Federal Budgets and Revenue Update

January 6, 2005
Volume 11, Number 1

An Information Service of the NCSL Budgets and Revenue Committee

President Lays Out Fiscal Agenda for 2005

One month prior to the release of his FY2006 budget proposal, President Bush is setting out the framework for his fiscal agenda for the next four years. Facing a CBO-projected $348 billion deficit in 2005, the president's first two initiatives include reforming Social Security and the current tax code.

While a White House Social Security reform proposal has not yet been released, it's expected to include the creation of voluntary, semi-private investment accounts available for younger workers. This option is one of at least three core Social Security reform principles the president said he would support during a White House economic forum in December. The other two are no increase in payroll taxes and no benefit reductions for retirees or near-retirees.

In 2001, the president's Commission to Strengthen Social Security proposed three reform models based on the private account approach. The Commission's report suggested that all three models ensure future retirees benefits that are at least as high as those received by today's retirees. Other unifying elements of the three reforms plans include the ability for retirees to pass
on their accounts to others in the form of an inheritance and transitional investments by the federal government to move to a system with personal accounts.

Of the three models one in particular-Reform Model 2-is garnering the most media attention It would use changes in the Consumer Price Index instead of workers' wages to calculate Social Security benefits. This approach, known as "price indexing," would be used to calculate the benefits for those workers turning 62 in 2009. Under the plan, workers who have not reached 55 will have the opportunity to redirect 4 percentage points of their payroll taxes, up to $1,000 annually, to a personal account.

The Commission noted in its 2001 report that Reform Model 2 requires the federal government to borrow close to $1.3 trillion from the treasury, although projected Social Security cash surpluses in the out years of the plan would eventually cover the cost of some of the borrowed funds. Recent reports suggest that transition costs could be closer to $2 trillion.

Some members of Congress oppose such borrowing to help cover the costs of transition. Although President Bush opposes any tax increases, Senator Lindsey Graham (R-SC) has suggested raising the limit on earnings that can be taxed for Social Security benefits from $90,000 to $200,000 for 10 years to help recover costs associated with the transition.

The president is also seeking to develop a tax reform plan. Prior to announcing his full initiative, President Bush will put together a panel of the nation's experts to study the issue. Former Sens. John Breaux (D-LA) and Connie Mack (R-FL) are being considered as possible co-chairs. Treasury Secretary John Snow has suggested in published reports that action on tax reform might take longer than Social Security reform as time will be needed for the panel to conduct hearings and issue a report. Look for legislative
action closer to 2006.

A number of other initiatives are also on the president's fiscal agenda The president seeks to make permanent his first-term tax cuts, which may reduce federal revenues by $1.85 trillion over 10 years and has already implied that Congress should expect a tight budget proposal come February. The proposal could include possible cuts in major entitlement programs such as Medicare and Medicaid, and place caps on non-defense discretionary spending as he plans to follow through with his plan to cut the deficit in half over the next 5 years. An additional supplemental appropriations bill from the White House may also be on the horizon-seeking roughly $75 to $80 billion in added funding for military operations in the Middle East.

For more information contact NCSL staff: Molly Stauffer, Nick Steidel.