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Bush pushes reforms
President uses State of Union to offer details on Social Security, tax reform.
February 2, 2005: 11:15 PM EST
By Krysten Crawford, CNN/Money staff writer
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NEW YORK (CNN/Money) - In his first State of the Union speech since winning a second term, President Bush stepped up the politically difficult job of selling his plan for changing Social Security to a skeptical Congress and public.

The president specified for the first time that new voluntary personal retirement accounts he has proposed for Social Security would be made available to workers younger than 55.

He also pushed to fulfill his campaign promises to simplify the tax code and reduce what he called frivolous lawsuits.

In his speech, Bush boasted of massive tax cuts, the end of the 2001 recession, a spike in home ownership and the creation 2.3 million jobs last year. But noting more remains to be done, he reiterated his pledge to cut the $427 billion budget deficit in half by 2009 and to make permanent four years of tax cuts.

He also said his 2006 budget, due next week, will keep spending growth at below-inflation rates and eliminate or reduce 150 under-performing government programs, which he did not identify.

"The principle here is clear: a taxpayer dollar must be spent wisely, or not at all," he said. "By making our economy more flexible, more innovative, and more competitive, we will keep America the economic leader of the world."

The 55-minute speech -- equal parts foreign and domestic policy -- comes three months after Bush and Republicans handily won control of the White House and Congress. Democrats, however, still have enough Senate seats to block any legislation through a filibuster.

Bush's address comes as the economy is expanding but job growth is the weakest of any recovery since World War II. The growing budget and trade deficits also worry powerful members of both parties.

Social Security Reform

Fixing Social Security has been a dominant theme for Bush in recent months and in his speech, he specified for the first time that Americans 55 and older would not be affected by any reforms.

He said only conservative investments would be permitted for people who choose to funnel part of their Social Security money into voluntary individual investment accounts. He said that eventually workers would be able to set aside 4 percentage points of their payroll taxes in their accounts. (For more on Bush's new proposals, click here).

Without changes, the Social Security trust fund is projected to last until 2042, according to Social Security's actuaries -- the point at which Bush said the system would be "bankrupt." The nonpartisan Congressional Budget Office puts that date at 2052.

But even after the trust fund is gone, payroll tax revenue would still be able to cover 73 percent to 81 percent of benefits, according to Social Security and CBO estimates.

Democrats agree that the day will come when Social Security takes in less revenue than it has promised to pay. But they have attacked Bush's plan for personal accounts, which they refer to as "privatization," charging that diverting payroll taxes would threaten retirees' benefits and that transition costs to the new system would drive up the budget deficit.

Sen. Harry Reid of Nevada, in the Democratic response to the speech, noted the jump in the federal deficit in Bush's first term, rising health care costs and the loss of U.S. jobs to overseas markets like India and China, where labor costs are significantly lower.

He also said Bush's idea for Social Security "isn't really Social Security reform -- it's more like Social Security roulette."

"Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings," said Reid. "But that doesn't mean taking Social Security's guarantee and gambling with it. And that's coming from a senator who represents Las Vegas."

Bush said the only other solutions are higher taxes, heavy borrowing, or severe cuts in Social Security benefits. But some independent experts say minor adjustments are all that's needed to keep the system sound.

Bush made it clear that many ideas are "on the table," including existing proposals to raise the retirement age and limiting benefits for wealthy retirees.

A simpler tax code

While Social Security was a dominant theme, another second-term priority for Bush is the federal income tax code. He called the tax code "archaic, incoherent" and pledged to find a way to make the code "pro-growth, easy to understand and fair to all."

What exactly Bush means by tax reform isn't clear yet -- and he offered no new details Wednesday night. He has said that any changes would be revenue neutral, should provide incentives for Americans to save more and protect existing breaks for home-buying and for charitable giving.

Simplification of the tax code won't be easy. Most everyone agrees that the current system is onerous, but there's considerable disagreement about what needs to be done.

The ideas "range from the sublime to the politically treacherous," said Clint Stretch, a tax principal with Deloitte & Touche, the accounting giant.

Some advocates of reform want to shuck the income tax in favor of a flat tax or a national sales tax or some combination of both. Others want to keep the income tax, but close loopholes or lower tax rates.

Later this month a newly appointed bipartisan advisory panel is set to begin working on reform proposals due in July, with Congress possibly taking action next year.

Paring lawsuits

Bush also touched on the need to create more jobs, improve education, and expand health care.

On the health care front, Bush again promised a new law to reduce lawsuits against doctors and medical providers, saying "irresponsible" lawsuits slow the economy and hurt small businesses.

Congress has tried repeatedly in recent years, without success, to reform the litigation system but opponents counter that the court system is far from broken.

Not since the Johnson administration in the 1960s has a U.S. president put forward such an aggressive domestic agenda, according to Chris Edwards, director of tax policy at the libertarian Cato Institute.

"The Bush agenda is very ambitious," he said, adding that tort and tax reforms are possible "if he's successful with Social Security."

That could be a long shot given stiff Democratic opposition so far, policy analysts said, adding Bush has about two years to achieve his key goals before attention shifts to the 2008 general election.  Top of page

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