Squaring Off, at Last, On Social Security

By: Richard W. Stevenson
The New York Times, November 29, 1998

The commitment appears as solid as ever, gut with Social Security facing long-term financial problems, the means of making good on it are now under serious debate for the first time since Franklin D. Roosevelt proposed what would become the most enduring of New Deal legacies.

Ten months after President Clinton said that shoring up the system should become the nation's top domestic priority, he and Congressional leaders will begin examining the options in earnest and probing for common ground at a two-day White House conference next month, kicking off a process that could as easily end in partisan gridlock as in the historic achievement both parties are hoping for.

Should the country stick with the system it has used for 63 years and continue to levy taxes on current workers and their employers to pay current retirees? Or as the time draws near for the vast baby boom generation to move onto Social Security, should the nation shift to a system under which individuals would invest a portion of their payroll taxes in private retirement accounts.

It is an issue that turns to some extent on the complexities of actuarial tables, benefit formulas and other arcana. But in a broader it encapsulates fundamental tradeoffs: between individual and collective responsibility, market forces and government, and maximizing rewards and minimizing risks. Indeed, few issues have such a rich ideological backdrop or high political stakes, a fact that promises to make the debate over Social Security's future particularly contentious.

The problem is rooted in inexorable demographic change. Because there will be fewer workers paying taxes relative to the number of retirees drawing benefits once the 76 million baby boomers leave the workforce in coming decades, Social Security will take in on enough revenue to pay 75 percent of its obligations starting around 2032.

Efforts to reach a solution are being framed in part by how the world has changed since 1935. Life expectancy is shooting up, so most people will spend far longer in retirement than anyone envisioned six decades ago. Investing, long the province of the elite, is now a routine part of middle-class life. Faith in market-based capitalism, which probably hit a nadir around the time of Social Security's creation, has long been on the rise, tested though it has been by the recent bout of global financial turmoil. At the same time, trust that government can deal with the big issues has eroded since Vietnam and Watergate.

To conservatives, such changes are a call to put more responsibility in the hands of individuals and an opportunity to put the power of the markets to work for everyone through private Social Security accounts. If in the process the country scales back the biggest of all Government social programs, so much the better.

"It's one of the reasons the debate has seen so it fierce," said Michael Tanner, the director of health and welfare studies at the libertarian Cato Institute. "There's a recognition, particularly on the part of the left that Social Security and Medicare are the last programmatic links between the average citizen and the government."

To liberals, though, the changes that have taken Place do not undermine the case for, a collective approach to income security for the elderly and other It is an issue that turns to some extent on, the beneficiaries of Social Security, including disabled workers and those left behind when a breadwinner dies.

Most individuals, said Henry J. Aaron, a senior fellow at the Brookings Institution, do not do a very goo job of planning for distant or unlikely events like retirement or disability. Moreover, he said, since many people are already exposed to the risks of big stock market swings through 401 (k) programs and Individual Retirement Accounts, there is good reason to maintain Social Security as a guaranteed benefit in which any investment or economic risks - as well as administrative costs - are spread across the generations and income levels. The wild gyrations in the stock market this year underscore the point.

"The reasons that led the nation to adopt social insurance are about as strong now as they ever were", Mr. Aaron said.

There is some common ground. Many, though not all, Democrats support looking to the returns available on Wall Street to help plug the hole, just as Republicans do. But rather than resort to the wholesale shift into private accounts advocated by Republicans, many Democrats want the investing to be done by the Government itself, using the surplus that will build up for the next 15 years as payroll tax receipts exceed what the system pays out in benefits.

Indeed, nearly every facet of any plan is likely to have as many opponents as supporters. Increasing the retirement age to, say, 70, would go a long way toward restoring the system's health, but is vehemently opposed by organized labor. Eliminating or substantially raising the cap on earnings subject to the payroll tax currently $68,400 - would solve much of the problem, but would amount to a big tax increase on middle-and upper-income people.

So it remains unclear whether it will be politically feasible to piece together a compromise.

"There is a growing understanding that this is a big issue out there," said Kenneth Apfel, the Social Security Commissioner, "but I must say I have yet to see any kind of consensus emerge."

Success will depend to some extent on political calculations by both parties. Congressional Democrats will have to decide whether to compromise now or delay in the hope that they might regain control of the House in 2000.

Republicans will have to decide whether to make a deal so they can turn attention to what they see as a more potent issue, tax cuts. And Mr. Clinton, more eager than ever after his travails this year to leave a positive legacy, will have to decide whether to take a bold stand or work behind the scenes to cobble together a one-from column-A, one-from-column-B solution.

With more than three decades to go before the problem hits, there would not appear to be much urgency. But economists say that every year that goes by will make any solution more expensive to taxpayers and beneficiaries alike. Perhaps more important, the political and economic climate is as favorable now as it is likely to be for years: a second-term President who does not have to worry about re-election, a big Federal budget surplus and a baby boom generation that has a stake in keeping the system healthy for another half century.

"We need to reach a consensus on needed changes," said Michael J. Boskin, who was the Bush Administration's chief economist, "adopt them now and phase them in gradually before the demographic transition overwhelms us economically and politically."