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Social Security

Hope For Social Security

By David S. Broder
Wednesday, April 15, 1998; Page A19

It is far too early to forecast victory, but a number of political, economic and psychological factors are pointing to the growing possibility of a historic deal next year to preserve Social Security for the next generation – and very possibly improve it.

The prospect of a healthy budget surplus – maybe $50 billion or more this year and even more the next – means that money likely will be available to cushion the costs of transition to a new retirement system for the 76 million baby boomers soon to reach their "golden years."

The response in both parties to President Clinton's call for a bipartisan solution to Social Security's boomer burdens has been positive. Members of Congress have been finding much of the public is ready to consider possible changes in the most popular of government programs.

The first of four presidential forums on Social Security produced agreement in Kansas City reaching from liberal Democratic Rep. Earl Pomeroy of North Dakota to conservative Republican Sen. Rick Santorum of Pennsylvania that any new system must continue to guarantee support for widows, orphans and the disabled plus a universal benefit sufficient to keep every retiree out of poverty. Within that framework, everyone who participated was receptive to adding a lifetime savings program that would, as Clinton said, "give all people some wealth-generating capacity."

That kind of package is about to be tried in Canada. On April 1, legislation took effect there to allow billions of dollars of Canadian Pension Plan funds to be invested in the stock market in hopes of improving retiree pensions. And here at home, the retirement program for federal workers is showing how well such an approach can pay off.

Today, 90 cents of every dollar being paid in Social Security taxes goes out the door immediately to pay someone else's retirement or disability benefits. The rest is invested in government bonds – offering a great deal of safety but a rather low return.

Many proposals before Congress would allow some portion of those taxes to be invested in equities, either by the individual worker or by a government-directed board. The Canadians, after two years of public debate, have chosen the latter option.

The law now taking effect will gradually increase the reserve fund, currently equal to about two years of benefits, up to four or five years. Previously, all reserve funds had been invested in bonds issued by Canadian provinces. In the future, surpluses not needed for that purpose can go into stocks. It's estimated that within 10 years the stock fund will grow to as much as $76 billion and secure a return almost 4 percent above the rate of inflation.

Sen. Daniel Patrick Moynihan of New York, who has offered his own Social Security reform, has expressed concern that any such scheme in the United States would tempt politicians to treat the huge pool of money as a new pork barrel. But the Canadians have devised an ingenious scheme for insulating the investment decisions from political influence while maintaining accountability. To ensure wide political and geographic representation, professional investment managers will be hired by a 12-person board of directors, with financial expertise of their own, appointed by the Canadian finance minister in consultation with his provincial counterparts. For the first few years, investments will be restricted to index funds mirroring the Canadian stock market, but after that, the board will have broader discretion.

Despite the effort to minimize political influence, controversy already has arisen about a provision in the new law that no more than 20 percent of the funds may be invested outside Canada. Some critics argue the money should go wherever the prospect of returns is greatest.

Another possible approach is working well for U.S. federal workers. Almost all those hired since 1983, when new government employees were brought into the Social Security system instead of the more generous federal retirement plan, have chosen to supplement their Social Security benefits with a voluntary savings program. They can choose an ultra-safe government bond fund, a somewhat more risky corporate bond fund or a more speculative stock fund. For the last seven years, according to figures reported by The Post's Mike Causey, the first fund has averaged a bit less than 7 percent annual return; the second, slightly more than 8 percent; and the third, more than 25 percent.

All this suggests a number of workable options are available for guaranteeing and improving Social Security. If the political will is available, next year could see that landmark government program become a firmer safety net and also a generator of new family wealth. As William Galston, a University of Maryland social philosopher and former Clinton aide, says, no other achievement could do more to help rebuild public confidence in politics and government.

© Copyright 1998 The Washington Post Company

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