Social Security changes are on the table in debt talks

While the political jousting continues, President Obama and congressional Republicans are moving closer to a multi-tiered deal that would include changes in Social Security benefits, tax reform, increases in various user fees, and large-scale cuts in annual spending, according to numerous sources close to the negotiations.

No agreement exists and both sides continue to shadow box even as they move cautiously around the underlying policy and unpredictable political reaction any one or all of these potential shifts might incite. On Social Security, it's unclear if Obama is willing to raise the retirement age or merely accept changes in inflation-adjustment calculations that would reduce benefits but not alter the program's basic architecture. Administration officials have said a proposal from Obama's Simpson-Bowles deficit-reduction commission to raise the Social Security income cap are among the ideas being considered if there is a comprehensive deal in the making.

In the nitty-gritty of negotiations, Republicans have made clear to Obama if he wants to spare domestic "investments" funded through discretionary spending he need only embrace structural changes to Social Security or Medicare. Republicans contend altering current benefit schedules would extend solvency for Social Security and put bigger deficit-reduction numbers on the board, giving Obama more room for annual discretionary spending. And both sides are still fighting over how much to cut future defense spending within the context of annual discretionary spending. Democrats want deeper cuts than the GOP and the GOP wants to guard against any legislative bias in favor of defense cuts over non-defense discretionary savings. Like every other issue, much has been discussed and dissected -- but nothing has been agreed to.

Obama meets on Thursday at the White House with the bicameral, bipartisan leadership. The session doesn't appear to be designed to settle matters but to continue the active discussions that have been taking place and improve the atmosphere heading into what all sides agree is a vital five or six days to cut a deal.

Sources involved in the talks say it will require at least 16 to 17 legislative days to pass a bill of the size and complexity now under consideration through Congress. This timeline does not include hours required to draft the bill into legislative language -- a process that could last one or two days. This scenario would require working through weekends and the House canceling a scheduled recess for the week of July 18 (already a foregone though unannounced conclusion).

Obama and Congress are trying to beat an August 2 deadline for when the U.S. government runs of out of funds to pay its debts and falls into technical default -- which carries with it an unpredictable set of circumstances that could roil domestic and global stock markets, increase interest rates, and bludgeon an already limping economic recovery.

Obama and Congress are seeking a deficit-reduction deal of at least $2 trillion, a target defined by GOP demands that deficit reduction exceed the amount of debt authority given to the Treasury Department. A boost of $2 trillion in borrowing authority above the current $14.3 trillion limit would extend solvency until after the 2012 election -- longer if economic growth triggers larger-than-expected revenue flows.

Importantly, none of the thorny issues such as how much to cut Social Security, how high to raise user fees, or how to trade lower income and corporate tax rates for the abolition of corporate tax favors and subsidies have been resolved. There is general agreements in some areas: Senate Minority Whip Jon Kyl, R-Ariz., said on Wednesday, for example, that Republicans have already agreed to up to $200 billion in higher user fees.

Conservative activists are already getting nervous, fearing Kyl's user-fee announcement was a trial balloon to gauge reaction with the base.

"At this point, it is unclear what the reported revenue agreement entails," said Michael Needham, CEO of Heritage Action, the political wing of the conservative think tank Heritage Foundation. "Heritage Action is eager to review the details, including what negotiators mean by 'user fees.' Any deal that includes a net tax increase -- including a net tax increase disguised as a 'user fee' -- is totally unacceptable."

Kyl's announcement of concessions on user fees could lead to other tax changes under the rubric of tax reform that cuts individual and corporate rates and possibly even rates on capital gains in exchange for wholesale abolition of tax subsidies. It might also lead to changes in the government method of calculating inflation for purposes of benefit allocations and tax brackets.

But talk of tax reform now is premature. Sources with intimate knowledge of the talks say that tax reform would not be drafted and voted on in the debt-ceiling legislation. Instead, there would be a binding commitment from Obama to work with Republicans on seeing implemented an agreed-upon set of tax changes aimed at lowering rates and boosting job growth and economic activity -- all designed to boost federal revenue.

A leading proposal in the wide arena of tax and benefit changes, several GOP sources told National Journal, is to adopt the so-called chained CPI. That approach to Consumer Price Index calculations lessens the presumed impact of inflation by calculating how consumers shift buying habits to avoid some higher prices. The change would reduce Social Security benefits and could intensify bracket creep, a phenomenon whereby taxpayers are pushed into higher tax brackets by inflationary pressures rather than actual buying power (a chained CPI would offer less protection from indexing for inflation, thereby exposing some earners to higher taxes).

Switching to a chained CPI arrangement would generate $59.6 billion in revenue from 2012 to 2021, according to the Joint Committee on Taxation. By 2021, the JCT found, more than two-thirds of the revenue would come from taxpayers making less than $100,000 a year -- 69 percent of it coming through taxes paid by those with incomes below that amount.

But Republicans insist no new tax increases are on the table or are any increases to existing taxes being discussed. The focus, even GOP sources acknowledge, is on subsidies, preferences, and "spending in the tax code" that benefits one sector of the economy but deprives Treasury of revenue it would collect if the subsidy or preference didn't exist.

At most, big numbers have been discussed and specific policy changes reviewed. But nothing has been drafted or scored by congressional agencies for review by the leadership, the White House, or rank-and-file Democrats or Republicans.