Tapping the bond markets to pay for private accounts proposed by Bush's Social Security Commission would increase the nation's debt-to-GDP ratio by 23.6 percentage points by 2036, the White House Council of Economic Advisers said in its annual Economic Report of the President.
Democratic critics said there could be dire economic consequences for letting the debt-to-GDP ratio rise from this year's 38.6 percent to as high as 62.2 percent -- a nearly two-thirds increase to the highest level recorded since the early 1950s in the aftermath of World War II.
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 say.
"The economic report illustrates that the long-term fiscal position of the government would improve if Social Security reform were enacted," said White House spokeswoman Claire Buchan, who insisted Bush has yet to settle on a plan to reform the retirement system or on a means to finance it.
The Council of Economic Advisers said increasing borrowing to finance the transition to private accounts was not a problem from an economic perspective. While the deficit would increase initially, it would fall as the reforms are phased in.
At its peak in 2022, the incremental deficit increase would be less than 1.6 percent of gross domestic product, they said. By comparison, Bush is projecting this fiscal year's deficit at 4.5 percent of GDP and a debt-to-GDP ratio of 38.6 percent.
"Since the budget surpluses forecasted a few years ago have not materialized, critics argue that adding personal retirement accounts to Social Security is impossible or impractical," the report said. "In reality, the need to add resources to the Social Security system is no less pressing now that the surpluses have disappeared; indeed, it may be even more so."
UNDER FIRE OVER DEFICITS
Bush is already under fire over record deficits, expected to reach $521 billion this year alone, and Democrats have warned that the nation's mounting debt load could become a drag on economic growth.
A senior Democratic congressional aide warned the debt would push up interest rates. While it may be designed to save Social Security in the long run, the aide warned, "The patient may be dead by then."
Gregory Mankiw, who chairs the White House council, acknowledged persistent budget deficits "do tend to raise interest rates. ... That is one of the reasons why getting the budget deficit down is an important priority."
Though Republicans who control the U.S. Congress see little chance of passing Social Security reform in a presidential election year, the estimates could revive debate over Bush's plan to let workers redirect a portion of their payroll taxes into personal stock or bond accounts.
Under the model analyzed by the Council of Economic Advisers, workers could voluntarily redirect 4 percent of their payroll taxes up to $1000 annually to a personal account.
Bond proceeds would make up for diverted payroll tax funds and shore up the Social Security system. Bush opposes raising taxes or requiring additional contributions from workers. The bonds would be gradually paid off using future savings from Social Security as benefits growth slowed.
But Buchan said: "We've made no decisions about how the transition to personal accounts would be financed."
Bush advisers had once hoped to use budget surpluses, projected in 2000 at $5.6 trillion over 10 years, to fund the transition period. Today, the White House expects the budget shortfall to total $1.35 trillion through 2009 and government debt to rise from $8.1 trillion to $10.5 trillion, forcing Bush's economic advisers to look at alternatives.
--------------------------------- Do you Yahoo!? Yahoo! Finance: Get your refund fast by filing online -------------- next part -------------- An HTML attachment was scrubbed... URL: <../attachments/20040210/19e9d4df/attachment.htm>