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Hill Weighs Stock Link For Social Security

By Clay Chandler
Washington Post Staff Writer
Monday, April 27, 1998; Page A01

Long dismissed as politically unthinkable, the idea of "privatizing" Social Security is gaining ground, raising the prospect that the Depression-era federal retirement program will be tied, at least in part, to the ups and downs of the stock market.

Only a year ago the privatization issue fragmented a special advisory panel that was to devise a rescue plan for the financially troubled insurance program. Now Democrats and Republicans are offering competing proposals that would establish personal retirement accounts for seniors and divert some of the billions of dollars collected in Social Security payroll taxes into stocks or other private investments.

Any shift toward privatization would be a sharp departure from the federal government's longtime policy of distributing benefits to retirees according to a fixed formula, based on earnings history and family status, and investing the Social Security trust fund solely in risk-free government bonds.

Attempts to make such basic changes in Social Security once were considered politically suicidal. But three months ago President Clinton used his State of the Union address to launch a nationwide debate about restructuring Social Security. And in fashioning solutions, politicians have become emboldened by the public's growing ardor for stocks and its skepticism about the solvency of the system as it now is configured.

House Speaker Newt Gingrich (R-Ga.), House Budget Committee Chairman John R. Kasich (R-Ohio) and Sen. Phil Gramm (R-Tex.) this month each floated separate proposals that would use projected budget surpluses to fund personal retirement accounts that would supplant benefits from the existing Social Security program.

From the Democratic side, Sen. Daniel Patrick Moynihan (D-N.Y.), the ranking minority member of the Senate Finance Committee, and Sen. Bob Kerrey (D-Neb.) have introduced a plan that would cut Social Security taxes by two percentage points and leave it to individual workers to decide whether to invest their tax savings for their retirement or spend part of it as they choose.

A sign of the changing mood came this month when Henry Aaron and Robert D. Reischauer, economists at the liberal Brookings Institution who have been among the most vocal defenders of the traditional Social Security system, called for creation of an independent federal retirement board charged with increasing returns from the Social Security Trust Fund by investing some of that money in the private sector. Many observers viewed their announcement as a tactical effort to blunt the appeal of more conservative proposals.

"I think it's fair to say that every plan that's out there right now incorporates some form of investment in the market in order to avoid deeper benefit cuts or sharper tax increases," said John Rother, legislative director of the American Association for Retired Persons. "The main differences in the plans are how they structure that investment."

The idea of shifting Social Security funds into the financial market worries champions of the current system, including some Clinton administration officials. They point out that the sudden enthusiasm for privatization comes at a time when many analysts believe U.S. stock prices to be dangerously overvalued. And many fear that once Social Security starts down the road of privatization the process may prove difficult to stop.

The program, they fret, might become viewed by the public as just another investment vehicle, which would undermine its broad communal appeal and threaten its role as a mechanism for insuring the elderly against poverty. Privatization foes also argue that workers would be swamped with complex retirement planning duties and seniors would be left at the mercy of a volatile stock market that won't necessarily continue its record of outperforming government bonds.

AFL-CIO legislative strategist Gerry Shea dismisses the recent burst of enthusiasm for privatizing Social Security as a strictly inside-the-Beltway phenomenon. "There is a huge disconnect between the thinking in Washington and attitudes in the rest of the country" on the issue, he contends.

Other key players in the debate discern a fundamental shift in worker attitudes about a social insurance system that, since its creation in 1935, has been regarded as the most popular federal program ever devised.

With the U.S. economy now in its eighth consecutive year of expansion and unemployment holding steady at its lowest level in a quarter century, Americans seem increasingly confident of their ability to take care of themselves.

At a time when the Dow Jones industrial average stands at more than 9000 and many Americans take it for granted that they will earn high returns from their mutual funds, more of the nation's 125 million workers are beginning to view their forced participation in Social Security as a rotten deal.

Conservatives and Wall Street investment firms have fanned dissatisfaction with the program by drawing attention to government projections that the Social Security Trust Fund will go bankrupt by 2029 as members of the baby boom generation, the 76 million Americans born from 1946 to 1964, reach retirement.

