By Andy Sullivan
WASHINGTON, March 6 (Reuters) - President Barack Obama must work with a deeply skeptical partner as he tries to undo painful spending cuts and set U.S. finances on a more sustainable course: the liberal wing of his own party.
While Republicans have dug in their heels against further tax increases, many of Obama's fellow Democrats have refused to consider cuts to popular health and retirement programs that are projected to eat up a growing slice of the nation's resources.
As a result, the lion's share of deficit-reduction efforts so far - apart from tax increases - have come from cuts to military and domestic programs, including the $85 billion in reductions that went into effect last week. The nonpartisan Congressional Budget Office projects that those "sequestration" cuts will eliminate 750,000 jobs.
Obama has said lawmakers in both parties will have to give ground to put an end to the budget wars that have slowed economic growth and dominated Washington for the past two years.
But many of his fellow Democrats already have ruled out the relatively modest changes the president has proposed to "entitlement" benefits such as the Social Security pension program and the Medicare health plan for the elderly.
"I am a supporter of the president, but me being a supporter of the president doesn't mean I'm a servant of the president," said U.S. Representative Keith Ellison of Minnesota, a leader of the party's liberal wing in the House. "He and I don't agree on this, and I'm going to fight him tooth and nail on it."
Ellison and other liberals are not eager to compromise after last year's election, in which Obama defeated Republican presidential candidate Mitt Romney, who called for further spending cuts and an overhaul of Medicare.
A majority of House Democrats signed a letter last month telling Obama they would not support cuts to Social Security and Medicare benefits as part of a deal to help tame the U.S. government's debt, now more than $16 trillion. A majority of Senate Democrats signed a similar letter in December, rejecting cuts to Social Security.
Powerful labor unions and other outside liberal groups also are pushing Congress to leave benefits untouched.
That stance could complicate Obama's efforts to build what he has called a "caucus of common sense" that could pair modest benefit cuts with reduced tax breaks for the wealthy to try to reduce the annual budget deficit and start to control the national debt.
Republicans have controlled the House since 2011, but they have needed Democrats' support to pass budget deals.
'DRIVING DEFICITS, CRUSHING INVESTMENTS'
Democrats' reluctance to touch entitlement programs also means that their other priorities, from science to transportation programs, will bear the brunt of spending cuts.
According to the centrist Democratic think tank Third Way, job losses from last week's "sequester" cuts will fall heaviest on scientists, engineers and construction workers - the type of workers whose labor is particularly important to boosting U.S. productivity.
"There is no doubt that to solve our budget problems more revenue is needed, but we cannot ignore that entitlements are also driving deficits and crushing investments in the next generation," Third Way policy adviser David Brown wrote in a report last week.
Social Security and Medicare are among the most popular services that the U.S. government provides.
As the automatic spending cuts loomed last month, the Pew Research Center found that only 10 percent of Americans would support scaling back Social Security and just 15 percent would back cuts to Medicare. By contrast, 48 percent said foreign aid should be cut.
But foreign aid and other programs that are funded annually by Congress are not the problem. Such "discretionary" spending is projected by the end of the decade to fall to its lowest level in 50 years as a share of the economy, because of spending caps put in place by a 2011 budget deal.
By contrast, Social Security, Medicare, and long-term care programs financed through Medicaid are projected to expand dramatically as the population ages in coming decades.
The Republican-controlled House twice has approved a budget plan that would try to rein in Medicare by offering participants a voucher to buy private coverage, but the measure failed to clear the Democrat-controlled Senate in 2011 and 2012.
The plan's author, House Budget Committee Chairman Paul Ryan, is expected to unveil a new version on Wednesday aimed at achieving more dramatic savings.
Democrats, including Obama, have rejected Ryan's approach on the grounds that it would force retirees to shoulder more of the their healthcare costs.
They argue that retirees on fixed incomes who depend on Social Security and Medicare should not be forced to bear the brunt of deficit reduction.
TOUCHING ENTITLEMENTS 'A DEAL KILLER'
Obama has put other, more modest benefit cuts on the table.
Notably, he has proposed changing the way Social Security and other benefits are indexed to inflation to slow their growth over time, a concept known as "chained CPI" in Washington-speak.
The savings could be substantial: $340 billion over 10 years, according to the Congressional Budget Office.
Obama has floated a modified version to shield the neediest beneficiaries that would save $130 billion over 10 years, but many of his fellow Democrats say they cannot support it because it would cut too deeply into retiree payments over time.
"I'm going to read anything that's sent over here, but it's a deal killer for me," said Ellison, the Democrat who co-chairs the House Progressive Caucus.
Obama also has proposed requiring wealthy retirees to pay more for their Medicare coverage, which would save about $35 billion over 10 years.
That may reflect the progressive notion that wealthier Americans should pay more for government services, but many liberal lawmakers and interest groups say it could undermine Medicare's financial health and political popularity if it leads affluent retirees to abandon the program.
They also say it would snare too many middle-income retirees in coming years because it would not be indexed to inflation.
"What we're really talking about ... is getting more money from middle-class people by asking them to pay higher premiums, and that's not progressive," said Kelly Ross, deputy policy director at the AFL-CIO federation of labor unions.
Analysts say Obama will have a hard enough time persuading Republicans to agree to any tax increases after he won $600 billion in more revenue in January.
If Obama is going to do so, he'll need to put entitlement cuts on the table, they say.
"It's astonishing that more people haven't pointed this out, that a balanced package would have to include something" on benefits, said Greg Valliere, an analyst with Potomac Research Group. "I think that's the only way we could break the logjam." (Editing by David Lindsey and Lisa Shumaker)
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