After refusing (fortunately) to consider raising the Medicare eligibility age, the news emerging from DC is that President Obama is offering cuts to Social Security in the hopes of reaching a deal with John Boehner before the end of December.
Obama’s proposal reportedly is:
- Bush tax cuts expire only for those making over about $400,000, but that group has deductions capped at 28% of income. No change for those with taxable income between $250K and $400K.
- Unemployment benefits extended
- Payroll tax cut not extended.
- Some new spending on infrastructure.
The downside is that the “chained CPI” would be adopted for Social Security and some other federal benefits. That means inflation will be calculated differently and benefits will rise more slowly. Estimates are that someone retiring next year would have Social Security payments about 6% lower by age 85. The longer you live, the bigger the gap between what you’d get under this deal and what you’d get under current law.
Paul Krugman (who has been right about basically everything) pronounces himself torn on this deal in two blog posts. As he understands it, treatment of dividends and capital gains also would revert to the pre-Bush era (dividends taxed as ordinary income, capital gains tax rising from 15% to 20%). Without that, Krugman says, the deal’s a non-starter for him. He nonetheless describes the Social Security cuts as “cruel and stupid,” but far less so than raising the Medicare age.
Krugman helpfully points out that a benefit of the deal is that it gets the unemployment extension (which Obama says must be in any deal) and provides for infrastructure spending. If Obama simply lets the Bush tax cuts expire with no deal, there might be pressure on the House GOP to pass a middle class tax cut in 2013, but Obama’s far less likely to get the unemployment, infrastructure, and payroll tax extension. That does change the calculus somewhat. Nonetheless, he pronounces himself very much on the fence, and completely opposed if (a) Obama cedes any more; or (b) the deal does not restore pre-Bush treatment of capital gains and dividends.
Further concessions seem likely since Obama is Obama, and Boehner is saying no for the moment. Obama calls the deal balanced. He calculates that the deal would raise $1.2 trillion in new revenues over 10 years, while cutting $1.2 trillion in spending. Of that figure, $122 billion (or 10 percent) comes from the Social Security cuts, and $290 billion from reduced interest payments on the national debt. Boehner disregards entirely the interest savings, calling the proposal a step in the right direction but still “unbalanced,” with $1.3 trillion in new revenue but only $930 billion in spending cuts. He wants more.
Oh, and there would only be a short-term debt ceiling resolution, so we can look forward to that again. Some are saying the White House has resolved not to cave on the debt ceiling ever again, so it doesn’t matter if it comes up again and may actually make the GOP look bad, like Gingrich in 1995. We’ll see. My guess: that’s when we’ll get the Medicare age raised.
Opinion at Daily Kos and other liberal sites is strongly against the deal, as are AARP, Move On and Americans for Tax Fairness. On the right the Norquist and Tea Party types are apoplectic as well. My own view is that the Democrats are doomed in 2014 if they take this deal. Anyone who doesn’t think the GOP will campaign on “Obama cut your Social Security” has not been paying attention.
I’ve never liked the payroll tax cut so I don’t see its expiration as such a bad thing in the long term, though it will hurt the economy some in the short term. I was livid in late 2010 when Obama pushed that as the only form of stimulus he could get. While it puts extra cash in the pocket of strapped consumers, it creates a Social Security funding problem where none really existed. Given the misinformation on that issue, and Obama’s repeated hints of willingness to cut (Simpson Bowles, debt ceiling holdup, etc.), I see the payroll tax cut as a Trojan Horse. I fully expect, in ten years, to hear all about the huge funding shortfall and how it means we need massive cuts.
These are highly disappointing days for the Democratic Party. I continue to think none of this would have happened if Obama had pushed for a sufficient stimulus in early 2009.