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W.House: Borrowing to Help Fund Social Security Plan

Mon Dec 6, 3:00 PM ET
Top Stories - Reuters
By Adam Entous

WASHINGTON (Reuters) - The White House said on Monday for the first time that President Bush (news - web sites)'s plan to add personal retirement accounts to Social Security (news - web sites) would be financed in part by new government borrowing that could top $1 trillion.

Bush has made reform of the U.S. retirement program a top priority in his second term and will push for creating private accounts in a meeting later in the day with top congressional leaders.

Bush's economic advisers have been analyzing financing options for more than a year. But the White House, until now, had declined to say that borrowing would be used to cover the transition costs. Experts say Bush has few other options because of record federal budget deficits. The president has ruled out tax increases.

"There will be some upfront transition financing that will be needed to move toward a better system that will allow younger workers to invest a small portion of their own money into personal savings accounts," White House spokesman Scott McClellan said.

Asked if transition costs, estimated at between $1 trillion to $2 trillion, would be financed by government borrowing, he added: "That's what you're looking at doing as part of the transition to a better Social Security system."

McClellan declined to say how much borrowing would be needed. "I'm not committing to any cost estimate at this point, because that's based on the plan that the president endorses," he said.

Bush's economic advisers believe a short-term increase in borrowing is economically feasible, and that the cost of doing nothing would be far greater in the long term. While the nation's debt load would increase initially, it would fall as the reforms are phased in, advocates say.

Democrats have vowed to protect Social Security from "privatization" by Bush and his Republican allies in the U.S. Congress. They warn that the nation's mounting debt load could become a drag on economic growth.

McClellan countered: "The Social Security system is unsustainable. It needs to be fixed."

He said it would cost $10 trillion "if we do nothing... It will lead to either massive tax increases or massive benefit cuts for younger workers."

A recent analysis by the White House Council of Economic Advisers found that tapping the bond markets to pay for private accounts would increase the nation's debt-to-GDP (news - web sites) ratio by 23.6 percentage points by 2036.

Under this scenario, the debt held by the public would increase by as much as $4.7 trillion. But the new government bonds would be repaid 20 years later, eliminating Social Security's unfunded liability while reducing the tax burden in the long term, advocates said.

"The president, at this point, has not endorsed a specific plan," McClellan said.

But Republicans say the Bush administration favors a plan that would allow workers to voluntarily redirect 4 percent of their payroll taxes up to $1,000 annually to a personal account.

Under this scenario, bond proceeds would make up for diverted payroll tax funds and shore up the Social Security system. The bonds would be gradually paid off using future savings from Social Security as benefits growth slowed, officials said.

Bush opposes raising taxes or making changes for those at or near retirement, the White House said.

The White House had once hoped that budget surpluses, projected in 2000 at $5.6 trillion over 10 years, would fund the transition period. But those surpluses have vanished.

The federal budget deficit hit a record of $412 billion in the 2004 fiscal year that ended Sept. 30, and the Congressional Budget Office (news - web sites) has projected $2.3 trillion in accumulated deficits over the next decade.

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