Background and Summary of

Fiscal Commission Plan

Why We Need Reform

Summary of the Fiscal Commission Plan
The Fiscal Commission Recommendations (in full)

Why We Need Reform

The problem is real. The solution will be painful. There is no easy way out. Everything
must be on the table. And Washington must lead.

-- The Moment of Truth, final report of the National Commission on Fiscal Responsibility and Reform

If we do not take decisive action, our nation faces the most predictable economic crisis in
its history. The current fiscal path we are on is simply not sustainable.

If we continue down our current path, public debt is projected to grow from a historical
average of less than 40 percent of GDP, to nearly 100 percent by the end of the decade, a
level not seen since just after World War II, and a level most economists find
problematic.

Federal debt this high is unsustainable. It will drive up interest rates for all borrowers –
businesses and individuals – and curtail economic growth by crowding out private
investment and making it more expensive for entrepreneurs and businesses to raise
capital, innovate, and create jobs.

Higher debt means the government will spend more money on interest payments, and
therefore have less available for other important priorities. By 2020, we will be paying
nearly $1 trillion a year in interest alone – much of it to our competitors.

In a worst-case scenario, investors could lose confidence that our nation is able or willing
to repay its loans – possibly triggering a debt crisis, at which point the bond markets will
force decisions upon us. If we do not act soon to reassure the markets, the risk of a crisis
will increase, and the options available to avert or remedy the crisis will both narrow and
become more stringent.

Delaying action will place the economy at greater risk and make the choices more
painful. The Congressional Budget Office projects that if we wait ten years to act our
economy could shrink by as much as 2 percent and spending cuts and tax increases
needed to plug the hole could nearly double from what is needed today.
Looking into the next two decades, the retirement of the baby boomers and rising health
care costs will make the situation far worse.

In addition to our debt problems, we have a budget that focuses too much on
consumption at the cost of important investments, and an inefficient and complex tax
code that encourages housing bubbles and health care cost growth instead of work,
investment, and global competitiveness.

Summary of Fiscal Commission Plan

Highlights:

• Nearly $4 trillion in deficit reduction through 2020, more than any effort in
history.

• Reduces the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security
reform), exceeding President’s goal of primary balance (about 3% of GDP).

• Stabilizes debt by 2014 and reduces debt to 60% of GDP by 2023 and 40% by
2035.

• Balances the primary budget beginning in 2014, brings down the debt as a share
of the economy thereafter, and balances the budget completely by 2035.

• Takes a balanced approach to deficit reduction, with a two to one ratio of

spending reductions to revenue increases (three to one if reductions in spending
on interest are counted).

• Applies discipline to all parts of the budget and goes after every sacred cow,
while protecting the most vulnerable and prioritizing high value investments in
education, infrastructure, and Research and Development.

• Recommends a tax reform framework which would help rid the tax code of the
over $1 trillion in spending in form of so called “tax expenditures,” while
dramatically bringing down rates.

• Caps revenue at 21% of GDP and gets spending below 22% and eventually to
21%. Ensures that any new revenues go to debt reduction, not new spending

• Ensures lasting Social Security solvency through progressive changes to benefits

and revenues, preventing the projected 22% across the board benefit cuts expected
to come in 2037 and reducing elderly poverty.
Major Elements

1) Discretionary Spending Cuts: Imposes tough discretionary spending caps to

force budget discipline. Recommends significant cuts in both security and non-
security spending by cutting low-priority programs and streamlining government
operations. Offers more than $50 billion in immediate cuts to lead by example,
and a total of $200 billion per year in illustrative savings.
2) Comprehensive Tax Reform: Sharply reduces rates, broadens the base,
simplifies the tax code, and reduces the deficit by reducing the many “tax
expenditures” – another name for spending through the tax code. Reforms
corporate taxes to make America more competitive, and cap revenue to avoid
excessive taxation.
3) Health Care Cost Containment: Includes a strict budget of GDP + 1% for
health spending along with specific medium-term reductions. Replaces the
phantom savings from scheduled Medicare reimbursement cuts that will never
materialize and those from a new long-term care program that is unsustainable
with real, common-sense reforms to physician payments, rationalizing cost-
sharing requirements, malpractice reform, acceleration of successful payment
reforms, increased prescription drug discounts, reductions in government-
subsidized medical education, and other sources.
4) Mandatory Savings: Cuts agriculture subsidies and modernizes military and civil
service retirement systems, while reforming student loan programs and putting the
Pension Benefit Guarantee Corporation on a sustainable path.
5) Social Security Reforms to Ensure Long-Term Solvency and Reduce
Poverty: Ensures sustainable solvency for the next 75 years while reducing
poverty among seniors. Reforms Social Security for its own sake, not for deficit
reduction.
6) Process Changes: Reforms the budget process to ensure the debt remains on a
stable path, spending stays under control, inflation is measured accurately, and
taxpayer dollars go where they belong.

