Reid: Senate at 'cliff' stalemate after GOP Social Security demand

Senate Majority Leader Harry Reid (D-Nev.) announced Sunday afternoon that negotiations with his Republican counterpart to avoid the “fiscal cliff” have hit an impasse.

Reid told colleagues on the Senate floor that Senate Republican Leader Mitch McConnell (R-Ky.) had shown good faith in the talks but the two could not bridge major policy disagreements.

“At this stage, I don’t have a counteroffer to make. Perhaps as the day wears on I will be able to,” Reid said on the floor. “I think that the Republican leader has shown absolutely good faith. It’s just that we’re apart on some pretty big issues.”

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A Democratic aide familiar with the talks said Reid and McConnell had been making steady progress until McConnell made a counteroffer Saturday evening that included a proposal to curb the cost of Social Security cost-of-living adjustments by using the chained consumer price index — or "chained CPI" —  formula.

The aide said Reid had agreed to raise the threshold for extending income tax rates from the $250,000 level President Obama campaigned on.

“Sen. Reid was personally taken aback and hugely disappointed to hear the new element of the Republicans latest offer,” the aide said.. “We’re further apart than we were 24 hours ago.”

A Republican aide said if Reid is so opposed to including chained CPI in a year-end tax deal, he could have merely submitted a counteroffer without it, instead of characterizing the talks at an impasse.

Reid and McConnell were making slow but steady progress until that point, according to aides. McConnell wanted Reid to raise the threshold for extending income tax rates, a point on which Reid gave ground, and to extend the estate tax rate at 35 percent with its exemption on inheritances up to $5 million per spouse.

Democrats say the additional demand of cutting Social Security benefits at this late stage is a non-starter.

“We’re not going to have any Social Security cuts at this stage, that just doesn’t seem appropriate,” Reid said. “We’re open to discussion about entitlement reforms but we’re going to have to take it in a different direction. The present status will not work.”

After a news conference later in the afternoon, Reid reiterated his opposition to the GOP demand. “We are not going to mess with Social Security,” he said. 

McConnell criticized Reid and the president for showing a lack of urgency.

“My office submitted an offer to the majority leader last night at 7:10 p.m. and offered to work through the night to find common ground. The majority leader's staff informed us they would be getting back to us this morning at 10 a.m. — despite our obvious time crunch. It’s now 2 p.m. and we’ve yet to receive a response to our good-faith offer,” McConnell said on the Senate floor.

“I'm concerned with the lack of urgency here. There’s far too much at stake for political gamesmanship,” he said.

McConnell said he has reached out to Vice President Biden twice in a last-ditch effort to "jump-start the negotiations on his side".

"The vice president and I have worked together on solutions before and I believe we can again," he said.

In the absence of an agreement between Reid and McConnell, Reid will bring to the floor on Monday a default bill that extends the Bush-era income tax rates for annual family income below $250,000, extends unemployment benefits and expiring business tax provisions, and freezes scheduled cuts in Medicare payments to doctors.

A Senate Democratic aide said McConnell inserted a poison pill in the negotiations by calling for Social Security reform at a time when Democrats thought it was off the table.

“We believed it was mutually understood that chained CPI was off the table for a smaller-scale agreement and see Republicans’ continued insistence on including it as a major setback. It is one of the biggest concessions our side could offer, and they know we cannot accept it in a scaled-down deal,” the aide said.

Reid said entitlement reform should be part of a larger deficit-reduction deal, not an emergency effort to stop tax hikes on the middle class.

“We're willing to make difficult concessions as part of a balanced, comprehensive agreement but we'll not agree to cut Social Security benefits as part of a small or short-term agreement, especially if that agreement gives more handouts to the rich,” Reid said.

The president, though, has expressed support for including chained CPI in a broader deficit-reduction deal.

In an interview aired Sunday on NBC's "Meet the Press" Obama touted his openness to the measures as proof that he was willing to buck his party to reach compromise.

"One of the proposals we made was something called chain CPI, which sounds real technical but basically makes an adjustment in terms of how inflation is calculated on Social Security. Highly unpopular among Democrats," said Obama. "Not something supported by AARP. But in pursuit of strengthening Social Security for the long-term I'm willing to make those decisions."

Some Democratic senators said they think McConnell’s call for Social Security reform is last-minute posturing and that Republicans will relent and agree to raise some taxes.

“These always happen at the end, they always happen at the end,” said Sen. Charles Schumer (D-N.Y.), Reid’s lieutenant.

During an appearance on ABC’s “This Week” earlier in the day, Schumer put the chances of a deal at “a little higher than 50-50”.

Sen. Sherrod Brown (D-Ohio) said he also thinks there is a likelihood that Reid and McConnell will strike a deal before Monday’s deadline.Two Republican senators said it was possible a deal could be approved with bipartisan support in the Senate without the chained CPI change on Social Security. 

Sen. Lindsey Graham (R-S.C.) said there was a "critical mass of 80 votes" in the Senate for a deal that would extend current tax rates on annual income under $500,000, along with provisions preventing more middle-class taxpayers from being hit by the alternative minimum tax and preventing Medicare payments to doctors from being cut. He described the chained CPI provision as never having been a core GOP demand.

Sen. Olympia Snowe (R-Maine), who earlier this year voted against Obama's favored tax plan, said she could support Obama's proposal to extend tax rates only on annual income below $250,000 if it was the only way to prevent middle-class tax rates from rising. 

"If at the end of the day that's all that remains on the table, then most certainly, because I think we should put to rest the fears of millions of Americans that their taxes are going to increase starting in 2013," Snowe said.

— Updated at 3:56 p.m.

Russell Berman contributed to this story.