Bush going to raise taxes?
Social Security reform ‘could hit high earners'
By Andrew Balls in Washington
Published: December 19 2004 21:01
Bush administration officials on Sunday refused to rule out the possibility that high-income earners would be required to make larger payroll tax contributions as part of Social Security reform.
John Snow, Treasury secretary, (pictured) left the door open to an increase in the payroll tax base in an interview on Fox News. “We don't have a detailed plan yet,” he said. “What the president said was no increase in rates.” Andrew Card, White House chief of staff, said President George W. Bush did not want to see the payroll tax rate increase but refused to comment on the tax base.
The payroll tax, which funds Social Security, is levied at a 12.4 per cent rate on the first $87,900 (€66,000, £45,243) of annual employment earnings. Raising the threshold above that level would increase the tax payments made by higher earners.
Congressional Republicans, including senator Lindsey Graham and congressman Jim Kolbe, have called for a significant increase in the payroll tax maximum to help reform the pensions system.
They have raised concerns over the fiscal probity of issuing $6,000bn of extra government debt over the next 20 years to pay the transition costs of introducing personal accounts as part of Social Security.
Federal Reserve members, including Alan Greenspan, the Fed chairman, and Edward Gramlich, a Fed governor, have also indicated their concern about Social Security reform involving the issue of a large amount of government debt.
Mr Bush has said he favours Social Security reform. But last week's White House economic summit provided no further details of his plan. The leading proposal from the 2001 presidential commission on Social Security reform highlighted in this year's Economic Report of the President is generally seen as the administration's template.
It would cut future benefits for younger workers by changing the formula used to calculate entitlements and would allow workers to divert a third of their payroll tax into a private account invested in equity and corporate bond index funds or in Treasuries.
Because Social Security would continue to pay the current level of benefits to those in or near retirement, that would create a hole in the system's accounts in the coming decades, increasing the government's debt by more than $6,000bn in the first 20 years, according to the Social Security administration's calculations. It would not lead to a reduction in government debt relative to the projections under current law for 60 years.
The Social Security trustees forecast that the system has a shortfall of $3,700bn over the next 75 years in net present value terms, rising beyond 2080.
Democrats have pointed out that the revenue that will be lost by making permanent the first term Bush tax cuts exceed Social Security's funding gap. The White House has made clear that extending those tax cuts, which are about to expire, is the administration's priority.
Mr Gramlich, who chaired a commission on Social Security reform during the 1990s, expressed concern at the administration's favoured approach in a recent interview.
“At a time when national savings is dangerously low, does it make sense to add hugely to government borrowing? Wouldn't it be safer to pay for individual accounts up front?” he said. “Some argue that we have this liability already, but that implicit liability can be roughly cut in half by a sensible measure such as gradually increasing the retirement age”.
Mr Greenspan has suggested that investors are likely to see the issuance of Treasury bonds as very different to the contingent liabilities represented by forecast Social Security benefits. His views were expressed in testimony given to Congress in November 1997 before the Senate budget committee.
“If markets have not fully accounted for this implicit liability, then making it explicit could lead to higher interest rates for US government debt,” he said.
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