The Fiscal Commission Recommendations (in full)

Discretionary Spending Cuts

1.1: CAP DISCRETIONARY SPENDING THROUGH 2020. Hold spending in 2012
equal to or lower than spending in 2011, and return spending to pre-crisis 2008 levels in
real terms in 2013. Limit future spending growth to half the projected inflation rate
through 2020. (Saves $183 billion in 2015, $1,760 billion through 2020)

1.2: CUT BOTH SECURITY AND NON-SECURITY SPENDING. Establish firewall

between the two categories through 2015, and require equal percentage cuts from both
sides.
1.3: ENFORCE CAPS THROUGH TWO MECHANISMS -- POINT OF ORDER AND
SEQUESTRATION. Require a separate non-amendable vote in House and 60-vote
point of order in Senate to waive spending beyond the caps. Impose across-the-board
sequester by the amount appropriations exceed the caps.

1.4: REQUIRE THE PRESIDENT TO PROPOSE ANNUAL LIMITS FOR WAR

SPENDING. Create a separate category above the caps for Overseas Contingency
Operations (OCO), proposed by the President to reflect the projected needs of war
policy.

1.5: ESTABLISH A DISASTER FUND TO BUDGET HONESTLY FOR

CATASTROPHES.
(Costs $11 billion per year, $99 billion through 2020)

1.6: STOP THE ABUSE OF EMERGENCY SPENDING.

1.7: FULLY FUND THE TRANSPORTATION TRUST FUND INSTEAD OF RELYING

ON DEFICIT SPENDING. Dedicate a 15-cent increase in the gas tax to transportation
funding, and reduce spending to match the revenues the trust fund collects each year.

1.8: UNLEASH AGENCIES TO BEGIN IDENTIFYING SAVINGS.

1.9: ESTABLISH CUT-AND-INVEST COMMITTEE TO CUT LOW-PRIORITY

SPENDING, INCREASE HIGH-PRIORITY INVESTMENT, AND CONSOLIDATE
DUPLICATIVE FEDERAL PROGRAMS.

1.10: ADOPT IMMEDIATE REFORMS TO REDUCE SPENDING AND MAKE THE

FEDERAL GOVERNMENT MORE EFFICIENT. (Saves $50+ billion)

1.10.1 Reduce Congressional & White House Budgets by 15 Percent ($0.8B)

1.10.2 Impose Three-Year Freeze on Member Pay
1.10.3 Impose Three-Year Pay Freeze on Federal Workers and Defense
Department Civilians ($20.4B)
1.10.4 Reduce Size of the Federal Workforce Through Attrition ($13.2B)
1.10.5 Reduce Federal Travel, Printing, and Vehicle Budgets ($1.1B)
1.10.6 Sell Excess Federal Property ($0.1B)
1.10.7 Eliminate All Congressional Earmarks ($16B)

Tax Reform
2.1: ENACT FUNDAMENTAL TAX REFORM BY 2012 TO LOWER RATES, REDUCE
DEFICITS, AND SIMPLIFY THE CODE. Eliminate all tax expenditures, dedicate a
portion of the additional revenue to deficit reduction and use the remaining revenue to
lower rates and add back necessary expenditures and credits.

2.1.1 Cut rates across the board, and reduce the top rate to between 25 and 29
percent.
2.1.2 Dedicate $80 billion to deficit reduction in 2015 and $180 billion in 2020.
 2.1.3 Simplify key provisions to promote work, homes, health, charity, and
savings while increasing or maintaining progressivity.

2.2: ENACT CORPORATE REFORM TO LOWER RATES, CLOSE LOOPHOLES,

AND MOVE TO A TERRITORIAL SYSTEM.

2.2.1 Establish single corporate tax rate between 25% and 29%.
2.2.2 Eliminate all tax expenditures in the corporate code.
2.2.3 Move to a competitive territorial tax system.

2.3: PUT FAILSAFE IN PLACE TO ENSURE SWIFT PASSAGE OF TAX REFORM.

