Bush's Perfect Storm

This Against the Grain commentary was written by CBSNews.com's Dick Meyer.

On the retirement front, the early, hard choices about Social Security and Medicare that could mitigate much harder, much more painful choices down the road are avoided. Instead the administration gets its trophy of limited private accounts and there are no benefits or funding changes now.

But those private accounts don't, over time, prove to be an entitlement panacea. In 10 or 20 years, as the actuaries predict, payroll taxes on wage earners go way up and benefits for retirees way down.

On the tax front, the administration ignores its stated goal of tax simplification, but attains its covert dream of eliminating taxation on investment income. It "pays" for this, in part, by adding new taxes on employer-paid health benefits and Social Security benefits.

These two fronts, in a decade or two, collide when Social Security and Medicare simultaneously start to crash. The only way to keep funding even modest retiree benefits (which are taxed, remember) will be to dramatically increase payroll taxes and income taxes on those poor schlubs who are still working, since corporate taxes and taxes on non-earned income would be long dead.

Likely? I don't know. Possible? It certainly is.

I would, in fact, argue that it's more likely this typhoon will hit than the one more commonly predicted, especially by Democrats - that Bush will privatize Social Security completely and it will then service only the well-off.

I don't think that can possibly happen because of four capital letters - AARP. There is a powerful, permanent lobby that protects Social Security and Medicare. The financing and benefits of the programs will change, but privatization, I think, is for Chicken Little.

As for the limited private Social Security accounts, I agree with The Wall Street Journal's veteran writer, David Wessel: "Private accounts alone will not destroy Social Security as we know it, despite claims from some. But private accounts alone won't save Social Security either, despite claims from others."

Taxes are different. There is no AARP for wage earners. There is no revolving door of Billy Tauzin's, John Beaux's and Thomas Scully's to lobby for couples making a combined $80,000 a year. The lobby of all lobbies, however, is the one that preserves and protects tax breaks, be they for mortgage deductions, capital gains or llama breeding.

The administration has not made it at all clear what it means by "tax reform." It intends to form one those blue-ribbon panels to ponder for a while and then announce a plan sometime in 2005. You probably don't need to worry about it until next Christmas.

Despite this president's talk about simplifying the code (they all talk about that), a senior official in a key agency told me he believes the administration's central goal in tax policy is to eliminate taxes on investment income for individuals - that is, dividends, interest and capital gains.

My view is buttressed by Jeffrey Birnbaum and Jonathan Weisman, who wrote in the Washington Post on November 18: "The Bush administration is eyeing an overhaul of the tax code that would drastically cut, if not eliminate, taxes on savings and investment, but it is unlikely to try to replace the existing tax code with a single flat income tax rate or a national sales tax, according to several sources familiar with ongoing tax deliberations."

The most likely tax reform, or deform, is that the 2001 tax cuts will be made permanent, new cuts for investments will be added, new taxes on health and retirement benefits will be heaped on, the alternative minimum tax will end and deductions for state and local taxes will be eliminated. Project that down the pike to around 2015, add in huge payroll tax hikes to keep Medicare and Social Security going, and there won't be much left in regular paychecks.

Sadly, when it comes to reform in the Bush regime, it's probably best to hope for gridlock.

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By Dick Meyer