Privatize Social Security? Nobody's Laughing Now

Conservatives long have dreamed about privatizing Social Security. They argue that the massive shortfalls projected in the 21st century for Uncle Sam's retirement system can be avoided only by giving back part of Social Security's annual $400 billion tax take to individuals to invest for retirement. But elected officials--afraid to touch politics' "third rail"--never paid much heed.

Until now. Social Security privatization is about to land on Washington's center stage--launched not by the GOP, but by a panel appointed by the Clinton Administration. The panel's explosive findings portend a battle that will make the fight over Medicare cuts look like a tea party.

In a report expected out by mid-February, five of the 13 members of the Advisory Council on Social Security will endorse replacing half of the retirement plan with Personal Security Accounts (PSAs). These accounts, funded by diverting 5% of wages from the 15.3% payroll tax, could be put in stocks, bonds, or other investments. Those funds are likely to pay a higher return than the benefits today's workers can expect from Social Security. The plan's goals: boost private savings and give Generation X workers proof that the system will exist when they follow baby boomers into retirement.

Two more panel members are likely to support requiring workers to set up small private accounts on top of the current system. So a majority of the group will back individual accounts. An advisory panel's findings aren't binding. But the recommendations will have clout, because they're the closest thing yet to an official endorsement for "an idea that was laughed out of town in the 1980s," marvels Dallas L. Salisbury, president of the Employee Benefit Research Institute.

STRONG LURE. No one's laughing now. At least three Washington think tanks are working on privatization studies. Securities, mutual-fund, and life-insurance interests are backing some of the research, drawn by the prospect of PSA balances that could hit $60 trillion by 2035. And while no action is likely until 1997, after the election, the idea is making waves in the campaign. GOP Presidential wannabe Malcolm S. Forbes Jr. has a privatization strategy, which front-runner Senator Bob Dole (R-Kan.) charges "would end Social Security as we know it." President Clinton is also unlikely to back the plan, though the Administration won't take a stand until the report is issued.

Why the ferment? Social Security will go broke during the baby boomers' retirement years. Although annual payroll taxes now exceed benefit payouts by $60 billion, the system's cash flow will turn negative sometime around 2014. By 2030, the cushion built by today's surpluses will disappear. Worse, those operating surpluses are now parked in Treasury bonds, which help mask the true federal budget deficit. By some calculations, the payroll tax on 21st century workers might have to nearly triple, to 40%, to fill the gap. "The one thing we all agree on is that the current system can't go on," says University of Michigan economist Edward M. Gramlich, chair of the advisory panel.

Another problem: Social Security no longer delivers the fat returns that past and current retirees have enjoyed. Today's 75-year-old single man can expect to get back all the taxes he and his employers paid, with interest--plus a 75% windfall. For today's 65-year-old, the lifetime windfall shrinks to 25%. But for boomers, the oldest of whom are just turning 50, "anyone earning average or above-average wages won't even get back his or her taxes plus interest," notes benefit consultant Sylvester J. Schieber of Watson Wyatt Worldwide. Schieber helped draft the Advisory Council's PSA plan.

Even Social Security's old guard, led by the system's patriarch, ex-Social Security Commissioner Robert M. Ball, recognizes the need to boost returns. Ball and five other advisers advocate letting the government invest part of Social Security's surplus in stocks. But even Democrats quail at allowing the government to own a multitrillion-dollar stake in Corporate America.

Private accounts pose problems, too. Under the PSA plan, anyone born before 1943 would remain in the old system, while workers born between 1943 and 1968 would face a mix of old and new benefits. To pay for already earned benefits during a 70-year transition, Schieber proposes a new series of "Liberty Bonds" backed by an earmarked 1% national sales tax. At their peak, in 2050, the bonds could boost the national debt by $10.2 trillion, $1.2 trillion in '96 dollars.

Defenders of the system figure that huge price will kill privatization. They bet Congress will repeat the Social Security reforms of 1977 and 1983 by raising taxes and the retirement age and trimming benefits. "This system needs adjustment, but it's not fundamentally broken," says a White House aide.

Backers contend that tinkering isn't enough. "If you tell the American public: `You can have a secure, funded pension, and the cost is a 1% sales tax,' they're going to think that's a pretty good deal," says Schieber. Bargain or not, that deal will soon be on the table.

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