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Preoccupied With Debt, Washington's Suddenly Facing the Federal Deficit

Both parties are trying to tackle sea of red ink

All over Washington, like cherry blossoms in spring, proposals are blooming to confront the nation's federal budget deficit.

Two deficit panels have reported and another weighs in on Dec. 1. Their ideas include sweeping remakes of the nation's tax system and major changes in spending priorities that would affect several programs, including Social Security and Medicare.

But whether the proposals will be carefully cultivated or mowed down by political realities remains to be seen.

"We are at a very important crossroads in our federal fiscal policy," said Alison Acosta Fraser, director of economic policy studies at the Heritage Foundation. "We are on a highly unsustainable path — it's economically reckless and morally irresponsible. The path we are on is going to put unconscionable debt on our younger generation."

'The path we are on is going to put unconscionable debt on our younger generation.'

Recession, war costs and stimulus funding have conspired to drive the nation's deficit and debt up. An aging population and fast-growing health care costs mean even more trouble in the future — by 2020 about half of all income tax revenue will be needed just to pay interest on the debt. The country's debt will hit dangerously high levels as a percentage of the nation's economic output, economists warn.

Former Sen. Pete Domenici, co-chair of the Bipartisan Policy Center's Debt Reduction Task Force, said the tide of red ink is the nation's gravest threat. "This silent killer is about to get us," he said at a news conference announcing a package that would cut $6 trillion in federal spending between 2012 and 2020.

While economists have been sounding their policy-paper alarms for years, a growing public backlash against the deficit has moved the issue onto the nation's political agenda. Republicans, backed by a Tea Party movement demanding smaller government, will take over control of the House in January.

And now, the deficit panels are getting the conversation started. The Peterson-Pew Commission on Budget Reform weighed in first, proposing changes to the federal budget process, including annual caps on spending and limiting the size of the debt as a percentage of the economy.

Next, on Nov. 17, Domenici's group proposed a national sales tax of 6.5 percent. The panel also would freeze spending, shift more of the responsibility for Medicare onto seniors and raise more money from Social Security taxes. But in the short term, workers would get a one-year reprieve from the 12.4 percent Social Security payroll tax that is borne by both employers and employees. That tax holiday is designed to stimulate the economy by putting $650 billion in taxpayers' pockets.

On Dec. 1, the National Commission on Fiscal Responsibility and Reform — appointed by President Obama and including elected officials of both parties — will issue its recommendations. Already the chairmen, Democrat Erskine Bowles and Republican former Sen. Alan Simpson, have put out a comprehensive proposal. Most budget experts don't expect them to win the 14 out of 18 votes needed to send it directly to Congress. But the plan already has generated strong reactions — everything from applause to boos.

They would cap spending on discretionary programs, saving $200 billion by 2015, and simplify the tax code and lower income tax rates in exchange for cutting pet deductions. They would raise the Social Security retirement age and increase the wages subject to the payroll tax, and trim health costs.

Both the presidential and bipartisan panels are looking at revenue increases and spending cuts — setting up bitter partisan battles in Congress. Isabel Sawhill, a senior fellow at the Brookings Institution, said it's hard to be optimistic when Republicans won't raise taxes and Democrats won't touch Social Security.

"You absolutely need to have everything on the table. It's going to take spending cuts and revenue increases. It's way too big to do on just one side of the budget," she said.

Prominent conservative Grover Norquist, head of Americans for Tax Reform, has already sent a warning shot to Republicans that supporting the package would violate promises not to raise taxes. And liberals, including outgoing House Speaker Nancy Pelosi, have complained about the benefit and spending cuts.

John Rother, AARP executive vice president for political strategy and international affairs, said he is concerned about the combined effect of proposals like raising the Social Security retirement age, reining in cost-of-living increases, eliminating tax breaks for charitable donations and for 401(k) saving, and requiring seniors to shoulder more of their Medicare costs.

"You have a real weakening of incentives to save for the future or contribute to charity," Rother said. "At the same time you have lower Social Security benefits and higher costs for Medicare. It's a quadruple whammy."

Here are some of the major proposals that affect older Americans:

Tax rates

The panel led by Republican Domenici and Clinton budget director Alice Rivlin would impose a new national "deficit sales tax," a 6.5 percent levy on many goods and services. Both the president's commission and the Rivlin-Domenici panel would lower income tax rates for corporations and for individuals.

Spending programs

Both of these groups would also like to rein in discretionary spending — which is federal programs outside of Social Security and Medicare and Medicaid. The Rivlin-Domenici panel opted to freeze spending on defense and other programs at 2011 levels.

Fraser said the new Republican majority is likely to get right to work on spending cuts because they feel that's why they were sent to Washington.

Social Security

Both the Bowles-Simpson proposal and the bipartisan group would take more Social Security taxes from wealthier taxpayers — currently the tax is levied on only the first $106,800 in income. Both would change the way cost-of-living adjustments are made so they would not increase as much.

Medicare and health care costs

The Domenici-Rivlin panel would raise Part B Medicare premiums. They also would charge higher premiums as costs go up.

Bowles-Simpson would limit the growth of health care costs to just a little more than inflation.

Dean Baker, codirector of the Center for Economic and Policy Research, said that's draconian and could lead to cuts in services because it won't cover the combination of health-care-cost increases and a burgeoning elderly population.

Baker said the Medicare and Social Security changes would hit vulnerable older Americans hard, just as the economy has left them approaching retirement with nest eggs diminished by the housing crash and recession.

William D. Novelli, a former head of AARP who sat on the Domenici-Rivlin panel, said the package was a way to stabilize Social Security and tackle the deficit. "Older people really understand the importance of their children and grandchildren having a secure future," he said after the proposal was released.

Skeptics like Baker see the concern over the deficit as "hugely overblown."

But Fraser said all the deficit panels are sparking a crucial debate in Washington and in the country as a whole. "We need to have a robust conversation about what we want government to look like."

Tamara Lytle is a veteran Washington-based political correspondent.

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