Democrats dig in over reform

November 28, 2012 7:25 pm - Financial Times

Democrats dig in over reform

By James Politi in Washington

President Barack Obama and Democratic candidates for the Senate campaigned heavily ahead of this month’s victorious elections on a simple message: raise taxes on the rich and make them bear a greater share of the burden in deficit reduction.

But with talks to avert the so-called fiscal cliff in full swing, Democrats are resisting proposals championed by Republicans to hit the rich on the spending side by curtailing their government health and pension benefits.

Republicans have made clear that they are willing to accept some higher revenue from the wealthy in any agreement, but only if Democrats concede to some structural changes to Medicare and Social Security, the two largest safety net schemes supporting elderly Americans.

One of the main policy proposals floated by Republicans in this area is to more aggressively “means test” these programmes, having wealthy seniors pay higher premiums for health insurance and limiting their pension cheques.

“There’s no reason in the world for wealthy seniors to be subsidised with American taxpayer money for healthcare benefits that they can afford,” Bob Corker, the Republican senator from Tennessee, told the Financial Times.

Mr Corker recently put forth a $4.5tn deficit reduction plan that included raising the cost of health coverage for retirees earning more than $50,000, saving about $50bn over a decade, and he is also proposing to make Social Security benefit distribution more progressive. “Especially when Democrats want wealthy citizens to pay more, this is a place hopefully where we would have common ground,” says Mr Corker.

Yet while this is theoretically terrain where Democratic and Republican interests might converge, there are plenty of obstacles to reaching any kind of agreement on so-called “entitlement reform” and some specific barriers to a deal on means testing.

Some Democrats have signalled that reductions in popular government programmes should not be on the table in the short term.

“Progressives should be willing to talk about ways to ensure the long-term viability of Social Security, Medicare and Medicaid,” said Dick Durbin, the second-highest ranking Democratic senator, in a speech at the Center for American Progress, a left-leaning think-tank, this week. “But those conversations should not be part of a plan to avert the fiscal cliff.”

Other Democrats say that some new spending cuts will have to be part of any deal. But they believe that reductions in entitlement programmes should only be considered once Republicans have made a big concession on taxes, which has not occurred yet. Even in that context, they would much rather see Medicare cut by reducing government payments to healthcare providers, rather than cutting benefits.

Means-testing health and pension benefits may be the most palatable way for Democrats to accept cuts aimed at seniors, but there is still a lot of coolness towards such a proposal within Mr Obama’s party.

The White House and Congressional leaders are embarking on high-stakes talks to avoid a looming fiscal cliff

One of the reasons is philosophical. Liberals see the universal nature of Medicare and Social Security as one of their core attributes. If the wealthy are not gaining as much from the programmes and benefits are increasingly concentrated among the poor and middle-class, it could erode support for them over the long term, say liberal critics.

Eventually this could lead to their demise or at least turn Medicare and Social Security into the subject of more contentious political fights, such as is the case with the welfare or food stamp programmes.

But other Democrats contend these concerns are overblown. “When millionaires see the government spending a lot of money on them, a lot of them see that as wasteful, so there’s more to that story than the left is making it out to be,” says Gabe Horwitz, director of the economic programme at Third Way, a centrist Democratic think-tank.

Mr Horwitz says making sure the “poor continue to have resources” and aren’t “harmed” by these proposals was crucial to Democrats and even Republicans.

“We’re going to need to see some solutions. Frankly some type of means testing should be on the table,” he says.