White House Says Social Security Fix Means Borrowing

The federal government would have to borrow money over the next decade to finance President Bush’s plan to create private Social Security accounts, the White House acknowledged Monday.

Independent analysts have estimated the government would initially need to borrow more than $1 trillion. The administration declined to provide its own figure, but said that if the program was not restructured to handle the coming wave of baby-boom retirees, the cost would be $10 trillion. “There will be some up-front transition financing that will be needed to move toward a better system,” White House spokesman Scott McClellan said.

The acknowledgment, the most explicit yet by White House officials, came as Bush launched a campaign to build bipartisan support on Capitol Hill for allowing workers to divert some of their Social Security taxes into individually controlled private accounts. The idea is likely to be the most difficult domestic policy initiative of his presidency.

In a meeting with congressional leaders of both parties, the president conceded that his vision for Social Security would require significant short-term borrowing, according to a participant in the closed-door session.

Bush has put Social Security restructuring at the top of his list of second-term priorities. But he faces wariness on both Capitol Hill and Wall Street about the initial borrowing needed.

Although it has been widely assumed that Bush’s approach to Social Security reform would run up the federal debt, which has reached a record $7.5 trillion, the White House had never before conceded the point publicly.

Last week, the president’s chief economist, N. Gregory Mankiw, acknowledged that fixing the Social Security system’s long-term problems would probably require a reduction in the promised level of benefits paid to future retirees. The president has ruled out any benefit cuts for current recipients or those near retirement age.

McClellan said he could not estimate the amount of borrowing required to finance personal accounts, because Bush had not endorsed a specific restructuring plan.

But analysts have said the options presented last year by an independent commission appointed by Bush would entail transition costs of $1 trillion to $2 trillion over the next decade.

Bush wants to let workers divert a portion of the 6.2% Social Security payroll tax into privately owned accounts. The funds could be invested in the stock market and allowed to build up over time, like 401(k) accounts.

Supporters of the concept say it would save money over the long term because the government’s future payments to retirees would be reduced for those who set up private accounts. Participants would come out ahead too, they say, because private accounts would be expected to grow faster than traditional Social Security benefits.

But that approach would cost the government significant sums over the next decade or so, because the diverted payroll taxes would no longer be available to pay benefits to current retirees.

Critics of the private account idea say the stock market is risky and that some workers will make poor investment choices. They say Social Security can be restored with less extreme changes.

McClellan said the transition debt should not be regarded as a cost, because it eventually would reduce Social Security’s long-term unfunded liability. That is the difference between the level of benefits promised to retirees over the next 75 years and the estimated payroll taxes that will be available to pay them.

The shortfall is attributable in part to the looming retirements of the baby-boom generation, which will leave the nation with fewer workers supporting more retirees. According to government projections, the system will start paying out more than it takes in by 2018, and the Social Security trust fund will be depleted by 2042.

At that point, the system would be able to pay about 73% of its promised benefits.

“The cost is $10 trillion if we do nothing,” McClellan said. “The Social Security system is unsustainable. It needs to be fixed. That’s why the president supports strengthening Social Security for younger workers so that they don’t face ... massive tax increases or massive benefit cuts.”

Private economists said the White House’s acknowledgment, while not surprising, could increase the skittishness of members of Congress and financial market participants who are concerned about the burgeoning federal debt.

“The real problem is not whether you have to borrow, because in a very real sense it’s already a liability of the government,” said David Wyss, Standard & Poor’s chief economist. “The real question is how you pay it off. Borrowing it does not close the budget gap. All it does is recognize it.”

Brookings Institution economist Robert Litan, a former Clinton administration official, said the kind of restructuring favored by Bush could force the government to sell an additional $100 billion to $200 billion a year in debt securities, putting upward pressure on interest rates.

“There’s a difference between having an obligation that’s theoretically recognized and actually putting it on the books and trying to sell a bond and getting somebody to buy it,” Litan said. “The difference could be higher interest rates.”

In an effort to overcome the political obstacles, Bush summoned congressional leaders of both parties to the White House.

“It was a good start,” said Rep. Roy Blunt (R-Mo.), a member of the GOP leadership team. “We all agreed to try to work toward common numbers and to be as open on this difficult process as we could be.”

Winning even a modicum of support from Democrats presents one challenge for Bush; assuaging concerns within the GOP ranks presents another.

“The president wanted to alert people that there is a problem that, without action, could become a crisis,” said a Republican official who attended the meeting. “He said he wanted it to be bipartisan and that this was the start of a serious dialogue.”

But strategists said it could prove harder than ever to get Democrats to sign up for changes in a program they consider the cornerstone of their party’s legacy. Of the handful of senior Democrats who have backed private accounts for Social Security, most are no longer on Capitol Hill.

Even on the GOP side, Republican leaders warned White House aides at a closed-door retreat last week that passing the reform would be no cakewalk.

Administration aides indicated they wanted to move quickly on legislation next year. But House Majority Leader Tom DeLay (R-Texas) wanted to give higher priority to overhauling the tax code, because “it was an easier sell,” according to a source attending the private meeting.

“Many Republicans know the party lacks credibility on the Social Security issue,” said Robert S. Walker, a former House Republican who remains close to GOP leaders. “For us to wade out there and take that on makes the party politically vulnerable.”

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Times staff writer Edwin Chen contributed to this report.