Curbing debt: Shoulda, coulda. Now gotta.

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- In the past five years, the administrations of both parties have tried to reform three big-ticket items: the tax code, health care and Social Security.

The reform efforts would have helped put the federal budget on a more sustainable course.

But all have been tabled in one form or another because of partisan resistance to key ideas.

Now policymakers' work is infinitely harder as they wake up to the realization that they must deal soon with the country's long-term fiscal problems.

At stake ultimately is the United States' status as a first-class economy.

"It's going to take bold strokes to deal with this challenge. It's going to take big ideas, and it's going to take political courage because it's every hot-button issue that's out there. It is Social Security. It is Medicare. It is revenue. All of them," said Senate Budget Chairman Kent Conrad, D-N.D., at a hearing last week on fiscal sustainability.

The president's yet-to-be formed bipartisan fiscal commission will be asked to propose ways to hit two key targets:

  • to get annual deficits to 3% of gross domestic product by 2015;
  • to then stabilize the nation's total accrued debt at something far lower than 77% of GDP, which is where it would be by 2020 under President Obama's proposed 2011 budget.

As things stand today, federal spending -- much of it in Medicare and to a lesser degree Social Security -- is on track to grow much faster than the economy for decades.

To achieve better fiscal balance after the economy recovers means that lawmakers will have to agree to measures that run contrary to the ideologies of the left and the right: Cut spending and raise taxes.

"And [the plan] must have the support of the leadership of both political parties," said Alice Rivlin, former vice chairman of the Federal Reserve, former White House budget director under President Clinton and former director of the Congressional Budget Office.

Rivlin and former Republican Senator Pete Domenici have formed a bipartisan debt-reduction task force that will craft a debt-reduction budget plan for Congress and the public to consider by the end of the year.

They, like other deficit-hawk groups, are suggesting that lawmakers seriously reconsider a number of proposals made in the past five years. Here are just five that likely will get more play in coming months.

Raise the Social Security retirement age: Currently, the full retirement age is set to hit 67 in 2027. Moving up that timetable, and then adjusting the retirement age by just 1 month every 2 years after that, could take care of nearly a third of the long-term shortfall in Social Security.

"As life expectancy increases, we just can't afford to support people in retirement for as long as we have currently under these programs," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers.

Slow the growth of entitlement benefits: To protect lower income seniors who depend most heavily on their Social Security benefits, one option would be to slow the growth of initial benefits for higher income people.

In terms of Medicare, MacGuineas said, one option is to ask higher income retirees who can afford it to contribute more to the cost of their benefits.

Reduce health insurance tax breaks: Everyone agrees controlling health costs is one of the biggest steps needed to reduce the growth in U.S. debt over time. One of the most effective ways to do so is to reduce or eliminate the tax breaks workers get when they buy their insurance at work.

Currently, the portion of premiums paid by employers is treated as tax-free compensation to workers, and there is no limit on how much employers may contribute. The cost in forgone revenue over 10 years is $2.5 trillion, Conrad said.

A cap would mean workers would pay income tax on the portion of their employer's contribution above the cap.

The theory is that workers would avoid paying income tax by choosing lower-cost plans over time.

Broaden the tax base: Close to half of tax filers will end up with no net federal income tax liability for 2009 thanks in large part to a complex host of credits, exemptions, deductions and exclusions. Those tax breaks reduce federal revenue intake by roughly $1 trillion a year.

"If we can get rid of a lot of tax expenditures, we can lower [marginal tax] rates actually below today's level and still raise additional revenues," said Rudolph Penner, a former CBO director who is now the co-chair of the Committee on the Fiscal Future of the United States.

Consider new revenue options: Generating more income tax revenue can be helpful, but raising taxes too high can dampen economic growth. So lawmakers will be looking for other sources of revenue on top of income taxes.

Among the ideas being considered is a national sales tax known as the value-added tax or a possible energy tax. To top of page

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