Social Security: Going Private?

Once considered untouchable as one of the most politically sensitive issues in the US, Social Security reform is gathering momentum as President Clinton today attends the first of four regional "town meetings" on the issue.

His presence in a Kansas City, Mo., gymnasium intensifies a year-long effort to find consensus on fixing a system that affects the lives of 50 million Americans. But already, momentum is building toward at least some involvement of private markets in the national retirement system - a fundamental departure from the early 1980s, the last time Social Security was reformed.

"Clearly, the debate is moving in the direction of introducing some kind of private accounts," says Bob Bixby, political director of the Concord Coalition, a sponsor of today's debate. "It's pretty astounding for a program that used to be known as the 'third rail' of American politics."

The problem, he says, is that the term "privatization" can mean a wide variety of things, and so discussion of options needs to become more specific for any national consensus to emerge.

To some people, privatization means taking the Social Security trust fund - a surplus account the government has paid benefits from since 1983 - and investing it in the stock market like every other pension.

To others, it means creating some kind of national 401(k) plan that operates on top of Social Security, but doesn't replace any part of it. A third concept involves taking part of Social Security and changing it in into individual, private accounts.

It's too soon to say what the final product will look like. But so far, almost every single plan introduced has incorporated one of those ideas.

"At the end of the day, we are going to see some variation of one of those or maybe even two together," says John Rother, chief lobbyist of the American Association of Retired Persons, a cosponsor of today's event.

The movement toward privatization got its biggest boost last year, when a national Social Security advisory council split into three factions - all favoring some form of investment in markets. Two of the council's three factions favored a radical privatization that would require workers to invest in 401(k)-type funds. The third included investment in private securities, but would have the government handle the investing.

Strong markets

As the stock market continues to break records, it's hard not to argue that America's workers should be benefiting from that - especially since the return on Social Security money is currently below the inflation rate, and the system itself will begin to run short of funds in 2029.

But Americans, even younger adults, are aware of the inherent risks of the markets, and are conflicted over how to take advantage of the market's potential while minimizing that risk.

In a new poll, Americans showed overwhelming support for the concept of private Social Security accounts. Eight in 10 Americans liked the idea, according to a survey conducted for the Associated Press. Among young adults, those aged 18 to 34, support reached 90 percent. But when asked who should be responsible for managing those investments, only 46 percent of the public overall (and 52 percent of young adults) said they felt comfortable handling it themselves.

Last month, Sen. Daniel Patrick Moynihan (D) of New York - a key figure in the last bailout of Social Security - garnered attention with a new proposal for fixing the program. His plan would convert the system to "pay as you go," by reducing the Social Security payroll tax by 2 percentage points and eliminating the trust fund. Workers would be allowed to invest the tax cut in voluntary private retirement accounts.

Senator Moynihan would pay for the tax cut by increasing income taxes, reducing cost of living increases for Social Security benefits, and raising the retirement age. In later years, the Social Security tax would increase again to cover benefits for retirees.

By involving the use of private accounts, Moynihan's plan represents a nod toward the "privatization" bandwagon - a point he made in a speech at Harvard University last month. And some Republicans have seized on the Moynihan plan as a sign of the inevitability of privatization. But in fact, Moynihan's proposal maintains the basic outlines of the current Social Security program, while adding an overlay of private accounts.

"A minimum retirement guarantee, along with survivors benefits, is surely something we ought to keep, even as we augment retirement income in other ways," said the senator, the top Democrat on the Senate Finance Committee.

Conservative question

Gary Burtless, an expert on Social Security at the Brookings Institution and a panelist at today's town meeting, compliments Moynihan for offering a "fiscally responsible plan," but he doubts conservatives will buy it, because of the increases in income taxes.

"He has done something that you can characterize as privatization, then it provides cover for your own plan, which may go further down the path toward reducing Social Security and setting up individual private accounts in its stead,"says Mr. Burtless.

Critics of the current system say Moynihan doesn't go nearly far enough. So far "none of the proposals per se are important," says William Shipman, co-chair of the Cato Institute's project on Social Security privatization and a principal at State Street Global Advisers in Boston. "What matters is that people have chosen to speak out."