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President Ties Program's Future to Stocks

Clinton President Clinton addresses Congress Tuesday night. (Tracy A. Woodward — The Post)

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  • By Amy Goldstein and George Hager
    Washington Post Staff Writers
    Wednesday, January 20, 1999; Page A1

    The path the White House laid out to preserve Social Security for the next half-century would bring about the most fundamental change in the program's history by hinging some of the nation's retirement system on the earning power of the stock market for the first time.

    But the proposal President Clinton set forth last night also reflects a relatively centrist approach, including various elements that appeal to both Democratic and Republican tastes, while rejecting the most extreme ideas that have surfaced lately for improving the economic well-being of the elderly.

    The largest part of the plan would pour nearly two-thirds of the federal surplus into Social Security over the next 15 years, and invest a portion of that money in the market. While shifting some money into stocks, this approach would satisfy liberals by leaving intact the program's basic character as a safety net that provides a guaranteed monthly retirement check to all Americans.

    The other part of the initiative would create a new type of individual savings program, devoting $500 billion from the federal surplus to give most working people seed money to open their own retirement accounts. The government also would help match people's personal investments as they built up those accounts over time, giving more money to those with low incomes. This approach might satisfy GOP desires to rest more of the nation's retirement system on private savings accounts, though it would not go so far as to privatize the Social Security system itself.

    Proposal at a Glance: Trust Funds
    Use 62 percent of projected budget surpluses over the next 15 years, more than $2.7 trillion, to bolster Social Security's cash reserves.

    This would extend the fund's solvency by more than 20 years, to 2055. Clinton wants to make the fund solvent until 2075, but doing that would require tougher measures, such as cutting benefits or increasing eligibility age.

    Invest one-quarter of transferred surpluses in the stock market.

    Savings Accounts
    Create subsidized retirement savings accounts with an additional 11 percent of the projected surpluses, about $500 billion.

    The government would provide equal dollar contributions to these accounts for most Americans.

    Additional amounts that individuals put into these accounts voluntarily would be matched by the government, with larger matches going to those with lower incomes.

    In setting forth this two-prong framework, Clinton's plan goes far beyond what the White House had hinted that it might do in charting a course for the future of the nation's biggest and most popular social program. While Clinton has made clear that he considered a long-term solution to Social Security his main domestic priority this year -- and while Republicans have prodded him to put forth his own plan -- his aides for months have said the president was reluctant to take the lead this early in the debate. Now, politicians and policy analysts alike said yesterday, the president has framed the terms of an issue that is likely to provoke the year's biggest legislative battle.

    As Clinton delivered his speech last night, his mention of Social Security drew a generally enthusiastic response. But earlier in the day, details of his initiative sparked a partisan war of words on Capitol Hill. Democrats largely praised the idea as a sound basis for negotiations. But like many Republicans, House Ways and Means Chairman Bill Archer (Tex.) denounced the idea that the government would manage stock market investments. "If you thought a government takeover of health care was bad," Archer said, referring to Clinton's failed health reform plan of his first term, "just wait until the government becomes an owner of America's private-sector companies."

    From the White House vantage point, the proposal addresses two-thirds of what Clinton has frequently called the "three-legged stool" required for retirees to be economically secure: employer-sponsored pensions, individual savings and Social Security.

    The plan Clinton laid out is the most recent phase of an effort he began a year ago to find a way to safeguard the long-term future of Social Security -- and to make reform of the nation's largest entitlement programs, including Medicare, a part of his legacy.

    In last year's State of the Union address, he challenged Congress not to spend any of the budget surplus until the government dealt with Social Security, an idea resented by many Republicans who favor using at least a portion of the money for a tax cut. Clinton then began to try to galvanize public support to restructure the retirement system by convening a series of "town meetings" and a White House conference last month.

    Started in the depths of the Depression in 1935, Social Security is expected to run out of money when the trust fund that pays retirees' checks is depleted in the year 2032. The program is funded through payroll taxes and right now has more money coming in than it pays out to retirees. But that will change once the baby boom generation begins retiring in about a decade.

    With the shift of $2.7 trillion from the projected surplus to the trust fund, and the expected higher earnings from the stock market, the White House estimates the program would remain solvent until 2055.

    Clinton said he would like to find ways to make the program last until 2075, but White House officials did not name any of the more painful steps that would almost certainly be required to do that, such as cutting benefits or making people wait longer to enter the program.

    In fact, the White House plan would make the basic program more generous and presumably slightly more expensive. It would increase benefits for widows and eliminate a provision that now phases out Social Security payments for beneficiaries who continue to work and earn more than a specified amount.

    The administration did not specify exactly how much money the government would give people for their private savings accounts, which would be funded using 11 percent of the budget surplus over the next 15 years. The basic idea is that the government would give a flat sum to everyone who decided to open an account. Then, trying to address liberal beliefs that the poor deserve more help, the program would create a sliding scale to match some or all of the personal money that people invested in their accounts.

    Gene Sperling, Clinton's top economic aide, said that the program would not be available to those with the highest incomes but that most working families would qualify.

    Even relatively liberal policy experts who praised the concept said it had a flaw. "My biggest concern is, how do you keep such a program going if the surplus goes away?" said Marilyn Moon, an Urban Institute economist and public trustee of the Social Security system.

    The idea of market investments is intended to take advantage of the higher returns that stocks tend to earn -- substantially more than the Treasury bonds in which Social Security trust funds traditionally have been placed.

    White House officials said that by having the government rather than individuals make the investments, they guarded against concerns that Wall Street is a riskier proposition than Treasury securities. And by investing only a fraction of the surplus, they tried to address fears that massive federal investments could distort the stock market. Yet some critics suggested yesterday that the government still could end up enriching certain investors or companies.

    © Copyright 1999 The Washington Post Company

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