Tax Fears Help Bush’s Plan Win Business Backing

Some of the nation’s major business organizations are preparing to enter the fray over restructuring Social Security, spurred by concern that companies could get stuck with the bill if the system faces money shortfalls.

The groups, including manufacturers, restaurant owners and small businesses, say they will spend millions of dollars to support President Bush’s efforts to create private Social Security investment accounts. Leaders say the campaign is being driven by fears that, without an overhaul, the government could resort to raising the Social Security payroll tax to bridge any funding gaps.

“It is a job killer, particularly for small businesses,” Dan Danner, senior vice president of public policy at the Washington-based National Federation of Independent Business, said of raising the payroll tax.

He said his members “would come unglued at the prospect” of any tax increase as a solution to long-term funding of Social Security.

Although there is vigorous debate over the long-term fiscal health of Social Security, concerns about a payroll tax hike are not far-fetched, according to business groups.

The Social Security payroll tax has been raised 20 times since it was imposed in 1937. The levy, originally 2%, is now 12.4% -- half paid by employers, half by workers.

Bush says the Social Security system faces insolvency without dramatic changes and has placed it at the top of his administration’s list of domestic priorities. As a cornerstone of his plan to bolster the program’s health, the president wants Congress to allow workers to divert a portion of their Social Security taxes to private investment accounts.

Business groups could play a crucial role in championing the plan, which has met with vehement opposition from many Democrats, organized labor and some seniors groups, who view it as a first step toward shrinking the federal safety net for retirees.

“They will definitely have a war chest now,” said Roger Hickey, co-director of the Campaign for America’s Future, a Washington-based group that is battling the president’s plan.

The support from business is coming at a crucial time. Many of Bush’s Republican allies in Congress have expressed reservations about tampering with Social Security, and the financial industry is keeping a low profile, chastened by critics’ portrayal of Wall Street as favoring private investment accounts for its own enrichment.

Business leaders say Bush’s pledge to block any increase in the payroll tax to fix the program was key in winning their backing.

“The president deserves the bipartisan support of the Congress and the strong backing of the business community” in addressing Social Security changes, John Engler, president of the National Assn. of Manufacturers, said in a recent open letter to members.

The manufacturers group is the principal sponsor of the Alliance for Worker Retirement Security, a coalition seeking to revamp Social Security. On its website, the alliance lists the creation of private accounts as its No. 1 principle; No. 2 is to oppose a payroll tax increase.

Danner of the independent business federation met with representatives of other business associations this month, a gathering organized by the Coalition for the Modernization and Protection of America’s Social Security, or Compass.

The coalition is led by the Business Roundtable, a group of blue-chip U.S. companies including Coca-Cola Co., Exxon Mobil Corp. and IBM Corp.

Compass was launched in 2002 to promote ideas for restructuring the Social Security system but has been mostly dormant for two years. Bush’s decision to move Social Security to the top of his action list has rejuvenated the group, said Derrick Max, who is coordinating the coalition’s activities.

The group is planning a nationwide campaign of town hall meetings, direct mailings and local TV ads to get out its message, which includes support for private Social Security investment accounts, Max said.

The coalition’s budget “will be a lot larger than in 2002,” when it spent $5 million promoting its viewpoint, he said.

Bush has flatly opposed the idea of boosting the payroll tax, as have Republican leaders in Congress. But business groups say they want to see changes to Social Security’s financial outlook that could reduce the likelihood that future administrations or Congresses would raise the 12.4% rate.

“Businesses see an opportunity to be sure they aren’t faced with a tax increase down the road,” Max said.

A bipartisan commission that Bush appointed in 2001 to study Social Security’s future said private investment accounts could be key to bolstering younger workers’ retirement security. The commission assumed that, by investing some of their Social Security payroll taxes in stocks and bonds through private accounts, workers could earn higher returns than if the money was left in the system.

Long term, that would allow the government to reduce workers’ Social Security benefits because the gains in private accounts would more than offset any cut in benefits, the commission said in its final report.

For businesses, that prospect offers the hope that future administrations or Congresses will face less pressure to order a payroll tax increase to raise money for Social Security.

AARP, the nation’s main lobby for older Americans, has opposed any changes to Social Security that would siphon payroll tax income from the program. “It’s the dedicated payroll tax that has kept Social Security strong all these years,” said David Certner, AARP’s director of federal affairs.

But many companies and entrepreneurs have long considered the payroll tax to be especially burdensome. Unlike with the corporate income tax, which is based on a company’s earnings, “you pay the payroll tax whether you make a profit or not,” noted Danner, whose organization represents 600,000 small businesses.

“It’s very hard on start-up companies,” he said.

Business groups say the payroll tax has over time stifled hiring. Engler of the National Assn. of Manufacturers said the group’s research found that payroll tax increases between 1984 and 1997 cost Americans 1 million jobs.

The tax rate rose to the current 12.4% from 10.8% in that period. The amount of annual wages subject to the tax has risen to $90,000 this year from $37,800 in 1984.

The manufacturers group said it had been joined by more than 40 other organizations and companies in the Alliance for Worker Retirement Security. Members include brokerage firm Edward Jones & Co., technology giant Hewlett-Packard Co. and the National Restaurant Assn.

The restaurant association has been roused to action in part because the industry claims the largest U.S. workforce apart from government, said Rob Green, vice president of federal relations for the Washington-based group.

Given the number of workers employed by restaurants, Green said, if payroll taxes were boosted, “you could dramatically impact restaurant profits.”

The idea of private Social Security investment accounts also has inherent appeal to many restaurateurs, he said.

“A lot of them obviously are entrepreneurial people,” Green said. “We like the concept of the ‘ownership society.’ ”

Bush has used that phrase in touting private accounts and other proposals that would make “every citizen an agent of his or her own destiny,” as the president said in his inaugural address Jan. 20.

Many business groups say they have reserved judgment on other suggestions for revamping Social Security, such as changes in the way benefits are indexed to grow with inflation.

“We want to see more information on what the proposals are,” Danner said.

Bush is expected to provide more details in his State of the Union speech Wednesday. But regarding the Social Security tax rate, there already is unanimity in business, Danner said: “Our guys do hate the payroll tax.”