The White House is continuing to push for legislation which would create private accounts funded by payroll taxes, even though Democrats remain almost unanimously opposed and some top congressional Republicans want to scale back such plans. Some House Republicans support Ways and Means Chairman Bill Thomas' (R-CA) proposal, which creates these accounts and while also claiming to move the program towards solvency. Yet although he has the support of some, many House members on both sides of the aisle continue to remain skepitcal about moving a solvency bill loaded with benefit cuts. As this Economic Snapshot from the Economic Policy Institute illustrates, the plan to create private accounts out of the Social Security surplus is less sound than it appears. As EPI says, "Proponents tout this plan as a way to 'stop the raid' on Social Security, but, like other privatization proposals, it diverts money from the trust fund and relies on infusions of general revenues to avoid worsening the trust fund balance." The Social Security surplus next year is projected to be around $85 billion. EPI estimates, "credits in the accounts would start at 2.2% of payroll in 2006 and shrink thereafter, dropping below 2% by 2009, below 1% in 2014, and to zero in 2017. Over 11 years, the typical worker would probably accumulate about three to five thousand dollars in such an account and face a comparable debt to the government."

Yesterday the House Republican Conference met to discuss a Social Security proposal to create private accounts by using the "Social Security surplus." The House Republicans, who could move a bill as early as July, have called the creation of private accounts one of three parts they would hope would be included in reform legislation; the other two parts would address solvency and private pension security issues. House Subcommittee on Social Security Chair Jim McCrery (R-LA) said the legislation would "stop the raid on Social Security.... Every penny of payroll taxes will be paid on Social Security benefits." However, the plans discussed so far do not address solvency and will drain money from other government programs. Ways and Means Ranking Member Charles Rangel (D-NY) called the GOP plan "a scam that doesn't stop their raid on Social Security and starts privatization." House Republicans are also arguing that the GOP bill will increase transparency by exposing the true size of the deficit, since the government won't be able to "borrow" from the surplus anymore to pay down the deficit. In 2004, $155.2 billion of the Social Security surplus was loaned to the government in return for Treasury bonds. Had the government not been able to borrow that money, the deficit would have been $567 billion as opposed to $412 billion (which was a record high as it is). However, if Social Security were simply "on-budget" instead of "off budget," the surplus would not help mask the true size of deficits, because the government wouldn't be able to borrow it in order to pay down the deficit. Therefore, there are other ways of increasing transparency besides the creation of these surplus-funded private accounts.

The Bank for International Settlements released their annual report yesterday. In the report (see also a summary), they issued warnings on economic imbalances, the U.S. budget deficit, and dollar depreciation. The report found that the world economy is marked by increasing internal and external economic imbalances. These imbalances raise serious questions about future global growth and financial stability. The report said, "One simply cannot ignore the number of indicators that are now simultaneously exhibiting marked deviations from historical norms," and went on to warn that the U.S. budget deficit was an increasing concern of global importance. The report basically stated that without any sort of budgetary discipline, the continued decline of the U.S. dollar against other currencies appeared "inevitable." The report also stated that the U.S. deficit "expanded to a record high as a proportion of GDP [almost 6%], and this in spite of a reduction in the effective real value of the dollar of more than 20% from its peak in early 2002.... It is unprecedented for a reserve currency country to have a current account deficit of such magnitude." The high deficit has resulted in the global financial system seemingly becoming increasingly prone to various sorts of financial turbulence. The Bank of International Settlements is warning Bush and Congress that if deficits continue to rise, there could be serious consequences. Given the current fiscal health of the U.S. economy, now is not the time for Congress and the President to be considering any extremely expensive legislation, without figuring out a way to pay for it.