Social Security drive stalls Market volatility raises questions about privatization

Even advocates reconsider

September 02, 1998|By Jonathan Weisman | Jonathan Weisman,SUN NATIONAL STAFF

WASHINGTON - The stock market's roller-coaster ride is threatening to derail Congress's drive to invest at least a portion of Social Security taxes in the stock market, a move that seemed unstoppable just two months ago.

Already, opponents of Social Security privatization are pouncing on the market's gyrations.

Yesterday's 288-point rebound may have allayed investor concerns, but it only underlined the kind of volatility that is anathema to political Washington.

Sen. Byron L. Dorgan, a North Dakota Democrat who is a market skeptic, predicted that the past few weeks of stock market instability would "cause a number of people to rethink this issue."

"It all suggests there's not quite the security that people have been placing in the market," Dorgan said yesterday.

Former Labor Secretary Robert Reich was more emphatic: "The plunge on the market has taken the wind out of the sails of privatization, no doubt about it."

Proponents of Social Security privatization are maintaining their composure.

Over the long term, they say, the stock market will move higher.

It will certainly yield far better returns than will low-risk Treasury bonds, where Social Security surpluses are now invested.

"I just think it's a shame that people don't have private accounts already," said Michael Tanner, director of the libertarian Cato Institute's Project on Social Security Privatization, "because they can't buy while the market's down."

But even the most ardent supporters of a market solution to Social Security's long-term problems concede that the current volatility will pose political problems - especially if they continue into next year, when Congress and the White House plan to address the Social Security issue seriously.

"There's no question, opponents who want to kill these proposals have more ammunition," said Sen. Bob Kerrey, a Nebraska Democrat who advocates diverting 2 percent of payroll taxes into individual investment accounts.

There is little doubt that something must be done about the Social Security system.

A flood of retiring baby boomers, coupled with declining birth rates and slowing economic productivity growth, threatens to swamp the nation's popular retirement security program.

By 2013, the federal government expects to pay out more Social Security benefits than it collects in payroll taxes.

Unless overhauled, the system will be insolvent by 2032, according to the Social Security Administration's most recent calculations.

What to do about that has been hotly contested ever since President Clinton pledged early this year to "save" Social Security.

Many liberals in and out of Congress contend that the government's gloomy scenario is based on overly pessimistic economic growth assumptions, and they believe only minor changes are needed.

But policy-makers on the left and right have backed some form of privatization.

Some, like conservative Sen. Phil Gramm of Texas, say the entire 12.4 percent payroll tax should be converted into personal retirement accounts. Billions of dollars could then be plowed into the stock market.

William V. Roth Jr. of Delaware, chairman of the powerful Senate Finance Committee, has proposed returning the federal budget surplus immediately to taxpayers in the form of retirement accounts that could be invested in the stock market.

Republican Sen. Judd Gregg of New Hampshire and Democratic Sen. John Breaux of Louisiana would give taxpayers control of 2 percent of the payroll tax.

Individuals would have up to five investment options, ranging from aggressive mutual funds to conservative bond funds.

Senate Democrats Kerrey and Daniel Patrick Moynihan favor a similar plan.

But in their proposal, taxpayers could either invest 2 percent of their payroll taxes or leave the money in the traditional Social Security system.

More liberal Democrats like Sen. Edward M. Kennedy of Massachusetts and Rep. Earl Pomeroy of North Dakota are rallying around a proposal that would keep the existing system intact, but allow taxpayers to pay an additional 2 percent tax that could be invested in the stock market.

All these plans emerged during the euphoric bull market of the 1990s, when many Americans came to take windfall gains on the stock market for granted and the protracted bear markets that reigned between 1968 and 1980 had been all but forgotten.

Indeed, the biggest debates have been about not whether to invest tax dollars in the stock market, but about how much and whether the government or the individual should do the investing.

But the Dow Jones Industrial Average's 19 percent decline since July 17 - including Monday's gut-wrenching 512-point plunge - may prove to be a reality check, said Wendell Primus, director of income security at the left-leaning Center on Budget and Policy Priorities.

"This is a reminder that what goes up can come down; markets are volatile," Primus said. "People have forgotten what that feels like."

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