Calling It ‘Charade,’ Bush Attacks Moynihan Plan to Cut Payroll Tax : Social Security: Remarks are an escalation of White House resistance. A top aide concedes the proposal could gain wide political appeal.

President Bush on Thursday denounced a proposal to cut Social Security payroll taxes by $55 billion next year, calling it a “charade” that would force an increase in income taxes or an eventual reduction in benefits.

Although Bush has decided to try to squelch the proposal, a senior aide admitted that “there is a concern” within the White House that its potential political appeal could gather a powerful head of steam.

Bush’s remarks reflected a significant escalation of the White House attack, which had been left to lower officials in the week since Sen. Daniel Patrick Moynihan (D-N.Y.) made the proposal.

Moynihan’s plan was intended to eliminate the large reserves accumulating in the Social Security System, which the senator said had a $52-billion surplus in fiscal 1989. The reserves are building up rapidly now for use in the next century, when the huge baby boom generation reaches retirement age.

The reserves mask the true size of the federal budget deficit because, although they cannot be spent on other programs, they are counted as part of total federal revenues.

The White House would prefer to have the surpluses accumulate. By making the deficit appear lower, the surpluses relieve pressure to either cut spending or raise taxes.

“This is an effort to get me to try to raise taxes on the American people by the charade of cutting them, or cut benefits. And I am not going to do it to the older people in this country,” Bush said, in response to a question posed by a reporter during a photo session with Turkish President Turgut Ozal.

Moynihan’s proposal has been quickly followed by two other tax plans:

--Sen. Ernest F. Hollings (D-S.C.) has suggested a 5% national sales tax to replace revenues that would be lost through a capital gains tax cut sought by Bush and to help reduce the deficit.

--Rep. John Porter (R-Ill.) called for reduced Social Security taxes, but coupled that with a proposal that workers be required to invest the savings in accounts that could be used only for retirement.

The Hollings plan fueled the Administration’s argument that any Social Security tax cut proposal would be followed by other plans to raise taxes. Vice President Dan Quayle said in an interview with Associated Press: “The cat’s a little bit out of the bag right now.”

Nevertheless, the Administration found itself in the awkward position of opposing a cut in taxes for lower- and middle-income taxpayers--a cut that is favored by its traditional allies in the U.S. Chamber of Commerce and some conservative groups--while championing a cut in the capital gains tax, which would provide immediate benefits to more wealthy taxpayers.

Moynihan’s proposal would return the Social Security System to the pay-as-you-go approach followed before 1983. At that time, Congress approved a new financing arrangement under which higher taxes were imposed now to avoid sharp tax increases when the current baby boomers retire in the early decades of the 21st Century.

Under the plan recommended by Moynihan, a member of the tax-writing Senate Finance Committee, the payroll tax hike that went into effect Jan. 1 would be rolled back from the current 7.65% to 7.51%, resulting in a $7-billion savings this year. Next year the rate would be cut to 6.55%, and would produce an additional $55 billion in savings for taxpayers.

The average employee would save roughly $300 a year in 1991 Social Security taxes. Those earning more than $55,000 would realize a $600 saving.

Moynihan has argued that his approach would end the practice of relying on escalating Social Security taxes, which fall heaviest on lower- and middle-income taxpayers, as an accounting gimmick to reduce the deficit.

During the lull in Washington before Congress returns from its year-end recess, the Moynihan proposal has garnered considerable attention.

The Social Security Administration is “already getting calls from people” fearful that the Moynihan plan to cut taxes could jeopardize future retirement benefits, Social Security Commissioner Gwendolyn S. King said in an interview with The Times.

“I’m glad President Bush has drawn the line” on the issue, she said.

King said Moynihan is like “a person with a house full of beautiful furniture and a roof that leaks--so his solution is to give away the furniture. I say to Sen. Moynihan, patch the roof by focusing your energies on the deficit. Please leave alone a program that has paid benefits every month for 50 years.”

King said the build-up of surpluses is vital to pay retirement benefits to the massive baby boom generation--the 76 million Americans born between 1946 and 1965.

“We need to save for future retirees,” she said. “I’m talking about factory foremen, teachers, working men and women who count on Social Security for their future.”

The Social Security commissioner said Moynihan’s “extraordinary proposal” to reduce Social Security taxes immediately will result in hikes in the next century that will “knock your socks off.”

The payroll tax increase on Jan. 1 was a modest rise of 14/100 of 1%. But if the tax is rolled back, it must be replaced later by increases of 9/10 of 1% in the year 2015, and two more increases of 8/10 of 1% in the years 2020 and 2025, King said. Those increases would be needed to pay for the retirement benefits flowing to the huge population of retired and retiring members of the baby boom generation.

King said the confidence of Americans in the safety of the Social Security system had been restored by the 1983 legislation that raised tax rates to assure the long-term solvency of the program. A cut could “slap away” public confidence again, she warned. The theme of “a tax cut today producing benefit cuts tomorrow” was taken up by White House Press Secretary Marlin Fitzwater.

“We think that when people have a chance to look at the tax increase and the benefit cut implications down the road of that proposal, that it won’t enjoy much support,” he said, describing the Moynihan proposal as “a wolf in sheep’s clothing.”

House Minority Whip Newt Gingrich (R-Ga.) accused Moynihan of employing “one of the classic bait and switch tactics of modern politics”--a reference to what he predicted would be a plan to offset the Social Security tax cut with a $55-billion increase in other taxes.

“Moynihan is a very clever man, and deliberately chose a gimmick which maximizes the sex appeal of what is essentially old-fashioned liberalism,” he said.

Staff writers Paul Houston and Shawn Pogatchnik contributed to this report.