Social Security debate heats up

The debate over Social Security's future is hot.

Expect it to get hotter.

The new frenzy should start with a White House conference on the topic Dec. 8-9 and it should intensify with the promise from Speaker-elect Bob Livingston, the Georgia Republican, that Social Security reform will be the first order of business in the new Congress.

"Everyone assumes it is building up to a real battle," says Dean Baker. The Economic Policy Institute economist supports the present pay-as-you-go system, with relatively minor changes. He opposes privatization of the system with individual retirement accounts.

One key missing element in the struggle for public support is the position of President Clinton. Other than expressing a dislike for higher payroll taxes, the president has said little.

It's rumored that Mr. Clinton will wait until his State of the Union message next year to make his case.

Opinion polls show that the public trusts Democrats more than Republicans to deal properly with Social Security, putting Republicans in a political bind. If they unite on a plan, it could be attacked soon by Democrats.

Journalists writing on Social Security are bombarded daily with faxes and e-mail from one side or the other of the debate.

Earlier in the year, the pro-privatization forces, often financed by Wall Street, dominated the debate, at least in volume.

Nowadays, they are having a harder time of it. The Cato Institute, which has a special multi-million dollar Project on Social Security Privatization, has had to frequently rebut defenses of the system.

For example, a Business Week editorial says, "A modest, long-term problem is being hyped into an impending catastrophe," and "privatization doesn't work without faster growth, and with faster growth, it isn't needed."

Cato responds that the current system "is the least desirable place for anyone to put their retirement money."

A Washington Post editorial calls privatization a "riverboat gamble."

Cato says the present system is "headed for collapse."

So far, public opinion polls show Baby Boomers remain worried that the system won't provide much of a pension for them.

To Mr. Baker, such fears are groundless. Last week his Washington think tank issued a report suggesting three modest steps to assure the adequacy of the system. One change would raise the cap on wages subject to Social Security taxes from $68,000 to $97,000, taxing the growing prosperity of the well-to-do.

Baker also blasted various privatization schemes, which differ widely.

William Shipman, a co-director of the Cato project, has on occasion debated Baker, AFL-CIO officials, and other defenders of the present system.

In an interview, he outlined a privatization proposal that attempts to deal with various criticisms.

Shipman's plan would put 5.3 percent of the pay of workers who chose to do so into the private financial market. He or she could choose between three giant pooled funds run by the Social Security Administration. One would invest 60 percent in stocks, 40 percent bonds. Another would have a greater proportion of stocks, a third tilted toward bonds and other fixed-income securities.

The government would then farm out investment of chunks of these funds to perhaps dozens of private professional money managers, much as big private pension funds do today.

This would be a competitive process.

Workers would have a choice of three funds. But they wouldn't manage their own individual account beyond that. This would avoid the risk of someone having a fling at pork-belly futures or some other hazardous investment.

The Social Security Administration would keep the records of each individual's account. And it would assure a pension that replaces 42 percent of final income at retirement if a person's account can't do that.

Such a fall-back would be rare, Shipman says, since a 60-40 investment mix has given a nominal 8.8 percent average annual return in the last 70 years.

Baker challenges that forecast.

If the economy grows at a historically slow 1.4 to 1.7 percent in the next 75 years, as seen by the Social Security trustees, the return will be a real 3.6 percent - before expenses of managing the money, he says. If it grows faster, today's system will be much closer to solvency. So few changes will be needed.

For low-income people, the Shipman plan's fall-back measure could mean a cut in pension benefits, warns Baker. And there are market risks.

Shipman argues that a privatized system would give workers a choice. "All the richness of creativity and ideas for investment in the private economy would be harnessed for those who choose a market account," he says.

The debate continues.

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