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Where will Washington find $4 trillion in cuts?

President Obama is reportedly seeking deficit cuts of $4 trillion over the next decade which would be about a one-third cut in the cumulative deficits.

President Obama is reportedly seeking deficit cuts of $4 trillion over the next decade which would be about a one-third cut in the cumulative deficits.

Obama told reporters Thursday that he and congressional leaders had “a very constructive meeting” at the White House on Thursday and they’ll reconvene on Sunday “with the expectation that at that point the parties will at least know where each other’s bottom lines are” and will start “engaging in the hard bargaining that’s necessary to get a deal done.”

He said, “Everybody acknowledged that there’s going to be pain involved politically on all sides.”

Obama is now said to be open to changes in Social Security, Medicaid and Medicare that could result in big savings from those programs — which together by 2021 will account for half of all federal spending.

But how might those changes affect people who hope to retire in the next decade? And how will Republican congressional leaders and Obama come up with revenue to reach a $4 trillion target?

Here are some questions and answers on the current state of play in the debt drama:

If I’m a 55-year old worker and I’m hoping to start collecting Social Security retirement benefits in 12 years, how would a change in Social Security benefits affect me?We won’t know for sure unless and until a deal is unveiled. But one idea that is reportedly under discussion in the budget talks is a change in the formula used to make the cost-of-living adjustment (COLA) for retirees collecting Social Security benefits.

In the past two years, there has been very low inflation and therefore Social Security beneficiaries have gotten no COLA — a sore point with many elderly people who contend that their costs have gone up, even if that hasn’t been reflected in the current formula.

In 2009, beneficiaries received a 5.8 percent COLA increase in their benefits.

The COLA has been in use since 1975. It is pegged to the consumer price index for urban workers. Some analysts say this measure overstates the true amount of inflation since it doesn’t account for product substitution, improvements in quality, and changes in consumers’ spending habits.

If an alternative measure — called “chained CPI” — were used to calculate the COLA, it would reduce Social Security outlays by about $112 billion through 2021, if it were adopted immediately, according to the Congressional Budget Office.

And that’s one of the devils in the details: would a change in the COLA formula apply immediately, or only to future retirees, let’s say those eligible to start getting benefits in 2021 and thereafter?

A change that applied only a decade in the future would at least allow current workers to try to save more for retirement. A change that took affect immediately or in the next few years would be politically perilous.

A leading House Democrat, Rep. Chris Van Hollen of Maryland, seemed to rule out any change in the COLA formula Friday, saying in an interview with NBC's Chuck Todd on The Daily Rundown, “I’m not saying we’re going to tinker with COLA."

How about raising the Social Security eligibility age for people who are still working? The full retirement age for Social Security beneficiaries is now 66 and is rising to 67 for people born in 1960 and later.

But about 40 percent of workers choose to start getting benefits at age 62, which is permitted under current law.

One possible change would be to nudge up that early benefits eligibility age. CBO has estimated that if the early eligibility age were gradually increased to 64, it would result in about $144 billion in savings in the first ten years.

Going further, if Congress were to do a new version of what it did back in 1983 — raising the eligibility age for all retirees — it would also be a big source of savings.

If the full eligibility age were gradually raised to 70 for workers born in 1973 and thereafter, that would cut Social Security outlays by 12 percent by 2050, which would equate to massive savings in dollar terms.

But, as CBO has noted, an increase in the eligibility age is, in effect, a cut in the benefits which people are expecting to get.

“Forcing people with lower-than-average life expectancies to delay claiming benefits would reduce their lifetime benefits.” CBO said in a report last March. “For example, someone who died at 68 would collect benefits for four years rather than six. And because people with lower earnings tend to have shorter life expectancies, they would be more likely to be harmed by the change.”

What changes in Medicare might produce big savings?Keep in mind that Medicare cuts are already on the way: the health care overhaul which Congress enacted last year will reduce future Medicare spending by more than $400 billion over the next decade, according to CBO. Much of that will come from reducing payments to hospitals, hospices, and other providers.

If Congress decided to go beyond that, it could increase eligibility age for Medicare. Gradually raising the age of eligibility — now 65 for most people — until it reached 67 for people born in 1960 would save $125 billion in the first ten years and much more after that, compared to current law.

There are other possibilities. The independent commission headed by former Senate Budget Committee chairman Pete Domenici, a Republican, and former CBO chief Alice Rivlin, a Democrat, has proposed gradually raising Medicare premiums and using Medicare’s buying power to force pharmaceutical companies to, in effect, lower the prices they charge Medicare.

What about defense cuts?Under existing law, defense spending is projected to fall from 19 percent of federal outlays today to about 15 percent by 2021.

Further cuts would likely require both scrapping some future weapons and — probably more importantly — forcing service members and military retirees to pay more of the cost of their health benefits.

The CBO reported last week that “growth rates in the military health system have been significantly higher than the corresponding rates in the national economy.”

What about revenue? With Republicans opposed to tax increases, is there a way to raise more revenue without raising tax rates? Yes, there at least four ways to do it.

First, and probably the smallest source of revenue, would be for the government to sell assets, such as federal lands, and to auction off parts of the wireless spectrum, as it has done since 1994. In Obama’s fiscal year 2012 budget blueprint, he proposed $32.5 billion in wireless spectrum license user fees and auction revenues.

Second, if the economy grows at a brisker pace, and more people are hired, tax revenues will increase, as happened from 1997 to 2001, when revenues went up even as taxes were cut.

But the depressing news Friday that employment grew by a scant 18,000 jobs in June, and that since March, the number of unemployed has increased by more than half a million, has dashed hopes that the economy will soon accelerate.

In the near term, a significant increase in revenues coming from new workers paying taxes seems most unlikely.

Third, Congress could require those getting benefits such as Medicare to pay more of the cost of the program, as the Domenici-Rivlin panel proposed.

Finally, there’s the course proposed both by the the Domenici-Rivlin group and by the Bowles-Simpson commission which the president appointed early last year: get rid of most tax deductions, credits, and preferences. In Washington jargon, these are called "tax expenditures."

In return all income tax rates would be lowered.

“It is possible both to reduce (tax) rates dramatically and to achieve significant deficit reduction if tax expenditures are eliminated or scaled back and better targeted,” the Bowles-Simpson commission report said.

“In additional to reducing rates, reform must be projected to raise $80 billion of additional revenue… in 2015 and $180 billion in 2020,” they said.

Their proposal would increase revenue, with taxpayers in the top fifth of the income distribution being faced with about a 10 percent tax increase.

There’d be no way to "spin" that tax increase as anything other than that — and therefore it seems a stumbling block for Republicans.