Reformers wrangle over Social Security tack, timeline

Bill Clinton's liaison with Monica Lewinsky not only exploded into partisan warfare in Washington and impeachment by the House. It also probably blocked Social Security reform efforts.

"It's hard to rerun history," notes Jeffrey Frankel, who was a member of President Clinton's Council of Economic Advisers. Nevertheless, Mr. Frankel suspects that Clinton might have succeeded in reaching a deal with congressional Republicans that would have set up individual private accounts as part of a grand Social Security package.

"The stars were aligned briefly - until Monica came along," says Frankel, now at Harvard University's Kennedy School of Government.

Though Clinton was able to zero in on government affairs while fighting impeachment, Congress was too tied up in the partisan wrangling to tackle the issue.

Now President Bush is trying to overhaul Social Security to include individual investment accounts. With the politically crucial election for control of Congress coming up next year, his prospects are not good.

Further, his huge tax cut - $1.7 trillion over 10 years if extra interest costs are included - has spent most, if not all, of the federal budget surplus (outside of the surplus in the Social Security account) that might have been used to grease the way for changing the system.

A study released last week by the Center on Budget and Policy Priorities calculates that the tax cut, assuming its provisions are extended indefinitely into the future, would be more than double the shortfall in revenues needed to fund Social Security over the next 75 years.

This shortfall arises from the demographic bulge in the number of retirees as baby boomers start collecting their pensions.

"The tax cut," notes the Washington think tank, "consumes non-Social Security resources that are likely to be essential to the development of a politically viable package of reforms to restore Social Security solvency."

On the same issue: "It is hard not to be disappointed that the opportunity to pre-fund future retirement and health benefits was not seized," conclude three economists that played a role in Clinton's Social Security policy group. They presented a paper on Clinton's fiscal policy at a Harvard seminar in June (www.ksg.Harvard.edu/cbg/).

The first report of Bush's Commission to Strengthen Social Security has stirred up a political storm. A fundamental issue behind the debate is whether Americans should pay extra taxes now, or accept reduced benefits later to increase the well-being of future generations of workers.

By 2038, when the Social Security Trust fund is expected not be fully able to meet its payments, Americans should be at least 30 percent better off. That's because the normal increase in productivity - at least 1 percent a year - soon raises living standards.

Even if no changes are made, the economic predictions behind the sober economic outlook in the report of the Social Security trustees prove correct, and retirees don't get the full benefits promised, their pensions or disability payments would still be higher in real terms than those paid today.

Alternatively, if future workers pay higher taxes to provide the benefits promised their retired mothers and fathers, they would still enjoy much greater affluence than today's workers.

What would be needed to fully deliver those benefits would be a gradual hike in the payroll tax from 12.4 percent (combined employee and employer) now to about 18.4 percent - a modest shrinkage in the much higher incomes of the future generation.

The counter argument holds that tackling the Social Security deficit today rather than tomorrow will increase national savings and thus provide the investment money that improves living standards of tomorrow's workers.

Even that is not certain. The United States has just seen hundreds of billions of dollars of excessive investment in dotcoms and telecommunications.

"It is very difficult to predict whether a given Social Security reform plan will actually boost national saving," add the three former Clinton administration officials (Douglas Elmendorf and David Wilcox, now at the Federal Reserve Board, and Jeffrey Liebman, now at Harvard).

One key reform issue is whether private accounts, similar to 401(k) plans, are added on top of the present system, leaving present benefits mostly intact, or whether they are carved out of the present system, reducing the assured benefits of about $900 a month for most retirees.

Clinton, notes Professor Frankel, would have blocked any "carve-out." He and his policy group were concerned about the little guy.