Debt ceiling: Slow grind

@CNNMoney July 11, 2011: 9:25 AM ET
Debt ceiling talkks: Slow grind as deadline nears

Still no deal: President Obama met with Democrat Nancy Pelosi and Republican John Boehner on Sunday.

NEW YORK (CNNMoney) -- Bye-bye big debt ceiling deal. Hello, 11th hour brinksmanship.

That's looking a lot more likely since House Speaker John Boehner said this weekend he can't sign on to a $4 trillion debt-reduction package because the White House continues to insist the package include some tax increases.

Even though the White House said it will continue to push for the biggest deal possible, a meeting Sunday evening between President Obama and congressional leaders lasted 75 minutes without any signs of progress toward a so-called "grand bargain." Instead, the White House announced talks would continue on Monday.

Nobody said it would be easy. After all, it took policymakers decades to put the United States at risk of a debt crisis. So it shouldn't be surprising if getting agreement on substantive debt reduction takes more than a couple of weeks.

The problem, of course, is that many Republicans have said they won't support an increase in the debt ceiling unless it's pared with a deal to cut spending.

And both Democrats and Republicans have since laid down ultimatums for what they need to support any deal, putting in jeopardy the chances that the debt ceiling gets raised in time.

If the ceiling isn't raised by Aug. 2, that would put the country's sterling credit at risk, potentially causing shock waves through the world economy.

The ratings agency Moody's, meanwhile, has said that if progress in talks "is not evident by the middle of July," it would likely place the U.S. government's credit rating on review for a downgrade. For those keeping score, Friday is July 15. (Read: Go big on debt ceiling)

For now, a gaping divide remains between the parties on three issues that could derail any debt ceiling deal, large or small.

'Cut, cap and balance' ... or else

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 said, there is no way that the House of Representatives will support a tax increase," House Majority Leader Eric Cantor said.

Earlier last week, Cantor said if 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 walk that back and vote for a deal that includes increases in revenue.

Social Security: Reports that Obama may be open to including changes to Social Security as part of a debt deal 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 last 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.

Last 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 debt deal, that will be a politically tough vote for Democrats since such measures would require future retirees to pay more, even if not as much as under Ryan's plan.

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

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