Social Security advisory panel proposes radical changes Investment in stocks seen as way to increase revenue as workers age

March 14, 1996|By John B. O'Donnell | John B. O'Donnell,SUN NATIONAL STAFF

WASHINGTON -- For years, Washington has considered Social Security sacrosanct, and any changes in it taboo.

But now, a proposal that would be truly revolutionary investing some of the giant pension fund's assets in the stock market and giving workers control over their own investment accounts is gaining credibility, thanks to a Clinton administration advisory group.

Six of the 13 members of the Advisory Council on Social Security want to keep the existing system but would invest excess Social Security tax revenue in the stock market, which, in the long run, would produce higher returns.

The seven other members would go further.

They would require that some of all revenue be invested in stocks and bonds, but have each worker manage his or her own account, as many people do now in 401(k) company retirement accounts.

"That's never happened before," said Sen. Daniel Patrick Moynihan, a New York Democrat, alluding to the council's proposals.

"It would have been unimaginable 20 years ago," he told a Social Security subcommittee hearing this week.

"Privatization" the self-management of Social Security money long "has been considered a kooky right-wing idea," Sylvester J. Schieber, a council member, said in an interview. "But now, I think we're going to get a legitimate political debate."

Investing in stocks entails "some risk factor," Harry C. Ballantyne, Social Security's chief actuary, cautioned yesterday, because in the short run, stock investments can lose money.

"But it [the risk] may be worth taking," he said, citing the long-term record of stock market gains.

Responded Mr. Moynihan: "The 1990s have been great; the 1930s weren't so good" for the stock market.

Fueling the engine of change is a stark demographic fact: Without revision, the Social Security system is headed for big trouble once the huge baby boom generation, now beginning to turn 50, begins to retire. Moreover, young workers have little faith in the system.

"None of my clients under 35 believe Social Security will be around for them," says Michael Engler, a Baltimore financial planner.

Social Security is a pay-as-you-go system, financed by a 12.4 percent payroll tax, half paid by the worker and half by the employer. An average of 3.3 workers support each retiree.

Once baby boomers begin retiring, there will be only 2.7 workers for each retiree. And by 2040, there will be only 1.6 workers for each retiree, according to the trustees of the system.

Revenue exceeds expenses by $34 billion a year, and the trust fund's surplus is $500 billion. That money is invested in government securities, with an average return above inflation of 2.3 percent. Stocks would pay a much higher rate, on average, in the long run.

Beginning in 2013, payroll tax revenue will no longer cover the cost of benefits. At that point, the Treasury will have to begin paying billions of dollars in interest and principal on the securities held by the trust fund. To do that, the Treasury will have to raise taxes or borrow money, thus swelling the budget deficit.

"We'll have a real crisis," Mr. Moynihan said this week.

Advisory council members would get at this problem in a variety of ways, including trimming benefits, raising taxes and increasing returns on Social Security investments.

The quadrennial council, whose report is expected by early April, is likely to outline three alternative approaches.

Mr. Schieber and Carolyn Weaver, a scholar at the conservative American Enterprise Institute, favor the most far-reaching proposal.

They would require workers to invest in equities $4 of every $10 that the worker and employer pay in Social Security taxes. Each worker would make investment decisions, becoming more responsible for the amount that is available at retirement.

The remaining payroll tax payments would go into the Social Security trust fund, as all revenue now does, and would go to pay a sharply lower pension benefit.

The Schieber-Weaver plan would require a transition from a pay-as-you go system. They propose a 1 percent national sales tax for 70 years to finance the shift.

"What they really want to do is abolish Social Security as we have known it," complains Robert M. Ball, a council member.

Mr. Ball, a former Social Security commissioner, is pushing his own proposal to preserve the current system while increasing its earnings. He has the support of five other council members.

Mr. Ball would maintain the current benefit structure but make changes to raise revenue, increase taxation of Social Security benefits and reduce cost-of-living increases.

He would invest the Social Security surplus in stocks, starting small and gradually building to 40 percent of the trust fund. ......TC His plan, Mr. Ball says, would increase the after-inflation rate of return on the entire trust fund from 2.3 percent to 3.8 percent.

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