President Bush's plan to partially privatize Social Security probably won't raise interest rates or adversely impact financial markets, even if the program entails borrowing hundreds of billions of dollars to finance it, Treasury Secretary John W. Snow said yesterday.
In an interview, Snow said he is consulting closely with the White House on the issue, which has dogged the president's Social Security proposal. He said any additional debt should be accounted for "openly, transparently, above board," not hidden "off budget" for political purposes. Some Congressional budget writers have suggested in recent weeks that borrowing for Social Security should be accounted for differently and essentially ignored as part of the yearly federal deficit since it would be reducing costs over the long run.
"If we have a real fix for Social Security, if we make the system financially feasible so that its revenue in-flows support its out-flows, and we eliminate this $10.4 trillion [funding] gap, the markets will applaud the political leadership that made it possible," Snow said. "The bond markets would respond positively to that."
Bush put Washington on notice Thursday that he will push hard next year to revamp Social Security so younger workers could divert some of their payroll taxes into personal investment accounts. But that would leave less money to pay benefits already promised to current retirees. To ensure those benefits are not cut, the government will have to borrow trillions of dollars well into this century.
The expected White House plan "would drive up the federal budget deficit for several decades," economists at the investment firm Goldman Sachs Group Inc. told clients yesterday.
Sen. Jon S. Corzine (D-N.J.), a former Goldman Sachs chairman, told reporters Thursday that the financial markets would treat that surge of debt the way they treat any government borrowing. Interest rates would ultimately rise, raising the cost of mortgages and car loans and slowing the economy.
But Snow said the government is nowhere near reaching the international lending market's ability to absorb more federal debt, even with the annual government budget deficit near a record in dollar terms already. On the contrary, he said, bond traders will reward the administration for tackling the problem presented by a rising tide of retiring baby boomers who, by 2019, will be taking more out of Social Security than workers will be putting into it.
"They understand that it's a real cost, that it's there today, and that actions to bring that unfunded obligation down will improve the balance sheet of the United States," he said.
The Goldman Sachs memo came down in the middle, saying Treasury bond interest rates would rise with the flood of new notes. But the overall effect on the markets should be modest, since the government's rising debt would be offset by the money flowing into personal savings accounts.
White House wants to simplify tax code
Snow also gave some hints about the direction in which the Bush administration would like to push the tax code in its second term. A panel will be named before the end of this month to examine changes the administration feels could simplify the tax code, promote economic growth and spur more savings and investment.
That will mean removing "the things that make it complex," Snow said, citing tax preferences, credits, deductions, and business tax depreciation schedules.
Business lobbyists have been pushing to scrap depreciation schedules, which allow investments to be written off over time. Instead, they want investments to be fully deductible immediately, an idea known as expensing.
Snow said he "fully expects the panel to look at the pros and cons of expensing," adding that it would be consistent with simplification goals. But he cautioned he did not want a tax plan to leave businesses with "negative income taxes."
'We want to move this initiative'
The secretary did indicate he would push the panel to move quickly. Members may hold hearings and gather facts if they wish, but Snow expects to send his own tax recommendations to the White House well before the end of next year.
"We want to get it [done] as soon as we can," he said. "We want to move this initiative."
The Bush administration yesterday also released new economic forecasts for the coming year, boosting its economic growth estimates from a year ago but trimming its estimate for new jobs.
White House economists expect payrolls to average 131.3 million jobs this year, down from the 132.7-million-job average predicted a year ago. In 2005, payrolls should average 133.4 million jobs, a 2.1-million-job increase from this year.
Overall economic growth should be a healthy 3.5 percent next year and 3.4 percent in 2006. Those estimates are up from last year's forecast, which put growth rates at 3.4 percent in 2005 and 3.3 percent in 2006.
"The economy is in very solid shape," said N. Gregory Mankiw, chairman of Bush's Council of Economic Advisers.