Lawmakers Target Social Security, Tax Breaks to Reduce Deficit

Senate Budget Committee Chairman Kent
Senate Budget Committee Chairman Kent Conrad. Photographer: Andrew Harrer/Bloomberg

Lawmakers may embrace plans by President Barack Obama’s debt commission to curb the costs of Social Security and $1 trillion in tax breaks even as comprehensive deficit reduction hinges on whether both parties seek confrontation or accommodation.

While the commission lacked the votes to send its proposal to Congress, bipartisan agreement on the panel will open a debate over the retirement system and the tax breaks, which include the home-mortgage deduction, several lawmakers and analysts said.

Any significant effort confronts what commission co- chairman Erskine Bowles called “the threat pressed upon us by these ever-increasing deficits.” Senate Budget Committee Chairman Kent Conrad, a Democrat, wants Obama to convene a summit, and House Republicans Dave Camp, incoming Ways and Means Committee chairman, and Paul Ryan, who will head the Budget Committee in January, say they’ll use the plan as a basis for hearings on the deficit.

“I put the likelihood at 15 percent that we would have any kind of deficit-reduction package in the next two years,” said Diane Swonk, chief economist for Mesirow Financial Inc. in Chicago. “That’s not that high. But it’s higher than I would have put it two weeks ago.”

Obama thanked the panel for highlighting “the magnitude of the challenge facing us” without embracing specific proposals. White House Budget Director Jack Lew has invited commission members to meet.

‘Strong Beginning’

“I would prefer to even go further in deficit reduction than this package,” Conrad, a commission member, said yesterday on “Fox News Sunday.” He called the proposal, backed by 11 of the panel’s 18 members, “a strong beginning,” with the “next logical step” a meeting between Obama and bipartisan Congress leaders.

Pressures to extend Bush-era tax cuts and respond to 9.8 percent unemployment will hamper fiscal restraint for now, said Lou Crandall, chief economist at Wrightson ICAP LLC, a unit of London-based ICAP Plc, the world’s largest broker of trades between banks.

“It is difficult for the congressional leadership to drive two conflicting processes at once,” Crandall said. “Congress is probably going to have to take things one step at a time.”

Still, 10-year Treasury note yields were at 3.01 percent on Dec. 3, suggesting the bond market isn’t too concerned yet about the deficit.

Voters Concerned

The federal budget deficit for the fiscal year ended Sept. 30 was $1.3 trillion or 8.9 percent of gross domestic product, according to a calculation released by the Treasury Department in October. Voters consider the shortfall their second most pressing concern, according to a Bloomberg National Poll.

The plan by Bowles, a former chief of staff to President Bill Clinton, and Republican co-chairman Alan Simpson, a former senator from Wyoming, would increase taxes by $1 trillion by 2020. It would scale back or eliminate hundreds of tax deductions, exclusions or credits such as those allowing homeowners to write off interest on their mortgage payments. It would also cut individual and corporate income tax rates.

Social Security benefits would be reduced, the gas tax would go up by 15 cents, discretionary spending would be lowered by $1.6 trillion and Medicare pared by $400 billion.

Tweaks Needed

Peter Orszag, who was running the White House budget office when Obama formed the panel, said if Congress makes any progress on the debt-reduction proposal, it’s most likely to be on Social Security’s long-term financial challenges.

“The most auspicious part of these proposals is in Social Security, where you need some tweaks to get bipartisan agreement, but they are tweaks,” said Orszag, who led the Congressional Budget Office before joining the Obama administration in 2009.

That sentiment was echoed by panel members including Alice Rivlin, another former CBO director, and Andrew Stern, president emeritus of the Service Employees International Union, among the nation’s largest labor organizations.

“Almost everybody mentioned it at some point in the deliberations,” said Rivlin. “Social Security can be done, I’m convinced now,” said Stern.

Republicans signal they intend to make their first order of business federal programs directed at specific groups. Republicans “must immediately start a conversation with the nation about the kind of entitlement changes that are necessary,” Majority Leader-elect Eric Cantor said in a statement Dec. 3.

Higher Earners

On Social Security, the commission’s report proposes moving to a formula that slows future benefit growth, particularly for higher earners, and raising the retirement age to 68 by 2050.

Previous efforts by Presidents Clinton and George W. Bush to overhaul the retirement system failed.

Now, Dick Durbin of Illinois, the Senate’s No. 2 Democrat, says: “If we want to come up with something bipartisan to work on together, Social Security is a good candidate.”

Durbin also said in an interview that “this commission opened a door that nobody has looked behind a long time, and that’s tax expenditures.”

Clearing out tax breaks appeals to Republicans looking to simplify the code and lower income tax rates.

Representative John Boehner, an Ohio Republican who becomes House speaker next month, said in an August speech in Cleveland that lawmakers need to “take a long and hard look at the undergrowth of deductions, credits, and special carve-outs that our tax code has become.”

Lower-Income Earners

Democrats can be brought on board by making sure the plan helps lower-income earners, said Mark Warner, a Virginia Democrat leading a bipartisan group of senators seeking common ground.

Higher-earning filers benefit the most from the exemptions because they are more likely to itemize their returns. That would allow Democrats to argue that doing away with them and cutting rates helps those who earn less, said Rivlin.

Edward Kleinbard, a tax professor at the University of Southern California who once headed the staff of Congress’s Joint Committee on Taxation, said limiting tax breaks may be gaining bipartisan support though Congress probably would have to phase in changes over 10 years.

“You can’t go cold turkey on removing these kinds of subsidies,” he said.

The commission report would allow taxpayers to claim a mortgage deduction up to $500,000 on their primary homes.

Bumpy Road

Even with the show of goodwill on the panel, the road to congressional consensus will be bumpy. Swonk said the transformation of deficits to surpluses during the 1990s came only after a series of politically painful actions.

Tax increases contained in the 1993 deficit-cutting package that Clinton passed through Congress were in turn taken up by Republicans as a campaign issue in the 1994 midterm election. Clinton’s Democratic Party lost control of both houses.

It may take a fiscal shock, such as a drop of confidence in state or local bonds that spreads to the Treasury market, to spur action on the commission’s proposals, Orszag said.

The commission has “put ideas back on the table that, if we do run into a fiscal tremor, can be picked up,” he said.