How We Can Fix Social Security

By GEORGE J. CHURCH

A quarter-century of writing and editing analyses of Social Security had convinced me that no one would cobble together even a jury-rigged fix for the system until five minutes before the first pension check bounced--if then. But now President Clinton really has put "saving Social Security" at the top of the nation's domestic agenda, sparking a debate unprecedented in its intensity. So maybe...

Then again, maybe not. A good deal of the debate is confused, ideologically envenomed, or both. Left and right squabble furiously over the latest idea--totally replacing Social Security with a system of individual investment accounts. Now, even this market-based approach is being shelved by its Republican proponents, who have become fearful of the political risks.

Some people think wishfully that rapid economic growth will enable the Social Security system to muddle through pretty much as is. Others talk in either-or terms--either funnel most future budget surpluses into Social Security and invest some of that money in the stock market, or increase Social Security taxes and modestly reduce benefits--and the problem will be solved.

Sorry, but it won't wash. The size of the gap between Social Security tax collections and pension payouts over the next 30 or so years, and how far any specific proposal would go toward closing that gap, are still anybody's guess. And those guesses depend on such variables as the speed of economic growth, the future pace of inflation and the course of the stock market--all notoriously difficult to predict even a year ahead. Estimates clash so sharply as to invite suspicion that they are shaped more by political bias than by analysis.

But it is possible to indicate orders of magnitude. Currently there are a bit more than three taxpaying workers supporting one retiree. By the 2030s, when the tidal wave of baby-boomer retirements crests, there will be only two. Somewhere around 2014, the system is expected to be paying out more in benefits than it collects in taxes, forcing Social Security to start cashing in the Treasury bonds in its trust fund, whose assets are now more than $760 billion. By 2034, that too will be gone, and taxes will cover only an estimated 71% of annual pensions.

One estimate is that under present tax and benefit schedules, the Social Security system would plunge $6.9 trillion into debt between 2014 and 2034. If that is accurate, Clinton's 1999 budget proposals, which are supposed to pump $2.7 trillion into Social Security during the next 15 years, would close less than half the initial gap. Further reforms would be needed to keep revenues in balance with payouts after 2034. Also, the present system contains some glaring inequities that ought to be corrected--at the cost of making the fiscal gap even wider. No one proposal will probably come near to filling it. What is needed, in my opinion, is a comprehensive program, summarized by these commands:

PLAY THE STOCK MARKET. By now there is wide agreement that stock and bond markets could in effect pay much of the nearly 30% of pensions that Social Security taxes will eventually no longer cover. But who should invest how much of the system's money? Clinton's proposal to have the government do the investing is a poor second best--and not only because of the danger of political manipulation of business. More fundamentally, individuals ought to have some say in how to invest money that the government taxes away from them. Redirecting some Social Security money into individual investment accounts would have social benefits too. It would give many of the 60% of Americans who have yet to share in the stock market boom the starting capital to join the party--and perhaps the only chance they will ever get to begin accumulating some wealth.

All this assumes, of course, that financial-market investments will continue to provide an attractive return. That seems reasonable, at least in the long run. Martin Feldstein, president of the National Bureau of Economic Research, calculates that a portfolio 60% of which is invested in stocks and 40% in bonds would grow on average 5.5% a year. That represents the actual average from the end of World War II until today, minus an allowance for administrative costs. By contrast, the special Treasury bonds that, by law, Social Security must now buy with any spare cash it has may yield on average less than 3%.

But many pensioners, present and future, would be terrified of having their retirement income depend heavily on the short-term ups and downs of Wall Street. They would have to be guaranteed a fairly high pension still paid out of regular Social Security taxes--currently 12.4% of each employee's wages, split between worker and boss--no matter what.

A Senate bill written by Democrats Daniel Patrick Moynihan of New York and Robert Kerrey of Nebraska would allow workers to divert 2% into investment accounts but would lower guaranteed benefits to what could be financed out of the remaining 10.4%. Feldstein has an even better idea: keep present tax and benefit rates but have the government deposit into individual accounts an additional 2% of each worker's earnings, up to the prescribed annual taxable limit. On retirement the worker would repay Uncle Sam $3 of every $4 he or she had in the account. Taxpayers under this scheme might earn somewhat less, in total, than under Moynihan's plan--though that one-fourth share could add up over decades. On the other hand, they would run little if any risk of losing anything, and the government would eventually gain a new and potentially major source of revenue to help pay the guaranteed pensions.

But suppose sharpies bamboozle Grandpa into buying stock in Fraudulent Uranium Co. or Flim-Flam.com Not to worry: the law should allow only competent and honest professional managers to bid for Social Security money--and require them to offer a wide choice among funds making highly conservative to more adventurous investments, which is roughly the deal enjoyed today by employees in company 401(k) plans. In any investing, some risk is inevitable, but probably less than the risk that pensions would be slashed to keep a completely tax-financed system sound.

PAY YOUR DEBT, UNCLE SAM! Right now the Treasury is still borrowing big Social Security surpluses--$99 billion in fiscal 1998--to wipe out deficits in everything else the government does, allowing it to report a consolidated surplus. About 15 years from now, though, there will be no more Social Security surplus. The rest of the government will have to be running honest-to-goodness surpluses big enough to begin repaying its accumulated debt to Social Security.

