The federal government is in desperate need of a fiscal correction. In just the last year, the annual budget deficit more than doubled from $933 billion to $2 trillion. Such explosive growth in federal borrowing might be warranted to combat an economic emergency such as the COVID pandemic, when the unemployment rate soared to 13%. But unemployment in both 2022 and 2023 has consistently been under 4% — a level not seen for such a prolonged period since the 1950s. Among economists, it’s axiomatic that in boom times such as these the government should be paying down its debts, not running them up.

The problem is only set to get worse in the coming years as deficits continue to grow with no end in sight. This borrowing comes at an enormous cost: annual interest payments on the national debt are at their highest level as percent of economic output since they peaked in the 1990s. By 2028, the government is projected to spend more than $1 trillion each year just to service our ballooning debts — more than it spends on national defense. The United States is potentially entering a vicious cycle whereby higher deficits lead to both a larger stock of debt and higher inflation, which the Federal Reserve must combat by raising the rate of interest paid on both public and private debts. These skyrocketing borrowing costs threaten to crowd out other critical public investments and slow economic growth.

Congress has unfortunately done little to show serious interest in tackling the problem. House Republicans claimed their brinkmanship over raising the federal debt limit and keeping the government funded earlier this year was an effort to get our debt under control. But during these battles, former House Speaker Kevin McCarthy — at the behest of the party’s likely 2024 presidential nominee, former President Donald Trump — took spending on Social Security, Medicare, national defense, and veterans’ benefits off the table. Together, these programs comprise more than half of noninterest spending and that share is projected to grow even more with the aging of the population. Combined with Republicans’ perennial refusal to entertain net tax increases, the party has no plausible path towards achieving the debt reduction it claims to covet.

Democrats are barely any better. Like McCarthy, President Biden has paid lip service toward reducing deficits. But in his State of the Union, Biden warned both parties not to make any changes to Social Security or Medicare benefits, despite the fact that both will face across-the-board cuts in the coming decade if lawmakers fail to avert their impending insolvencies. The president has also stuck doggedly to his pledge not to support any tax increase on any household making under $400,000, which covers roughly 98% of the population. So long as Democrats maintain these postures, they will struggle to advance a progressive agenda just as they did when the Build Back Better plan collapsed in 2021. How can voters trust politicians who want to expand government services if the government can’t even pay for the promises it’s already making?

Establishing a bipartisan fiscal commission could be the first step towards breaking this fiscal deadlock and setting national priorities. An outside task force with a clear mandate to address the problem would be forced to confront the tradeoffs today’s policymakers have been unwilling or unable to. Whatever plan it generates would at least reshape the conversation by establishing a benchmark against which other proposals can be judged, much as the National Commission on Fiscal Responsibility and Reform (aka Bowles-Simpson) unofficial recommendations did in 2010. Implementing legislation inspired by the commission’s recommendations, either in whole or in part, would help curtail our inflation challenges, preserve fiscal space for vital public investments, and set the country on a foundation for more durable economic growth.

How Should a Commission Be Structured?

Of the many fiscal commission proposals that have been offered over the last few years, we believe the most promising is the Fiscal Commission Act of 2023 introduced by the Bipartisan Fiscal Forum in the House. This bill was first introduced last month ahead of the government funding deadline and was attached to the partisan continuing resolution that former Speaker McCarthy put up for a vote on September 29, meaning 198 members of the House of Representatives have already voted for it.

This bill tasks the fiscal commission with producing a plan that would reduce the ratio of publicly held debt to GDP below 100% within the next 10 years, balance the budget at the “earliest reasonable date,” and restore 75-year solvency to all programs with federal trust funds.

Most economists agree that growing debt can be sustainable as long as it is growing slower than national income. Thus, the most important of the commission’s objectives is the first one. Although it may not be necessary to ever actually balance the budget, adopting policies that put the federal budget on a path to eventual balance outside the 10-year window creates fiscal space for future borrowing to address unforeseen national emergencies. The requirement to make federal trust fund programs solvent for at least 75 years ensures that savings from Social Security and Medicare are used to prolong the lives of the program and would give current workers the certainty they need to plan around benefits in their retirement.

The commission would be comprised of 16 members, with four being appointed by each of the Democratic and Republican leaders in the House and the Senate. Each leader would appoint three members of their conference or caucus to the commission and one outside expert, such as an economist or a leader in the business or labor community. PPI is agnostic on the right mix of elected officials and outside experts but believes both are necessary to ensure the commission’s plan is both economically sound and politically plausible. A commission comprised solely of elected officials is no more likely to be successful than the existing congressional committees that have produced only unserious plans to rein in the debt. However, a commission comprised of only outside experts is not likely to be attuned to the political realities of what can make it through Congress.

One of the most important considerations in structuring a fiscal commission is what the threshold is for the commission to formally adopt its recommendations. The Bowles-Simpson commission voted 60% in favor of its final recommendations, but because it was subject to an absurd three-fourths supermajority requirement, the recommendations were not formally adopted and transmitted to Congress. The Fiscal Commission Act avoids this unforced error by requiring only a simple majority of commissioners to support transmitting the recommendations to Congress. However, it ensures there is broad bipartisan support for the recommendations by requiring at least three members of each party to be in the supporting majority.

