G.O.P. Has Few Options on Social Security
By: Richard W. Stevenson
The New York Times, January 22, 1999
Republicans were quick to criticize President Clinton's proposal to
invest a portion of Social Security's reserves in the stock market, but
they have been slow to lay out any specific alternative for dealing with
the retirement system's problems because other options have their own
economic and political drawbacks.
Mr. Clinton's plan is built around earmarking $2.7 trillion in
projected Federal budget surpluses over the next 15 years for Social
Security, and investing around $700 billion of that in stocks in an effort
to capture some of the hefty returns available on Wall Street.
Republicans do not object to using a big part of the surplus for Social
Security, and party leaders like Representative Bill Archer of Texas, the
chairman of the Ways and Means Committee, endorsed the President's
approach today on that score. They also support efforts to reap higher
But Republicans are divided over whether the best way to use the
surplus on behalf of Social Security is to pay down the national debt, as
Mr. Clinton wants, and they have rejected the idea of the Government
becoming a stock buyer, saying it would amount to meddling in the free
Instead, Republicans want Social Security to be remade to allow
individuals to invest part of their payroll taxes in stocks and bonds.
There are two basic approaches to doing so, each with its own
proponents and critics, and its own political risks.
Under one approach, two percentage points of the 12.4 percent payroll
tax that finances Social Security would be diverted into private
investment accounts owned by each worker. But making such a plan work
would require substantial cuts in Social Security's guaranteed benefit
through mechanisms like increasing the retirement age and tweaking the
formulas that determine average lifetime earnings.
Although its proponents say the return on investment from the private
accounts would more than make up for cutbacks in the guaranteed benefit,
the political cost of making the necessary cutbacks is sufficient that
some Republicans are backing away.
The second approach, which is increasingly popular among Republicans,
would provide offsetting tax breaks to workers who placed part of their
payroll tax into private accounts. But it would pay for the change largely
by using the surplus, and would reduce guaranteed benefits only to the
degree that gains from the investment account still allowed each worker to
come out ahead.
This approach, developed by Prof. Martin Feldstein of Harvard
University, would be pain-free - but only for a decade or two, when the
Government would again face huge deficits after the baby boom generation
begins to retire. In effect, critics say, it would just push down the road
for a few years the hard decisions about how to insure Social Security's
long-term solvency, and make it difficult if not impossible to reduce the
national debt in the meantime.
The Republicans are not alone in their dilemma. Although he put forth a
framework for dealing with Social Security, the President admitted that
his ideas would not solve the entire problem, and that the Administration
and Congress would still have to make some tough choices about tax
increases and benefit cuts to get the job done.
"Clinton's speech only gave the easy solutions, and the
Republicans only responded with their easy solutions," said Ron
Gebhardtsbauer, senior pension fellow at the American Academy of
Actuaries, a nonpartisan research organization. "We're looking for
the free lunch."
The President's effort to minimize the pain rests on his proposal to
devote $2 trillion over the next 15 years to reducing the national debt.
(The other $700 billion he would earmark for Social Security would be
invested in the stock market.)
Under the Administration's plan, the $2 trillion would be used by the
Social Security system to buy Government bonds held by the public.
Those bonds would then essentially become part of the Social Security
trust fund, and the interest payments on them would bolster the retirement
system's reserves, extending its solvency to about 2050 from 2032.
To some degree, the approach is an accounting gimmick. Because the debt
would be transferred from the public onto the Government's own books, it
would not reduce the total debt outstanding, currently about $5.5
trillion, which includes money the Government owes to itself under its
complex accounting system.
But it would reduce the publicly held debt, now about $3.8 trillion.
And it is that public debt portion of the nation's balance sheet that is
more important economically, because its size determines how much
competition there is between the government and the private sector for
The lower the publicly held debt, the less the Government's borrowing
needs push up interest rates and crowd out investment by companies in new
products, factories and jobs. In that sense, reducing the publicly held
debt could boost the economy, which would in turn help Social Security by
increasing the number of people working, the size of their paychecks and
the taxes they pay to support the retirement system.
But Mr. Clinton's plan would not solve all of Social Security's
problems, and White House officials acknowledge that the Administration
and Congress still have to find a way to deal with the remaining shortfall
over the next 75 years.
At a hearing before the Ways and Means Committee today, the Rev. Jesse
Jackson argued for a traditional liberal Democratic approach, saying
Social Security should remain an intergenerational commitment with a
guaranteed benefit. Jack F. Kemp, the 1996 Republican Vice-Presidential
candidate, called for "a shareholder democracy" built on wealth
accumulation through individual accounts.
But Republicans remain reluctant to get any more specific about how
they would proceed until the President provides more details of what steps
he is willing to support.
Representative Jennifer Dunn, Republican of Washington, said on Tuesday
that the retirement system could be shored up through private accounts
"without touching a dime in Social Security funds, without raising
one nickel in taxes, without touching one penny in current benefits."
But Ms. Dunn did not explain how, prompting Mr. Gebhardtsbauer of the
American Academy of Actuaries to say that she "ignores the fact that
if there is no pain anywhere, it ends up being our kids who pay."
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