June 23 (Bloomberg) -- Congressional Republicans' proposal to use the current Social Security surplus to pay for personal investment accounts may be headed for a collision with the federal budget deficit.

Plans being championed by Senator Jim DeMint of South Carolina and by House Republicans including Representatives Sam Johnson of Texas would fund the individual accounts by tapping the excess payroll taxes currently paid by workers, which the Social Security Administration estimates will be $86.7 billion next year.

That surplus is now spent on other government programs; diverting it to private accounts would add to the overall federal budget deficit, said Robert Bixby, executive director of the Concord Coalition in Washington, a group that advocates a balanced budget. And after peaking in 2008, the surplus begins to dwindle.

``Then what happens?'' asked Bixby, who supports adding private accounts to Social Security separate from payroll taxes. ``It's kind of like watching a mission to Mars without any plan to land when you get there.''

President George W. Bush has been trying since January to build support for his personal-accounts proposal and to generate congressional interest in addressing the future funding shortfall in Social Security, which the system's trustees forecast will run through its surplus by 2041. While House Majority Leader Tom DeLay of Texas and other Republicans are lining up to support the idea of using the excess payroll taxes for private accounts, Democrats are giving no signs of interest, indicating the logjam on Social Security in Congress remains in place.

Deficit

The federal deficit swelled to a record $412.6 billion in 2004, and Bush has vowed to cut it in half by 2009. Currently, the U.S. Treasury borrows Social Security surplus for the government's use and in turn issues special bonds to Social Security. Those bonds, held by the Bureau of Public Debt in Parkersburg, West Virginia, totaled $1.7 trillion at the beginning of 2005.

Republicans say the deficit concerns won't undermine their plans. ``The government needs to recognize this debt,'' said DeMint, who is sponsoring a version of the surplus-funded private accounts in the Senate.

``We can pay for this simply by slowing the growth of government over the next 10 or 15 years instead of spending it on new programs we can't afford,'' he said. ``We'll figure out the next steps on down the road.''

House Plan

The House legislation would use the surplus to seed individual accounts invested in Treasury bonds. This provision initially wouldn't increase the deficit because the government could still use the money represented by the Treasury securities for other programs, as is current practice.

The impact on the deficit would be felt in 2009 when a commission set up to manage the accounts would offer a plan to allow people to invest in things other than Treasury bonds. When the bonds were sold, the government would lose its access to money they represent, widening the deficit.

Bush proposes letting workers younger than 55 divert as much as a third of the 12.4 percent Social Security payroll tax into personal accounts that could be invested in stock and bond funds managed by private firms and administered by the government. The administration estimates that would cost the government $754 billion in revenue over 10 years.

Changing the Formula

He also proposes to change the formula for calculating benefit increases in the future to address the funding shortfall. After 2041, Social Security would only be able to pay about 74 percent of promised benefits under the current system.

David John, a private-account supporter and Social Security analyst at the Heritage Foundation, a conservative research organization in Washington, said that while some Republicans are concerned about the impact on the budget deficit, they view the proposals as a last-ditch effort at reaching a legislative compromise.

``It's essentially come down to this or nothing,'' he said.

Democrats have signaled it may be the latter. ``The latest Republican privatization scheme is a transparent political gimmick that would weaken Social Security,'' Senate Minority Leader Harry Reid of Nevada said in a statement yesterday.

``It's really nothing new,'' Michigan Representative Sander Levin, ranking Democrat on the House Social Security subcommittee, said in an interview. ``There's no lockbox here.''

`No Trust Fund'

That's also a point that Bush makes: He has been telling audiences around the country that the Social Security surplus is a fiction. ``There is no trust fund,'' he said after inspecting papers representing the $1.7 trillion in special Treasury securities held in a locked file cabinet at the Bureau of Public Debt facility.

In University Park, Pennsylvania, June 14, Bush said that once the payroll taxes are applied to Social Security benefits, the excess revenue ``funds all the different programs'' of government. ``And do you know what's left behind?'' Bush said. ``Paper. IOUs in a file cabinet in West Virginia.''

John said that in presenting their proposals, the congressional Republicans may be looking ahead to their re- election campaigns. The idea of shielding the Social Security surplus from being spent on other government priorities has broad public appeal, he said, and ``has the potential to be a very effective election issue.''

Uniting Republicans

Even if the plans for using the surplus fail to bring both parties together, they may allow the Republicans to unite behind a popular proposal that they will try to use against Democrats in the 2006 congressional elections. ``This is calling the bluff of the Democrats,'' said Michael Tanner, a Social Security analyst and account advocate at the Cato Institute, a libertarian- oriented research organization in Washington. ``The idea of not raiding the trust fund has huge public support.''

Delay, who has allowed the White House to take the lead on Social Security, gave a preview of that argument in a statement yesterday on the plan offered by Johnson, Representative Jim McCrery of Louisiana and others.

``This proposal is proof that Republicans are offering solutions, while the only thing Democrat leaders have to offer is criticism,'' Delay said.

To contact the reporter on this story: Heidi Przybyla in Boston at hprzybyla@bloomberg.net; Jeff Bliss in Washington at jbliss@bloomberg.net

Last Updated: June 23, 2005 00:03 EDT