Retirement Plans

Genuine Social Security reforms appear surprisingly likely.

Michael W. Lynch from the August/September 1998 issue

(Page 2 of 2)

It's important to note that the approach embodied by the Moynihan-Kerrey plan seeks a permanent two-tier system. While 2 percent of one's income compounded over a lifetime amounts to a significant chunk of change, the savings account is designed to supplement the Social Security benefit, not replace it.

Contrast this approach with that of Sens. Gramm and Pete Domenici (R-N.M.). They have developed a two-tier plan that would allow individuals to invest three percentage points of their payroll tax in individual retirement accounts, leaving the other 9.4 percent to cover the costs of current retirees. As with the Moynihan-Kerrey plan, the government would guarantee a minimum benefit. But the goal of Gramm's plan is a fully funded system based on individually owned accounts. Over a period of 50 years, the portion of the payroll tax dedicated to private accounts would increase from 3 percent of payroll to 8.5 percent, as those already locked into the current system die. The government would always guarantee a minimum benefit no less than 120 percent of the current level. But if the economy performs at the historical average, few would have to rely on the government's safety net.

Not surprisingly, this approach is more popular in the House, where Reps. Nick Smith (R-Mich.), Mark Sanford (R-S.C.), Pete Sessions (R-Texas), and John Porter (R-Ill.) have introduced bills that would put the system on a glide path to privatization. Their plans, while falling in the same category as the Gramm-Domenici proposal, would carve out different amounts targeted for private investment, ranging from 2.8 percent in Smith's proposal to 10 percent in Porter's.

None of these plans is perfect. Daniel Mitchell of the Heritage Foundation and Ed Crane, president of the Cato Institute, criticize each of the Senate plans as too timid. Mitchell, who has studied Britain's two-tiered system, maintains that at least 5 percent of payroll must be deposited into private accounts for the system to work. Crane, who seems generally cranky with Congress, says at least 10 percent ought to go into private accounts.

A Social Security analyst from the Hill notes that the plans' numbers don't always support the sponsors' rosy claims. Moynihan's approach, after all, solves the solvency problem the old-fashioned way: by increasing taxes and lowering benefits. Gramm relies on the fictitious Social Security trust fund to solve what he calls the short-term "cash flow problem," otherwise known as transition costs.

But another way of interpreting the proposals' moderation is the seriousness with which politicians are taking the issue, now that Social Security reform is a legislative possibility, rather than just an applause line in Republican after-dinner speeches. Gramm picked the 3 percent figure after analyzing two independent variables: the lowest amount of average payroll that a 22-year-old would need to invest to be fully self-supporting at retirement and the highest amount of average payroll that would be politically feasible to fund during the transition.

Gramm is upfront that funding the transition to his system, which would be 3 percent more expensive than the status quo in the short run, would come from three sources: the budget surplus, redirection of some corporate taxes, and 71 percent of the Social Security trust fund. "No one should think [this] is a free transition," warns Gramm. "[It] is going to require cutting spending or raising taxes or incurring debt in order to do it." The bottom line for Gramm, however, is that it is worth doing even if it is necessary to raise taxes to liquidate the trust fund, since funding the current system will also require tax increases. Says Gramm, "The benefits of the transition are so big, you would want to do it even if you had to fund every penny of it by raising taxes."

The Breaux-Kolbe plan too is designed to become law rather than please activists. When asked why his plan doesn't more aggressively move Social Security to a wealth-based system, Kolbe cites the political importance of retaining a government safety net. "When I started out, I was really [leaning] much more towards the Chilean, individual savings account," he says, referring to the much revered plan enacted by Chile in the early 1980s that is entirely based on mandatory savings. "But I realized politically it wasn't going to work."

At any rate, these plans are simply blueprints of possibilities. With congressional elections in November, nothing will happen until the next Congress. President Clinton, who promises to "fix the roof while the sun is shining," will sponsor a White House conference on Social Security reform in December. In January, he promises to huddle with congressional leaders to craft a passable plan.

Is Social Security reform likely to end the injustice of the system's coerced savings or bring riches to Americans in their golden years? No. But if it allows individuals a chance to invest a portion of their payroll taxes, it will take an important step in the right direction. What is more noteworthy is how far the center has shifted. Says Kolbe, "I've heard Dick Morris say on a couple of occasions that he told Clinton a couple months ago that his legacy would be Social Security."

Once again, the crafty political consultant may have whispered in the president's ear at an opportune time. Come 1999, there may just be a bipartisan deal working its way through Congress that will actually benefit us all.