G.O.P. Has Few Options on Social Security

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 investment returns.

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 enterprise system.

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 capital.

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."