Dec. 16 (Bloomberg) -- President George W. Bush said creating private retirement accounts under Social Security will signal to Wall Street that the U.S. government is confronting long-term budget deficits.

``We'll send a message to the financial markets that we recognize we have an issue with short-term deficits and long-term deficits with unfunded liabilities'' such as Social Security, Bush told an economic conference in Washington. Social Security will begin paying more in benefits than it receives in tax dollars in 2018, according to the Social Security trustees.

``We have a problem,'' Bush said. ``Are we willing to confront the problem now or are we going to pass it on to future Congresses and future generations?'' Bush said. ``Now is the time to confront Social Security.''

Bush, facing pressure to trim a record U.S. budget deficit, is using the conference to spotlight his agenda for his second term beginning Jan. 20. He said yesterday that letting younger workers invest part of their Social Security taxes in stocks and bonds is a priority. He promoted the plan today at a handpicked forum that included Time Warner Inc. Chief Executive Officer Richard Parsons and Liz Ann Sonders, chief investment strategist for Charles Schwab and Co., both based in New York.

`Massive Spending'

Democrats such as House Minority Leader Nancy Pelosi of California and Senate Minority Harry Reid of Nevada oppose Bush's Social Security proposal. They say it would drain money from Social Security, swell the federal budget deficit and mostly benefit Wall Street mutual fund managers. None of the panelists at the event with Bush opposed his plan.

The president's plan may cost $1 trillion to $2 trillion over 10 years, according to the Congressional Budget Office. He also promised during his re-election campaign to cut the U.S. deficit, $412 billion last year, in half in five years.

``Thanks to massive spending increases over the last four years,'' it's ``vital that the Bush administration focus its sights on controlling spending,'' said Stephen Slivinski, director of budget studies at the Cato Institute, a Washington group that advocates limited government. ``An honest discussion of ways to reduce the size of government could be a vital element in a second-term economic agenda.''

A $127 billion budget surplus has vanished since Bush took office, amid an economic slowdown, enactment of $1.85 trillion in tax cuts over 10 years and spending for military operations in Iraq and Afghanistan as well as homeland security.

`Tough Budget'

Bush said he'd send Congress a ``tough budget'' in an effort to cut spending. He said he'd also urge that tax cuts enacted during his first term be made permanent, and renewed his pledge that he won't raise the payroll tax that funds Social Security.

The president said personal retirement accounts could be passed on to heirs and wouldn't be controlled by the government. There would be ``reasonable guidelines'' about where investments could be made, and people would be barred from socking money away in a ``frivolous fashion,'' Bush said. ``You can't take it to the race track to really increase the returns.''

Discretionary spending authorized by Congress has grown an average of 6 percent a year and a cumulative 27 percent over his first term, according to the White House Office of Management and Budget. While the president has repeatedly called for budget restraint, he has yet to veto a spending bill.

The budget deficit is forecast to be $348 billion in the current fiscal year ending Sept. 30 and probably will continue at an annual rate of about $300 billion or more for the balance of Bush's term ending 2008, according to the non-partisan CBO.

Budget Deficit

The CBO projects a deficit of $2.3 trillion over the next decade. That will grow to $3.6 trillion if Congress adopts other Bush proposals, such as extending tax cuts when most of them expire in 2010 and allowing middle-class families to avoid the alternative minimum tax, the CBO estimated.

Bush said Social Security overhaul is needed because ``more people now believe'' they won't get a check from the system.

Social Security began with 40 workers' tax dollars paying for each retiree and now that ratio is 3 to 1, Time Warner's Parsons said. ``It's only going to get worse in the sense that we're more distant from the way the system began,'' he told the panel. ``Tinkering can't work anymore.''

Private Accounts

Republican congressional leaders have indicated they will support Bush's plan for private accounts, yet deficit concerns have sparked resistance. Senator Lindsey Graham of South Carolina, Senator Charles Grassley of Iowa and Representative Jim Kolbe of Arizona are among Republicans who say higher taxes may be needed to win bipartisan support for private accounts.

Democratic Representatives Robert Matsui of California and John Spratt of South Carolina said the administration's first priority should be reducing the federal budget deficit and only then can it deal with Social Security.

The deficit ``is the problem that is affecting the dollar'' and worrying bond traders, Spratt, the senior Democrat on the House Budget Committee, said on a conference call with reporters yesterday. The dollar has dropped 6.5 percent against the euro and 2.8 percent versus the yen this year.

Social Security is a ``distant problem,'' and the system is ``nowhere near collapsing today,'' Spratt said. ``This existing system can be tuned up and made to run as far into the future as you can project.''

A Dec. 9-13 NBC News/Wall Street Journal poll found that the public, by 50 percent to 38 percent, think investing Social Security in stocks is a ``bad idea.''

`Manageable Challenge'

Problems with the Social Security system are manageable and not as dire as in 1983, said Matsui, who served on a commission established by then-President Ronald Reagan to recommend ways to close the funding gap.

Bush's contention that spending $1 trillion to $2 trillion now to establish the accounts is better than dealing with a $10.4 trillion shortfall in the future is misleading, said Jason Furman, former economic policy director for Democratic Senator John Kerry's presidential campaign.

The $10.4 trillion is an estimate over the infinite life of Social Security, he said on a conference call with reporters earlier this week. A more realistic assessment of the system's deficit is $3.7 trillion over 75 years, the conventional time span for Social Security estimates, he said. Reducing the figure is a ``manageable challenge,'' Furman said.

Employees and employers each currently pay a payroll tax of 6.2 percent of the first $87,900 earned, while the self-employed pay 12.4 percent.

Senator Graham supports legislation that would allow younger workers to set aside 4 percentage points of their Social Security taxes, up to $1,300 a year.

Since current Social Security beneficiaries rely on the same tax dollars, younger workers would be investing in stocks and bonds and the government would have to fill in the gap by borrowing, raising or cutting benefits.

``Even if you favor privatization, you should be against hokey budget gimmicks,'' Alan Blinder, Federal Reserve vice chairman under President Bill Clinton, told reporters on the conference call with Furman.

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

Last Updated: December 16, 2004 11:02 EST