Security slips through the safety net

Growing up in a family of 14 in Anderson, S.C., 60 years ago, Julia Searles knew firsthand about hardship.

To earn her $2 a week, Ms. Searles worked as a maid until after midnight and quietly bit her lip over abuse by her white employer. She remembers the numbing shame she felt at walking a mile to work, barefoot.

"Brother Hardship" still bedevils Searles: Each month the retired nurse scrimps by on a Social Security check of $510. "At the grocery store I have to put things back on the shelf because I don't have the money to pay for them," she says.

If current trends continue, millions of Americans who never knew Searles's kind of adversity in childhood could know it in old age. Social Security, say economists, is headed toward insolvency. And most Americans have savings so paltry that they won't get by in retirement without a severe cut in lifestyle.

There's a will, but still no way

Lawmakers have pledged to reform Social Security and defuse this most far-reaching domestic policy problem of the end of the 20th century.

The issue of reform pits Republicans against Democrats - a high-stakes, classic American conflict over how to balance individual rights with civic duties.

The two parties must reconcile the hallowed principle of private property with a moral imperative to repair the nation's most important social safety net.

President Clinton's impeachment casts doubt on expectations he will propose a scheme to reform social insurance in his State of the Union address on Jan. 19.

But even if Washington revitalizes the nation's most sweeping social welfare program, retirement security could still end up a mirage for millions of Americans.

"Social Security is just one aspect of the reforms needed in how we save for retirement," says James Smith, senior economist at the Rand Corp. in Santa Monica, Calif. "To focus only on Social Security [and disregard savings incentives and other retirement income initiatives] is a mistake."

The golden pinch

Indeed, several stubborn trends suggest that many Americans will still spend their "golden years" pinching pennies:

* Americans are living longer and retiring earlier. This means they are giving less to but demanding more from retirement savings.

* The coming retirement of the baby-boom generation fizzes like a "demographic time bomb." In just over three decades, the ratio of workers who pay into Social Security compared with those who draw out of it will shrink from 3.3 to 1 today, to 2 to 1.

* Companies are slashing pension-fund contributions. So employees must increasingly take charge of retirement planning and saving. Nonetheless, an increasing number of them believe employers are chiefly responsible for their retirement income, according to a survey by Merrill Lynch.

* Americans, feeling flush from a soaring stock market, spend more than they earn. Since September, they have drawn down their savings for the first time since the 1930s.

Back then, Americans tapped savings in order to slow a Depression-era plunge in living standards. Today, like the fabled grasshopper, they are spending in a headlong binge, disregarding the frugality of the ant, say economists.

"Thirty years ago saving was something you were supposed to do, it was good behavior, but now the idea of saving just isn't a part of many people's value systems," says Mr. Smith. Most people in their 50s, he says, have saved no more than $16,000.

A gap in the logic

Not all economists believe the living standards of Americans at retirement will topple into a yawning "savings gap."

"It's a very questionable conclusion," says Daniel Bachman, an economist at WEFA Inc. in Philadelphia.

Indeed, there is no evidence that a shortfall in retirement savings is any worse than for previous generations, he says.

Also, household net worth has swelled 89 percent this decade, he notes, quoting Federal Reserve figures.

Moreover, retirees are increasingly returning to work for part- or full-time jobs, thereby contributing more to Social Security.

At least 80 percent of the 75 million baby boomers - people born between 1946 and 1964 - plan to work at least part time after retirement, according to separate polls by the Gallup Organization and Roper Starch Worldwide Inc.

Explosive politics

But skeptics say most gains in household net worth this decade have gone to the wealthiest 10 percent of households. Others emerge with a paltry windfall at best. And there is no guarantee that retirees seeking work can overcome age discrimination and tight labor markets, they say.

"We've created a foolish fantasy: first, that most people have extra after-tax income to save and second, that they can work forever," says Karen Ferguson at the Pension Rights Center in Washington.

Without reform, she and others say, Social Security will falter early next century and fail to help millions of savings-poor Americans dodge poverty.

The program will fall in the red in 2013 and pay just 75 percent of promised benefits by 2032. Today, such a blow would be devastating to the 18 percent of senior citizens, like Searles, who rely solely on Social Security.

The cures seem obvious - boost taxes, cut benefits, or a mix of both. But the politics of changing such a keystone entitlement are explosive.

No easy solutions

Proposed reforms, none of them without controversy, include:

* Raising the retirement age.

* Cutting benefits for wealthy retirees.

* Curtailing cost-of-living adjustments.

* Privatizing.

The latter strategy involves channeling part of program funds into the stock market. Either the federal government would shift a portion of Trust Fund reserves from bonds into stocks, or workers would move proceeds from a reduced payroll tax into individual retirement accounts.

The "privatization" plans, however, are highly controversial.

The idea of the federal government investing in equities is, for many taxpayers, an anathema. Also, many fear exposing their retirement money to the whims of Wall Street.

Champions of private accounts try to dispel such fears by pointing to the success of Chile's 17-year-old program in privatization. (See story, above.) But they face a lot of skeptics, such as Searles.

People who want to change Social Security," she says, "don't know what hard times are like ... As hard as I worked, I don't want a penny of my money going into the stock market - it's far too risky there."

And Chile's system is not flawless. More than half the labor force is not enrolled. Administrative costs remain high. And limited diversity among state-approved stock funds means limited real choice for account holders, critics say.

"The bottom line is, there are lessons to be learned for the United States, says Eugene Steuerle, a senior fellow at the Urban Institute in Washington, "but it's far from a pure model."

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