Social Security option: Lift the wage cap

PORTSMOUTH, N.H. — President Bush for the first time has said he is open to raising taxes on wealthier Americans to cover the costs of transforming Social Security.

At the same time, Federal Reserve Chairman Alan Greenspan endorsed Bush's vision of private investment accounts, but warned Congress to go slow in borrowing.

Bush has been promoting a plan to let workers younger than 55 divert a portion of their Social Security payroll taxes into the accounts. But he has not settled on how to replace that diverted money.

Greenspan said transition costs of more than $1 trillion over 10 years would be unacceptable at this time. The president's plan estimates transition costs at $754 billion over six years, and presumably well beyond $1 trillion during the first decade. Some critics claim transition costs of the Bush plan could total more than $2 trillion over 10 years.

The president, in an interview published yesterday in several regional newspapers, left the door open to the idea of raising the cap on wages subject to the Social Security tax as a way to help cover transition costs. Earnings of more than $90,000 currently are not subject to tax.

"I've been asked this question a lot, and my answer is that I'm interested in good ideas," Bush said, according to the Birmingham (Ala.) News. "The one thing I'm not open-minded about is raising the payroll-tax rate, and all the other issues are on the table, and that's important for people to know."

He was drawing a distinction between the amount of earnings subject to the Social Security tax and the 12.4 percent tax rate, paid half by workers and half by employers, which he is opposed to raising.

As Bush campaigned for private Social Security accounts yesterday in New Hampshire, the ninth state he has visited recently to promote the idea, his proposal received cautious support in Washington from Greenspan.

"If you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way," he told the Senate Banking Committee.

Greenspan warned that establishing investment accounts could have a major impact on interest rates. He did not say what that impact might be, but other economists have said new borrowing as part of creating the accounts might drive up interest rates.

There was debate yesterday about whether Bush's interview remarks signaled a sincere willingness to embrace a higher wage cap or merely were designed to discourage lawmakers who favor that option from abandoning discussions with the White House.

In December, Bush was praised widely by some of his allies when he said: "We will not raise payroll taxes to solve this problem." Asked at the time whether that meant Bush opposed raising the $90,000 wage cap, White House spokesman Scott McClellan said: "If you're talking about raising payroll taxes, that is a payroll-tax increase; the president would not be for that."

He repeatedly called Bush's stance "very clear."

Bush spokesman Trent Duffy made no attempt yesterday to clarify Bush's remarks that all options but a tax-rate increase were under consideration, saying the president did not necessarily contradict himself.

"Just because options are on the table doesn't mean he's endorsed anything," Duffy said. "This is just a good sign of the president's willingness to be flexible and open to ideas."

One key Republican senator said Bush's comments to the regional newspapers reflected a move to the middle by a president who previously appeared unwilling to compromise.

Sen. Lindsey Graham, R-S.C., who has said a change to private accounts would be impossible without some type of tax increase to avoid massive borrowing, hailed the president's words as "compelling evidence he is serious about making hard decisions for the common good."

But Bush's potential embrace of a higher wage cap could anger the very conservatives who have pushed for private retirement accounts. Grover Norquist, a leading anti-tax activist and adviser to the White House on Social Security, said he did not believe Bush would agree to raising the $90,000 cap. But he acknowledged that the president's remarks would rattle some conservatives.

"Should it make us nervous when somebody says, 'I would think about cutting off your fingers,' even if you don't think he really would? Yes. It makes one nervous," Norquist said. "I understand that it's his job to say, 'Let's come to the table and have a conversation.' He's counting on the fact that once you get in the room, the American people will demand personal savings accounts, and they will not demand higher taxes."

Increasing the cap on wages subject to the Social Security tax to $140,000, as some lawmakers support, would result in an additional $3,100 tax payment for Americans earning that amount or more. For the self-employed, who pay both the individual and employer portions, the tax would go up $6,200 for those making $140,000 or more.

As did Bush's comments, Greenspan's testimony to the Senate Banking Committee generated debate among people following the president's Social Security initiative.

The Fed chairman is so esteemed that private-account supporters and opponents alike regard his stance as critical to their success.

Greenspan said private accounts by themselves would do nothing to erase the $3.7 trillion shortfall that is estimated over the next 75 years between Social Security's promised benefits and its income from the payroll tax.

Congress must come to grips with that funding gap, he said, regardless of what it decides to do about private accounts.

Greenspan said the ultimate test of a Social Security rescue package was whether it increased national savings. Only with the investment from more saving, he said, could the United States hope to support its growing army of retired people without a sharp decline in the standards of living of all age brackets.

"I was actually very encouraged," said David John, who as a senior policy analyst at the Heritage Foundation has long championed private accounts. While Greenspan made an "oblique suggestion that Congress not go overboard," John said, "he very carefully did not say to Congress, 'Don't do it.' "

Los Angeles Times reporters Warren Vieth and Janet Hook contributed to this report; the costs of Bush's plan were provided by the Chicago Tribune.