Health Care Savings

3.1: REFORM THE MEDICARE SUSTAINABLE GROWTH RATE. Reform Medicare
Sustainable Growth Rate (“doc fix”) for physicians and require the fix to be offset.
(Saves $3 billion in 2015, $22 billion through 2020, relative to a freeze)

3.2: REFORM OR REPEAL THE CLASS ACT. (Costs $11 billion in 2015, $76 billion
through 2020)

3.3: PAY FOR ‘DOC FIX’ AND CLASS ACT REFORM. Enact specific health savings
to offset the costs of the Sustainable Growth Rate (SGR) fix and the lost receipts from
repealing or reforming the CLASS Act.

3.3.1 Increase authority and funding to reduce Medicare fraud. (Saves $1

billion in 2015, $9 billion through 2020)

3.3.2 Reform Medicare cost-sharing rules. (Saves $10 billion in 2015, $110
billion through 2020)

3.3.3 Restrict first-dollar coverage in Medicare supplemental insurance.

(Medigap savings included in previous option, additional savings total $4 billion
in 2015 and $38 billion through 2020)

3.3.4 Extend Medicaid drug rebate to dual eligibles in Part D. (Saves $7 billion
in 2015, $49 billion through 2020)

3.3.5 Reduce excess payments to hospitals for medical education. (Saves $6

billion in 2015, $60 billion through 2020)

3.3.6 Cut Medicare payments for bad debts. (Saves $3 billion in 2015, $23
billion through 2020)

3.3.7 Accelerate home health savings in ACA. (Saves $2 billion in 2015, $9

billion through 2020)

3.3.8 Eliminate state gaming of Medicaid tax gimmick. (Saves $5 billion in

2015, $44 billion through 2020)
 3.3.9 Place dual eligibles in Medicaid managed care. (Saves $1 billion in 2015,
$12 billion through 2020)

3.3.10 Reduce funding for Medicaid administrative costs. (Saves less than $260
million in 2015, $2 billion through 2020)

3.3.11 Medical malpractice reform. (Saves $2 billion in 2015, $17 billion through
2020)

3.3.12 Pilot premium support through FEHB. (Saves $2 billion in 2015, $18
billion through 2020)

3.4: AGGRESSIVELY IMPLEMENT AND EXPAND PAYMENT REFORM PILOTS.

Direct CMS to design and begin implementation of Medicare payment reform pilots,
demonstrations and programs as rapidly as possible and allow successful programs to
be expanded without further Congressional action.

3.5: ELIMINATE PROVIDER CARVE OUTS IN IPAB. Give the Independent Payment
Advisory Board (IPAB) authority to make recommendations regarding hospitals and
other exempted providers.

3.5: ESTABLISH LONG-TERM GLOBAL BUDGET FOR TOTAL HEALTH CARE

COSTS. Establish a global budget for total federal health care costs and limit the growth
to GDP plus 1 percent.

Other Mandatory Savings

4.1: REVIEW AND REFORM FEDERAL WORKFORCE RETIREMENT PROGRAMS.
Create a federal workforce entitlement task force to re-evaluate civil service and military
health and retirement programs and recommend savings of $70 billion over ten years.

Use the highest five years of earnings to calculate civil service pension benefits
for new retirees (CSRS and FERS) rather than highest three years prescribed
under current law, to bring the benefit calculation in line with the private sector
standard.
Savings in 2015: $500 million. Savings through 2020: $5 billion.

Defer COLA for retirees in the current system until age 62, including for civilian
and military retirees who retire well before a conventional retirement age. In
place of annual increases, provide a one-time catch-up adjustment at age 62 to
increase the benefit to the amount that would have been payable had full COLAs
been in effect.
Savings in 2015: $5 billion. Savings through 2020: $17 billion.

Adjust the ratio of employer/employee contributions to federal employee pension

plans to equalize contributions.
Savings in 2015: $4 billion. Savings through 2020: $51 billion.
4.2: REDUCE AGRICULTURE PROGRAM SPENDING THROUGH 2020. Reduce net
spending on mandatory agriculture programs by $10 billion from 2012 through 2020 with
additional savings to fund an extension of the agriculture disaster fund and allow the
Agriculture Committees to reallocate funds as necessary according to their priorities in
the upcoming Farm Bill. Savings in 2015: $1 billion. Savings through 2020: $10 billion.

4.3: ELIMINATE IN-SCHOOL SUBSIDIES IN FEDERAL STUDENT LOAN

PROGRAMS. Eliminate income-based subsidies for federal student loan borrowers in
favor of better targeted hardship relief for loan repayment. Savings in 2015: $5 billion.
Savings through 2020: $43 billion.

