Privatize Social Security?

Soon, the question may not be whether, but how much

On Apr. 7 in Kansas City, President Clinton kicks off a series of town meetings to discuss the plight of the Social Security system, which some economists fear could be tapped out by 2030. Clinton, who called for Congress to allocate anticipated budget surpluses for a Social Security fix during his State of the Union address in February, has now found a surprising ally in House Speaker Newt Gingrich. On Mar. 5, the Speaker urged fellow Republicans to postpone income-tax cuts and make Social Security salvation their crusade this election year, too.

Although there is no consensus yet on how to solve the Social Security mess--or whether a heroic rescue is actually needed--Democrats and Republicans are both talking about some form of privatization. Indeed, the politics of the issue are coming down to a debate over how much privatization is justified, rather than whether any is appropriate at all. Wall Street interests, not surprisingly, are pushing for the maximum, since privatization would bring a new flood of money into mutual funds, bonds, and other investments.

Under one compromise scenario, about 21% of one's annual Social Security tax payment would be handed back to the individual for investment in stocks and bonds. Like a 401(k), the account would be subject to the upticks and downturns of the markets. But proponents argue that given the long-term record of rising equity markets, the potential for impressive returns would more than make up for the additional risk.

BUSINESS WEEK's Michael McNamee and Christopher Farrell take up the opposing sides of the debate. McNamee argues that a system of partial privatization would be the best solution. Farrell says the transformation of Social Security from a social safety net into a more risky investment system would violate the founding principles of the program and unnecessarily risk the monthly retirement checks that those most in need depend on.

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