11/12/2012 05:02 pm ET Updated Jan 12, 2013

The Human Cost of Simpson-Bowles

Just before the election last Tuesday, 80 corporate CEOs called on Congress to formulate a debt reduction plan including both spending cuts and revenue increases. As "an effective framework" for addressing the issue, the statement cited Simpson-Bowles, a sweeping plan to fiscally restructure the federal government that was put together two years ago by former Clinton Chief of Staff Erskine Bowles and former Wyoming Senator Alan Simpson, then serving as co-chairs of President Obama's deficit commission.

Post-election, with a "fiscal cliff" looming that would end the Bush tax cuts and impose mandatory spending cuts, Simpson-Bowles -- and its authors -- are expected to play a role in congressional negotiations to avoid sudden belt-tightening. However, very little attention has been paid to the human cost of Simpson-Bowles -- which would be deep and destructive, especially for retirees and workers approaching retirement. In fact, this much-praised plan could hasten a national retirement crisis that's already brewing.

Quantifying the effects of Simpson-Bowles is difficult, because its authors never provided an analysis of its economic impact on different populations, despite repeated requests from Democratic members of the deficit commission. But here's what Bowles and Simpson propose for the two most important pillars of old-age income adequacy: Social Security and Medicare.

Their plan calls for setting a "global target" for all federal health care spending -- including Medicare -- of no more than one percent over annual GDP growth. It doesn't specify how to achieve this drastic slowdown (overall U.S. health care spending has been rising at two percent above GDP for the past 20 years). But it makes some suggestions, including raising premiums still higher for retirees and turning Medicare into a "premium support" system in which retirees would get vouchers to purchase private coverage (if the size of your voucher doesn't keep up with the cost of health insurance, you're on your own).

As for Social Security, Simpson-Bowles would reduce the program's costs long-term by raising the retirement age in step with increases in longevity, switching to a stingier formula to calculate benefits, and cutting benefits outright for higher-income earners. To achieve those savings, Simpson-Bowles would cut deeply into the benefits that middle-income Americans rely on.

Brookings Institute budget expert Henry Aaron has calculated that raising the Social Security retirement age as Bowles and Simpson propose would, alone, cut lifetime benefits by 6.7 percent for every additional year added. According to Social Security's chief actuary, their plan would reduce Social Security by a hefty 22 percent for a middle-class worker earning an average $43,084 annually. By 2080, Social Security would replace only 28 percent of that person's pre-retirement earnings, versus 49 percent under current rules.

Simply put, hard-pressed working people can't afford this. While seniors certainly are better off than they were 40 or even 30 years ago, they are not a coterie of "greedy geezers" soaking up excessive benefits, as Senator Simpson has often portrayed them.

What's not widely understood amidst the talk of cutting Social Security is that it's already been cut. Legislation in 1983 gradually raised the age for claiming full retirement benefits from 65 to 67, amounting to an average 13 percent reduction in lifetime benefits for anyone born after 1960. A little less than 10 percent live below the poverty line, and another 35 percent have household income less than twice that level. Nearly two out of three seniors get more than half their income from Social Security. The average monthly payment to retirees was only $1,176 in 2010.

Social Security kept some 21 million people out of poverty last year, according to the Social Security Administration. Even modest cuts in benefits could push these people into hardship or worse, because for many of them -- and for many workers approaching retirement -- Social Security and Medicare are the only reliable sources of retirement income support they have left. Employer-based pensions are disappearing. Trillions of dollars of home equity vanished with the collapse of the housing bubble. Health care costs, including for long-term and nursing home care, continue to mount. And the student debt burden is affecting even workers in their fifties.

The Simpson-Bowles plan, which corporate CEOs, leaders of both parties in Congress and even newly reelected President Obama has indicated could be a conversation starter for the debt and tax negotiations to follow this election, could turn back the clock for older Americans. If we don't want to go back to the days when the elderly were always one of the poorest parts of the population, cuts to Social Security and Medicare should be completely off the table in the upcoming fiscal talks. Debt reduction mustn't be achieved at the expense of an increasingly vulnerable population: people who work.