Bush rules out raising taxes for Social Security

Heavy federal borrowing, reduced benefits loom larger in overhaul plan

The Nation

December 10, 2004|By Warren Vieth | Warren Vieth,LOS ANGELES TIMES

WASHINGTON - President Bush flatly rejected a payroll tax increase to shore up Social Security yesterday, narrowing the range of options available to lawmakers to address the retirement system's long-term financial needs.

"We will not raise payroll taxes to solve this problem," Bush said after a meeting with Social Security trustees.

Although the president said he did not want to prejudge Social Security legislation under consideration in Congress, his declaration appeared to undermine two leading proposals for overhauling the program - both of which include an increase in the payroll tax for some higher-income workers.

It also made it increasingly likely that any measure Bush signs into law will rely on borrowed money and reductions in benefits for future retirees to finance the creation of private investment accounts and make the system financially sound.

Bush has placed Social Security at the top of his second-term policy agenda, asking Congress to approve a plan to let younger workers divert a portion of their payroll taxes into private investment accounts that they would control.

Putting funds into private accounts, however, would deprive the Social Security system of money needed to pay benefits to current retirees. Economists have estimated that it could cost $1 trillion to $2 trillion over the next decade to replace the payroll taxes that would be diverted into private accounts. The additional federal borrowing could push up interest rates, some analysts say.

White House officials contend the additional debt would be more than offset by the eventual reduction of Social Security's long-term unfunded liability, which they estimate at $11 trillion over 75 years. Their argument assumes that future benefits would be reduced to offset the creation of private accounts.

Independent analysts said they considered it unfortunate that Bush appeared to be foreclosing one of the few basic choices for ensuring that future revenues are adequate to cover promised benefits to retirees.

"It constrains the options significantly," said Peter Orszag, director of the Brookings Institution's Retirement Security Project. "Once you cut through the various accounting maneuvers that may be employed, we really do face the choice of either reducing benefits or raising revenue. To the extent the president has just rolled the latter off the table, we're faced with just reducing benefits."

Bush has not endorsed a single restructuring plan. But in the past he has pledged, in general terms, not to increase taxes or cut benefits for current retirees or those nearing retirement.

Until yesterday, it was unclear whether he would consider any change in the payroll tax that finances Social Security. Under current law, workers and employees each pay a 6.2 percent tax on all wages up to $87,900 a year. More money could be generated by either raising the tax rate or increasing the amount of income subject to taxation.

Republican Sen. Lindsey Graham of South Carolina, a reform advocate, has suggested lifting the ceiling on wages subject to the payroll tax to $200,000 a year as part of a broader plan to create private accounts and improve the system's finances.

Graham has said a payroll tax increase might help attract Democratic support for legislation to restructure Social Security. But White House officials indicated Graham's proposal was unacceptable because it would increase taxes.

Graham said in a statement that it would be a mistake to try to fix Social Security with tax increases alone, but he suggested that raising the payroll tax wage ceiling was part of a `'mix of options" that could help cover the transition costs of private accounts.

The president's prohibition also cast a cloud over bipartisan legislation drafted by Rep. Jim Kolbe, an Arizona Republican, and co-sponsored by Rep. Allen Boyd Jr., a Florida Democrat. The bill contains several provisions designed to improve the system's finances, including an increase in the taxable wage ceiling to $133,200.

Kolbe's press secretary, Davy Kong, said it was not clear whether Bush's prohibition ruled out an increase in the wage ceiling - although that view was in the minority yesterday. In addition, she said, Kolbe's restructuring plan could survive even if the payroll tax increase was eliminated.

Times staff writer Joel Havemann contributed to this article. The Los Angeles Times is a Tribune Publishing newspaper.

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