Bush Rejects Tax Hike for Social Security

President Bush on Thursday flatly rejected a payroll tax increase to shore up Social Security, narrowing the range of options available to lawmakers to address the retirement system’s long-term financial needs.

“We will not raise payroll taxes to solve this problem,” Bush told reporters following a meeting at the White House with Social Security trustees.

Although the president said he did not want to prejudge Social Security legislation under consideration in Congress, his declaration appeared to undermine two leading proposals for overhauling the program -- both of which include an increase in the payroll tax for some higher-income workers.

It also made it more likely that any measure Bush signed into law would rely on borrowed money and reductions in promised benefits for future retirees to finance the creation of private investment accounts and make the system financially sound.

Bush has placed Social Security at the top of his second-term policy agenda. He has asked Congress to approve a plan to let younger workers divert a portion of their payroll taxes into private investment accounts that they would control.

Diverting money into private accounts, however, would deprive the Social Security system of money needed to pay benefits to current retirees. Economists have estimated that it could cost $1 trillion to $2 trillion over the next decade to replace the payroll taxes that would be diverted into private accounts. The additional federal borrowing could put upward pressure on interest rates, some analysts say.

White House officials contend the additional debt would be more than offset by the eventual reduction of Social Security’s long-term unfunded liability, which they estimate at $11 trillion over 75 years. Their argument assumes that future benefits would be reduced to offset the creation of private accounts.

Bush threw down the tax marker as the White House prepared to launch a public relations campaign to build bipartisan support for Social Security restructuring, beginning with a two-day economic conference next week.

Independent analysts said it was unfortunate that the president appeared to be foreclosing one of the few basic choices for ensuring that future revenues were adequate to cover promised benefits to retirees.

“It constrains the options significantly,” said Peter Orszag, director of the Brookings Institution’s Retirement Security Project. “Once you cut through the various accounting maneuvers that may be employed, we really do face the choice of either reducing benefits or raising revenue. To the extent the president has just rolled the latter off the table, we’re faced with just reducing benefits.”

Bush has not endorsed a single restructuring plan. But in the past he has pledged, in general terms, not to increase taxes or cut benefits for current retirees or those nearing retirement.

Until Thursday, it was unclear whether he would consider any change in the payroll tax that finances Social Security. Under current law, workers and employees each pay a 6.2% tax on all wages up to $87,900 a year. More money could be generated by either raising the tax rate itself or increasing the amount of income subject to taxation.

Sen. Lindsey O. Graham (R-S.C.), a prominent reform advocate, has suggested lifting the ceiling on wages subject to the payroll tax to $200,000 a year as part of a broader plan to create private accounts and improve the system’s finances.

Graham has said a payroll tax increase might help attract Democratic support for legislation to restructure Social Security. But White House officials indicated Graham’s proposal was unacceptable because it would increase taxes.

“The principles upon which the president is working are very clear to members of Congress,” White House spokesman Scott McClellan said. “They know what his position is. If you’re talking about raising payroll taxes, that is a payroll tax increase; the president would not be for that.”

Graham said in a statement that it would be a mistake to try to fix Social Security with tax increases alone, but suggested that raising the payroll tax wage ceiling was part of a “mix of options” that could help cover the transition costs of private accounts.

The president’s prohibition also cast a cloud over bipartisan legislation drafted by Rep. Jim Kolbe (R-Ariz.) and cosponsored by Rep. Allen Boyd (D-Fla.). The bill contains several provisions designed to improve the system’s finances, including an increase in the taxable wage ceiling to $133,200.

Kolbe’s press secretary, Davy Kong, said it was not clear whether Bush’s prohibition ruled out an increase in the wage ceiling -- although most observers disagreed with that view Thursday. In addition, she said, Kolbe’s restructuring plan could survive even if the payroll tax increase were eliminated.

Some analysts and lawmakers criticized the president for curtailing the range of options at such an early stage in the congressional discussion.

“He takes options off the table, and that ties the hands of people who are trying to find answers in this very important debate that we’re about to begin,” said Barbara B. Kennelly, a former House Democrat from Connecticut who heads the National Committee to Preserve Social Security and Medicare.

Rep. Robert T. Matsui (D-Sacramento) said Bush had painted himself into a corner on Social Security. “The only thing he does not rule out is massive increases in the debt, but that would be a disaster not just for Social Security but for the economy,” Matsui said. A debt increase could put upward pressure on interest rates and slow the economy.

But Bush’s decree drew praise from tax-cut advocates.

“President Bush drew a sharp line in the sand this morning when he categorically ruled out raising the payroll tax on working Americans to pay for the transition costs of Social Security reform,” said Donald Devine, vice chairman of the American Conservative Union.

Devine called it a “read-my-lips moment,” referring to the famous pledge by Bush’s father to not raise taxes during his presidency. It was a promise he ultimately broke, alienating conservatives and perhaps contributing to his defeat in 1992.

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Times staff writer Joel Havemann contributed to this report.