Barn Door Open On Privatization Of Social Security

By , Staff writer of The Christian Science Monitor

Nineteen ninety-seven may be remembered as the year Washington began a serious debate on one of the most fundamental issues of United States public policy: the federal government's role in ensuring retirement financial security.

The report of President Clinton's Advisory Council on Social Security, released yesterday, could be this argument's starting point. After two years of work, the 13-member panel couldn't agree on a single plan of action to shore up Social Security's shaky finances. It produced three, instead - but all three touch in some manner on the sensitive question of Social Security privatization.

Should some portion of Social Security tax revenue be invested in the stock market, and its potentially higher returns? Should individuals have greater say in the management of their Social Security retirement assets? Or would such changes leave too many Americans without adequate funds for retirement?

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Edward Gramlich, chairman of the panel and director of the University of Michigan's Institute of Public Policy Studies, says he sees today's study as "initiating a political debate" on such difficult questions.

Close observers of the Social Security system have long known that such a discussion is looming. The basic problem is well known: As large numbers of baby boomers reach retirement age in coming decades, the federal system will find itself hard-pressed to pay their promised retirement benefits.

Right now Social Security is running a surplus. But by 2029, projections are that the program will be taking in tax revenue equal to only about 75 percent of the money it needs to pay out in benefits.

During last fall's political campaign, there was much talk of appointing a bipartisan commission to tackle this issue. This came as news to Dr. Gramlich and other members of the existing panel, who felt they were already fulfilling such a role.

Unable to reach a consensus, the commission finally developed three alternative rescue plans. All, in their own way, would represent historic change in the system. (It's also important to note that retirees already drawing Social Security would be unaffected by almost all of these changes.)

The commission's Option 1 would generally maintain today's benefit structure. Financial soundness for the system would be reached via tweaks: Benefits for future retirees would be reduced by 3 percent by 1999, for instance, and payroll tax rates would go up 0.8 percentage points in increments by 2045.

Option 1 would also call for a major study of the effects of investing up to 40 percent of Social Security trust fund assets in the stock market.

Option 2 would go further down this privatization road. It proposes that straight Social Security benefits be somewhat reduced - but supplemented by mandatory Individual Accounts (IAs). These IAs would be funded by worker contributions equal to 1.6 percent of earnings. They'd be held by the federal government, but workers would be able to move them within a range of investments, including stocks.

Option 3 has the largest degree of proposed privatization. It calls for a gradual movement to a two-tier system - a flat retirement benefit of about $410 a month, plus a mandatory Personal Security Account (PSA) funded by 5 percentage points of today's 12.4 percent Social Security payroll tax.

The PSAs would be wholly owned and managed by workers. Their benefits would be paid out in tax-free installments, beginning at age 62.

Senate minority leader Tom Daschle (D) of South Dakota has already rejected Option 3 as a "non-starter." The general principle of investing at least some Social Security money in the stock market, however, is very much alive. Proponents say that over decades the return on stocks is so much greater than the return on government bonds (today's Social Security investment) that it's a shame not to take advantage of it.

Others point out that, economics aside, the social implications of increased Social Security privatization are huge. Sure, people would have more freedom to manage their own money. But that would include freedom to fail. Would the government abandon those who make bad retirement investment decisions? And should PSAs and IAs be available for nonretirement emergencies, as Individual Retirement Accounts (IRAs) are?

"Is it desirable, or even acceptable, to force everyone to save for retirement only?" asks University of Massachusetts gerontology expert Yung-Ping Chen.

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