Bipartisan Path Forward does not endorse this type of dynamic scoring as a normal budget convention -- we've written before about the pros and cons of such an approach -- but that doesn't mean growth effects should be ignored. By replacing the abrupt mindless sequester with more intelligent, gradual, and ultimately larger deficit reduction measures it is possible to improve the short- and long-term economy and in the process further control our mounting debt. While dynamic economic effects are difficult to estimate, these estimates show that the Simpson-Bowles proposal could both promote economic growth and reduce debt even further than advertised.

Previously on The Bottom Line, we have shown how the chained CPI could be a 6 percent benefit cut or a 25 percent benefit increase, depending on how you measure it, and we have looked at the low-income and old-age protections in the President's budget.

The Center on Budget and Policy Priorities today analyzed the effects of the President's chained CPI proposal on Social Security benefits in particular, finding that the average benefit cut relative to current law would be one percent. For old-age beneficiaries , the President's budget would have a bump-up in benefits for people reaching age 76 equal to 5 percent of the average benefit, phased in over ten years, with a second bump-up at age 95.

CBPP summarizes their findings as follows:

• Future beneficiaries receiving an average benefit would experience a benefit reduction averaging 1 percent to 2 percent over the course of their retirement.  The benefit reduction would average 1.1 percent if they draw benefits through age 71, 1.8 percent if they draw benefits through age 81 (which is more common), and 1.6 percent if they draw benefits through age 91.
• For future beneficiaries receiving smaller-than-average benefits, the reduction would be smaller, likely in the 0.5 percent to 1.5 percent range — except for beneficiaries poor enough to qualify also for Supplemental Security Income (SSI), who would be held harmless. 
• For future beneficiaries receiving higher-than-average benefits, the reduction would be larger, averaging 2 percent or slightly more.

One clear takeaway is that having an old-age benefit bump-up combined with the chained CPI makes the change progressive overall, blunting the impact much more for lower-income beneficiaries (or at least those that receive smaller benefits). CBPP explains why:

The special benefit increase (or "bump") would provide more help to seniors and people with disabilities who receive smaller-than-average Social Security benefits.  All eligible retirees and disability beneficiaries would receive the same basic dollar increase, so those with smaller benefits would receive a larger percentage increase.

In addition, since the proposal calls for the chained CPI to take effect in 2015 and the 5-percent benefit adjustment to begin to take effect in 2020 (and to be phased in through 2029), people who are 69 or older today would begin to receive the 5-percent benefit increase after being subject to the chained CPI for only five years.

The graph below from CBPP's analysis makes this point clear. For an illustrative low-wage retiree, benefits are equal to or higher than current law from about age 80 on. An average retiree would have their benefits return close to current law levels after the first bump-up fully phases in. The bump-up, though, would make less of a difference for the high-wage retiree.

^{Source: CBPP}

Note that this analysis assumes that the low-wage retiree is not on Supplemental Security Income (SSI), which the President exempts from the chained CPI. As a result, those on SSI would face no benefit change since their benefit change in Social Security would be fully offset by SSI.

CBPP's analysis shows that adjustments like the old-age benefit bump-up are a much more targeted way to protect vulnerable beneficiaries than to continue overstating inflation for all beneficiaries.

In their new deficit reduction proposal, A Bipartisan Path Forward, former Fiscal Commission co-chairs former Senator Al Simpson (R-WY) and Erskine Bowles include $585 billion in savings to federal health spending. They also put forward as one of their central principles that policymakers should "bend the health care cost-curve," looking beyond one-time savings and cost-shift to reforms which would fundamentally realign incentives to slow health care cost growth.

To this end, $170 billion of savings in the plan are described as "structural reforms to bend the health care cost curve." Simpson and Bowles assert that by realigning incentives to encourage behavior change, lawmakers can help to bend the health care cost curve and put federal health spending on a more sustainable path.  They recommend four categories of reforms to achieve this goal:

1. Delivery system and payment reforms ($60 billion through 2023): Simpson and Bowles propose a number of changes on the provider payment side meant to encourage more efficient delivery of health care. Among those changes include:

– Replacing the Sustainable Growth Rate (SGR) formula with reforms to drive providers away from Medicare fee-for-service (FFS) and towards a payment model that encourages quality and coordinated care while prioritizing primary care and reducing Medicare costs.

– Expanding and increasing current penalties for avoidable hospital readmissions and complications ("never events") -- a proposal similar to one proposed by Community Catalyst.

