Economic Summit: Cheney Urges Spending Restraint

Cheney at economic conference
Vice President Dick Cheney speaks during the morning session of the White House Conference on the Economy at the Ronald Reagan Center in Washington on Dec. 15.
(AP/Pablo Martinez Monsivais)
Times Staff Writers

WASHINGTON — Vice President Dick Cheney opened a two-day White House-sponsored economic conference this morning, calling for spending discipline, extended tax cuts, and “an honest, straightforward, and realistic discussion about the future of the Social Security system.”

Cheney’s opening remarks echoed themes that were central to President Bush’s campaign for a second term, and from its start, the conference was making clear that the administration would not relax the political pressure to make permanent the tax cuts enacted during the first term. They have been credited with playing a large role in expanding the budget deficit.

Cheney said that economic growth, with increases (of 5.5% this year) in tax receipts, was helping to bring down the deficit.

“Spending discipline is also absolutely critical to reducing the deficit,” he said, sidestepping the running fight over precisely which programs would be cut.

The vice president, adhering to the path of other administration officials, beginning with the president, avoided details about what course the White House would take to overhaul the Social Security system other than to emphasize the goal of allowing some form of private investment.

The questions surrounding the retirement program’s future, he said, provide “an opportunity to help millions of our fellow citizens find the independence of ownership.”

“Social Security has given seniors the dignity, security, and peace of mind that Franklin Roosevelt promised. Our job is to keep that same promise to our own children and grandchildren,” Cheney said.

It will be months before President Bush and Congress agree on how to restructure Social Security, if they come to terms at all. But the rough contours of what Bush has in mind have begun to emerge, and battle lines are forming.

Administration critics already voiced opposition Tuesday to the apparent direction of Bush’s plans.

Bush has said he wants to shore up the finances of the Social Security program and allow workers to shift some of their Social Security payroll taxes into private investment accounts, but he has not endorsed a specific proposal. Some analysts expect him merely to state basic principles and leave Congress with the task of restructuring the program, which faces cash shortfalls as baby boomers begin retiring and benefit payouts exceed payroll tax collections.

Yet advisors and analysts say it is becoming increasingly clear that the starting point for discussions is the second of three restructuring options outlined in 2001 by an independent commission appointed by Bush. The commission’s co-chairman, Time Warner Chief Executive Richard D. Parsons, is listed first among speakers on Thursday’s Social Security panel.

“Administration officials have been talking to Wall Street about this,” said Ethan Harris, chief economist for Lehman Brothers, a major investment firm. “These are all trial balloons, but it adds up to a sensible package. … The ingredients are very clear.”

Princeton economist Alan S. Blinder, a former vice chairman of the Federal Reserve, said that although the outlines of Bush’s plan were becoming clear, the package was not desirable.

“Under these changes, Social Security would be neither social nor provide security,” he said. “This would be a piece of a program to expose people to more and more risk. … There are millions of Americans who have no desire and no ability to gamble on the financial markets, and they shouldn’t be pushed to.”

Under the presidential commission’s “Model 2,” younger workers, perhaps those under 55, would be allowed — but not required — to divert up to $1,000 of their annual payroll taxes into private accounts. Their investment options would be limited to diversified mutual funds containing mainly stocks and bonds.

When they reached retirement age, they could convert their private accounts into annuities that would provide a guaranteed monthly payment until they died. Their conventional Social Security benefits would be cut to reflect the reduced payroll taxes they paid.

Beyond that, the conventional benefits received by all Social Security beneficiaries below the age cutoff — even those who didn’t set up private accounts — would be calculated according to a new formula tied to price inflation rather than wage growth. Retirees would receive smaller checks than under current law.

Under Model 2, the stingier benefit formula for all participants would account for all the improvement in Social Security’s finances. Private accounts would not help bridge the long-term funding gap. In fact, the government would have to borrow as much as $2 trillion over the next decade to pay benefits to current retirees because that much payroll tax revenue would be diverted into private accounts.

Bush administration officials insist that private accounts must be included in any plan. They consider them an essential element of Bush’s “ownership society” agenda, which emphasizes greater individual responsibility for retirement savings, healthcare spending and other matters of personal finance.

But some analysts say they believe the administration also views personal accounts as politically necessary to persuade younger workers to swallow a substantial reduction in promised future benefits. The prospect of greater control and higher returns provided by private accounts might seem like an acceptable trade-off, in this view.

“It’s a bribe to get the real reform, which is cutting future benefits to levels they can manage,” said Lehman Brothers’ Harris. “What they’re doing is making a bargain with the baby boomers. The privatization is a sugar-coating to get the broader reform passed.”

It would be possible to fill Social Security’s future revenue gap without private accounts, and it would be possible to create private accounts in a way that would not improve Social Security’s long-term finances. For example, Congress could go along with the private account portion of the president’s plan but refuse to make any across-the-board changes in the benefit formula because of possible political opposition.

But administration officials and some analysts say it is a mistake to view Social Security reform only from the perspective of its effect on federal finances.

“It’s the classic conundrum of what do you look at,” said William W. Beach, head of data analysis at the conservative Heritage Foundation. “Do you look at the trust fund or do you look at the worker’s portfolio? I argue that you want to look at the outcome for the worker first, and the trust funds second. Others see it differently.”

One who does is Bill Spriggs, a fellow at the Economic Policy Institute. Bush’s style of Social Security reform, he said, would put pressure on Congress to make further domestic spending cuts in such programs as aid to education.

Times staff writer Nick Anderson and James Gerstenzang contributed to his report.