The plan, if ever enacted, could touch almost all Americans. The rich would see tax increases, the poor and the elderly would get smaller annual increases in their benefits, and middle income taxpayers would slip into higher tax brackets despite Obama's repeated vows not to add to the tax burden of the middle class. His proposed changes, once phased in, would mean a cut in Social Security benefits of nearly $1,000 a year for an average 85-year-old, smaller cuts for younger retirees.
Obama proposed much the same without success to House Speaker John Boehner in December. The response Friday was dismissive from Republicans and hostile from liberals, labour and advocates for the elderly.
But the proposal aims to tackle worrisome deficits that are adding to the national debt and placing a long-term burden on the nation, prompting praise from independent deficit hawks. Obama's budget also proposes new spending for public works projects, pre-school education and for job and benefit assistance for veterans.
"It's not the president's ideal approach to our budget challenges, but it is a serious compromise proposition that demonstrates that he wants to get things done," said White House press secretary Jay Carney.
The budget, which Obama will release Wednesday to cover the budget year beginning Oct. 1, proposes spending cuts and revenue increases that would result in $1.8 trillion in deficit reductions over 10 years. That figure would replace $1.2 trillion in automatic spending cuts that are poised to take effect over the next 10 years if Congress and the president don't come up with an alternative, thus delivering a net increase in deficit reduction of $600 billion.
Counting reductions and higher taxes that Congress and Obama have approved since 2011, the 2014 budget would contribute to $4.3 trillion in total deficit reduction by 2023.
The budget wouldn't affect the $85 billion in cuts that kicked in last month for this budget year.
A key feature of Obama's plan is a revised inflation adjustment called "chained CPI." This new formula would effectively curb annual increases in a broad swath of government programs but would have its biggest impact on Social Security. By encompassing Obama's offer to Boehner, R-Ohio, the plan would also include reductions in Medicare spending, much of it by targeting payments to health care providers and drug companies. The Medicare proposal also would require wealthier recipients to pay higher premiums or co-pays.
Obama's budget proposal also calls for additional tax revenue, primarily by placing a 28 per cent cap on deductions and other tax exclusions. That plan would affect wealthy taxpayers as would a new administration proposal to place limits on tax-preferred retirement accounts for millionaires and billionaires.
Obama made the same offer to Boehner in December when he and the speaker were negotiating ways of avoiding a steep, so-called fiscal cliff of combined across-the-board spending cuts and sweeping tax increases caused by the expiration of Bush-era tax rates. Boehner rejected that plan and ultimately Congress approved tax increases that were half of what Obama had sought.
"If you look at where the president's final offer and Boehner were ... they were extremely close to each other," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "We do think that it's a very good sign that the president has included real entitlement reforms in the budget."
Boehner, in a statement Friday, said House Republicans made clear to Obama last month that he should not make savings in entitlement programs that both sides agree on, contingent on more tax increases.
"If the president believes these modest entitlement savings are needed to help shore up these programs, there's no reason they should be held hostage for more tax hikes," Boehner said. "That's no way to lead and move the country forward."
The inflation adjustment would reduce federal spending on government programs over 10 years by about $130 billion, according to White House estimates. Because it also affects how tax brackets are adjusted, it would also generate about $100 billion in higher taxes and hit even middle income taxpayers.
Once the change is fully phased in, Social Security benefits for a typical middle-income 65-year-old would be about $136 less a year, according to an analysis of Social Security data. At age 75, annual benefits under the new index would be $560 less. At 85, the cut would be $984 a year.
The concept behind the chained CPI is that consumers substitute lower-priced alternatives for goods whose costs spike. So, for example, if the price of oranges goes too high for some consumers, they could buy alternatives like apples or strawberries if their prices were more affordable. This flexibility isn't considered in the current system of gauging inflation, a calculation that determines how much benefits grow each year. Taking it into account means such benefits won't grow by as much.
Advocates for the elderly say seniors pay a higher portion of their income for health care, where costs rise more quickly than inflation.
The White House has said the cost-of-living adjustments would include protections for "vulnerable" recipients.
"The president should drop these misguided cuts in benefits and focus instead on building support in Congress for investing in jobs," AFL-CIO President Richard Trumka said in a statement.
AARP's legislative policy director said Obama's budget proposal, while not a surprise, was a disappointment.
"The message seems to be that the president wants a deal and is willing to even sacrifice such important benefits as Social Security as part of that deal," said David Certner. The seniors lobby argues that Social Security doesn't belong in the budget talks because it isn't contributing to the deficit and is separately financed with its own dedicated taxes.
Citing the effect on veterans, Sen. Bernie Sanders, I-Vt., chairman of the Senate Committee on Veterans' Affairs, said he was "terribly disappointed" in the Obama plan and would "do everything in my power to block" it.
While Obama has proposed the slower cost of living adjustment plan during fiscal negotiations with Republican leaders, placing it in the budget would put the administration's official imprint on the plan and mark a full shift from Obama's stand in 2008, when he campaigned against Republican Party nominee John McCain.
In a Sept. 6, 2008, speech to AARP, Obama said: "John McCain's campaign has suggested that the best answer for the growing pressures on Social Security might be to cut cost-of-living adjustments or raise the retirement age. Let me be clear: I will not do either."
Obama also proposes $305 billion in cuts to Medicare over a decade, including $156 billion through lower Medicare payments to drug companies and higher premiums or co-pays from wealthy recipients. That's to the right of the conservative budget of House Budget Committee Chairman Paul Ryan, R-Wis., which barely touches Medicare in the coming 10 years, cutting just $129 billion from the program. The huge Medicare savings from Ryan's proposal, which transforms the system into a program in which the government subsidizes health insurance purchases on the private market, wouldn't accrue until the following decade.
Obama's budget comes after the Republican-controlled House and Democratic-run Senate passed separate and markedly different budget proposals. House Republicans achieved long-term deficit reductions by targeting safety net programs; Democrats instead protected those programs and called for $1 trillion in tax increases.
But Obama has been making a concerted effort to win Republican support, especially in the Senate. He has even scheduled a dinner with Republican lawmakers on the evening that his budget is released next week.
As described by the administration officials, the budget proposal would also end a loophole that permits people to obtain unemployment insurance and disability benefits at the same time.
Obama's proposal, however, includes calls for increased spending. It proposes $50 billion for public works projects. It also would make preschool available to more children by increasing the tax on tobacco.
Associated Press writers Stephen Ohlemacher and Ricardo Alonso-Zaldivar contributed to this report.
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