CNN's Garrett explains Bush's 'new accounting'

CNN White House Correspondent Major Garrett

WASHINGTON (CNN) -- CNN White House Correspondent Major Garrett explains the Bush administration's "new accounting" for Social Security revenues.

Q: How did the White House change the way it counts Social Security revenue?

A: It recalculated tax revenue over the past three years (1998, 1999 and 2000) and discovered that Social Security had been short-changed by $5.6 billion. Under normal circumstances, the government would have taken that $5.6 billion out of existing general revenue and given it to Social Security. But the White House decided to leave it in the general fund so Congress could use it on other domestic spending. However, Congress will not get all of the $5.6 billion.

Q: Why not?

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A: Because the White House also discovered that the Postal Service will run a $1.3 billion deficit this year. That's important because the Postal Service usually runs a surplus. That surplus is typically added to the Social Security surplus, making it larger than it otherwise would be. The White House says that's wrong and that that practice won't happen anymore.

So, if you remember the $5.6 billion that Social Security was short-changed but was to be given to Congress to spend, well, the White House subtracted the $1.3 billion Postal Service deficit, leaving a remainder of $4.3 billion. Yes, it's more confusing than the circuitry inside your desktop computer, but that's what the White House did.

Q: All right. But why on earth does this budget arcana matter?

A: It matters in the all-important political derby of "Who Loves Social Security More." President Bush promised that his budget and 10-year tax cut would never, ever eat into Social Security surpluses. Those surpluses are estimated to be $157 billion this year.

Where does that surplus come from? Payroll taxes now extract far more from workers and employers than Social Security pays out in benefits. The amount left over each year after the payroll tax revenue is counted and the benefits paid out to retirees is the Social Security surplus.

In 1999 the government -- for the first time -- had a surplus larger than the Social Security surplus, meaning the surplus was larger than the payroll taxes collected but unspent on Social Security. Politicians thought this a great thing. And to show their devotion to Social Security, they pledged not to spend any of the Social Security surplus. This looked easy because at the time the economy was growing and President Clinton was not interested in a big tax cut. So revenue kept pouring in, surpluses ballooned and all was milk and honey -- budgetarily speaking.

Then President Bush was elected and persuaded Congress to pass a $1.3 trillion tax cut, which some Democrats said was too big and would eat into those surpluses. At the same time, the economic slowdown hit, depleting revenue even more. Democrats said Bush would have to tap into the Social Security surplus to pay for all his spending and his tax cut.

The White House said he wouldn't. But behind-the-scenes, they knew it come very, very close. With the arrival of this newly found money, even Democrats seem to agree the White House can avoid tapping into the Social Security surplus. But Democrats say the president has done it only with a budget "gimmick."

Q: What does all this mean to Social Security benefits now? Are they being cut?

A: Absolutely not. None of this has anything to do with current benefits. Benefits will be paid as always and are not in the least bit affected by this argument. It's all about symbolism. And timing. If the Bush White House had tapped into the Social Security trust fund, it could have lost valuable political support among seniors. But by preserving its promise -- even if Democrats say it's been done only by shifting money -- the White House knows that was better than the alternative.

Q: How could the White House be so lucky? And is there anything wrong or out-of-bounds with this new accounting?

A: Luck has nothing to do with it. Budget analysts say the White House is correct to make this technical change in the way Social Security revenue is calculated. They are a bit skeptical about the timing, but, as the saying goes, necessity is the mother of invention. And clearly the necessity of political pressure brought about some intensely clever thinking among the president's top budget analysts, and they found a way out of what could have been a painful political problem.

Q: Well, what about the overall surplus? Are we in trouble?

A: Budget analysts say no. This year the government surplus will be about $160 billion. That's a lot of surplus. Was it projected to be larger before the economic slowdown and the Bush tax cut? Yes. By dozens of billions of dollars. But it's still large. And here's where another political argument crosses into a disagreement about economic theory.

Democrats say you need to keep surpluses large to generate economic growth because surpluses pay down federal debt, freeing up capital in private markets and keeping interest rates down. All these things, Democrats say, are good and keep an economy healthy.

The Bush White House has a completely different opinion. It argues that economic growth creates surpluses, not the other way around. The White House says the best way to boost economic growth now is with a tax cut, which Congress passed.

A growing economy, Bush and his economic team contend, will shortly create larger surpluses, protecting Social Security and leaving more revenue in Washington for other spending or to send back to taxpayers in the form of another tax cut. In fact, the White House now predicts economic growth next year will be 3.2 percent, almost double its projection of economic growth this year of 1.7 percent.