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Bush's Economic Vision

Debt Won't Hurt, Treasury Chief Says

By Jonathan Weisman
Washington Post Staff Writer
Saturday, December 18, 2004; Page E01

President Bush's plan to partially privatize Social Security probably won't raise interest rates or adversely impact financial markets, even if the program entails borrowing hundreds of billions of dollars to finance it, Treasury Secretary John W. Snow said yesterday.

In an interview, Snow said he is consulting closely with the White House on the issue, which has dogged the president's Social Security proposal. He said any additional debt should be accounted for "openly, transparently, above board," not hidden "off budget" for political purposes. Some Congressional budget writers have suggested in recent weeks that borrowing for Social Security should be accounted for differently and essentially ignored as part of the yearly federal deficit since it would be reducing costs over the long run.


Treasury Secretary John W. Snow says he thinks the economy can withstand added borrowing if it means a true fix for Social Security. (Pablo Martinez Monsivais -- AP)

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"If we have a real fix for Social Security, if we make the system financially feasible so that its revenue in-flows support its out-flows, and we eliminate this $10.4 trillion [funding] gap, the markets will applaud the political leadership that made it possible," Snow said. "The bond markets would respond positively to that."

Bush put Washington on notice Thursday that he will push hard next year to revamp Social Security so younger workers could divert some of their payroll taxes into personal investment accounts. But that would leave less money to pay benefits already promised to current retirees. To ensure those benefits are not cut, the government will have to borrow trillions of dollars well into this century.

The expected White House plan "would drive up the federal budget deficit for several decades," economists at the investment firm Goldman Sachs Group Inc. told clients yesterday.

Sen. Jon S. Corzine (D-N.J.), a former Goldman Sachs chairman, told reporters Thursday that the financial markets would treat that surge of debt the way they treat any government borrowing. Interest rates would ultimately rise, raising the cost of mortgages and car loans and slowing the economy.

But Snow said the government is nowhere near reaching the international lending market's ability to absorb more federal debt, even with the annual government budget deficit near a record in dollar terms already. On the contrary, he said, bond traders will reward the administration for tackling the problem presented by a rising tide of retiring baby boomers who, by 2019, will be taking more out of Social Security than workers will be putting into it.

"They understand that it's a real cost, that it's there today, and that actions to bring that unfunded obligation down will improve the balance sheet of the United States," he said.

The Goldman Sachs memo came down in the middle, saying Treasury bond interest rates would rise with the flood of new notes. But the overall effect on the markets should be modest, since the government's rising debt would be offset by the money flowing into personal savings accounts.

Snow also gave some hints about the direction in which the Bush administration would like to push the tax code in its second term. A panel will be named before the end of this month to examine changes the administration feels could simplify the tax code, promote economic growth and spur more savings and investment.


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