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Bush Shifts Pension Stance

Times Staff Writers

In an important shift from his hard-line stance against tax increases, President Bush has said he is open to raising taxes on wealthier Americans to cover the costs of transforming Social Security.

Bush has been promoting a plan to let workers under age 55 divert a portion of their Social Security payroll taxes into private investment accounts. But he has not settled on how to replace that diverted money -- an estimated $1 trillion or more over a decade that would be needed to pay benefits to current retirees.

The president, in an interview published Wednesday in several regional newspapers, left the door open to the idea of raising the cap on wages subject to the Social Security tax as a way to help cover the transition costs of private accounts. Earnings above $90,000 are not subject to tax now.

“I’ve been asked this question a lot, and my answer is that I’m interested in good ideas,” Bush said, according to the Birmingham (Ala.) News. “The one thing I’m not open-minded about is raising the payroll tax rate, and all the other issues are on the table, and that’s important for people to know.”

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He was drawing a distinction between the amount of earnings subject to the Social Security tax and the 12.4% tax rate, paid half by workers and half by employers, which he is opposed to raising.

As Bush campaigned for private Social Security accounts Wednesday in New Hampshire, the ninth state he has visited recently to promote the idea, his proposal received cautious support in Washington from Federal Reserve Chairman Alan Greenspan.

“If you’re going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way,” Greenspan told the Senate Banking Committee. The comment was his first on private accounts since Bush made them the top domestic priority of his second term.

Greenspan warned that establishing the investment accounts could have a major effect on interest rates. He did not say what that effect might be, but other economists have said that new borrowing by the government as part of creating the accounts might have the effect of driving up interest rates.

In telling the regional newspapers that he was open to raising the $90,000 wage cap, Bush appeared to contradict previous statements by him and his staff.

The mixed signals reflected the increasingly difficult job facing the White House as it tries to bring together competing interest groups in order to revamp the nation’s popular, 70-year-old retirement system.

Those interest groups include fiscal conservatives in his own party who are wary of borrowing money to finance the transition to private accounts, small-government conservatives who long have pushed for worker-owned accounts, and a small group of Democratic lawmakers who may be willing to buck their party leadership and embrace Bush’s proposal. Most Democrats, senior groups and labor unions oppose the private account plan.

There was debate Wednesday about whether Bush’s interview remarks signaled a sincere willingness to embrace a higher wage cap or were designed to discourage lawmakers who favor that option from abandoning discussions with the White House.

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In December, Bush was widely praised by some of his allies when he said: “We will not raise payroll taxes to solve this problem.”

Asked at the time whether that meant Bush opposed raising the $90,000 wage cap, White House spokesman Scott McClellan said: “If you’re talking about raising payroll taxes, that is a payroll tax increase; the president would not be for that.”

He repeatedly called Bush’s stance “very clear.”

On Wednesday, Bush spokesman Trent Duffy made no attempt to clarify Bush’s remarks to the regional reporters that all options but a tax rate increase were under consideration, saying the president did not necessarily contradict himself.

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“Just because options are on the table doesn’t mean he’s endorsed anything,” Duffy said. “This is just a good sign of the president’s willingness to be flexible and open to ideas.”

Bush commented on the tax issue Wednesday during his brief stop in New Hampshire, telling an audience that he would “look at all the different options, with the exception of the payroll tax increase.”

One key Republican senator said Wednesday that Bush’s comments to the regional newspapers reflected a move to the middle by a president who previously appeared unwilling to compromise.

Sen. Lindsey Graham (R-S.C.), who has said a change to private accounts would be impossible without some type of tax increase to avoid borrowing, praised the president’s words as “compelling evidence he is serious about making hard decisions for the common good.”

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But Bush’s potential embrace of a higher wage cap could anger conservatives who have pushed for private retirement accounts.

Grover Norquist, a leading anti-tax activist and advisor to the White House on Social Security, said he did not believe that Bush would agree to raising the $90,000 cap, despite the apparent shift in his public negotiating position. But he acknowledged that the president’s remarks would rattle some conservatives.

“Should it make us nervous when somebody says, ‘I would think about cutting off your fingers,’ even if you don’t think he really would? Yes. It makes one nervous,” Norquist said. “I understand that it’s his job to say, ‘Let’s come to the table and have a conversation.’ He’s counting on the fact that once you get in the room, the American people will demand personal savings accounts, and they will not demand higher taxes.”

Bush’s arrival in New Hampshire was greeted with the release of a statewide poll showing 54% of respondents opposed to the private investment accounts.

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Rep. Jeb Bradley, the second-term Republican who represents the district visited by Bush on Wednesday, skipped the event; he issued a noncommittal written statement that he was glad Bush was discussing “his ideas” on Social Security but calling for a bipartisan solution. Bradley has said in the past that he opposed private accounts.

As did Bush’s comments, Greenspan’s testimony to the Senate Banking Committee generated debate among those following the president’s Social Security initiative.

The Fed chairman is so esteemed as the overseer of the nation’s economic well-being that private account supporters and opponents alike regard his stance as crucial to their success.

Greenspan said private accounts by themselves would do nothing to erase the $3.7-trillion shortfall that is estimated over the next 75 years between Social Security’s promised benefits and its income from the payroll tax.

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Congress must come to grips with that funding gap, he said, regardless of what it decides to do about private accounts.

Greenspan said the ultimate test of a Social Security rescue package was whether it increased national savings. Only with the investment from more saving, he said, could the United States hope to support its growing army of retired people without a sharp decline in the standards of living of all age brackets.

Creating private accounts through more federal borrowing, Greenspan said, would be a wash, with each dollar saved in a private account offset by a dollar borrowed from the public. “Moving to a forced savings account technically does not materially affect net national savings,” he said. “It merely moves savings from the government account to a private account.”

Supporters of private accounts welcomed his comments.

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“I was actually very encouraged,” said David C. John, who as a senior policy analyst at the Heritage Foundation has long championed private accounts. While Greenspan made an “oblique suggestion that Congress not go overboard,” John said, “he very carefully did not say to Congress, ‘Don’t do it.’ ”

Among private account opponents, Christian Weller, an economist with the Center for American Progress, said, “If the administration thought it was gaining an important ally, they have to be disappointed.”

Economists at the investment house UBS characterized Greenspan’s endorsement of private accounts as lukewarm, saying, “We believe that stance could disappoint the president, who will need all the help he can get to push private accounts from concept to reality.”

Wallsten reported from New Hampshire and Havemann from Washington. Times staff writers Warren Vieth and Janet Hook also contributed to this report.

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