"A majority of non-retired adults do not think they will get Social Security at all," Moynihan said. "So if you raise the proposition of changing the system with them, it's not going to drive them crazy. To the contrary – they say: "You'd better damn well do something."

Eight in 10 Americans expressed support for the idea of private Social Security accounts, according to a recent survey by the Associated Press. Among young Americans ages 18 to 34, support was almost 90 percent.

Best known as a retirement program, Social Security also supports workers who become disabled and the survivors of deceased workers. In 1995 43.4 million people received Social Security benefits averaging $649 per month. The program is funded through a 12.4 percent payroll tax on wages and salary paid jointly by workers and their employers up to a maximum of $65,400.

The Treasury now collects about $100 billion more each year in payroll taxes than it pays out to Social Security beneficiaries. But the surplus will evaporate over the next three decades as the proportion of workers to retirees begins to decline. There are about 3 workers for every 1 retiree today; the ratio is expected to drop to 2 to 1 by 2030.

Until recently that arithmetic forced politicians to contemplate chopping benefits or raising taxes to keep the system solvent in the long run. Now, the allure of high returns from stocks is transforming what was essentially a zero-sum debate and providing politicians with options for changing the system that seem virtually painless.

In internal White House discussions, some of Clinton's economic advisers, among them Treasury Secretary Robert E. Rubin, have expressed misgivings about even partial privatization of Social Security. But so far Clinton, who is seeking to portray himself as a honest broker in the debate, has refrained from criticizing the idea in public.

At a Social Security forum in Kansas City, Mo., earlier this month, Clinton rejected the idea of complete privatization. But he surprised many Democrats by signaling his willingness to consider personal retirement accounts and proposals that would shift Social Security money into the stock market. "Could you construct some system which also made allowance for private accounts?" Clinton asked. "I think you could, yes."

Leaders of the AARP, the powerful seniors' lobby invited by the White House to co-sponsor the Kansas City forum and three others like it later this year, also have held their fire. "I think the [personal retirement] accounts are important to take a look at," AARP executive director Horace Deets said in a recent appearance on CBS-TV's "Face the Nation."

But the administration's "let-a-thousand-flowers-bloom" approach has many of the Democratic Party's core supporters fuming. In his effort to seem even-handed, critics charge, Clinton is allowing advocates of privatization to define terms of the Social Security debate before it has even started.

"What you have is one side that's been out there very effectively making the case [for privatization] and the other side that doesn't have its act together," said Dean Baker, senior economist at the liberal Economic Policy Institute. Conservatives and Wall Street investment banks "are out there undermining confidence" in the existing Social program, while congressional Democrats are "sitting on their hands."

Clinton aides reject the suggestion that the White House has lost control of the issue, arguing that a spirit of bipartisanship is even more necessary for Social Security reform than it was in negotiating last year's balanced budget deal. "It's not that the administration doesn't have a view about all this," a top Clinton aide said. "But at this point, our biggest enemy is litmus tests – Republicans saying we absolutely have to have personal accounts, Democrats saying we absolutely can't have personal accounts. The main thing now is to prevent people from getting completely locked in."

Meanwhile, House minority leader Richard Gephardt (D-Mo.) is preparing to step into the void. In an interview last Friday, he praised Clinton for encouraging a public discussion about how to rescue Social Security, but promised a Democratic alternative to the many conservative privatization plans now on the table.

"Very soon the vacuum will be filled," he said. "I have been working on this a lot, talking to people I respect. I hope to be able to come forward soon with some ideas that will add to this discussion."

Many analysts believe the public could easily sour on the idea of privatization once its implications have been more thoroughly aired.

"When people start to get up close and personal with some of these proposed changes, things may start to get a whole lot nastier," Brookings' Reischauer said. Still, he conceded, "Right now, it is hard to imagine a solution that doesn't rely on investment in the market in some form."

© Copyright 1998 The Washington Post Company

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