A five-person panel of experts questioned whether the U.S. will be able to meet fiscal challenges in the coming year, citing “irreconcilable differences” between the two parties, election-year politics and entrenched interests.

The panelists–AALU CEO David Stertzer; Mark Cadin, AALU’s senior vice president of government affairs; Chris Morton, an AALU vice president of legislative affairs, Federal Policy Group Managing Director Kenneth Kies, and Ricchetti Inc. President Steve Ricchetti–explored fiscal and other challenges the U.S. faces during a general session at the AALU’s annual meeting earlier this month.

Kies said that the national debt, only $5.08 trillion in fiscal 2008, will exceed $20 trillion in the several years, based on current projections. He added that the budget deficit in 2011 was $1.65 trillion.

These numbers, as bad as they are, could be even worse,” said Kies. “We’re on an unsustainable path. As a percentage of GDP, we’re heading into the 80% range. That puts us in the inauspicious company of Greece, Portugal, Spain and Ireland–all countries that have seen a downgrade to the credit rating.”

“We’re facing the most serious fiscal problems in our history while heading towards an election,” he added. “And election-year politics will make getting an agreement this year very difficult.”

On the question of raising the current $14.3 debt ceiling–the amount of money the federal government can borrow under U.S. law–Ricchetti said that to do so would have “catastrophic effects” on the U.S. financial standing in credit markets and the fragile economy recovery.

Cadin agreed, adding that Republicans and Democrats in Congress will have to achieve consensus on either of two choices: a “clean debt ceiling” (raising the debt ceiling without enacting concurrent spending cuts); or coupling a new debt ceiling with spending reductions.

“In my view, we need to deal with spending,” said Cadin, adding that the real debate will focus on how much in spending cuts both parties will agree on to get to a new debt ceiling.

“The reality is we don’t have to raise taxes to deal with the spending problem,” Cadin said. “We have to cut spending to deal with the spending problem. That will be the message that carries the day. And I think ultimately a spending deal will produce a deficit pact.”

Kies expressed skepticism that a deal can be achieved because of the “irreconcilable positions” of the two parties. President Obama and leading Democrats in Congress, he said, expect that between $1 and $2 trillion in deficit reduction to come from tax increases. The Republicans are steadfastly opposed to any increase in income taxes.

He suggested that Congress will finesse the issue through a series of short-term debt ceiling extensions that could carry into the fall or next year.

Ricchetti agreed with Kies that the two parties have “taken irreconcilable political positions.” But he expressed hope that the killing of al Qaeda leader Osama bin Laden, announced by President Obama on May 1, just as the AALU conference was starting will provide a “unifying atmosphere” in which Republicans and Democrats can bridge differences.

He added, however, that serious negotiating will require the parties over the coming weeks to “put everything on the table.” And he noted the political rhetoric of recent weeks will make the task “extraordinarily difficult.”

Turning to the potential impact of deficit reduction negotiation on producers, the panelists agreed that the tax-favored treatment of life insurers remains a target. Kies noted this is annually cited by the Congressional Budget Office as a deficit reduction “option.” Taxing the inside build-up of permanent policies, he added, would generate more $200 billion over 10 years.

Cadin said that a phrase adopted by Democrats to describe tax preferences in the Internal Revenue Code–tax expenditures–could make the taxing of life insurance more appealing.

There is no question that Democrats want tax increases as part of a deficit reduction package,” he said. “And ‘spending’ through the tax code doesn’t really sound like a tax increase.”

Ricchetti said the industry could be negatively impacted if an overhaul of the tax code takes the form of lower marginal tax rates for high income earners, as many Republicans advocate. Life sales might also suffer if, as left-of-center think tanks have proposed, the tax-favored treatment of life insurance were limited through income-testing.

“Individuals with higher incomes might have a lower chance of being able to take advantage of tax preferences [offered on life insurance],” he said. “Income-testing could easily be embedded in a tax reform bill.”

Kies, however, was skeptical tax reform will happen this year because any effort to simplify the IRS code by removing tax preferences is “complicated.” The initiative, he said, affects a myriad of interests that have a vested stake in maintaining current tax credits. Among them: the home mortgage interest deduction.

“Tax reform is enormously complicated,” Cadin said. “We as an industry have a vested interest in the discussion. Our message to Congress needs to be: the tax code needs to incent people to save. And life insurance is a big piece of saving incentives. There’s a lot of stake.”

Ricchetti expressed confidence that the industry will be able to rebuff potential challenges to its tax preferences. He noted that industry lobbying campaigns currently are backed by $16-17 million in funding from AALU member companies. And he noted the AALU has “market-tested” its advocacy messages. Among them: that the savings component of life insurance is critical to helping consumers achieve financial security in retirement.

Cadin also voiced optimism about the industry’s ability to protect its interests.

“The unity of the industry has never been greater,” he said. “We have the relationships, the funding, the communication tools and the messages to address any new legislative initiative. In terms of preparation, we’re ready to go.”

Added Morton: “Each year we’re getting stronger as a result of the relationships we’ve built fighting back adverse tax proposals. Thirty-one of 37 members on the House, Ways and Means Committee have signed a letter stating that taxing COLI [corporate owned life insurance] is not an appropriate way to address fiscal challenges that we face as a country. What we’ve done works.”