Bush Panel: Privatizing Social Security Could Mushroom Debt

In its annual Economic Report of the President, Bush’s Council of Economic Advisers admitted that plans to turn to the bond markets to pay for personal retirement accounts and other reforms would increase the nation’s debt-to-GDP ratio by up to 23.6% in 2036, Reuters reported.

Under this scenario, the national debt could rise by up to $4.7 trillion over the next 40 years. But the new bonds would be repaid 20 years after that from program savings, eliminating Social Security’s unfunded liability and reducing the lobng-term tax burden, advocates of the reform proposals say.

“Is this temporary increase in government borrowing a problem? Not from an economic perspective,” the Administration report insisted.   “The deficit initially increases, but then falls as the reform is fully phased in.” At its maximum in 2022, the incremental deficit increase would be less than 1.6% of gross domestic product, the report said. By comparison, Bush is projecting this fiscal year’s deficit at 4.5% of GDP and the debt-to-GDP ratio of 38.6%.

But the Council played down the implications of such sizable government borrowing hikes – arguing that it would cost more to do nothing.

“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.”

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.

Paying for Personal Accounts

Though Republicans who control the US Congress see little chance of passing Social Security reform in a presidential election year, the estimates could revive a heated debate over Bush’s plan to let workers redirect a portion of their payroll taxes into personal accounts that could hold a mix of stocks and bonds. Under that model, workers could voluntarily redirect 4% of their payroll taxes up to $1,000 annually to a personal account.

The problem: how to make up for funds saved to personal accounts and shore up the underlying Social Security system without raising taxes or requiring additional worker contributions.

To cover these so-called transition costs, estimated at $1 trillion, the government could issue bonds, Bush’s advisers said. Bonds would be used instead of internal IOUs, and they would gradually be paid off using future savings from Social Security because the growth in benefits would be slowed.

Advocates had once hoped to use budget surpluses, then projected at $5.6 trillion over 10 years, to fund the transition period. But the plan lost momentum as surpluses turned into deficits and the stock market sank.