If adopted, the commission’s recommendations would be subject to expedited consideration in the House and Senate during the lame-duck period following the 2024 presidential election. This timing would prevent the recommendations from becoming campaign fodder and allows them to be considered on their merits during the least politically charged period of the electoral cycle. It also ensures they would be considered during a period of divided government where both parties are on board. Passing the recommendations in a divided government is crucial because big policy changes must be bipartisan to be durable. Importantly, the commission’s recommendations would still require 60 votes in the Senate for final passage, but the motion to start debate would not be subject to a filibuster.

We at PPI believe this is a strong structure and would support it in its current form, however, we also think there are opportunities for improvement. Currently, the president has no role in the commission. Although it is perfectly reasonable procedurally to have legislation crafted by the legislative branch, input from the executive would help ensure presidential buy-in for the final product and discourage the administration from doing anything to undermine the process. Getting this buy-in is particularly important given that Biden administration officials have previously blasted commissions as “death panels.”

We also believe it is important that the commission is co-chaired by a Democrat and a Republican with a strong working relationship. Erskine Bowles and Alan Simpson were jointly appointed by President Barack Obama and produced a strong package of recommendations through close collaboration. By comparison, when Sen. Patty Murray and Rep. Jeb Hensarling were independently appointed to co-chair the bipartisan Joint Select Committee on Deficit Reduction, it failed to produce consensus recommendations. Under the Fiscal Commission Act, as currently written, each party’s House and Senate leader jointly appoint one co-chair, which we believe has the potential to end up more like Murray-Hensarling than Bowles-Simpson.

One way to address both of these potential issues would be to allow President Biden to select the co-chairs, either from among the congressional appointees or as additional appointees subject to the approval of each party’s congressional leaders. Another option would be requiring all four congressional leaders to jointly agree on the co-chairs while allowing two members of the Biden administration to sit on the commission as non-voting appointees (so as not to upset the 50/50 bipartisan balance).

What Policies Should a Fiscal Commission Consider?

Should a commission be established, PPI would encourage it to draw from the comprehensive budget blueprint we published in 2019. This plan would meet every objective set out in the Fiscal Commission Act, and many of the policies contained within it could potentially get bipartisan support as part of a balanced package that compromises tax increases with benefit reforms.

To strengthen Social Security, PPI proposed moving to a “work-credit” benefit structure that awards benefits based on the number of years a beneficiary worked rather than their average lifetime earnings. This structure would preserve Social Security’s nature as an “earned benefit” but make the program more progressive. A low-level employee and a CEO who put in the same amount of work will get the same benefit out of Social Security. PPI also proposed other benefit changes to modernize the program, such as indexing the retirement age to longevity and changing cost-of-living adjustments to better reflect real price increases. Taken together, PPI’s Social Security reforms would increase benefits for the most vulnerable seniors over the current schedule while reducing deficits by $770 billion over the next 10 years.

PPI also proposed to consolidate Medicare Parts A, B, and D into a streamlined “Medicare One” benefit with one premium, one annual deductible, one copayment or coinsurance rate for spending above that deductible, and a cap on out-of-pocket costs. CMS would pool the bids of all available plans, including the cost to cover a beneficiary under Medicare One, and calculate the average. Beneficiaries could then choose between the government-administered Medicare One plan and a privately administered Medicare Advantage plan. Each beneficiary would pay a premium equal to the difference between the cost of the plan they selected and 84% of the average bid, with additional subsidies available for low-income beneficiaries. This consolidated structure would both simplify the program and encourage beneficiaries to choose cheaper plans, further driving down the benchmark subsidy over time. By leveraging competition to control health care costs, we estimated Medicare One would reduce the deficit by $765 billion over the first 10 years.

Even with these changes, the reality is that an aging society needs more revenue to support these bedrock retirement programs — and everyone will need to contribute something to that effort. Countries across the OECD collect an average of 32% of their revenue through consumption taxes to finance their social safety nets, most commonly through value-added taxes. By comparison, consumption taxes in the United States account for only 16% of government revenue and most of that is collected at the state and local level in the form of sales taxes. The Congressional Budget Office estimates that a national value-added tax with a broad base and a 5% rate would raise more than $3 trillion over the next decade.

Although a commission is unlikely to be able to stabilize our debt solely by taxing the ultra-wealthy, it should still consider measures that improve the progressivity of our tax code without harming economic growth. PPI has proposed to replace the current estate tax with a progressive inheritance tax that would raise roughly $1 trillion over the next 10 years. This revenue would come exclusively from wealthy Americans whose income comes from inheritances rather than their own hard work or investments, meaning it would have minimal effects on economic behavior.

Regardless of whether it chooses to adopt these specific policies or others, PPI strongly believes that a successful fiscal commission plan must be intergenerationally equitable by balancing the needs of young workers and older retirees, and it must preserve critical public investments that lay the foundation for long-term growth.