Deficit Targets: Social Security, Mortgage Breaks

WASHINGTON — In a politically incendiary plan, the bipartisan leaders of President Barack Obama's deficit commission proposed curbs in Social Security benefits, deep reductions in federal spending and higher taxes for millions of Americans Wednesday to stem a flood of red ink that they said threatens the nation's very future.

The White House responded coolly, some leading lawmakers less so to proposals that target government programs long considered all but sacred. Besides Social Security, Medicare spending would be curtailed. Tax breaks for many health care plans, too. And the Pentagon's budget, as well, in a plan designed to cut total deficits by as much as $4 trillion over the next decade.

The plan arrived exactly one week after elections that featured strong voter demands for economic change in Washington. But criticism was immediate from advocacy groups on the left and, to some extent, the right at the start of the post-election debate on painful steps necessary to rein in out-of-control deficits.

The plan would gradually increase the retirement age for full Social Security benefits — to 69 by 2075 — and current recipients would receive smaller-than-anticipated annual increases. Equally controversial, it would eliminate the current tax deduction that homeowners receive for the interest they pay on their mortgages.

Obama, in Seoul, South Korea, declined to comment Thursday on the commission's work but said, "We're going to have to take actions that are difficult and we're going to have to tell the truth the American people." He said there was a lot of rhetoric about the nation's debt and deficits but "a lot of the talk didn't match up with reality."

"We need to be straight with the American people," the president said. "We can't just engage in political rhetoric."

No one is expecting quick action on any of the plan's pieces. Proposed cuts to Social Security and Medicare are making liberals recoil. And conservative Republicans are having difficulty with options suggested for raising taxes. The plan also calls for cuts in farm subsidies, foreign aid and the Pentagon's budget.

The document was released by Democrat Erskine Bowles, a former Clinton White House chief of staff, and Republican Alan Simpson, a former senator from Wyoming.

Acknowledging the controversy involved, Simpson quipped to reporters, "We'll both be in a witness protection program when this is all over, so look us up." Said Bowles, "This is a starting point."

Controversial or not, Bowles said serious action was demanded. He declared, "This debt is like a cancer that will truly destroy this country from within if we don't fix it."

The government reported separately Wednesday that the deficit for last month alone was $140.4 billion — and that was 20 percent lower than a year earlier. The red ink for all of the past fiscal year was $1.29 trillion, second highest on record, and this year is headed for the third straight total above $1 trillion.

Current deficits require the government to borrow 37 cents out of every dollar it spends.

Still, the plan was rejected as "simply unacceptable" by House Speaker Nancy Pelosi, D-Calif., a top Obama ally.

The Social Security proposal would change the inflation measurement used to calculate cost-of-living adjustments for benefits, reducing annual increases. It immediately drew a withering assault from advocates for seniors, who are already upset that there will be no inflation increase for 2011, the second straight year.

The plan would also raise the regular Social Security retirement age to 68 by about 2050 and to 69 in 2075. The full retirement age for those retiring now is 66. For those born in 1960 or after, the full retirement age is now 67.

Better-off beneficiaries would receive smaller Social Security payments than those in lower earning brackets under the proposal, and the amount of income subject to Social Security taxes would be increased.

"The chairmen of the Deficit Commission just told working Americans to 'Drop Dead,'" AFL-CIO President Richard Trumka said in a statement.

From the right, anti-tax activist Grover Norquist — whose opinions carry great weight among Republicans — blasted the plan for its $1 trillion in tax increases over the coming decade. But Bowles and Simpson say eliminating costly tax deductions could bring income tax rates way down.

For every $1 of new revenue, the plan demands $3 in spending cuts, and that was acceptable to panel member Tom Coburn, a Republican senator from Oklahoma. "If we do the cuts, I'll go for it," he said. "We may have to go for some revenues at some point."

The entire commission is supposed to report a deficit-cutting plan on Dec. 1, but panel members are unsure whether they'll be able to agree on anything approaching deficit cuts of the size proposed. And even if they could, any vote in Congress this year would be nonbinding, Simpson said.

"This is not a proposal I could support," said panel member Rep. Jan Schakowsky, D-Ill. "On Medicare and Social Security in particular, there are proposals that I could not support."

The release of the plan follows midterm elections that gave Republicans the House majority and increased their numbers in the Senate. During the campaign, neither political party talked of spending cuts of the magnitude offered Wednesday, with Republicans proposing $100 billion in cuts to domestic programs passed each year by Congress — but with no specifics.

Wednesday's proposal would leave Obama's new health care overhaul in place, while greatly strengthening its cost control provisions, including a board with the power to make cuts in Medicare payments to providers.

For most Americans with job-based health coverage, the biggest change would be to limit or eliminate altogether the tax-free status of employer-provided health benefits, which would provide a stiff nudge to force people into cost-conscious insurance plans.

To deal with the rising costs of Medicare and Medicaid, the giant health care programs for seniors and low-income people, the proposal calls for limiting annual spending increases to no more than 1 percent above the growth rate of the economy.

It outlines a series of strategies to achieve that goal, including changing provider payments to reward quality instead of sheer volume, demanding rebates from drug companies that want to participate in Medicare and raising cost-sharing for Medicare recipients while also putting in place a limit on their out-of-pocket costs.

"It's a very provocative proposal," said a Republican panel member, Rep. Jeb Hensarling of Texas. "Some of it I like. Some of it disturbs me. And some of it I've got to study."

Other proposals by Bowles and Simpson include:

_Increasing the gasoline tax by 15 cents a gallon to finance transportation programs.

_A three-year freeze in the pay of most federal employees and a 10 percent cut in the federal work force.

_Eliminating all congressional pet projects, known as earmarks.

The plan also calls for a major overhaul of both the individual income tax and the corporate tax systems with the idea of lowering overall tax rates, simplifying the tax code and broadening the taxpayer base.

For individuals and families, the proposal would eliminate a host of popular tax credits and deductions, including the child tax credit and the mortgage interest deduction. However, it would significantly reduce income tax rates. The top rate would drop from 35 percent to 23 percent.

The deduction that companies take for providing health insurance to their employees would be eliminated, but the corporate income tax rate would be reduced from 35 percent to 26 percent, and the government would stop taxing overseas profits of U.S.-based multinational corporations.

Even with the dramatic proposals, the Bowles-Simpson plan would leave deficits of about $380 billion in 2015, the year by which Obama tasked the group with balancing the federal budget, except for interest payments on a national debt that now stands at $13.7 trillion. If the changes to Social Security are dropped, the deficit would be about $400 billion in 2015.

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Associated Press writers Martin Crutsinger, Stephen Ohlemacher, Tom Raum and Ricardo Alonso-Zaldivar contributed to this report.