– Expanding the current competitive bidding program for durable medical equipment (DME) and applying it to lower the cost of more medical devices, laboratory tests, radiologic diagnostic services, and various other commodities -- a proposal similar to one offered by MedPAC, the National Coalition on Health Care, and others.
–  Increasing payment bundling where many providers are paid with a fixed amount for a bundle of services as has begun to occur in the Medicare Acute Care Episode (ACE) demonstration -- a proposal similar to those proposed by experts at the Center for American Progress (CAP) and the American Enterprise Institute, as well as more modest bundling policy in the President's FY2014 budget proposal.

– Increasing price and quality transparency such as those proposed by CAP

– Giving CMS and the Independent Payment Advisory Board (IPAB) greater authority to experiment and improve delivery and payment for care.

– Simpson and Bowles also call on lawmakers to consider creating an alternative benefit package that would drive beneficiaries and providers toward higher value, coordinated care. For example, this could be similar to the Commonwealth Fund’s Medicare Essential plan, Michael Chernew and Dana Goldman’s global payment model, or even BPC’s proposed Medicare Networks.

2. Reform Medicare cost-sharing rules ($90 billion through 2023): Another way in which the Simpson-Bowles plan would slow health care cost growth in Medicare is by altering cost-sharing rules for beneficiaries. We’ve talked about the growing consensus around such reforms recently, and their proposal adds yet another approach.

– They recommend building on the original Fiscal Commission proposal that combines cost-sharing provisions of Medicare Part A and B into a simple income-based system of deductibles, co-insurances, and out-of-pocket limits by implementing income-adjusted out-of-pocket maximums and a lower deductible for low-income beneficiaries.

– Their plan would also restrict and discourage the use of supplemental coverage (including Medigap, retiree health plans, FEHBP and TRICARE for Life) from distorting Medicare incentives through first-dollar coverage.

Together, these reforms seek to give beneficiaries more “skin in the game” by using cost-sharing levels to encourage high value services and discourage excessive or low value care. The plan's cost-sharing reforms help to slow cost growth by instituting higher copayments, coinsurance, and first-dollar deductibles.  However, it would include some out-of-pocket limits for low-income seniors. The Bipartisan Path Forward highlights a few other variations of these cost-sharing policies that policymakers could use to achieve the same goal, and by doing so, demonstrates the dial-ability of many options that are on the table.

3. Medical Malpractice Reform ($20 billion through 2023): Simpson and Bowles offer $20 billion in savings through several proposals on medical malpractice reform to reduce the cost of defensive medicine. These include instituting a statute of limitations for malpractice claims, sliding-scale limits on lawyer contingency fee, rules to ensure defendants are only responsible for their share of the responsibility for injury, and evidence-based clinical practice guidelines among others.

4. Increase State Flexibility for Reforms: Give states greater flexibility through a new Medicaid waiver program that encourages states to coordinate care, improve quality, and lower costs. For instance, this could target high-cost populations such as dual eligible beneficiaries and advance better coordination between states and the federal government.

Simpson and Bowles project the above policies to save the federal government $170 billion through 2023, but argue that they could save substantially more if they were truly able to "bend the cost curve." To ensure further savings materialize, they propose a cap on the growth of the per beneficiary net federal commitment to health care to growth to GDP after 2018. The cap would be enforced through a combination of an across-the-board increase in Medicare premiums, a reduction in the value of the employer-provided health insurance exclusion, and something called a value-based withhold, under which a percentage of provider payments would be withheld and rewarded to providers only if they meet certain savings and quality targets. This is just one approach towards applying a budget constraint on the federal commitment to health care; however, other deficit reduction plans have included similar caps at varying levels.

As health care spending continues to rise, these reforms make an aggressive effort to bend the health care cost curve downwards. While the savings of some of these reforms may be uncertain, they hold potential to provide structural changes necessary to reign in federal health spending and are backed-up by real enforcement mechanisms. Still, bending the health care cost curve is only one part of putting federal health spending on a more sustainable path.  Other reforms will be necessary, particularly to address the aging population which is the primary factor behind rising spending over the next few decades.  That's why Simpson and Bowles also include other savings from means testing, a gradual increase in the eligibility age, elimination of overpayments to providers and states, and other Medicare provider reductions. Overall, A Bipartisan Path Forward provides lawmakers with more options that should be considered in this budget debate.