U.S. debt battles to persist no matter what

WASHINGTON Sat Nov 19, 2011 9:48am IST

A one Euro coin is placed over one dollar notes in this illustrative photograph taken in Madrid November 17, 2011.  REUTERS/Sergio Perez

A one Euro coin is placed over one dollar notes in this illustrative photograph taken in Madrid November 17, 2011.

Credit: Reuters/Sergio Perez

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WASHINGTON (Reuters) - It is make or break time for a special U.S. committee on deficit reduction, but even if it succeeds in striking a last minute deal, it will not be enough to address future financial strains from an aging population.

The panel needs to have a deal in hand by Monday to meet a Nov. 23 deadline for a vote by the 12 "super committee" members. But as negotiations enter the final days after more than two months of intense talks, the six Democrats and six Republicans remain far apart on the central issues of tax increases and spending cuts for healthcare and retirement programs that threaten to overwhelm the federal budget.

While many lawmakers have pushed for a "big deal" of $3 trillion to $4 trillion in spending cuts and tax increases over the next decade, the super committee was asked to find at least $1.2 trillion in deficit reduction over 10 years. Failure to reach agreement will trigger a similar amount of automatic spending cuts split between military and domestic programs.

Even if the panel manages to strike an eleventh hour deal, bitter partisan battles over U.S. deficits, which have topped $1 trillion for each of the past three years, will almost certainly continue through next year's presidential and congressional elections.

"Whatever they do this time: The trigger, or a partial deal, or a $1.2 trillion non-structural deal, and even the $3 trillion to $4 trillion deal, it is not the end of deficit reduction," said Ethan Siegal of The Washington Exchange, which tracks Washington for investors.

The reason is the 78 million baby boomers born between 1946 and 1964. The first wave is already beginning to draw on Medicare health and Social Security retirement benefits, leading program costs spiraling higher.

U.S. Census data for 2009, the most recent available, show about 8.6 million baby boomers, 11 percent of the total, are already receiving Social Security benefits and about 6.6 million were receiving disability benefits.

This should come as no surprise to lawmakers. For years the non-partisan Congressional Budget Office has issued dire warnings about the budget effects of an aging population and rapidly rising healthcare costs.

PUTTING ON A BRAVE FACE

If nothing changes, federal spending on health and retirement programs will grow from roughly 10 percent of the total U.S. economy currently to about 15 percent of GDP 25 years from now, according to the CBO. By comparison, spending for all federal programs averaged just over 18 percent for the past 40 years, the CBO said.

"Putting the federal budget on a sustainable path will require significant changes in spending policies, tax policies, or both," CBO director Douglas Elmendorf told the super committee as it began its work in early September.

In the end, it appears the super committee will do neither.

Putting a brave face on the super committee effort, one Republican congressional aide said that at a minimum the negotiations had helped raise public awareness over the hard choices needed to rein in spending on Medicare and Medicaid health programs for the elderly and poor as well as the Social Security retirement program.

"Things are being talked about in a way they have never been talked about before," said the aide, who is familiar with super committee discussions but asked not to be identified.

Republicans had said they could support some tax increases in return for a major overhaul of Medicare and other benefits. At the same time, they pushed to lower the top income tax rate from 35 percent to 28 percent.

Democrats rebuffed those Medicare proposals saying they would put too great a financial burden on the elderly and poor while giving big tax benefits to the wealthy .

The $1.2 trillion in automatic spending cuts that will start going into effect in January 2013 may be enough to avert any immediate adverse reaction by financial markets.

But with the U.S. debt topping $15 trillion, many experts believe continued failure by Washington to close the gap between spending and revenues will eventually upset financial markets, leading to further downgrade of U.S. debt by credit rating agencies and higher interest rates.

(Additional reporting by Richard Cowan; editing by Todd Eastham)

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