CONGRESSIONAL estimate shows tax cut, economy eating into Social Security surplus

WASHINGTON (AP) _ President Bush's tax cut and the nation's economic downturn will force the government to take $9 billion out of Social Security this year to pay for other operations, breaking

Monday, August 27th 2001, 12:00 am

By: News On 6

WASHINGTON (AP) _ President Bush's tax cut and the nation's economic downturn will force the government to take $9 billion out of Social Security this year to pay for other operations, breaking a bipartisan commitment in Congress, congressional analysts reported Monday.

The nonpartisan Congressional Budget Office offered a more pessimistic view of the government's finances than the Bush administration did last week. The CBO estimated the total budget surplus for the fiscal year that ends Sept. 30 at $153 billion _ down $122 billion from its May estimate.

The CBO says Social Security will be tapped for $9 billion in fiscal 2001. After a small non-Social Security surplus of $2 billion in fiscal 2002, it projects the government will use $18 billion out of the retirement program in 2003 and $3 billion in 2004.

While the White House projected similar numbers, it forecast a non-Social Security surplus of $1 billion this year and next. That was just enough to permit Republicans and Democrats to say they have kept a promise not to use Social Security tax collections for other government programs.

The CBO report was scheduled for official release Tuesday. It was obtained Monday by The Associated Press from congressional sources.

Diverting Social Security money has no practical effect on the program. It does prevent the government from paying down public debt as quickly as it otherwise would. But making the Social Security exempt from such invasions has become a political priority as both parties sought the mantle as its greatest protector.

The first year of the 10-year, $1.35 trillion tax cut championed by Bush accounts for about two-thirds of the lowered fiscal 2001 surplus estimate, the CBO report says. A fourth of the reduction was attributed to the troubled economy, mainly in the form of lower tax revenues. The tax cut includes $40 billion in income tax refunds this year and deferring about $33 billion in business taxes into fiscal 2002.

CBO analysts say the economy should ``narrowly avoid recession and recover gradually next year.'' The recovery, however, is projected to be less robust than the 3.2 percent growth rate estimated by the White House Office of Management and Budget. The CBO is forecasting 2.6 percent gross domestic product growth next year, slightly below private consensus estimates.

Over the next 10 years, the CBO is forecasting a $3.4 trillion surplus counting Social Security, down from $5.6 trillion in its May forecast. Bush's tax cut and the associated changes in interest costs account for more than $1.7 trillion of the surplus reduction.

Those numbers assume no additional spending by Congress, including items already promised by lawmakers, such as a Medicare prescription drug benefit, increases for defense and education and a new $74 billion farm bill.

The Bush administration last week forecast a surplus of $158 billion this year, $173 billion next year and $3.1 trillion over the next 10 years. Over the decade, the White House figured defense spending at $198 billion above the numbers used by the CBO and Medicare spending $37 billion higher.

The White House used a Social Security accounting change and a few other assumptions to claim that Social Security would remain untouched this year; the CBO did not use those same assumptions.

The president last week said the Social Security fund should not be tapped unless the nation was at war or in a recession. He has said that Congress can avoid dipping into it by controlling spending. Yet many of the spending proposals that could force use of the retirement trust fund were made by Bush, not congressional Democrats.

Aside from the political fight, the main impact of the CBO forecast would be on repayment of public debt. The CBO says its new estimate will delay maximum debt repayment by four years compared with its May forecast.