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Deficit Panel Offers Cuts in Social Security, Taxes Amid Doubts on Passage

The leaders of President Barack Obama’s debt-reduction commission unveiled a revised $3.8 trillion savings plan as panel members signaled reluctance to reach a consensus to cut benefits and eliminate tax breaks.

The proposal released today would reduce income tax rates, impose spending caps and salary freezes on the federal government and cut health-care costs. Similar to a draft version released Nov. 10, it recommends cutting Social Security and Medicare and a payroll tax holiday.

“The era of debt denial is over, and there can be no turning back,” co-chairmen Erskine Bowles, a former chief of staff to President Bill Clinton, and Republican former Wyoming Senator Alan Simpson said. “We sign our names to this plan because we love our children, our grandchildren, and our country too much not to act while we still have the chance.”

Prospects for approval are dim even as concern mounts over the U.S.’s $13.7 trillion national debt and $1.3 trillion deficit this year. Republicans will take control of the House in January, making a political agreement with Obama and the Democratic-dominated Senate less likely.

A panel vote set for today was delayed until Dec. 3. Bowles said yesterday he didn’t know if members will reach agreement on the proposal, which includes scaling back such popular tax breaks as the home-mortgage interest deduction. Agreement from 14 of the commission’s 18 members is needed to send a plan to Congress for a vote on whether to put it into effect. A failure to get 14 votes would kill the plan.

‘Very Small Changes’

Representative Jan Schakowsky, an Illinois Democrat on the commission, said she will vote against the new proposal because it contained only “very small changes” from the previous draft. “I don’t see how I can” support it, she said in an interview.

Republican Representatives Paul Ryan of Wisconsin and Jeb Hensarling of Texas said the plan doesn’t do enough to address rising health-care costs. “I don’t know if you’re going to get my vote,” Hensarling said. Yesterday, Ryan said he probably wouldn’t vote for the proposal.

Retiring Senator Judd Gregg, a New Hampshire Republican, was among five members, addition to the two co-chairmen, saying they will vote in favor. “It represents a step forward that we urgently need,” he said in a statement.

Senator Kent Conrad, a North Dakota Democrat who heads the Budget Committee, said he will vote yes, as did commission member David Cote, chairman of Honeywell International Inc.; Ann Fudge, former chief executive officer of Young & Rubicam Inc., and former Congressional Budget Office Director Alice Rivlin.

‘Very Hopeful’

“I remain very hopeful that in the next 48 hours colleagues will reflect and decide to support this effort,” said Conrad.

Unchanged from the previous draft are proposals to raise taxes and fees by $1 trillion over the next nine years. Discretionary spending would be cut by $1.67 trillion while mandatory programs would be pared by $556 billion. The government would balance its budget in 2035.

The proposal would cut Medicare by more than $400 billion. It targets provisions in the administration’s health-care overhaul establishing a long-term care insurance program, while proposing tougher restrictions on war funding and other types of “emergency” spending. Total savings would amount to $3.885 trillion over the next nine years, up slightly from the previous draft’s $3.831 trillion.

Gregg said it’s vital that the government get the deficit under control.

‘Tough Decisions’

“The job of governing right now is getting our fiscal house in order,” Gregg said on Bloomberg Television today. “This is a blueprint for making those tough decisions.”

Still, Stan Collender, a former congressional budget aide and managing director of Qorvis Communications in Washington, said the plan has little chance of approval. “The mantra for next year is gridlock, stalemate and shutdown,” he said.

Senator Dick Durbin of Illinois, the second-ranking Democrat and a member of the commission, said, “I can’t believe I volunteered for this root canal.” He said a proposal to raise the Social Security retirement age was “acceptable” though he wasn’t ready to say whether he would support the full plan.

The proposal would reduce the deficit to 2.3 percent of gross domestic product by 2015.

The previous draft by Bowles and Simpson had sparked instant opposition from Democrats, some Republicans and groups such as the Mortgage Bankers Association and the Aerospace Industries Association. Democratic House Speaker Nancy Pelosi of California called the targeting of Social Security and Medicare “simply unacceptable.”

Social Security

On Social Security, the report proposes gradually moving to a formula that slows future benefit growth, particularly for higher earners.

Currently, initial benefits are calculated using a three- bracket formula with an annual cap at $106,800. The commission recommends gradually transitioning to a four-bracket formula that would remove the current cap to tax all income above $102,000 at 5 percent.

Social Security would create a new special minimum benefit of no less than 125 percent of the poverty rate in 2017 and gradually increase the retirement age to 68 by 2050 and 69 by 2075. It would include a hardship exemption for those who can’t work beyond age 62 and don’t qualify for disability.

Discretionary spending would be frozen at 2011 levels and then require “serious belt-tightening” to begin in 2012, followed by substantial cuts in 2013.

Tax Holiday

The proposal for a payroll tax holiday was first offered by Rivlin to appeal to Democrats concerned about cutting government benefits as the economy continues to shed jobs.

The plan establishes a firewall between security and non- security spending, requiring equal percentage cuts from both sides. The security category covers all defense spending including homeland security, nuclear weapons, veterans and international affairs, with the exception of war spending.

A 15-cent-per-gallon gas tax to fund the transportation trust fund would also be implemented.

Cuts to government budgets would reduce congressional and White House spending by 15 percent, saving $800 million in 2015. Salaries for members of Congress would be frozen for three years, as would those for federal workers and Defense Department civilians.

The proposal would overhaul income taxes by cutting back or eliminating various tax breaks and using the revenue to lower rates and reduce deficits. Income tax rates could be as low as 8 percent, 14 percent and 23 percent. The plan also offers different options for retaining popular items like the child tax credit.

Mortgage Interest

One alternative includes a 12 percent non-refundable tax credit available to all taxpayers on their home-mortgage interest with no credit for interest from a second residence.

The co-chairmen also said Congress should consider a temporary suspension in 2011 of one side of the Social Security payroll tax, financed by transfers from general revenue. This would cost $50 billion to $100 billion in lost revenue.

Collender said the committee chairmen “decided this was the best they could do and they would go out in a blaze of glory rather be timid and come out with a vanilla plan.”

To contact the reporters on this story: Brian Faler in Washington at bfaler@bloomberg.net; Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

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