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Fiscal Cliff Forces Republicans and Democrats to Work Together

Time will show whether lawmakers can compromise

Obama congress new challenges 2013

Pete Souza/White House/Handout/CNP/Corbis

President Barack Obama and a new Congress face challenges in 2013.

The new year brings the same crew of cooks in the nation's kitchen, each with different recipes for how to whip up a menu of fiscal change that will satisfy the nation without burning down the house.

After a $6 billion campaign and a post-election tug-of-war, President Obama still sits at one end of Pennsylvania Avenue, with a Republican-majority House and Democratic-controlled Senate at the other end.

Financial markets and public opinion have made it clear they want leaders to work through four potent dishes — reducing the debt, energizing the economy, implementing the health care law and actually cooperating.

Reasons to Be Hopeful

As the president begins his second term and Congress reconvenes this month, a unique blend of motivation and opportunity exists in abundance. For one thing, none of the Washington politicians has to worry about partisan elections this year. For another, countries such as Greece and Spain have shown the sorts of social and economic upheaval that result when a nation doesn't preemptively tackle its fiscal imbalances. With that dynamic, "it's possible to get some things done now that were not possible before," says Allan Meltzer, professor of political economy at Carnegie Mellon University and a fellow at the Hoover Institution.

Few people understand the issues better than G. William Hoagland, a senior vice president at the Bipartisan Policy Center. For 33 years, Hoagland worked on Capitol Hill, with a unique vantage point as staff director of the Senate Budget Committee and as a top aide to former Senate Republican leader Bill Frist. Hoagland says that he has never seen so many crucial issues come together at once — including the temporary budget that runs out in March, the need to raise the nation's debt limit and the "fiscal cliff" deadline. The fiscal problems are so big and so fraught, he says, the two parties will finally be forced to work together for a change. "It's going to force us back into the old bipartisan way in which we used to get work done around here," he says. "I see coming out of this better policies to address the challenges our country faces."

Republicans and Democrats each have favorite ingredients — the GOP is pushing for cuts to spending, including Medicare and Social Security, and Democrats want higher taxes for the wealthy. An AARP Bulletin poll found public support for raising taxes to close the deficit, strengthen Medicare and Social Security, and finance schools and highways, but skepticism that agreement can be struck. The coming months will show whether lawmakers can compromise to come up with what many experts say is needed — a federal budget that is $4 trillion smaller over the next 10 years than the $44 trillion it would be under current law.

Now is the time for action. If the two sides don't come to an agreement, the consequences are significant. "Debt will continue to balloon. We are borrowing one-third of everything we spend right now," says Isabel Sawhill, a budget expert at the Brookings Institution.

The Federal Budget and You

Some of the options on the table could have far-reaching impact on older Americans. Advocates have argued that Social Security, with its own funding source, shouldn't get drawn into the debate over the deficit. And Medicare's projected spending already was trimmed as part of the health care reform bill. But economists and political scientists on both sides of the ideological divide say no major work will be done on the nation's fiscal problems without including both more tax revenue and cuts to programs like Medicare and Social Security.

The long list of options to be considered for Social Security includes raising the retirement age beyond the current limit of 67 and raising the cap on wages (now $113,700) subject to the payroll tax. While some Republicans advocate a long-term plan of premium support for Medicare, other Medicare adjustments being debated include raising the eligibility age from 65 to 67; raising the premiums paid by wealthier recipients; more closely linking Medicare costs to inflation; and aligning costs with medical outcomes instead of medical services provided.

Obama congress new challenges 2013

Pete Souza/White House/Handout/CNP/Corbis

President Barack Obama and a new Congress face challenges in 2013.

"We have to be honest with the American people," Hoagland says. "We've overpromised. There's no way to do this without possible pain."

AARP and other groups that advocate for retirees have opposed major changes.

"Older Americans care deeply about reducing the deficit and about strengthening our economy, and we're hopeful a deal can be reached to protect taxpayers and reduce unnecessary government spending," says AARP Executive Vice President Nancy LeaMond. "But raiding Medicare and Social Security to pay for other government programs is shortsighted and harmful to seniors and their kids and grandkids."

Tinkering With the Tax Code

Eventually, the discussion will focus on simplifying the tax code: reforming it to raise revenue by getting rid of several loopholes. But some of the most expensive loopholes are also the most popular — like deductions for home mortgage interest and charitable contributions, and tax breaks businesses get for providing health insurance. "When you use the word 'simplification,' it doesn't capture the fact there is a lot of pain involved," says Sawhill of the Brookings Institution. "None of this is easy."

Hoagland says that the time is right for a budget deal that rewrites the tax code. He sees parallels to the bipartisan budget deal of 1997 that led directly to balanced budgets from 1998 to 2001. A second-term president is leading the way without worrying about running for reelection, the nation is fed up after the impasse of a year ago, and the two parties have outside pressures to make a deal.

"They're all thinking we have to do something," Hoagland says.

The Health of the Health Care Law

The coming year also will be key for health care. Given the results of the election, the Affordable Care Act — dubbed Obamacare — won't be repealed. But with major provisions beginning in 2014, key decisions will be made this year about implementation.

Governors will have two big decisions to make: Do they expand Medicaid to include more uninsured people, and do they set up insurance exchanges that help individuals buy coverage?

The ACA has been supremely unpopular in some areas of the country, and several governors have wanted no part of it. "Now that the election is behind us, we will see most if not all states move forward," says Drew Altman, president and CEO of the Kaiser Family Foundation.

But as the nation moves toward requiring individuals to have insurance or pay a penalty and starts up a new board designed to rein in Medicare spending, Congress likely will play a role.

"A law this complicated and controversial is bound to have major and minor hiccups galore," says Larry J. Sabato, director of the University of Virginia Center for Politics.

Tamara Lytle is a Washington-based reporter who has covered Congress and the White House. She writes about politics for the AARP Blog.