Chicago Tribune

August 18, 2001 Saturday, NORTH FINAL EDITION

SECTION: News; Pg. 1; ZONE: N

Trust funds at center of budget fight;

Democrats attack, say Social Security reserve in danger

By William Neikirk, Washington Bureau. Tribune national correspondent Bob Kemper contributed to this report.

DATELINE: WASHINGTON

The Bush administration defended itself Friday against Democratic allegations that it was raiding the Social Security trust fund to pay for its tax cut, signaling a return of budget wars that could turn nasty when Congress meets this fall.

Bush's spokesman, Ari Fleischer, said new White House budget figures will be unveiled soon showing the secondlargest surplus in the nation's history "while fully and totally protecting Social Security, as well as increasing spending on education, Medicare and other vital government services."

But Democrats accused the administration of relying on an overly optimistic economic forecast of 3.2 percent growth in 2002 to claim that it would not touch the Social Security surplus, which the Congressional Budget Office expects to grow to $2.5 trillion by 2011.

Tom Kahn, Democratic staff director for the House Budget Committee, said Bush was using "rosy scenarios" and questionable accounting changes in Social Security to avoid being accused of tapping the Social Security and Medicare trust funds for tax cuts and other Bush initiatives.

Kahn added that Bush will not be able to make such claims when the Congressional Budget Office reports its new budget projections later this month. He and other budget analysts said the non-partisan CBO will lower its surplus projections because of the economic downturn, forcing the administration to tap into the Social Security trust fund.

The developments indicate that Democrats are poised to make the economic downturn and the deteriorating budget picture a major political issue leading into the 2002 midterm elections. Bush's $1.35 trillion tax cut over 10 years is becoming one of their major targets.

Before Congress returns to work after Labor Day, Democrats will intensify their attacks on Bush's economic and budget policies, according to a congressional source, and try to hammer home the contention that the tax cut was a mistake, even though many economists believe it could help boost consumer spending and end the slowdown.

CBO numbers key

Using his party's theme, Kahn said that when the CBO makes its report, it will be clear that Bush violated a pledge not to use Social Security funds to pay for his tax cuts and other priorities. His argument received some support from William Hoagland, the Republican staff director of the Senate Budget Committee.

Hoagland said the GOP may not succeed in protecting Social Security if, as he expects, the CBO report projects smaller budget revenues. In Texas, Fleischer all but agreed, saying Hoagland was using CBO figures, not those that will be released by the White House's Office of Management and Budget.

Congress routinely uses CBO numbers in writing its budget, so Bush's assertion that he is leaving the Social Security trust fund alone may not be widely shared. But many private economists said Bush's 3.2percent economic growth projection for next year is not wildly far from the mainstream forecast of 2.8 percent growth.

Brian Wesbury, senior economist at Chicago-based Griffin Kubik Stephens & Thompson Inc., an investment banking firm, said the economy is in a recession but probably would rebound next year and match the Bush forecast.

David Jones, economist at Aubrey G. Lanston & Co., a New York government securities dealer, said the Bush outlook is optimistic. But he said Americans won't even notice if the administration uses Social Security funds for other purposes in the short run.

'Will hurt the country'

Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, seized on the news that the administration might have to use Social Security and Medicare trust funds, collected in the form of payroll taxes.

"The Bush administration has authored a budget and tax plan that does not add up, and that will hurt the country," Conrad said.

The tighter budget picture will create major fights over expenditures this fall when Congress returns, said Stan Collender, a federal budget analyst for Fleishman-Hillard, a public-relations and advertising firm.

"This could get ugly," he said, as Congress fights over prescription drug benefits for seniors, money for the military and education, energy tax breaks, and spending for a host of other programs.

Shift in debate

Nothing like this was anticipated during the 2000 campaign, when Bush and Democratic opponent Al Gore battled over whether to use the surplus for cutting taxes or paying off the national debt. The projected total surplus over 10 years--estimated by the Congressional Budget Office--is $5.6 trillion.

Of that, $2.5 trillion represents the Social Security surplus that analysts say is needed to help pay for retirement of the Baby Boom generation. The surplus in the Medicare trust fund, chiefly hospital insurance payroll taxes, was projected at $400 billion.

But Bush argued in his budget that there really was no Medicare surplus, because the government heavily subsidizes the program with other money. Conrad has threatened to block Bush's defense-spending increases this fall, saying they would wipe out the Medicare surplus.

Many analysts believe the tax cut, along with Bush's defense, education and other spending priorities, have reduced the 10-year non-Social Security surplus to virtually zero. "It's pretty much gone," Collender said.

Economist Laurence Kotlikoff of Boston University said the current budget situation does not adequately reflect the nation's longer-term fiscal position, especially when the oldest Baby Boomers reach 65 in 2011. Future claims on the Social Security system will far outstrip the money available, Kotlikoff said. "The Bush tax cut made it worse."

Economist Jones sided with the White House on the budget wars, saying the economic slowdown has caused the current problem and the Democrats are on the wrong side of the issue.

"You want budgets to go into deficit in recessions," he said. "It serves as an automatic stabilizer. You shouldn't be trying to jealously guard a surplus, when the economy is going to hell in a handbasket."

Alice Rivlin, a former Congressional Budget Office director and member of the Federal Reserve Board, questioned the administration's use of an accounting change in the way the administration collects Social Security taxes to free up $4billion for the budget in the fiscal year that ends Sept. 30.

"They are trying to do everything they can to make the situation look a little better," she said. In the short run, the surplus will be reduced, she said, but as the economy recovers, it will return.