It won't happen automatically. Rosy current projections could go wrong--the February 1997 projection of 1998 results was off by $191 billion. Clinton has proposed using 62% of surpluses during the next 15 years to pay down the $3.7 trillion national debt. Congress should raise that to a full two-thirds and write the requirement into law. That would go far toward preventing politicians from squandering the surpluses on tax-cutting or spending sprees. It would also ease the immense burden of interest payments--currently $229 billion a year--on federal finances and help pep up the economy. The more debt the government pays off as it comes due, the less new money it must borrow to refinance the remaining debt; the less the government borrows, the more loan money is freed to finance consumer spending and business investment. All that will help assure that the forecast surpluses materialize and become available to help Social Security in its hour of need.

GIVE THE WORKING POOR A BREAK. Social Security taxes are a crushing and unfair burden on low-paid workers. And make no mistake: they pay not just the 6.2% of earnings that shows on their paychecks but also their employers' theoretical share as well. A boss who figures he can afford an additional cost of, say, $300 a week to hire a new worker will deduct the combined 12.4% share, or $37.20, and pay the employee only $262.80. And at present there is no way to lighten the tax--no exemptions, no deductions, no adjustments.

Republican Senator John Ashcroft of Missouri has suggested allowing workers to take an income tax deduction equal to their supposed half share of Social Security taxes. Right idea, wrong numbers. Ashcroft would give this break to anyone earning $70,000 a year or less. It should be targeted much more closely on those struggling to escape or avoid poverty--perhaps those earning no more than $30,000. The many families in this bracket who earn too little to pay income tax yet "contribute" to Social Security should get a proportionate cash refund in the form of an expanded earned-income credit.

MAKE THE RICH PAY MORE. Social Security taxes are now levied on only the first $72,600 of wages or salary, an amount that gradually increases. So an executive with a $500,000-a-year salary would pay Social Security less than 1.8% of his full earnings, even counting the employer's theoretical share, while the people who empty his trash baskets pay 6.2%, or actually 12.4%, on every dollar of their scant wages. The cap should be abolished and all wage-salary income taxed at the same rate.

DEFLATE THE FATTEST PILLOWS. Social Security was meant to keep the elderly from falling into poverty when they could no longer work, not to plump up an extra cushion under the already well off. Investment banker Peter Peterson proposes paying full Social Security benefits only to those whose income from other sources is $35,000 a year or less. Payments to the better off would be reduced on a sliding scale starting at 7.5%; those with outside income of $185,000 or more would receive only 15% of the Social Security pension that they would qualify for without such a means test. Again, correct principle, but too drastic. Pensions should be reduced only for those earning $50,000 or more. The budget-balancing Concord Coalition estimates that this move would save the government $20 billion a year.

SWITCH TO A "DIET COLA." More formally, adopt a formula for cost of living allowances that increases pensions less rapidly than the consumer price index rises. Inflation has subsided so drastically as to drain the urgency from this proposal. Also, because of changes in the way it is calculated, the CPI no longer overstates inflation by a bit more than one percentage point, as a government panel of economists thought it did two or three years ago. But some overestimation probably remains, and could cause trouble in the hardly impossible event that price increases speed up once more. So it would be a wise precaution to decide that if the CPI rises more than 2% in a year, the COLA would go up half a point less. If the CPI rises 2.5%, pensions would go up 2%; a CPI increase of 5% would boost pensions 4.5%, and so on.

RAISE THE RETIREMENT AGE--but not for everybody. Life expectancy has increased greatly since Social Security payments started in 1940, but the age for retiring with full benefits is still 65. Next year it is scheduled to begin increasing gradually to 67 by 2027. It could be raised further to 70. But raising the earliest age for retirement with partial benefits from the present 62 to 65, as many ardent reformers propose, would be a mistake. Miners, laborers and other manual workers have enough trouble continuing their exhausting toil even to age 62. For many, staying on the job until they are 65 or older could imperil their health--or even life.

STOP SHORTCHANGING WORKINGWOMEN. Social Security is a rare if not unique institution that pays cash for housework and mothering. It pays a wife a benefit at least equal to 50% of her husband's, even if she never worked outside the home or paid a penny of Social Security tax. But women who worked on and off at low-paying jobs, as all too many in the generation nearing retirement age have done, receive pensions no higher than the stay-at-home moms. In effect, the Social Security taxes these workingwomen have paid earn them nothing.

Individual investment accounts might help remedy this; whatever a woman earned on investments would be hers to keep and would add to the pension she would otherwise get. But much more should be done. The National Organization for Women advocates an income-splitting approach for married women: if a couple makes, say, a combined $60,000 a year, husband and wife would each be credited with $30,000 of earnings for Social Security purposes. This arrangement would be costly and no doubt difficult to sell to male legislators. But it sounds fair--a partial remedy for the discrimination that still keeps the pay of even many highly skilled professional women below that of men doing the same job.

Some colleagues have asked me, "Do we really need to do all that?" Maybe not--if the economy and the stock market continue to boom and inflation stays tame for years to come. But we shouldn't take chances. The system needs to be shored up so it can continue to keep the elderly out of poverty, come what may: recession, a stock-market crash, a flare-up of inflation or even all these things together. In the unlikely event that the economy continues to show its remarkable combination of superfast growth, superlow unemployment and superlow inflation for another decade or so, and the stock market soars even further into the wild blue yonder, then this program could be softened. Some ideas: restore full COLAs; do not increase the "normal" retirement age beyond 67, and set the earliest at 60; grant income tax deductions equal to Social Security levies to people with somewhat more income--maybe as much as $50,000.

This program, which borrows ideas from Ashcroft on the right to NOW on the left, can hardly be called partisan. Nor can it be called self-serving. If it had been in effect years ago, I would have paid Social Security tax on much more of my 1995-97 income. And my proposed means test would bar me from collecting much, if any, future pension benefits.

Tough! It needs to be done.