This setting is changed in the “Structure for New Projects” dialog. Navigate to “File” -> “New Projects Setup” -> “Structure…”
Next, modify the “Project SDK” and “Project Language Level” as appropriate.
Previous versions of IntelliJ IDEA had this setting in “File” -> “Other Settings” -> “Default Project Structure…”.
IntelliJ IDEA 12 had this setting in “Template Project Structure…” instead of “Default Project Structure…”