BANKING ON STOCKS

By Daniel Kadlec

Like Russia going capitalist, the idea of America sinking Social Security revenues into stocks may not sit well with a lot of folks. But set aside the doubts, endure the initial pain, and 10 or 20 years from now everyone will be better off. Boris Yeltsin jumped on a tank to defend that strategy. We need only say, "Do it."

Defeating armed insurrection may sometimes seem easier than getting Washington to do the right thing. But this one's a no-brainer. Over the long term, stocks return two or three times more than Treasury securities, which by law is where the current $565 billion surplus is parked (it's really an iou; the money has been spent). Billions more are headed for T-bond land--and woeful investment performance--in each of the next 10 to 15 years. After that baby boomers start to retire en masse, and the surplus begins to erode.

There are costs and risks. What if the stock market crashes? It could happen, and that's why stocks have to be a long-term solution. Twenty years from now, and forever after, if the market crashes, stocks will have enough built-in gains to be above water and probably still have done better than bonds. It's the first 20 years that cause headaches. But a simple guarantee for those who are less than 20 years from retirement removes the issue.

For a lot of reasons now is the time to act with dramatic, fundamental overhaul that will get people excited. Committing something to stocks is a good start, but it's not enough. To generate real excitement for reform and ensure that something gets done, individuals need personal accounts so they not only control the stocks their Social Security benefits are riding on but also have absolute assurance that spendthrift politicians can't get at the money. Such authority won't come easy. Politicians tightly clutch the purse strings of any program. But it has to be. Why change Social Security at all if Washington is allowed to keep plundering the reserves? And the thought that some bureaucrat is managing the nation's stock portfolio--even one consisting entirely of index funds--is just plain chilling.

Why act now? Because the surplus won't be there much longer. Even if you write off the $565 billion iou as uncollectible, there is still a decade of excess payment to come. Saving future overpayments would go a long way toward offsetting any near term market problems and could help finance a period of transition. This unique window of opportunity closes a little each year. In addition, the publicity surrounding a special panel's endorsement of the idea last week has given it a boost. And, finally, the public is ready; it has never been more enthusiastic or savvy about investing.

The panel suggested three methods of enlisting the stock market's help. None of them goes far enough, but one comes close. It's the one that gives taxpayers a personal security account funded by 5 percentage points of the current 12.4% payroll tax. Individuals would invest that money as they see fit and at retirement add the results to a low-level guaranteed Social Security benefit.

In this era of IRAs, 401(k)s and booming interest in mutual funds, a case can be made for letting individuals control the full 12.4%. It's their money. They know what they're doing. That will never fly though. Too many people confuse Social Security with welfare. So 5 percentage points in a personal account is as good as it's going to get. We should grab it while time is on our side.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]