Bush May Be Borrowing Trouble with Social Security Plan

Ron Brownstein of the LA Times has a nice analysis of the risks of the Bush Social Security plan. Brownstein writes that even Wall Street is skeptical:

The plan Bush is expected to endorse would close that long-term funding gap by significantly reducing the growth in guaranteed benefits for future retirees, relying on the returns from the individual accounts to compensate for part of the loss.

In essence, the administration is betting that the markets will stomach even large amounts of explicit new debt for a Social Security plan that reduces the so-called implicit debt of unfunded future obligations.

The administration says it is finding plenty of Wall Street support for that logic. But some financial traders consider it more wish than forecast. They believe the markets will weigh the reality of massive new federal borrowing more than the promise of long-term savings — especially if the plan defers any benefit reductions far into the future, as seems possible.

"In an ideal world, the market would say, 'Good, they're doing something to fix Social Security,' " says Ethan Harris, chief U.S. economist for the investment firm Lehman Brothers. "But I think the market will focus almost exclusively on the increased deficit."

If Harris is right, that would mean higher interest rates — and bigger bills for mortgages and consumer loans.