4.5: GIVE PENSION BENEFIT GUARANTEE BOARD AUTHORITY TO INCREASE

PREMIUMS. Savings in 2015: $2 billion. Savings through 2020: $16 billion.

4.6: ELIMINATE PAYMENTS TO STATES FOR ABANDONED MINES.

4.7: EXTEND FCC SPECTRUM AUCTION AUTHORITY.

4.8: INDEX MANDATORY USER FEES TO INFLATION.

4.9: RESTRUCTURE THE POWER MARKETING ADMINISTRATIONS TO CHARGE

MARKET RATES.

4.10: REQUIRE TENNESSEE VALLEY AUTHORITY TO IMPOSE TRANSMISSION

SURCHARGE.

4.11: GIVE POST OFFICE GREATER MANAGEMENT AUTONOMY.

4.6-4.11 Savings in 2015: $1 billion. Savings through 2020: $8 billion.

Social Security Reform

5.1: MAKE RETIREMENT BENEFIT FORMULA MORE PROGRESSIVE. Modify the
current three-bracket formula to a more progressive four-bracket formula, with changes
phased in slowly. Change the current bend point factors of 90%|32%|15% to 90%|30%|
10%|5% by 2050, with the new bend point added at median lifetime income.

5.2: REDUCE POVERTY BY PROVIDING AN ENHANCED MINIMUM BENEFIT FOR

LOW-WAGE WORKERS. Create a new special minimum benefit that provides full
career workers with a benefit no less than 125 percent of the poverty line in 2017 and
indexed to wages thereafter.

5.3: ENHANCE BENEFITS FOR THE VERY OLD AND THE LONG-TIME DISABLED.
Add a new “20-year benefit bump up” to protect those Social Security recipients who
have potentially outlived their personal retirement resources.

5.4: GRADUALLY INCREASE EARLY AND FULL RETIREMENT AGES, BASED ON

INCREASES IN LIFE EXPENCTANCY. After the Normal Retirement Age (NRA)
reaches 67 in 2027 under current law, index both the NRA and Early Eligibility Age
(EEA) to increases in life expectancy, effectively increasing the NRA to 68 by about
2050 and 69 by about 2075, and the EEA to 63 and 64 in lock step.

5.5: GIVE RETIREES MORE FLEXIBILITY IN CLAIMING BENEFITS AND CREATE A

HARDSHIP EXEMPTION FOR THOSE WHO CANNOT WORK BEYOND 62. Allow
Social Security beneficiaries to collect half of their benefits as early as age 62, and the
other half at a later age. Also, direct the Social Security Administration to design a
hardship exemption for those who cannot work past 62 but who do not qualify for
disability benefits.

5.6: GRADUALLY INCREASE THE TAXABLE MAXIMUM TO COVER 90 PERCENT

OF WAGES BY 2050.

5.7: ADOPT IMPROVED MEASURE OF CPI. Use the chained CPI, a more accurate
measure of inflation, to calculate the Cost of Living Adjustment for Social Security
beneficiaries.

5.8: COVER NEWLY HIRED STATE AND LOCAL WORKERS AFTER 2020. After
2020, mandate that all newly hired state and local workers be covered under Social
Security, and require state and local pension plans to share data with Social Security.

5.9: DIRECT SSA TO BETTER INFORM FUTURE BENEFICIARIES ON

RETIREMENT OPTIONS. Direct the Social Security Administration to improve
information on retirement choices, better inform future beneficiaries on the financial
implications of early retirement, and promote greater retirement savings.

Budget Process Reforms

6.1: SWITCH TO A MORE ACCURATE MEASURE OF INFLATION FOR INDEXED
PROVISIONS. Rely on chained CPI to index all CPI-linked provisions across
government.

6.2: ESTABLISH A DEBT STABILIZATION PROCESS TO ENFORCE DEFICIT

REDUCTION TARGETS. Establish a debt stabilization process to provide a backstop to
enforce savings and keep the federal budget on path to achieve long term targets.

6.3: GIVE THE PRESIDENT THE POWER OF EXPEDITED RESCISSION.

6.4: ALLOW CAP ADJUSTMENTS FOR PROGRAM INTEGRITY EFFORTS.

6.5: CONDUCT REVIEW OF BUDGET CONCEPTS TO MORE ACCURATELY

REFLECT GOVERNMENT LIABILITIES.