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War spending puts a squeeze on Social Security panel

BY Tony Pugh
by Tony Pugh on 10/19/01.

 New spending on the war against terrorism is adding to worries about the long-term financial health of Social Security.

The concern threatens to distract a White House commission created by President Bush to weigh options for reforming the Social Security program. The panel strongly favors allowing individuals to invest a portion of their Social Security payroll tax in stocks and bonds.

A projected $52 billion budget surplus that would have provided a cushion for the Social Security program was pared last week to a $10 billion deficit, due largely to tax cuts and lower projected tax revenue. The full costs of President Bush's economic stimulus and terrorism recovery packages have yet to be added in.

At a Social Security panel meeting yesterday, cochair Richard Parsons, chief operating officer of AOL-Time Warner, said neither terrorism nor other "day-to-day" crises should affect the commission's final recommendations, due this fall.

Peter Orszag, senior fellow for economic studies at the Brookings Institution, a Washington think tank, and others said the revenue shortfall would inevitably make it harder to win public support for privatizing Social Security.

"The easiest way to finance contributions to private accounts is to leave the current structure alone and use the general revenue [surplus] money," Orszag said. "But now there's no money left."

Social Security is the nation's largest benefits program and will pay about $400 billion this year to about 45.4 million people.

The pending retirement of 79 million baby boomers born between 1946 and 1964 and declining tax revenues from a shrinking workforce have combined to place the program in jeopardy.

Government officials estimate that beginning in 2016 the program will be paying out more in benefits than it takes in from payroll taxes. It is projected to be insolvent by 2038.

Because of the new budget deficit, the commission will have to lean more heavily on benefit reductions to finance any privatization plan, said Hans Riemer, chairman of the 2030 Center, a Washington public policy organization focused on young adults. That "will send opposition to the plan through the roof," Riemer said.

Paul Beckner, president of Citizens for a Sound Economy, a fiscally conservative advocacy group, said new federal spending "could lead to serious problems for Social Security." But Beckner, a proponent of privatizing, concluded that "if people were allowed to own their own retirement through personal retirement accounts, the insolvency of the Social Security system would not even be an issue."

Without reforms, benefits would have to be cut or payroll taxes increased to keep the program afloat. Neither proposal has broad political or public support.

The President and the 16 commission members he picked strongly favor private accounts invested in stocks and bonds - over Social Security payments, which are invested more conservatively in Treasury bonds.

Privatization critics say the system would drain high-income workers from the current program, leaving moderate- and low-income workers to fund it.

Orszag of Brookings said that given the unappealing choices and harsh economic climate, it may be wise to defer the commission's report and recommendations beyond the fall.

With the country focused on fighting terrorism, "no one's really going to pay much attention to it," Orszag said.

Tony Pugh's e-mail address is