Social Security Panel Offers 3 Reform Plans

WASHINGTON —  After almost three years of futile struggle, a deeply divided federal advisory council on Social Security on Monday offered three divergent plans to ensure retirement benefits for the baby boom generation.

The failure to reach agreement demonstrates the deep political passions aroused by discussions of Social Security. And it is likely that the council’s contending plans will become heavy ammunition in a struggle over the future of the massive retirement system.

The advocates of major change--five of the council’s 13 members--said that Social Security will not fulfill its promises to today’s younger workers without a drastic shift.

They called for the creation of Personal Security Accounts that would require individuals to take 5% of their taxable Social Security income and invest it in stocks and bonds that they personally select. The other 1.2% of the current 6.2% Social Security payroll tax that employees pay would continue to go to the central trust to pay a basic benefit and also provide for payments to disabled workers. The matching 6.2% paid by the workers’ employers also would continue going into the trust fund.

The so-called “privatization” plan would provide a higher return for retirees, supporters said.

But in a preview of the larger fight over Social Security’s future, the labor members serving on the council announced that unions and their allies will mount a grass-roots campaign against any privatization plan.

The individual investment option--as well as a more limited alternative plan proposed by two council members--is too “radical” for serious consideration, said Gerald Shea, a council member and assistant to the president of the AFL-CIO. The labor movement will fight to “prevent these plans . . . from getting beyond the fantasy stage,” Shea said.

Although it failed to reach agreement, the council introduced a major new concept into serious discussions of Social Security--the idea that some payroll tax money should be invested in the stock market. The long-range return in the stock market has been about 10% a year, compared with less than 4% a year for Treasury securities, in which Social Security surpluses are now invested.

However, there is vociferous disagreement over how that investment might be made. The traditionalists, including labor unions and most Democrats, say that the idea should be approached gingerly, only after years of national debate and discussion. And if it is ever done at all, they say, the government could place the money--as much as 40% of the surplus from a year’s payroll tax revenues--into index funds that reflect the whole market, with no investment risks placed on individuals.

Those calling for dramatic change--some pension experts, the business community, Wall Street and many Republicans--offer the prospect to workers of more-generous returns and the security of knowing that the money belongs to them, not the government.

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“If you want to create real new savings, you have to do something through individual accounts,” said Sylvester J. Schieber, a council member and prime author of the major privatization plan. “People have been sending money to Social Security--this bureaucratic structure--for years and years. Now they would have a chance to put money in their own accounts, and they wouldn’t have to worry about the viability of the benefits,” said Schieber, a vice president of Watson Wyatt Worldwide, a benefits and consulting firm.

The third plan, backed by two council members, would create a new mandatory savings account, with workers required to contribute 1.6% of their income under the Social Security wage base to an individual private account. This new private account would be imposed atop the current 12.4% payroll tax.

The advisory council goes out of business now, having delivered its long-awaited report. But its offering of three approaches is expected to serve as the starting point as Congress and the Clinton administration grapple with the future of the federal government’s biggest spending program.

Social Security enjoys a surplus now but is projected to face demographic strains when baby boomers--the biggest generation in American history, those born between 1946 and 1964--begin drawing retirement checks. Based on projections, the retirement fund would confront a fiscal crisis in 2029, when revenues are expected to be sufficient to pay only about 75% of promised benefits.

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Although the council members could not agree on a single plan to deal with this gloomy prospect, they did find some common ground. All agreed that new state and local government workers should be brought under the system, assuring new revenues. They said that the change in age for full-benefit eligibility--now scheduled to rise from 65 to 67 in the year 2027-should be accelerated.

And, perhaps most significantly, they agreed that Social Security beneficiaries should continue to receive an annual cost of living increase linked to the consumer price index. There was no support at all for the recent report by another federal commission--chaired by Stanford University economist Michael J. Boskin--suggesting that the CPI overstates inflation by 1.1 percentage points and that benefits should be curtailed accordingly.

