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Obama Budget to Include Social Security Debt-Cutting Plan

President Barack Obama will propose cutting spending on Social Security and Medicare in the budget he sends to Congress next week, reviving a deficit-cutting deal first proposed to congressional Republicans in December.

The core of the plan, set for release April 10, would change the inflation calculation for Social Security cost-of-living increases, slowing benefit increases. It also would limit inflation adjustments to tax brackets, resulting in a larger tax bill for many Americans, according to an outline released by the White House. For Medicare, Obama has proposed reducing payments to drug companies and care providers and imposing higher costs on high-income beneficiaries.

It tracks the offer on spending cuts and revenue increases that Obama made to House Speaker John Boehner of Ohio as part of an end-of-the-year deal on expiring tax cuts.

“That means that the things like CPI that Republican leaders have pushed hard for will only be accepted if congressional Republicans are willing to do more on revenues,” the e-mailed outline said. “This isn’t about political horse trading; it’s about reducing the deficit in a balanced way.”

While Obama’s fifth budget proposal stands little chance of becoming law because of opposition from Republicans who control the House, it emphasizes the president’s priorities and will set the stage for talks with Republicans on a broader debt-reduction package.

Political Risks

For the first time, Obama is adding specific entitlement benefit cuts in his official budget, an attempt to signal to Republicans that he still wants to reach a deal on reducing the deficit. Trimming Social Security, the government retirement insurance program, carries political risks and may generate opposition from Obama’s allies.

“There’s measures in here we would prefer not to take,” Gene Sperling, head of Obama’s National Economic Council, said in a Bloomberg Television interview. “But we think for us to move forward as a country in divided government everyone’s got to compromise.”

Republicans have resisted raising revenue through higher taxes, and Boehner said he rejected the president’s offer last year because it relied too much on raising taxes and not enough on cutting spending.

“At some point we need to solve our spending problem, and what the president has offered would leave us with a budget that never balances,” the Ohio Republican said in a statement. “If the president believes these modest entitlement savings are needed to help shore up these programs, there’s no reason they should be held hostage for more tax hikes.”

Obama Allies

Groups that supported Obama in the past took aim at the Social Security proposal and the president.

“Under this plan, a typical 80-year-old woman would lose the equivalent of three months worth of food every year. That’s unconscionable,” Anna Galland, executive director of Democratic-leaning advocacy group, said in a statement.

“It’s even more outrageous,” she said, that “the drive to cut Social Security is being led by President Obama and Democrats.”

Including $2.5 trillion in deficit reduction from the year-end budget deal, the administration said that the total deficit-reduction package would reach more than $4.3 trillion over 10 years.

Deficit Plan

In turn, that would trim the deficit to 2.8 percent of gross domestic product by 2016 and 1.7 percent by 2023, putting the U.S. on a fiscally sustainable path with debt declining as a share of the economy, according to the White House statement.

Obama also is proposing more spending on some programs, such as education, that the administration argues is important to ensure future economic growth.

In his State of the Union message in February, the president called for a new pre-kindergarten program for four-year-olds nationwide under a federal aid to states arrangement.

This would be paid for by raising taxes on cigarettes and other tobacco products, according to the White House. The amount of the new taxes wasn’t specified.

The budget will call for raising about $9 billion over a decade by prohibiting individuals from accumulating more than $3 million in Individual Retirement Accounts and other tax-retirement instruments. A $3 million limit would be about equal to an annuity of as much as $205,000 a year, according to the White House.

Inflation Yardstick

The proposal would make the so-called chained Consumer Price Index the benchmark for Social Security increases and adjusting tax brackets.

Switching to the alternative inflation yardstick for Social Security would save $130 billion by making annual benefit increases smaller, according to the plan Obama offered last year.

It also would result in more income being subject to higher income tax rates. The administration in its earlier proposal estimated that would bring in additional tax revenue of about $100 billion over 10 years.

In 2020, the change would raise taxes for 78.3 percent of households by an average of $124, according to the nonpartisan Tax Policy Center in Washington. Taxes would increase for 98 percent of households making between $75,000 and $100,000 a year.

Investor Focus

While lawmakers wrangle over the budget, investors have focused on an improving economy. The benchmark Standard & Poor’s 500 Index has risen 8.9 percent so far this year. The S&P retreated 0.4 percent to 1,553.28 in New York today after a government report showed U.S. employers hired less than half the workers economists forecast in March.

Even though the president’s budget is more than two months late, because of tax-and-spending-legislation at year’s end known as the “fiscal cliff,” Pat Griffin, former President Bill Clinton’s lobbyist in Congress, said the timing “may be just right.”

“If there’s one more chance this year to ignite this conversation, this would be it,” Griffin said.

That’s because House Republicans and Senate Democrats have passed non-binding budget resolutions that are far apart, and there’s little likelihood they will be reconciled. Obama plans to dine with Senate Republicans the evening of April 10, just hours after his budget plan is released.

Failed Negotiations

The chained CPI was a centerpiece of failed negotiations between Obama and Boehner over a “grand bargain” budget deal in the summer of 2011, and it was also the key trade-off Obama was willing to make as part of the so-called fiscal cliff negotiations in December in the context of a broad debt-reduction package.

Unlike the consumer price index, chained CPI adjusts for consumers’ tendency to switch products when prices rise. In that way, economists say it is a more accurate measure of the cost of living for purposes of setting tax policy and Social Security benefits. The regular CPI tends to overstate inflation because it doesn’t adjust for consumer behavior, economists say.

A concern for Democrats is whether a change can be made in a way that would protect low-income and other vulnerable groups of senior citizens. Obama’s 2010 debt commission recommended instituting a flat-dollar benefit “bump-up” for Social Security recipients who have been receiving benefits for 20 years, and a minimum benefit for lower-income beneficiaries.

Another major concern for Democrats and Republicans will be protecting disabled veterans. That could be addressed by enhancing Social Security disability benefits or increasing certain credits for low-income taxpayers.

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