Ideology Aside Tough Choices on Social Security

WASHINGTON - The debate over how to prepare Social Security for the next century has been cast all year as a philosophical clash between those who would keep the system intact and those who would rebuild it to allow individual investment in the financial markets.

Regardless of which path Congress and the Clinton Administration choose, they will be forced to select 'from the same unappetizing menu of benefit cuts, tax increases and tradeoffs between risk and investment return to assure that Social Security will be able to weather the baby-boom generation's retirement.

When President Clinton brings together members of Congress, economists and public policy analysts on Tuesday and Wednesday for a White House conference on Social Security, the focus will be as much on those politically excruciating choices as on the sweeping debate over the system's structure.

"No matter which ideological side you're on, you still have to make painful choices," said Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries, who will participate in the conference.

Administration officials hope the conference will be a springboard for legislative action to shore up the program, which without any changes will run short of money to pay all promised benefits starting in 2032. But the officials said that the most they can hope for out of the conference is to find some common ground as a first step toward bipartisan legislation next year.

Gene Sperling, the White House economic adviser, said that by bringing together Administration officials and members-of Congress from both sides of the aisle, the conference would be "an opportunity to build some bipartisan trust in an area that has often been typified by very partisan and very harsh rhetoric in the past."

Trust and bipartisanship will be essential because the options that the conference will be examining are as explosive and subject to demagoguery as any on the domestic political agenda.

Should the nation raise the retirenient age, a step that would in effect be a benefit cut for most people?

Many economists say the answer is yes, because people are living longer and healthier lives. Organized labor, however, is vociferous in its opposition, saying it would be cruel to anyone doing physical labor. Moreover, many people do not realize that the age at which full retirement benefits can be claimed is already being increased to 67 from 65 over the next 24 years.

Should the relatively well off have to pay more in taxes to help keep the system afloat?

Social Security is financed by a 12.4 percent tax - split equally between employers and employees on earned income up to a certain level, now $68,400. Some proposals call for the income cap to be substantially increased or even eliminated, steps that would amount to a tax increase on middle and upper income workers. Such an increase would help close much of the financial gap facing Social Security, but would make the system a worse deal for those paying the higher tax.

Those are just two of the more straightforward ideas on the table. Others include reducing annual cost-of-living adjustments and reducing benefits for wealthy recipients. Some are complicated, like reducing the lifetime average earnings used in setting benefit levels by increasing the number of years used in calculating the average.

Some seem relatively straightforward, like requiring all new state and local government employees many of whom are not now covered by Social Security - to be brought into the system, helping to increase payroll tax revenues.

Some ideas have more or less been ruled out. There is no serious discussion of a straightforward, across-the-board benefit cut. And President Clinton has all but promised not to raise the payroll tax rate, although he has left open the option of increasing revenues through other means, like raising the cap on taxable earnings.

Politicians on both sides of the aisle say the most likely outcome is a compromise that includes some limited use of private accounts, a variety of benefit cuts and tax increases, and use of the projected Federal budget surplus. One approach favored by some Republicans would use all of the surplus to avoid benefit cuts or tax increases, although that plan, critics say, would only delay the day of reckoning.

Mr. Clinton is seriously considering support for some version of individual accounts for Social Security, although his advisers insist that he has made no decisions yet and that the most likely outcome is a compromise between the competing visions. Mr. Clinton has remained silent about which of the specific benefit cuts and tax increases he might support.

"I think he is wrestling with some of the difficult issues," Mr. Sperling said. "I do not feel that he has locked in on one specific proposal at this point."

Republican leaders all support some version of the individual accounts plans, most of which call for diverting a portion of payroll tax revenues into accounts that would be owned and controIled by the worker.

They have support from several prominent Democrats, including Senators Bob Kerrey of Nebraska, John B. Breaux of Louisiana and Daniel Patrick Moynihan of New York. But most liberal Democrats, especially those in the House, strongly oppose individual accounts and say the current system, under which payroll taxes go to pay benefits to current retirees, can and should be maintained.

The challenge underlying both approaches is to close a long-term gap between Social Security's revenues and its promises to pay benefits. Starting in 2032, unless changes are made, the system will take in enough money from the payroll tax to pay only 75 percent of promised benefits.

Proponents of individual accounts say the solution is to harness the power of financial markets. Allowing a portion of their payroll taxes to be invested through personal accounts will generate much better returns for workers than the current system, they say, and will give workers greater control over their own finances.

"The fact is that when today's 30-somethings start to retire we will not be able to pay the tab," said M. Anthony Burns, the chairman of Ryder System Inc., who headed a study of the issue for the Business Roundtable, an organization of large corporations. "We must bolster our current social safety net by increasing individuals' abilities to own and grow their retirement funds."

But shifting payroll taxes into private accounts creates a problem. That money has already been earmarked to pay benefits to current retirees. Current workers, therefore, would effectively be called on to save for their own retirement and to support current retirees simultaneously. As a result, individual account plans require deeper cuts in guaranteed benefits for current workers than those required by plans that would not establish individual accounts.

Advocates of private accounts say the cuts in guaranteed benefits will be more than offset by high returns on individual investments. Opponents, however, say the result will be to leave many retirees at the mercy of the markets, especially those most vulnerable in old age.

"We have seen an unprecedented level of outrage among working families when they learn of the benefit cuts and tax increases being proposed by those who would turn Social Security over to Wall Street," said John J. Sweeney, the president of the A.F.L.-C.I.O.

Some liberals say that the threat to Social Security is exaggerated and that if the system assumes even moderate economic growth in coming decades most of the problem will disappear.

Most liberals, though, are less sanguine, and the plans they are advancing generally rely, just like those of conservatives, on Wall Street. The difference is that liberals want the Government rather than individuals to do the investing, by putting as much as 40 percent of Social Security's reserves into stocks and bonds. They say that such an approach allows the system to benefit from the power of the markets without exposing individuals to the risks of Wall Street's ups and downs.

Moreover, most plans advocated by liberals also call for benefit cuts and tax increases. A plan developed by Henry J. Aaron and Robert D. Reischauer of the Brookings institution calls for accelerating the planned increase in the retirement age to 67 and continuing to raise it gradually as life expectancy increases; reducing spouses' benefits; computing average lifetime earnings in a way that reduces benefits, and subjecting a greater portion of benefits to income taxes.