Bentsen Appears to Doom Big Cut in Social Security Tax

The much-discussed Moynihan plan for a big cut in Social Security payroll taxes appeared doomed Thursday after Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, declared his opposition, saying it would cause “serious problems for the economy.”

Bentsen told reporters that he was not ruling out a smaller reduction in Social Security taxes if it were offset by an increase in revenues so there would be no rise in the federal budget deficit. But even such a “mini-Moynihan” bill now faces an uphill fight in the Senate.

Three leading economists, testifying before the committee, criticized the proposal by Sen. Daniel Patrick Moynihan (D-N.Y.) to slash $62 billion in payroll taxes over the next two years, contending that such action would drive up the deficit, interest rates and prices.

Currently, excess Social Security funds are used to buy Treasury bonds, indirectly funding general operating expenses. The bond obligation is not counted as part of the federal deficit, thus helping to mask its true size.

Late last month, Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, denounced Moynihan’s plan, calling it “irresponsible” and “political junk food.” He has been Congress’ chief tax writer for almost a decade, and his opposition was a clear blow to the proposal.

Moynihan’s plan would have rolled back the tax to eliminate most of the surplus. The approach, he said, is designed to end the practice of relying on Social Security taxes, which fall heaviest on lower- and middle-income taxpayers, to cover other programs.

The Administration has charged that Moynihan’s plan would invite proposals to raise income taxes to make up for the lost revenue.

After Thursday’s setback, Moynihan indicated that he was working on an alternative plan that would bar the use of Social Security surpluses to finance the government’s deficit. He said he hoped to get Bentsen’s backing for that measure, at least.

“We’re talking--that’s what we do around here,” Moynihan told reporters. “We negotiate.” Bentsen agreed, adding: “A lot of alternatives are being discussed.”

Earlier, speaking of Moynihan’s proposal, Bentsen said: “There’s no way we can afford to do that at the present time . . . . That much loss of revenue would cause serious problems for the economy.”

Sen. Bob Packwood (R-Ore.), ranking GOP member of the Finance Committee, said he felt the Moynihan plan was not feasible because the public was not clamoring for a reduction in payroll taxes and there was no way to do it without enlarging the deficit or raising other taxes.

The Democratic leaders in the Senate and House have not yet taken a position on the Moynihan plan.

However, with the chief tax-writers in the Senate and House opposed to Moynihan’s approach, it appeared increasingly unlikely that Senate Democratic leader George J. Mitchell of Maine or Speaker Thomas S. Foley (D-Wash.) would embrace the controversial bill.

In their testimony, the three economists sharply criticized the payroll tax cut plan on grounds that the tax cut would drive up interest rates, add to inflation and increase the deficit to $95 billion a year from $40 billion.

Unless the lost revenue were replaced, Moynihan’s plan would result in a tightening of monetary policy, resulting in an increase of 1.5 to 2 percentage points in interest rates, said Charles L. Schultze, budget director in the Lyndon B. Johnson Administration who is now director of economic studies at the Brookings Institution.

Robert Reischauer, director of the Congressional Budget Office, gave a similar analysis, saying: “A significant reduction in payroll tax rates without offsetting deficit reductions elsewhere could harm the economy’s performance over the next several years.”

Carolyn L. Weaver, a pension expert with the American Enterprise Institute, said she opposed Moynihan’s bill even though accumulated Social Security reserves now stand at $170 billion.

She noted that the retirement system faces “an enormous liability” in the early part of the next century, when the baby boom generation will be ending its working life.

Meantime, the panel gave a chilly reception to President Bush’s proposal to wait until 1993 before setting up a special fund to segregate fast-mounting Social Security surpluses.