Budget Deal Envisions Deep Social Security Cuts Next Year

By Damian Paletta

WASHINGTON—The last-minute tax and spending deal being discussed in the Senate would do little to reduce the deficit, and could actually expand it, leaving difficult choices about Medicare, Social Security, and the country's borrowing limit until next year.

White House and congressional negotiators had originally envisioned a package of tax and spending changes that would reduce the deficit between $3 trillion and $4 trillion over 10 years. Their goal was to start reversing the country's stubbornly large budget deficit and stabilize the nation's debt, which is near $16.4 trillion.

The White House wanted these changes to include more than $1.2 trillion in new taxes over 10 years and include a number of spending reductions, including a plan to slow the growth of Social Security benefits that had rankled liberal allies. Many Republicans had agreed to include a more modest level of new taxes as part of any deal, and wanted more fundamental changes to Medicare and Social Security to limit the growth of the costly entitlement programs.

Those large-scale talks stalled two weeks ago. The menu of options now under consideration is more focused on tackling a shorter-term problem: imminent deadlines that if missed would lead to tax increases and spending cuts.

President Barack Obama on Friday said he "still" wants a long-term deficit-reduction deal, "but the hour for immediate action is here. It is now." He urged Congress to act on a number of changes, including the prevention of tax increases on the middle class and continuing certain unemployment benefits.

Republican leaders pushing for action on the deficit want the focus to be on spending, rather than taxation, arguing that the U.S.'s long-term budget problems are driven by entitlement programs, especially spending on health care.

Senate Minority Leader Mitch McConnell (R., Ky) has also said he wants to find a big solution to the fiscal talks. "The election is two years away," he said in a recent interview. "The country has huge problems. Rather than looking at what we're trying to do in the context of what might happen in 2014, I'd like to get results."

This weekend, with talks moving closer to the deadline, the only item being discussed that would reduce the deficit is a White House proposal to let the Bush-era tax cuts expire for upper-income households. White House officials believe raising tax rates on income above $250,000, combined with changes in capital-gains, dividend, and estate-tax rules, would raise roughly $950 billion over 10 years, a level that is short of their $1.2 trillion goal. That means the White House is likely to try and pursue more tax increases as part of any subsequent budget debate in 2013.

According to its own budget estimates, that tax change would raise only between $50 billion and $60 billion in new revenue in its first year, less than 10% of the projected budget deficit.

The other items being discussed as part of the slimmed-down package would cost the government. One would extend emergency unemployment benefits for one year, at a cost of roughly $30 billion. Another would prevent Medicare payments to doctors from being cut close to 27%. This change would cost another $10 billion, according to estimates.

The most expensive item being considered as part of the package would extend a change to the alternative-minimum tax and prevent it from hitting as many as 30 million additional households. That change would reduce potential revenue by close to $100 billion.

Given that Congress typically patches the AMT this way, some budget counters don't consider it a cost on the assumption that the policy is effectively permanent. The same is true of the Medicare payments, which are addressed every year, too.

The White House has backed away from other ideas that it believes would have helped the economy but in the short term hurt the deficit, including new infrastructure spending and an extension of the payroll tax cut, which expires Monday.

Meanwhile, the White House wants to postpone—at least temporarily—scheduled cuts in defense and other domestic spending that are set to begin Jan. 2, 2013. The 2011 Budget Control Act requires $110 billion in cuts for the first nine months of 2013, and then for eight subsequent years. The White House and Republicans are at odds over how to replace or postpone these cuts. Many Republicans have said the government should come up with new cuts to offset any that are going to be canceled.

Shelved, at least temporarily, are the long-term changes to spending in programs like Medicare and Social Security that both parties had discussed.

Speaker of the House John Boehner (R., Ohio) had sought roughly $3.6 trillion in deficit reduction. This would include between $800 billion and $1 trillion in new revenue, $300 billion in cuts to discretionary spending, $600 billion in reductions to health programs, $300 billion in cuts to other areas of "mandatory" spending, and $200 billion in savings from changing the government's measure of inflation, among other things.

Mr. Obama had sought between $1.2 trillion and $1.3 trillion in revenue, $400 billion in health-care cuts, $200 billion in cuts to discretionary spending, $400 billion in cuts to health-care programs, and $130 billion in savings from changing the measure of inflation, among other things.

If Democrats and Republicans are able to reach an agreement on the smaller-scale deal, something neither party believes will be easy, they will likely have to quickly revisit the longer-term deficit-reduction talks.

That is because the government is expected to hit its borrowing limit Monday, forcing the Treasury Department to enact emergency measures that can delay a full-blown debt crisis for several weeks. Many Republicans have said they would only agree to raise the debt ceiling in exchange for the significant spending cuts that are absent in the current talks.

The White House has said it won't negotiate with Congress over raising the debt ceiling. In an acknowledgment the debate will continue into 2013, White House officials told corporate executives Friday evening they hoped the package currently under consideration could pave the way for Democrats and Republicans to reach an agreement on a substantive deficit-reduction package next year.

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