Democrats to Back Using Stocks for Social Security

WASHINGTON â€”  House Democrats will embrace the idea of stock market investments by the Social Security system to assure its financial solvency and avoid more sweeping changes offered by Republicans, the architect of the Democratic plan said Thursday.

Democrats believe that extra money generated from the investments can close most of Social Security’s financing gap and enable them to avoid such politically distasteful choices as voting to increase the payroll tax or to raise the retirement age.

The Democratic proposal, outlined in a speech by Rep. Earl Pomeroy of North Dakota, demonstrates the consensus that has developed around using stock market investments to assure the solvency of Social Security as the baby-boom generation retires in the early part of the next century. That the Democrats would embrace the stock market option represents a major break from the party’s past positions, which viewed the workings of the retirement system as inviolate.

The big question that remains is whether individuals or the Social Security system would handle the stock market investments.

Republicans and some Democrats favor permitting workers to keep some of their Social Security payroll taxes and use the money to buy stocks and bonds for personal retirement accounts.

But the overwhelming majority of House Democrats want the stock buying to be done by the Social Security system, Pomeroy said. He was chosen by House Minority Leader Richard A. Gephardt of Missouri to lead House Democrats in preparing their proposals for assuring the solvency of the Social Security system.

House Democrats want a new agency, independent of Congress and the president--like the Federal Reserve Board--to hire portfolio managers to invest as much as 50% of Social Security taxes, Pomeroy said. The managers would place the money in various index funds, which are collections of stocks representing different segments of the securities markets.

The Democratic legislators also will propose a new plan to ease the dependence of many poor and moderate-income Americans on Social Security checks. Under the plan, Pomeroy said, personal accounts similar to the 401K plans for employees at many corporations would be created. The accounts would be available only to families with annual incomes below $50,000. Individuals could contribute as much as $2,000 annually and the federal government would match 50 cents for every dollar contributed, Pomeroy said.

Although details of how the government would pay for this or of other parts of the Democratic proposal have not been completed, Pomeroy indicated Thursday that the Democratic Party leaders have made some core decisions about their position in the intensifying debate about the future of Social Security.

“I have locked in on some defining principles,� Pomeroy said in his speech to a group of major employers involved in pension and health benefit issues.

House Democrats will be unalterably opposed to individual investment accounts as risky and expensive to administer. Still, investment of Social Security funds in stocks under any system would represent a major change for the program, in which revenues now are invested exclusively in special issues of Treasury securities. Since 1926, Treasury issues have an average annual return of about 5%, compared with about 11% for stocks.

Social Security now runs a surplus, collecting more taxes from workers than it pays in benefits to retirees, the disabled and survivors of deceased workers.

But the system will come under financial strain with the retirement of the largest generation in U.S. history, the 76 million baby boomers born from 1946 to 1964. In 2032, the tax revenues will be sufficient to pay only 75% of the benefits promised under current law.

If Congress were to wait until 2010 to take action, it would have to slash benefits by at least 35% to keep Social Security in financial balance, Pomeroy warned.

While embracing stock market investment, House Democrats will emphatically reject other ideas to help Social Security’s balance sheet, Pomeroy insisted.

For example, raising the payroll tax rate (now 12.4% on salary up to $68,400, with workers and employers each paying 6.2%) is “a non-starter, it’s off the table,� Pomeroy said.

Making workers stay on the job longer before they can collect benefits, a popular idea among some in the capital, generates no enthusiasm back in his home state of North Dakota, where “farm and physical labor is a big part of people’s work,� Pomeroy said. “I can go through the entire House of Representatives and not see a pair of callused hands--it is easy for us in Washington to say people should work longer.�

The current age for full retirement benefits is 65 and is scheduled to rise gradually to 67 for those born after 1959. Various proposals would boost the age to 70.

Pomeroy also vowed that House Democrats would fight any effort to “take whacks� at the annual cost-of-living increases in Social Security benefits.

Although the members of Congress are staking out positions, the Clinton administration has pursued a policy of staying studiously neutral for now, offering to discuss all ideas on Social Security while embracing none.

President Clinton has declared 1998 a year to discuss Social Security, culminating in a December conference at the White House. He has promised to meet with congressional leaders early next year to begin efforts to develop a bipartisan plan that could be approved by Congress in 1999.