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Obama’s Deficit Plan Sets Up a Battle With GOP on Medicare, Medicaid Cuts

More taxes on the wealthy, more cuts in defense

En español | President Obama on Wednesday laid out a vastly different vision of how to wrestle the nation’s debt problems into submission compared with a Republican plan that comes up for a vote later this week.

See also: Washington's 2011 fiscal wars: What they mean to you.

“Doing nothing on the deficit is just not an option,” Obama told a crowd at George Washington University. “Our debt has grown so large that we could do real damage to the economy if we don’t begin a process now to get our fiscal house in order.”

Obama proposed cutting the deficit by $4 trillion over 12 years or less, compared with a $6 trillion cut over 10 years in the plan led by House Budget Committee Chairman Paul Ryan, R-Wis.

One of the keenest differences between the plans is how Obama approaches the Medicaid program, which pays for much of the nation’s long-term care, and the Medicare health insurance program for older Americans and people with disabilities. Obama opposes turning Medicaid into a grant that would leave states to decide who gets benefits, but he provided little detail about his plan to cut $100 billion from the program. He opposed Ryan’s plan to turn Medicare into a program in which seniors get aid to help buy insurance from the private market.

President Barack Obama outlines his fiscal policy during an address at George Washington University in Washington DC, Wednesday, April 13, 2011

Charles Dharapak/AP

President Barack Obama's deficit plan differs sharply with that of the GOP.

“I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs,” Obama said.

Yet a third plan is expected soon — from a bipartisan group of senators dubbed the “Gang of Six” who are looking for a red-ink reduction plan that can win support from Republicans and Democrats. Four of the “gang” members — including leader Kent Conrad of North Dakota, who chairs the Senate Budget Committee — sat on the president’s fiscal commission.

That commission reported its plan in December to raise the Social Security retirement age to 69 and to make other spending cuts and tax law changes such as closing tax loopholes and reducing overall tax rates.

The commission’s cry for action added momentum to political and economic realities putting a spotlight on federal budgeting. Last November’s election swept into office many Republicans who promised to scale back the size of government and vigorously attack the deficit. Voters have become nervous watching some state governments and European nations teeter on the verge of bankruptcy. And the debt load has been growing as a result of the recession, stimulus spending and war costs — just as more boomers are retiring, which reduces tax revenues and increases Social Security and Medicare spending.

Next: Republicans focus on domestic spending cuts. >>

“There has never been so much sustained concern about the fiscal future of our country,” says Michael Franc, vice president of government studies at the Heritage Foundation. “It’s a sense we are on a precipice as a nation.”

Obama’s plan — a do-over just two months after he submitted an annual budget with less deficit relief — includes more taxes on the rich and cuts to defense programs than what Republicans support.

Ryan said Wednesday that he was disappointed with Obama’s plan, which he called partisan and inadequate.

“When the president reached out to ask us to attend his speech, we were expecting an olive branch,” Ryan said. “What we heard today was not fiscal leadership from our commander in chief; we heard a political broadside from our campaigner in chief.”

Republicans have focused their deficit reduction on domestic spending cuts, including $38.5 billion for the current year that will come to a vote Thursday in the House. Budget expert Stanley Collender, a partner at Qorvis Communications, says the fight over those cuts, which pushed the nation to the brink of a shutdown, will “look like a romantic comedy” compared with the looming battle over the Ryan and Obama budget plans.

Republicans wasted no time criticizing the president for wanting to roll back tax cuts for the wealthy.

“Outside of Washington, it’s obvious that the problem isn’t that people are under-taxed, but that Washington over spends,” said Sen. Chuck Grassley, R-Iowa. “They said so loud and clear in the last election.”

Obama vowed to refuse to extend Bush-era tax cuts for families earning more than $250,000 a year. Republicans argue that the country can ill-afford to raise taxes on people who create jobs. But the Gang of Six is likely to press for a compromise that lowers tax rates for income and corporate taxes in exchange for getting rid of many loopholes.

Obama’s plan would set up automatic cuts to both tax loopholes and spending programs if Congress doesn’t enact enough deficit reduction.

The tax issue and changes to retirement programs like Medicare are likely to be centerpieces of next year’s presidential and congressional elections. Ryan’s approach was to give future seniors aid to buy insurance. But the Congressional Budget Office has estimated that will leave seniors with more than $6,000 a year in extra costs compared with the current Medicare system.

Next: How is Obama's plan different? >>

Obama’s program, by contrast, keeps the current program but could limit increases in payments to doctors who serve Medicare patients.

“You’re just rearranging deck chairs on the USS Medicare,” Franc says. Ryan’s plan instead acknowledges that keeping the current program is unaffordable because of growing medical costs and will cause “a heart attack to our economy.”

Franc says Obama doesn’t address the real threat to the budget — the health care costs for Medicare and Medicaid that are growing faster than inflation.

But John Rother, AARP executive vice president of policy and strategy, says Obama’s plan is better than Ryan’s because it doesn’t push costs off on seniors.

“Instead of just shifting who pays the bill, it tries to lower the growth of the programs,” Rother says.

Obama’s plan would cut Medicare by $480 billion through changes such as using its purchasing power to get lower prescription drug prices and tamping down increases in spending per beneficiary. Franc says that could come from the reimbursements to doctors, who could in turn refuse new Medicare patients.

Social Security would not be changed under Obama’s plan, and a senior administration official said Wednesday that Obama opposed raising the retirement age. He would set up a separate process to work on the long-term solvency of Social Security.

“While Social Security is not the cause of our deficit, it faces real long-term challenges in a country that is growing older,” Obama said.

Obama asked Vice President Joe Biden to work with congressional leaders to come up with a bipartisan deficit plan by the end of June.

Scott Lilly, senior fellow at the Center for American Progress, says the budget debate is painful but necessary. Much of the deficit is driven by programs for the elderly, he says. “The country is going to have to decide how much we want to contribute to those programs, or raise taxes or continue to borrow.”

Despite the coming elections, which could make it harder for the two parties to compromise, Lilly says progress is possible. Especially because the public is deeply concerned about the deficit.

“Sometimes you make a political breakthrough at a time you least expect it to happen,” Lilly says.

Tamara Lytle was Washington Bureau Chief for the Orlando Sentinel.