How We Can Fix Social Security

A quarter-century of writing and editing analyses of Social Security had convinced me that no one would cobble together even a jury-rigged fix for the system until five minutes before the first pension check bounced--if then. But now President Clinton really has put "saving Social Security" at the top of the nation's domestic agenda, sparking a debate unprecedented in its intensity. So maybe...

Then again, maybe not. A good deal of the debate is confused, ideologically envenomed, or both. Left and right squabble furiously over the latest idea--totally replacing Social Security with a system of individual investment accounts. Now, even this market-based approach is being shelved by its Republican proponents, who have become fearful of the political risks.

Some people think wishfully that rapid economic growth will enable the Social Security system to muddle through pretty much as is. Others talk in either-or terms--either funnel most future budget surpluses into Social Security and invest some of that money in the stock market, or increase Social Security taxes and modestly reduce benefits--and the problem will be solved.

Sorry, but it won't wash. The size of the gap between Social Security tax collections and pension payouts over the next 30 or so years, and how far any specific proposal would go toward closing that gap, are still anybody's guess. And those guesses depend on such variables as the speed of economic growth, the future pace of inflation and the course of the stock market--all notoriously difficult to predict even a year ahead. Estimates clash so sharply as to invite suspicion that they are shaped more by political bias than by analysis.

But it is possible to indicate orders of magnitude. Currently there are a bit more than three taxpaying workers supporting one retiree. By the 2030s, when the tidal wave of baby-boomer retirements crests, there will be only two. Somewhere around 2014, the system is expected to be paying out more in benefits than it collects in taxes, forcing Social Security to start cashing in the Treasury bonds in its trust fund, whose assets are now more than $760 billion. By 2034, that too will be gone, and taxes will cover only an estimated 71% of annual pensions.

One estimate is that under present tax and benefit schedules, the Social Security system would plunge $6.9 trillion into debt between 2014 and 2034. If that is accurate, Clinton's 1999 budget proposals, which are supposed to pump $2.7 trillion into Social Security during the next 15 years, would close less than half the initial gap. Further reforms would be needed to keep revenues in balance with payouts after 2034. Also, the present system contains some glaring inequities that ought to be corrected--at the cost of making the fiscal gap even wider. No one proposal will probably come near to filling it. What is needed, in my opinion, is a comprehensive program, summarized by these commands:

PLAY THE STOCK MARKET. By now there is wide agreement that stock and bond markets could in effect pay much of the nearly 30% of pensions that Social Security taxes will eventually no longer cover. But who should invest how much of the system's money? Clinton's proposal to have the government do the investing is a poor second best--and not only because of the danger of political manipulation of business. More fundamentally, individuals ought to have some say in how to invest money that the government taxes away from them. Redirecting some Social Security money into individual investment accounts would have social benefits too. It would give many of the 60% of Americans who have yet to share in the stock market boom the starting capital to join the party--and perhaps the only chance they will ever get to begin accumulating some wealth.

All this assumes, of course, that financial-market investments will continue to provide an attractive return. That seems reasonable, at least in the long run. Martin Feldstein, president of the National Bureau of Economic Research, calculates that a portfolio 60% of which is invested in stocks and 40% in bonds would grow on average 5.5% a year. That represents the actual average from the end of World War II until today, minus an allowance for administrative costs. By contrast, the special Treasury bonds that, by law, Social Security must now buy with any spare cash it has may yield on average less than 3%.

But many pensioners, present and future, would be terrified of having their retirement income depend heavily on the short-term ups and downs of Wall Street. They would have to be guaranteed a fairly high pension still paid out of regular Social Security taxes--currently 12.4% of each employee's wages, split between worker and boss--no matter what.

A Senate bill written by Democrats Daniel Patrick Moynihan of New York and Robert Kerrey of Nebraska would allow workers to divert 2% into investment accounts but would lower guaranteed benefits to what could be financed out of the remaining 10.4%. Feldstein has an even better idea: keep present tax and benefit rates but have the government deposit into individual accounts an additional 2% of each worker's earnings, up to the prescribed annual taxable limit. On retirement the worker would repay Uncle Sam $3 of every $4 he or she had in the account. Taxpayers under this scheme might earn somewhat less, in total, than under Moynihan's plan--though that one-fourth share could add up over decades. On the other hand, they would run little if any risk of losing anything, and the government would eventually gain a new and potentially major source of revenue to help pay the guaranteed pensions.