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Social Security

Panel Suggests Bold Changes for Social Security

By Spencer Rich
Washington Post Staff Writer
Tuesday, January 7, 1997; Page A01

A deeply divided Social Security advisory council yesterday put forth several drastic and controversial changes to the giant retirement system as a means of saving it from the severe financial shortfalls it faces starting in the next century.

In its final report, two of the council's conflicting factions proposed radical privatization that would substantially reduce the scope of the current Social Security system and instead require workers to invest money in personal investment plans similar to a 401(k). The third plan also allows as one possibility some investment of payroll tax revenues in private securities, but with the government, rather than individuals, making the investments.

The 13-member commission was appointed two years ago to study ways to bring the retirement system into financial balance over the next 75 years, so that the amount of money collected through payroll taxes doesn't exceed what is paid out in retirement benefits. Although major legislation in 1983 put the system into projected balance through the middle of the next century, that projection has eroded because of the impending retirement of the huge baby boom generation, the fact that people are living longer and an economy that is growing slower than projected.

While there has been keen interest in the report, both in Washington and on Wall Street, whether or not Congress will attempt to adopt any of the recommendations is unclear. Making changes to Social Security is so fraught with political peril that it is often called "the third rail of politics," and as a result legislators have been reluctant to propose dramatic changes to its structure. And no matter what direction Congress moves in in the upcoming session, it is likely first to tackle the more immediate Medicare financing problem, because the date of future Social Security shortfalls is still far off, 2029.

In its long-awaited report, the advisory commission never agreed on an overall plan to address Social Security's problems, dividing instead into three factions that have some points in common but differ significantly on many fundamentals.

Both the two groups that are proposing individual investment plans would cut future Social Security benefits sharply and at the same time raise Social Security payroll taxes substantially. One plan, sponsored by council chairman Edward Gramlich, would increase payroll taxes on workers by 1.6 percentage points a year, or about 25 percent more than what they pay now. That extra money would then be diverted into personal retirement accounts.

The other privatization plan, sponsored by Sylvester Schieber, would require workers to put about 80 percent of their current payroll tax into these individual investment accounts. It would also raise the payroll tax 1.52 percentage points.

The money in the individual accounts would be invested in stocks, bonds and other financial instruments chosen by the workers themselves on the theory that the eventual return to the worker from these investments would be larger than if the money were kept in government bonds, where average yields over time are less.

The third proposal, backed by the six Social Security traditionalists on the council who make up the largest bloc, would maintain the current benefit structure essentially as it is, but make certain small changes and raise some taxes, though not the payroll tax. They would then have lawmakers decide on further steps to close the coming gap between revenues and expenditures. One of these adjustments might be a payroll tax increase but the other might be having the government invest a portion of the Social Security money it now collects in the private market in order to capture higher returns.

Although this last notion of investing money on Wall Street sounds like "privatization," former Social Security Commissioner Robert Ball, who heads this faction, said it is far different from the other two proposals because it is the government that would do the investing and because the proceeds would be used to help cover all the benefits. Their plan, they argue, would not have the inherent risks of the more radical privatization plans.

The strong feelings and the sharpness of the issue were quickly illustrated yesterday. A few moments after the council released its two-volume 752-page report, the six traditionalist members, including Gerald Shea, assistant to the president of the AFL-CIO, held a news conference to denounce the two "privatization plans" and to promise a major political coalition to kill them.

"Our plan will stabilize Social Security for the next 75 years without the huge tax increases and benefit cuts required by the twin Wall Street privatization schemes being advanced by other members of the advisory council," said Shea.

The members of this bloc argue that the privatization schemes would tear the existing system to pieces, as well-to-do workers skilled at investing would increasingly pressure the government to let them divert their entire payroll tax contribution into their privatized accounts, leaving insufficient funds to finance the basic system.

Critics of the privatization plans also complain that there could be severe financial consequences for those who invest poorly, or who retire when the market is in a temporary lull. These proposals, critics argue, would also be a multibillion-dollar boon to the investment banking firms that would manage these individual retirement accounts.

Although the council split on major changes, it agreed on maintaining cost-of-living adjustments as determined by the federal government and on maintaining the retirement system and its benefits for everyone regardless of income.

Several of the political leaders who would have a hand in enacting any changes to Social Security revealed little about how receptive they were to the ideas put forth.

"We have not committed to any specific idea of how you would go about addressing these questions," White House press secretary Michael McCurry said.

House Ways and Means Committee Chairman Bill Archer (R-Tex.) said he would be willing to work with the president on structural changes in retirement programs but did not give any details. Senate Finance Committee Chairman William V. Roth Jr. (R-Del.) said the fact that all blocs on the council favored the possibility of some type of investment in the market place is a "very important development" but went no further. However, Sen. Bob Kerrey (D-Neb.), long a supporter of individual privatization, called for action soon on the concept.

© Copyright 1997 The Washington Post Company

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