Debt ceiling: Perils of a 'grand bargain'

@CNNMoney July 8, 2011: 2:39 PM ET
Debt ceiling: Perils of a 'grand bargain'

"There's going to be pain involved politically on all sides" with any debt deal, President Obama said after meeting Thursday with congressional leaders, including House Speaker John Boehner.

NEW YORK (CNNMoney) -- With less than a month to go before debt ceiling D-Day, President Obama says he's gunning for the big deal -- the comprehensive, balanced plan that would take a big knife to the country's debt.

That so-called "grand bargain" would be worth up to $4 trillion in debt reduction over the next decade.

But getting that grand bargain will be very hard and not just because time is short.

"This is a really heavy lift," said longtime political observer Norm Ornstein, a resident fellow at the American Enterprise Institute.

So heavy, in fact, that Ornstein is not convinced lawmakers will get past their partisan furies before markets go nuts and jolt them into action if only to raise the debt ceiling.

That's because the key issues under discussion are political rats' nests.

Tax increases: Republicans have said repeatedly that they're happy to put everything on the table except tax increases. Democrats, meanwhile, have said they can't agree to a spending-cuts only deal.

But Republicans are not budging publicly, and especially not after Friday's disappointing jobs report.

"It just does not make sense for Americans to suffer under higher taxes in an economy like this. And, as the Speaker [of the House John Boehner] said, there is no way that the House of Representatives will support a tax increase," House Majority Leader Eric Cantor said.

Earlier this week, Cantor said if President Obama wants to talk about closing tax loopholes, he'd be happy to if the revenue produced from doing so is offset by tax cuts elsewhere.

In other words, no new revenue could be used for debt reduction. So that doesn't move the two sides much closer.

Other Republicans, like Sen. Orrin Hatch, only want to discuss closing loopholes in the context of fundamental tax reform. And tax reform, they believe, should not be part of any debt-reduction discussion.

Fiscal experts from the left and right have said repeatedly that any credible plan to reduce the country's debt load -- which is to say a plan the country can stick to -- will have to involve changes to spending and taxes.

Their reason: Curing budget shortfalls with spending cuts alone would require draconian cutbacks in government programs.

Many Republican lawmakers, however, have frequently and loudly demonized tax increases of any kind at any time. So it will be hard for them to vote for a grand bargain that includes increases in revenue.

Social Security: Reports that Obama may be open to including changes to Social Security as part of a grand bargain created a firestorm of protests from liberal Democrats and progressives.

They have said all along that Social Security should not be part of any debt-reduction deal because the program hasn't contributed to the country's current debt. In fact, the surplus payroll tax revenue paid into the program over the years and loaned to the Treasury has actually kept the country's deficits below where they would otherwise be.

That's correct, but over the long term Social Security will start contributing to the country's budget shortfalls. And experts say the sooner changes are agreed to, the more moderate changes will be because they can be phased in slowly.

Nevertheless, Social Security advocates have vociferously opposed most proposals to change the program. But one acceptable change in their view: Increasing the amount of taxes paid into the system by those who earn more than $107,000 -- which is the current cap on the income subject to the Social Security tax.

But reports this week suggested that one Social Security change under consideration is revising the way inflation is calculated when determining Social Security beneficiaries' annual cost-of-living adjustments.

The change could result in a seniors' annual benefits being reduced by roughly 3% for 75-year-olds to 9% for 95-year-olds. By contrast, however, if no changes are made to Social Security, benefits would have to be cut across the board by 23% come 2036.

On Thursday, some progressive House Democrats said they will collect signatures for a letter to Obama warning that they will oppose any deal that cuts entitlement programs or fails to raise taxes on the wealthy.

Medicare: Democrats have spent a lot of time lambasting Republicans for supporting a Medicare reform plan from House Budget Chairman Paul Ryan. They excoriate it as "destroying Medicare as we know it."

Among other things, Ryan's plan would raise the age of eligibility for Medicare and convert the fee-for-service health care program into a "premium-support" system for everyone under 55 today. Seniors would choose from a Medicare-approved list of private insurance plans and the cost of their chosen plan would be subsidized in part by the federal government.

The Congressional Budget Office said seniors would pay more for their health care than they do under the current system and they would assume greater financial risk "if the volume, complexity and costs of medical services turned out to be greater than expected."

Some of the ideas that have been proposed in the past for reforming Medicare -- which threatens to eat up ever larger pieces of the federal budget -- have included increased cost-sharing for beneficiaries and higher premiums, at least for wealthier seniors.

So if any of those ideas are included in a grand bargain, that will be a politically tough vote for Democrats since those ideas would require the elderly to pay more, even if not as much as under Ryan's plan.

"This isn't a Grand Bargain -- any cuts to Medicare, Medicaid, or Social Security benefits are a grand destruction of the Democratic legacy," said Stephanie Taylor, co-founder of the Progressive Change Campaign Committee, in an email to reporters.

--Reports from CNN's White House and Capitol Hill units were used in compiling this article. To top of page

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