Social Security Heads For Wall Street

When "privatization" surfaced 18 months ago as a way to fix Social Security, skeptics dismissed it as a fringe notion peddled by right-wingers out to dismantle the New Deal's greatest legacy. But no one is shrugging off the idea anymore. President Clinton and Congress are scheduled to negotiate a long-term funding solution for Social Security early next year, and their overhaul almost certainly will include private savings accounts that working Americans can invest in stocks and bonds.

Pols across the spectrum are climbing on board. House Speaker Newt Gingrich (R-Ga.) has made private accounts a top budget priority. A bipartisan commission endorsed them on May 19. And they will probably be a hot topic when Vice-President Al Gore chairs a Social Security town meeting in July.

YIELD GAP. What has shot personal accounts up the list of reform options? Two things: the bulging budget surplus and the stark contrast between double-digit stock-market gains and the retirement system's puny 2.7% return. With the Treasury expecting $1.5 trillion in surpluses over the next decade, Washington sees a painless way to finance private accounts, which would let workers control a portion of the tax money withheld from paychecks for retirement.

"I see lots of $6- and $8-an-hour workers managing their own retirement funds," says Senator Bob Kerrey (D-Neb.). "[Private accounts] are what the American people are coming to expect." Kerrey is eyeing a 2000 Presidential bid built around the idea of using private accounts to generate wealth for low-income Americans.

The momentum behind privatization worries some Clintonites. The President, who is hosting a June 4-5 White House summit on retirement, is open to individual accounts. But Treasury Secretary Robert E. Rubin, concerned about the effect of a market downturn, is still cool to the idea.

Other Clinton advisers fret that privatization's rise could trigger a liberal counterattack. Clintonites are anxiously awaiting reform plans from Senator Edward M. Kennedy (D-Mass.) and House Minority Leader Richard A. Gephardt (D-Mo.). If they embrace the traditional solution of shoring up Social Security with payroll-tax hikes, they could turn reform into a partisan issue in the fall elections and sink Clinton's hopes of cutting a deal. The White House is also watching whether Democrats will rally behind the option of letting the government invest the Social Security trust fund in stocks.

While the opposition has been quiet, privatizers have been fleshing out their plans. The bipartisan commission of pols, business execs, and policy wonks proposed diverting two percentage points of the 12.4% payroll tax to individual savings accounts for Americans born after 1944. Social Security's basic pension would gradually be trimmed as these accounts take over a growing share of retirement funding.

The plan's weak link: a steep hike in retirement ages to help close Social Security's funding gap. The commission would raise early-retirement age from 62 to 65 by 2017. Full-benefit retirement age, now set to rise from 65 to 67, would be 70 by 2029. That's "more than the public will stand for," says a Clinton strategist.

Fights over details won't stall privatization, though. Even the American Association of Retired Persons agrees that it is likely to be a major part of a Social Security solution. Of course, reform could be derailed if the GOP pushes for too much or if Democrats resort to scare tactics. But with the head of political steam that privatization has now, it is likely to be the engine pulling Social Security into the 21st century.