President George W. Bush's economic advisers said on Monday that an overhaul of Social Security favored by the administration would sharply increase the nation's debt load in the next several decades.
Tapping 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 percentage points in 2036, Bush's Council of Economic Advisers said in its annual Economic Report of the President.
Under this scenario, the debt held by the public could rise by up to $4.7 trillion over the next four decades. But the new bonds would be repaid 20 years after that from program savings, eliminating Social Security's unfunded liability and reducing the tax burden in the long term, advocates say.
"Is this temporary increase in government borrowing a problem? Not from an economic perspective," Bush's advisers said.
"The deficit initially increases, but then falls as the reform is fully phased in," they added.
At its maximum in 2022, the incremental deficit increase would be less than 1.6 percent of gross domestic product, the report said. By comparison, Bush is projecting this fiscal year's deficit at 4.5 percent of GDP and the debt-to-GDP ratio of 38.6 percent.
But the Council of Economic Advisers played down the implications of such large increases in government borrowing, asserting the cost of doing nothing would be even greater.
"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," it added.
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.
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 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.
Bush's economic advisers say they are not recommending a specific course of action, though their analysis is based on only one of the models proposed by Bush's Social Security Commission.
Under that model, workers could voluntarily redirect 4 percent of their payroll taxes up to $1000 annually to a personal account.
The problem: how to make up for funds diverted 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.
Bush touted private accounts during the 2000 campaign as a way to increase retirement savings and keep the system solvent when the baby boom generation retires.
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.
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.