Thursday, December 9, 2004

President Bush yesterday said the nation must begin to address the impending bankruptcy of Social Security and pledged that payroll taxes will not be increased as part of his plan to incorporate private retirement accounts for younger workers into the system.

Mr. Bush, who is trying to make Social Security reform and an overhaul of the tax code the domestic-policy legacy of his second term, said the impending retirement of the enormous baby-boomer generation makes structural reform of the government retirement system essential.

“For the sake of our younger workers, for the sake of younger Americans, we must be willing to address this problem,” Mr. Bush said after meeting in the Oval Office with the trustees of Social Security.

“I think it’s vital to consider allowing younger workers, on a voluntary basis, set aside some of their own payroll tax in personal accounts as part of a comprehensive solution to dealing with the Social Security issue.”

The president’s plan would allow younger workers — generally those younger than 55 — to invest from 2 percent to 4 percent of their payroll taxes into private accounts that will be invested in safe stock-market funds. White House advisers have told The Washington Times that the administration is leaning toward the 4 percent figure.

The transition costs of weaning younger generations away from the government system is estimated to be as high as $2 trillion, but Mr. Bush said that figure pales in comparison with the $11 trillion currently listed as unfunded liabilities in the program.

“I think it’s very important for the first step to be a common understanding of the size of the problem,” Mr. Bush said. “And then for members of both parties, in both bodies, to come together, to come and listen to the options available.”

Mr. Bush said he would prefer the federal government borrow money to pay for the startup costs of his program and reiterated his opposition to raising taxes to fill the gap — an option preferred by some Republicans and Democrats.

“We will not raise payroll taxes to solve this problem,” Mr. Bush said.

Donald Devine, second vice chairman of the American Conservative Union, praised Mr. Bush’s pledge, invoking a famous quote of the president’s father about tax increases that came back to haunt him and cost him conservative support.

“President Bush drew a sharp line in the sand this morning when he categorically ruled out raising the payroll tax on working Americans to pay for the transition costs of Social Security reform,” Mr. Devine said.

“This was a ‘read my lips’ moment. ACU expects President Bush will keep his word and oppose any Social Security reform plan that would raise the payroll tax,” Mr. Devine said.

Currently, employees and employers split the Social Security payroll tax of 12.4 percent of wages.

Michael Tanner of the Cato Institute, the libertarian think tank that has helped the White House hammer out its reform plans, lauded Mr. Bush’s “commitment to make Social Security reform the top domestic issue of his second term.”

“Clearly, the president understands the need for reform,” Mr. Tanner said. “Failing to act will only pass on an intolerable legacy of debt and higher taxes to our children and grandchildren.”

The Social Security trustees said in their latest report in the spring that the program would begin to run a deficit in 2014 and be exhausted in 2043.

Bringing Social Security into balance over the next 75 years would require an immediate increase in payroll taxes of 15 percent or a reduction of benefits of 13 percent, the report said, with those cuts or tax increases growing each year that reform is not enacted.

“The president understands that we have an opportunity to use Social Security’s financial crisis to create a better retirement system, one that gives workers ownership and control over their retirement benefits,” Mr. Tanner said.

Mr. Bush’s plan is likely to run into opposition from Democratic lawmakers, who argue that increasing the deficit in the short-term would harm the economy and raise interest rates.

House Minority Leader Nancy Pelosi, California Democrat, has said in the past that adding private accounts to Social Security would “destroy” the program, and yesterday she repeated her belief that Republicans are among those “who set out to undermine Social Security, and one of their tactics was to introduce privatization of Social Security, introducing these private accounts.”

She added, however, that she will keep an open mind about Mr. Bush’s proposal and is willing to negotiate as long as Republicans show that the program will remain solvent.

“We should come to the table with no preconditions, with the same numbers, then evaluate the problems and discuss solutions,” Mrs. Pelosi said. “I do believe the middle class should be held harmless and whatever is done should not add to the deficit.

“Among all retirement packages, savings, pensions, Social Security is the only guaranteed retirement, and it should have a guaranteed annuity,” she said.

Mr. Bush agrees and said yesterday, “It’s very important for those who are near retirement to understand nothing will change.”

John Rother, policy director of AARP, said his organization opposes private accounts, but will wait to see more details of Mr. Bush’s plan before taking a position.

“Depending on how it’s done, it could ship risk to the individual,” Mr. Rother said of private accounts. “Some people are pretty well-prepared to handle that; others are not.”

Mr. Rother acknowledges that Social Security has long-term solvency problems, but in the 20 years before the program starts running a deficit, “there is time to get this right.”

“We can address the problems by keeping the system strong and not undermine its basic protections,” Mr. Rother said. “If [the president’s reforms] involve massive new borrowing, interest rates will be even higher, and that would affect people.

“They don’t have to do private accounts to keep the system strong,” he said.

Social Security payments consume 23 percent of the federal budget, and 80 percent of taxpayers pay more in Social Security taxes than income taxes.

Sen. Lindsey Graham, South Carolina Republican, has suggested raising the income level subject to Social Security tax from $87,900 to as much as $200,000, a proposal that is expected to garner broader bipartisan support.

Mr. Graham said such a reform would generate more than $1 trillion in 10 years and the burden would fall mostly on the wealthy.

“I am proposing we look at a mix of options to pay for the transition costs,” Mr. Graham told the Associated Press.

White House spokesman Scott McClellan said Mr. Bush is not warm to that idea.

“This is a very real and growing problem,” Mr. McClellan said. “We want to get it done, and we want to reach out to members. We’ll listen to their ideas. But his principles are very clear. And I think if you’re talking about increasing taxes, the president has made it clear that he would not support that.”

• Brian DeBose contributed to this report.

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