Privatizing Social Security Gains Backers in Congress

Washington, April 5- Just a few years ago, Cynthia de Lorenzi, a stay-at-home mother in Dallas, knew little about investing and found the topic intimidating. "It was like knocking on the doors of a world I'd never been invited into," said Ms. de Lorenzi, who was forced to confront the subject after a divorce left her in charge of her own finances for the first time. These days she spouts investment jargon, debates the merits of technology stocks and rattles off names of mutual funds.

With the stock market having gone up and up since her first tentative investments three years ago -- the Dow Jones industrial average topped 9,000 briefly for the first time on Friday, up from 4,000 in 1995 -- Ms. de Lorenzi now feels confident turning her modest savings over to Wall Street. So much so, in fact, that she enthusiastically supports what would be one of the most fundamental changes to the Government's compact with its citizens in decades: the proposal to remake Social Security by giving individuals the right to invest some of the money they normally pay in taxes to finance the retirement system, granting them a shot at a pot of gold but also exposing them to new risks. "Be afraid not to do it," she said, "because you'd be missing the opportunity of a lifetime to get control of your life."

Not everyone shares her outlook. Among those who believe that stock markets go down as well as up, and others to whom Wall Street might as well be on another planet, the notion of turning Social Security into an investment program is often seen as irresponsible or at least unnecessary.

"There are tens of millions of people who have no familiarity with financial affairs," said Henry J. Aaron, a senior fellow at the Brookings Institution, the research group. "Even among those who are sophisticated, we tend to be lulled into a false sense of power and competence by what has happened recently in the U.S. with this perfectly marvelous period of rising share prices."

But as Congress and the White House debate how to insure that Social Security will be able to weather the retirement of the baby boom generation in coming decades, members of both parties are taking seriously the idea that this has become a nation of money managers, knowledgeable and secure enough, like Ms. de Lorenzi, to take on at least partial responsibility for what has long been a Government guarantee against poverty in old age.

The issue is sure to be central to a public discussion about Social Security's future that President Clinton will lead on Tuesday at a bipartisan forum in Kansas City, Mo., the first in a series of events he will hold this year on how to prepare for the aging of the 76 million Americans born in the 18 years after the end of World War II.

When the baby boomers start retiring in droves in about a decade, they will drain Social Security's reserves rapidly, and by 2029, if no changes are made, the system will be able to pay only 75 percent of promised benefits. Defenders of the current system say the problem can be taken care of through relatively modest steps like accelerating the planned increase in the retirement age to 67, raising payroll taxes slightly and trimming cost-of-living increases.

It remains unclear which way the debate will tilt, or whether the solution might be found on some middle ground like having the Government invest the Social Security system's money directly in the markets in search of higher returns rather than turning that job over to individuals.

That such a national discussion is taking place at all reflects the changes to the nation's psyche wrought by the stock market's unprecedented surge and the proliferation of investment vehicles like 401(k) programs, mutual funds and Individual Retirement Accounts.

Just to touch Social Security was long considered political suicide in Washington, an attack on what is arguably the most popular and successful of Federal social programs. But privatization proposals that even a year or two ago were heard only at conservative think tanks are now being bandied casually about Congress with no apparent political backlash. With little fanfare, the Senate last week passed a nonbinding resolution calling for private investment accounts to be part of any Social Security reform package. Even Senator Daniel Patrick Moynihan of New York, a Democrat who is a staunch defender of Social Security, set out an approach last month that includes private accounts.

Most of the privatization proposals call for a portion of the payroll taxes levied on workers and employers to finance Social Security to be diverted into individually managed accounts that could be tapped only in retirement. The Government, under these proposals, would continue to pay a reduced but guaranteed benefit as a safety net for the elderly. Under the current system, known as pay as you go, each generation of workers pays for the benefits of people then in retirement.

"Stock ownership is now wide but not terribly deep, and clearly that fact along with the extraordinary upsurge in the market has changed the way people think about savings and retirement," said Robert B. Reich, who was Secretary of Labor in Mr. Clinton's first term. "This debate was ostensibly triggered by fears about the solvency of the Social Security trust fund. The real source of this debate is the increase in stock market participation."

The percentage of Americans owning stocks doubled, to 21 percent, in the 25 years up to 1990, said a report done last year for the Nasdaq stock market by Peter D. Hart Research Associates. In the next 7 years, it doubled again, to 43 percent. The same study reported that ownership of mutual funds jumped to 40 percent of adults in 1997 from 13 percent in 1990. The number of people in 401(k) programs jumped to 27 million last year from 7.5 million in 1984, the Labor Department said.

Yet, if there is clearly a constituency for a more investment-oriented approach to Social Security, the data also show a sharp divide between people who invest and those who do not.

The 1995 Survey of Consumer Finances conducted by the Federal Reserve, the most recent detailed nationwide look at household finances, found that among respondents who identified themselves as professional and managerial, 70.3 percent had some form of retirement account, 26.1 percent owned individual stocks and 21.3 percent owned mutual funds. Among respondents who identified themselves as machine operators and laborers, 47.3 percent had retirement accounts, 9.0 percent owned individual stocks and 6.9 percent owned mutual funds. Moreover, for 16 percent of the nation's elderly, Social Security's old-age benefits are their only source of income; and for two-thirds of the elderly, Social Security is the major source of income.

Defenders of the current system and proponents of a major change have been arguing heatedly in the last several months about the relative rates of return available from the stock market over the long run versus the payback workers can expect from their contributions to Social Security.

From 1926 through 1996, the stock market generated an annual average return of 7.56 percent after factoring out inflation, far higher than almost anyone working today can expect to get back in retirement benefits from their Social Security contributions. But critics of the investment-oriented approach said the overall figures mask long periods in which returns have been weak or even negative.

None of the counterarguments shake the faith of Ms. de Lorenzi in the power of investing. She has started appearing on a radio program in Dallas to urge people, especially women, to save and invest more, and she has joined a grass-roots group, Economic Security 2000, that advocates individual investment accounts as one element of a plan to fix Social Security.

"When we first started talking about this, it was a taboo subject, as if you had showed up in your underwear," she said. "Now people are constantly talking about the stock market, and becoming very comfortable with the language. And as they become more comfortable, they're more accepting of the idea."