President-to-be George W. Bush faces a tough choice: Does he want a big tax cut? Or does he want partial privatization of the Social Security system?
Experts think its unlikely he can get both - even if the Democrats in Congress decide to go along.
It's a matter of mathematics. Both the tax cut and privatization are expensive. The budget surplus, though growing, isn't likely to be big enough for both.
The Congressional Budget Office (CBO), for instance, estimated last July the budget surplus for 2001 through 2010 would be $4.56 trillion, if discretionary spending by Congress kept pace with inflation. The CBO is expected to raise that projected surplus late this month. One guess is $6 trillion for 2002 to 2011. Maybe less.
In the first two months of the current fiscal year (October and November) the federal budget picture is already $17 billion better than that of last year. The present sharp slowdown in the economy, if it lasts awhile, could whittle away some federal revenues. But most economists expect any slump to be short and not do much damage to a 10-year forecast.
Separately, the White House last July put the 10-year surplus at $4.2 trillion. Just last week President Clinton said it would actually be $5 trillion.
Whether $5 trillion or $6 trillion, the surplus amount sounds like an awful lot. But it disappears fast in the hands of budget analysts.
To start with, half of the surplus belongs to the Social Security Trust Fund. Both presidential candidates pledged during the campaign not to touch that. Remember the word, "lockbox"?
By the way, that growth in the Social Security surplus will put off the day when the retired baby boomers exhaust the Social Security Trust Fund. At present, that date is 2037. Then, in theory, retirees would get only 70 percent of the benefits they would be owed, paid out of the payroll tax revenue stream.
Such a cut in benefits won't happen, mind you. Baby-boomer retirees will have so much political clout that no politician will risk losing their votes by trimming their pensions.
In any case, the extra surplus means the theoretical day of reckoning will be put off to maybe 2038 or 2039, reckons Peter Orszag, an economist with Sebago Associates in Berkeley, Calif.
So the date for a Social Security crisis, like a water mirage on a desert highway, will again recede, as it has now for several years. The Social Security trustees will set the new official doomsday in the spring. The economic assumptions chosen by the Bush appointees will be crucial.
The remaining non-Social Security half of the 10-year budget surplus could grow from $2.2 trillion to maybe even $3 trillion.
It would appear such a huge surplus should easily accommodate the $1.3 trillion Bush tax cut with lots left over to pay for Social Security reform.
But an analysis by the Center on Budget and Policy Priorities (CBPP) indicates that isn't the case.
First, a $1.3 trillion tax cut means less of the federal debt is paid down. So the interest charges are bigger than assumed in the CBO surplus projection. Add $400 billion to federal expenses.
Second, the Bush tax cut is "back loaded." It costs more revenues as time goes on. The 10 years at stake now is 2002 to 2011. Add $250 billion.
And so it goes.
Congress has already in the pre-election days spent more than projected by the CBO. For instance, it gave the military a costly special healthcare benefit. Many members of Congress pushed through various pork-barrel projects.
There's more to come.
In the tax code, there's a provision called the alternate minimum tax (AMT). Those well-to-do taxpayers with so many deductions that they pay little income tax become subject to this extra tax.
Unless Congress alters that provision, millions of Republican voters will get hit.
By 2010, with inflation, 45 percent of all families with two children would also be paying the AMT. The cost of getting rid of the unpopular measure: $140 billion.
Then there are some tax credits that are supposed to expire, but will be renewed, such as those for corporate research and development.
Also, President-elect Bush has promised more federal aid for education, more defense spending, and a prescription-drug program. All will cost money.
Added up, no surplus money is left over.
Bush planners, however, were hoping to use some surplus general revenues to ease the transition to a partially privatized Social Security system. The CBPP, a Washington think tank, figures $500 billion will be needed for that.
Without the surplus, the switch becomes politically problematic.
Details for the Bush plan were never spelled out. But it was widely assumed two percentage points of the Social Security payroll contributions would be diverted into individual accounts that could be invested in the stock market.
Such a diversion would mean the Social Security Trust Fund would be exhausted much faster - about 2024, according to Mr. Orszag - unless money was taken from general revenues to cover that loss.
Alternatively, the Social Security benefits of younger Americans could be cut drastically. Bush promised that retirees and those close to retirement would not suffer any benefit cuts. But without help from general revenues younger workers could see benefits cut.
A study by The Century Foundation, in which Orszag participated, found that benefits would need to be cut 41 percent for workers 55 or younger to maintain solvency of the system for 75 years.
Bush experts did not quarrel with the results of that study.
Supposedly the individual accounts would offset the cuts in Social Security benefits. With the stock market down decidedly last year, though, fewer Americans may be in the mood to gamble the minimum financial security for their retirement years (Social Security) on these private accounts.
The Bush Social Security plan may die. Or the tax cut will shrink.
(c) Copyright 2001. The Christian Science Publishing Society