Reactions to Monday’s report by the council were swift and divided along predictably partisan lines.

The administration insisted that there is no need to rush to solutions. “Let there be no doubt: Social Security will be there for generations to come,” said Shirley Chater, the Social Security Commissioner, and Donna Shalala, secretary of Health and Human Services. Shalala appointed the council in March 1994.

Chater and Shalala emphasized that Social Security will have enough revenues to pay full benefits for 33 more years. “This means we have time to make prudent and careful decisions,” the two administration officials said in a joint statement. Any decisions “must involve the Congress and be bipartisan,” they said.

The focus from the Republican camp, meanwhile, is the need for change. “Policy experts on the council, from all points on the political spectrum, recommended an increased role for the private market,” said House Majority Leader Dick Armey (R-Texas). The willingness to discuss the investment plans is a “vast paradigm shift on the issue,” he said.

Rep. Bill Archer (R-Texas), chairman of the House Ways and Means Committee, said that he is ready to join President Clinton in calling for “a bipartisan commission to save Social Security.”

Archer was a member of a 1983 commission that dealt with a funding crisis then facing Social Security through a package of measures that included an acceleration of a scheduled tax increase, taxation of benefits for the first time and a delay in the cost-of-living allowance. Without that fix, the system would have been unable to pay benefits in the summer of 1983.

What is likely to begin now is a lengthy national conversation about Social Security. And based on reactions from powerful special interest groups to Monday’s report, a consensus could be a long time coming.

“A system based on private savings accounts would enable millions of Americans to receive enhanced retirement benefits and position our country’s economy to grow at a rate greater than the current feeble 2%,” said Paul Huard, senior vice president of the National Assn of Manufacturers. The current system “isn’t sustainable,” he said.

But Gloria Johnson, a member of the advisory council and president of the Coalition of Labor Union Women, warned that a private investment plan in which individuals would risk their retirement security on their stock-picking prowess would throw workers “into the pit and let them scrap with the wolves.”

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Revamping the Social Security System

The 13-member Social Security Advisory Council offered three plans in an effort to keep the retirement system solvent. Here’s a look at the current system and the alternatives:

The Current System

An estimated 141 million workers and their employers contribute payroll taxes (12.4% of salary, up to $65,400, with taxes equally divided between worker and employer).

Taxes provide benefits for 43 million people. Retirees average $745 monthly.

Surplus revenues (currently about $500 billion) are invested in special issues of Treasury securities.

Plan A--Maintain Benefits

* Would tax all Social Security benefits once retirees have collected more than they paid in payroll taxes.

* Suggests Congress study potential investment of 40% of revenue surpluses in the stock market. Government would select firms to manage the funds.

Plan B--Personal Security Accounts

* Workers would invest 5% of their income under the Social Security wage base in the Personal Security Account. The money would be individually owned and privately managed, with workers picking the stocks and bonds for investment. The remaining 7.4% would go into the regular Social Security Trust Fund. Total Social Security tax would remain at 12.4%, half of that paid by the employer.

* Individuals could withdraw money for retirement starting at age 62.

* Each person would have a basic monthly Social Security benefit of $410. Added would be money earned under the savings account.

* 50% of benefits would be taxed.

* Payroll taxes would increase by 1.52 percentage points, to 13.92% in 1998, and continue through 2069. In addition, this plan would borrow about $2 trillion from the federal government to pay benefits currently promised as taxes are diverted to individual accounts.

Plan C--Individual Accounts

* Would create a compulsory savings plan, financed by deducting an additional 1.6% of income from workers’ earnings.

* The payroll tax rate in 1998 would be 14%, with 7.8% contributed by workers.

* Workers would have a limited choice of investments--five or 10 funds.

* Rather than receiving a lump sum payment at retirement, retirees would have to convert the funds into a lifetime annuity.

* Basic Social Security benefits would be gradually reduced, resulting in a cut of about 30%, to help assure the fund’s solvency.