ANALYSIS - Obama leaves big reforms off deficit table

WASHINGTON Tue Sep 20, 2011 5:07am IST

U.S. President Barack Obama speaks at a press conference in the Brady Press Briefing Room of the White House in Washington, July 22, 2011.  REUTERS/Jason Reed/Files

U.S. President Barack Obama speaks at a press conference in the Brady Press Briefing Room of the White House in Washington, July 22, 2011.

Credit: Reuters/Jason Reed/Files

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WASHINGTON (Reuters) - President Barack Obama's debt plan avoids making the changes to massive government social programs that economists, budget experts and the president himself say are needed to achieve long-term fiscal stability.

Critics are calling Obama's $3.6 trillion proposal to the congressional "super committee" on deficit reduction little more than a political paper that sets the stage for a 2012 election-year battle over the future of popular healthcare and retirement programs.

It steers clear of the Social Security retirement program entirely. It aims to achieve $248 billion in savings over 10 years from the Medicare health program for the elderly -- the bulk of which would come from cuts in payments to hospitals and other medical care providers, not structural reform.

The proposal also seeks to cut $73 billion from the Medicaid healthcare program for the poor that is administered by the states.

"It is just nickel-and-diming providers and states and not dealing with the structural issues," said Joseph Antos, a health specialist with the Washington think tank the American Enterprise Institute.

Antos said Obama needed to do more to change Medicare incentives that reward quantity of services and treatments rather than the quality of care.

Obama's healthcare overhaul tried to change those incentives, but many analysts believe more is needed to rein in rapidly rising healthcare costs and government spending.

Obama's Medicare proposals would only add three years to the program's solvency, according to administration documents. The healthcare program will exhaust its trust fund by 2024 without sweeping changes to the program.

"That's the biggest single short-coming in the Obama package," said Steve Bell, a budget analyst at the Bipartisan Policy Center.

"He doesn't address the fundamental structure of Medicare and Medicaid and does nothing to change the spending curve, which accelerates upward at an alarming rate the next 20 years."

The retiring baby-boom generation, born between 1946 and 1964, and rising healthcare costs will put increasing pressure on government healthcare and retirement programs for decades.

POLITICAL, ECONOMIC REALITIES

Under current law, federal spending on Social Security and federal healthcare programs will rise from about 10 percent of Gross Domestic Product to 15 percent of the economy in 25 years, according to the non-partisan Congressional Budget Office.

The CBO has called those increases unsustainable saying it would crowd out other economic investments if nothing changes.

Obama was under pressure from liberal groups and advocates for the elderly to separate Social Security from deficit reduction talks. During negotiations with Republicans over the U.S. debt limit, he had considered a proposal to change the inflation calculation for annual benefit changes to slow the increase in benefits.

But Social Security and Medicare are shaping up to become powerful issues in next year's presidential and congressional election campaigns. Indeed, older voters punished Democrats in last year's congressional elections over Medicare changes that helped cover the cost of Obama's healthcare overhaul.

The inflation proposal and another controversial proposal to raise the Medicare eligibility age to 67 were omitted from Obama's submission to the super committee.

Obama vowed on Monday to veto any deficit package that reduces Medicare healthcare benefits for the elderly and leaves lucrative tax breaks for the wealthy intact.

That populist line in the sand will help energize the president's liberal base. Liberal groups felt that during the summer showdown over the debt limit, Obama had been too willing to agree to Medicare and Social Security benefit cuts in negotiations with Republicans, who rejected tax increases.

But it does not sit well with Republicans who were calling for more sweeping changes to those programs.

"This is more of a campaign document than a serious proposal and yet he's characterized it as a message to the committee," said Republican super committee member Senator Jon Kyl.

(Additional reporting by Richard Cowan; Editing by Cynthia Osterman)

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