Bysh budget for 2006 may not count SS costs.
AP Wire | 11/22/2004 | Bush Budget May Not Count Social Security: President Bush isn't likely to include costs for overhauling Social Security in the 2006 budget he presents to Congress in February, which some supporters say could hurt the White House drive to pass bipartisan legislation next year.
Chad Kolton, spokesman for the White House budget office, said Monday costs won't be budgeted until the White House settles on a specific plan to restructure Social Security that would let younger workers divert a third or more of their payroll taxes into personal investment accounts. Bush must present his budget to Congress in early February. "There's not a specific plan that the president has proposed," Kolton said. "When that is developed, that plan will dictate when we start to show those costs in the budget." There's little time to get behind a plan before Bush's budget is due in Congress.
Democrats opposing a Social Security overhaul and the White House's business allies have urged the White House to include costs in the new budget. Leaving it out, Democrats say, would mislead people by omitting the potential changes' effect on the budget. Supporters say including the costs in the budget proposal would be viewed as a strong sign the administration is committed to pushing through a bill next year and is reaching out to fiscal conservatives in a time of record budget deficits. The deficit hit $413 billion in 2004. "Do I think reform is still possible without it being in there? I do," said Derrick Max, executive director of the Alliance for Worker Retirement Security, a business-backed coalition supporting investment accounts. "But I think it becomes more difficult."
Including Social Security costs in the new budget "seems to us a wise thing to do in trying to move this forward with fiscally conservative Democrats," Max said. He noted that $400 billion for a Medicare prescription drugs plan was put in Bush's 2004 budget even though details had not been worked out. Because Social Security is a pay-as-you-go system, the government would have to make up the shortfall for current retirees' benefits should payroll taxes be diverted into private investment accounts. The transition costs range from $1.7 trillion to more than $2 trillion.
Sen. Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee, said he is "open to considering changes to Social Security because changes must be made," including adding personal investment accounts that have additional incentives for saving. "But these things have to be part of an overall budget framework. I'm not going to be supportive of something that explodes the deficits and the debt further," he said. Not including Bush's Social Security overhaul in the budget "kind of makes a farce of the budget process," Conrad said....
It gets even more bizarre:
washingtonpost.com: Republicans Finding Ways To Account For Overhaul: Judd Gregg (R-N.H.), the incoming chairman of the Senate Budget Committee, said concerns about the deficit should not be allowed to stand in the way of an overhaul that would put the ailing Social Security system on the path to solvency.... Gregg's thinking mirrors sentiments within the White House, according to administration officials and White House advisers. "The budget should reflect that this is an investment, a down payment that will have very positive implications," said White House spokesman Trent Duffy.
Within 20 years, the retiring baby-boom generation will begin earning more in Social Security benefits than workers are expected to be paying in taxes, a shortfall forecast to increase every year from then on. To ease the long-term shortage, the Bush administration wants to slow the growth in benefits but allow people to divert about a third of their share of Social Security taxes into personal retirement accounts.
In the years before the slower growth in benefits compensates for the loss in revenue, the government would have to borrow, raise other taxes, or cut other spending to maintain benefits for Social Security recipients. An analysis of one plan produced by Bush's Social Security Commission concluded that the interim financing would cost as much as $104.5 billion the first year, balloon to $194.4 billion in the 10th year and would peak in roughly 20 years at $258 billion. Any accounting mechanism that obscures or minimizes those costs is sure to be controversial. John M. Spratt Jr. (S.C.), the ranking Democrat on the House Budget Committee, called it "the budgetary equivalent of having your cake and eating it too." Social Security can be put on a stronger financial footing at a fraction of the cost of partial privatization, say critics, who note that borrowing hundreds of billions of dollars on top of already large deficits could spell fiscal disaster.
"We're entering the theater of the absurd, where you spend money, but it doesn't count, you borrow money, but you deny it," said Kent Conrad (N.D.), the ranking Democrat on the Senate Budget Committee. "Republicans are becoming further and further detached from reality."
To cope with the cost, while still helping the White House at least appear to be moving toward its goal of cutting the deficit in half by 2009, White House and congressional budget experts are looking at a variety of accounting mechanisms, said Michael Tanner, a Cato Institute Social Security expert who has worked closely with the White House. They include treating the cost of Social Security reform not as a present-day expenses, but more as a prepaid benefit for future retirees that should not be counted against current deficits. Or they may take the costs "off-budget," meaning Social Security spending would not be included in the calculation of the annual budget deficit.
"How they label it is going to be somewhat of an exercise in creative budgeting," Tanner said.
Gregg and other allies of the president argue, in fact, that transition costs of $1.5 trillion or more over the next 10 years should not be considered an increase in the nation's debt. Instead, they say, such borrowing would be a prudent recognition of future obligations.
"The diversion of a portion of payroll taxes to personal accounts is akin to prepaying a mortgage," R. Glenn Hubbard, former chairman of Bush's Council of Economic Advisers, wrote in the current issue of Business Week. "If the transition costs are borrowed, the resulting higher explicit federal debt in the near term is offset by lower implicit debt (Social Security obligations) in the longer run."
The U.S. government may already be borrowing more than $400 billion a year, but supporters argue that international lenders will not punish the Treasury for additional borrowing because they already have factored Social Security's future obligations into the interest rates of today.
"The market is rational, and they are already nervous about all these unfunded obligations in Social Security and Medicare," said Kent Smetters, a former Bush Treasury Department economist now at the University of Pennsylvania. "Resolution of that uncertainty is actually going to be a positive."
Now there are three things going on here:
1. Glenn Hubbard and Kent Smetters are talking about having the government write a large check to the Social Security Trust Fund to boost its current size and so bring the Social Security system into actuarial balance, and then having the government borrow the money to cover the check. That is a relabeling and a making explicit of current implicit federal liabilities, and such a topping-off of the Trust Fund *could* and *might* be carried off as Kent expects, without raising interest rates. (For example, if the Social Security Trust Fund then invests its enlarged balance in the very same Treasury securities the government issues to cover the check to the Trust Fund.)
2. Judd Gregg is talking about cutting current government revenues (by cutting Social Security taxes paid to the government), while (a) cutting far future Social Security benefits by enough to offset in the long run the cut in Social Security taxes and (b) cutting far future Social Security benefits again by enough to erase the current imbalance in Social Security funding. That's a very different thing: only if the recipients of the private accounts fail to regard their account balances as theirs and think of them as the government's is it possible to argue that Gregg's position is correct--but the major political reason the Republicans want to do private accounts is that the recipients will regard them as their own, and be happy as a result.
3. The Social Security system needs either big benefit cuts or large injections of additional resources. Private accounts are irrelevant to that big issue--even if you believe (as Kent Smetters apparently does not) that the market is far from perfect, and that there are huge risk-adjusted profits to be picked up by boosting the share of your portfolio invested in stocks (a view that I am in sympathy with). Posted by DeLong at November 23, 2004 04:46 AM | TrackBack
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