- The Washington Times - Wednesday, December 15, 2004

The White House plan to partially privatize Social Security, as made public thus far, will not cure the system’s funding gap, and could make it worse with the retirement of baby boomers, Congress’ chief budget watchdog said yesterday.

But Douglas Holtz-Eakin, director of the Congressional Budget Office (CBO), said he is optimistic the administration will propose the adjustments in benefits needed to put the retirement system on a sound footing, in an interview with editors and reporters at The Washington Times.

“If you take the payroll tax devoted to the traditional program and divert it into private accounts, you’ve widened the gap” between revenues and outlays that already was set to grow explosively by trillions of dollars starting in 2019, in the midst of the retirement of baby boomers, he said.

The only way to close that gap, Mr. Holtz-Eakin said, is through payroll tax increases — which President Bush has ruled out — and benefit cuts, such as trimming the cost-of-living adjustments retirees receive each year. He said the administration seems likely to propose curbs in benefits.

“The administration has been talking about no free lunches, and there’s a whole bunch of free lunches floating around out there,” he said, referring to private proposals that would finance the $1 trillion to $2 trillion transition cost of the privatization plan entirely through borrowing.

Mr. Holtz-Eakin applauded the White House for starting the debate over reforming Social Security. But he said the uncontrolled growth of Medicare and Medicaid pose an even greater financial challenge that so far has defied attempts at solution.

Curbing the rapid growth in spending of all kinds — including defense — should be Congress’ top priority, he said, suggesting that further preoccupation with tax cuts and tax reform should be set aside for now.

“Now is an opportunity to do something,” with the economy settling comfortably into its fourth year of expansion and unemployment on the decline, he said.

“The focus should be on the spending side of the budget,” he said, noting that “borrowing is a decision to raise taxes in the future.”

On defense, he said, “We’re on a track to spend … 15 percent more than the cost of the Cold War.” He estimated the yearly cost of the war on terror, including the conflicts in Iraq and Afghanistan, at $70 billion.

That comes on top of a $400 billion base defense budget — making defense the fastest-growing and largest program outside Social Security in recent years. The CBO estimates that defense spending will soon exceed Social Security and stay above $500 billion for years to come.

“Are we using those dollars effectively?” Mr. Holtz-Eakin asked, stressing that unchecked spending at the current rate will test the government’s ability to borrow in the financial markets.

The dollar has plummeted to near record lows against other major currencies in recent weeks on worries about whether the United States will be able to keep finding ways to finance its $413 billion budget deficit and $660 billion current account deficit.

Yesterday, the dollar renewed its fall after the Treasury Department reported that it was able to attract only $48 billion in net foreign investment during October — short of the estimated $60 billion needed each month to underwrite the deficits.

Mr. Bush responded to worries about the dollar and calls for deficit reduction from business groups by pledging to renew his efforts to curb spending in Congress this year, after meeting with Italian Prime Minister Silvio Berlusconi in the Oval Office yesterday.

“We’re going to take this issue on seriously with the Congress,” he said. “We’ll do everything we can in the upcoming legislative session to send a signal to the markets that we’ll deal with our deficits, which hopefully will cause people to want to buy dollars.”

The president said “members of both political parties understand now is the time” to reform Social Security.

“Baby boomers are getting ready to retire, and there’s not enough workers to sustain that which has been promised. And so the fundamental question I placed before the Congress is we have a problem; let’s work together to deal with it.”

On the U.S. trade deficit, which is often criticized by Europeans, Mr. Bush said, “That’s easy to resolve; people can buy more United States products if they’re worried about the trade deficit.”

Mr. Bush has said his goal is to cut the budget deficit in half. Treasury Secretary John W. Snow has suggested the administration will rely primarily on economic growth to achieve that goal, along with cuts in selected domestic discretionary programs.

But Mr. Holtz-Eakin said more vigorous action is needed, as government revenues are not likely to get much more of a boost from economic growth.

“The deficit is no longer a cyclical phenomenon,” he said. CBO’s projections show the deficit leveling out at about $300 billion without further action to cut it. “The policy chain will determine any further reduction, not the path of the economy,” he said.

The government also will not be able to grow out of the Social Security funding gap, he said, which stems from the shortfall of revenues collected from payroll taxes on U.S. citizens and legal immigrants and projected outlays for future retirees.

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