February 16, 2004

I certainly applaud the President on his purpose and his optimism in his State of the Union message. 

But I wanted to scream at the end of his outline of domestic programs that our country does not have the resources to do what he wants.  Keeping the discretionary budget growing less than the rate of inflation is not going to halve the deficit by the end of his administration. 

Once you subtract out all the mandated programs, such as Medicare and Medicaid, and pay the growing interest on the mounting debt, that discretionary budget is less than 20 percent of the total budget. 

Perhaps he believes that tort reform will slow those medical costs to less than three percentage points more than the rate of inflation.  Maybe he hopes that energy programs will improve the balance of payments and reduce our mounting debt to the rest of the world. 

Yet, one year after outlining the goal of halving the deficit by 2009, the Congressional Budget Office has determined that this year’s budget deficit probably will be a record.  Furthermore, the CBO, using current law, estimates that deficits will average $388 billion in the next four years.

Current law sunsets some of the tax reductions that President Bush wishes to make permanent.  Neither does it adjust for “tax reform,” which increasingly appears to be little more than reducing the impact of the alternative minimum tax (AMT). 

Those changes alone add about $170 billion per year to the deficits.  (Those who say that the revenue growth achieved by these changes would raise the tax base sufficiently to pay for them simply do not understand economic behavior.  Preserving tax cuts may prevent growth from declining, while the AMT actually has a lower marginal tax rate than the basic tax code for many people. They do not stimulate more revenue than currently exists).

These changes alone probably make the deficit goal unachievable.  But President Bush then wants to allow young people to take up to 4% of their social security contributions to fund private retirement accounts. 

Furthermore, these new accounts will be financed without raising payroll taxes or altering the benefits that those 55 and older currently expect. 

As the President clearly stated, the outgo begins to exceed the income for social security in 2018.  By further lowering the income but doing virtually nothing to change the outgo by that time, the cash flow turns negative even sooner. 

Some of the proposed changes in social security he ascribed to others, such as changing the retirement age or using prices rather than wages to index the initial benefits paid might have some impact by 2042.   But they will not prevent the drastic changes in benefits or taxes that he currently indicates will be required to prevent the system from going bankrupt. 

In fact, the system does not go bankrupt.  It merely becomes a bad deal for young people.  In 2042, or sooner with private retirement accounts, the bookkeeping surplus in social security vanishes.   About 75 percent of the promised benefits still can be delivered through prevailing cash flow.  That certainly is a busted system, but not a bankrupt one. 

I remember those cartoons when President Nixon attacked the energy crisis by changing daylight savings time.  They showed a blanket that had been cut at one end and sewed back on the other.  The implication: you did something but you did not change anything. 

If we use debt today to fund those private savings accounts, are we really securing retirement for the next generation?  They may get a better return on their personal retirement accounts, but they will be paying much larger interest in their government budgets.  Furthermore, the government debt would be trillions higher than if we did nothing.  

A few months ago I wrote that we should fund the actuarial deficit that currently exists in the social security system by imposing payroll taxes on all wage income (rather than the estimated $90,000 individual ceiling in 2005).  We should then manage the system responsibly with a surplus pool rather than rely upon the Treasury to assign interest income based upon yields on government bonds. 

Anyone choosing to drop out of the system by establishing personal retirement accounts for the full 6.2 percent paid by individuals should be permitted to do so. 

No one liked my proposal.  But it was achievable.  Halving the deficit and accomplishing the list of domestic programs outlined by President Bush is not. 

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