ELECTION COULD CLOG SOCIAL SECURITY FIX; POLITICS COULD BE DELAYING PANEL REPORT
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September 02, 1996 01:00 AM

ELECTION COULD CLOG SOCIAL SECURITY FIX; POLITICS COULD BE DELAYING PANEL REPORT

Vineeta Anand
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    WASHINGTON - Election-year politics could conspire to delay an already overdue report on fixing the Social Security system until after the November elections, according to sources close to the national task force.

    Members of both parties readily admit publication of the council's report could cost President Clinton and GOP nominee Bob Dole precious political capital by forcing them to respond to the recommendations on strengthening the financially strapped system.

    The council's report is expected to present three proposals to buttress the system, combining benefit cuts, tax increases and partial privatization through diversion of some Social Security taxes into the stock market and out of government securities.

    Mr. Dole probably stands to lose the most if the report comes out before the elections because of his ties to Carolyn Weaver, a council member who helped devise the most radical proposal, which would mandate IRA-type accounts for younger Americans and let them plunk nearly half of their Social Security taxes into the accounts.

    Ms. Weaver, director of social security and pension studies at the American Enterprise Institute, a Washington conservative think-tank, served as Mr. Dole's social security adviser when he was Senate majority leader in the mid-1980s. But her proposal could translate into a tax increase for most Americans, a direct contradiction of Mr. Dole's pledge to cut taxes.

    Experts estimate that proposal could cost the nation as much as 2% of the gross domestic product for 60 years, or a roughly 1.5 percentage point-increase in payroll taxes for most Americans.

    What's more, Mr. Dole repeatedly has said he would "not touch" Social Security to squeeze the saving in government spending needed to pay for his $548 billion tax cut proposal.

    "It would be awkward if someone was successful in connecting (Mr. Dole) to Carolyn Weaver's plan," said Lawrence H. Thompson, senior fellow at the Urban Institute, a liberal Washington think-tank and previously deputy Social Security commissioner in the Clinton administration.

    At the same time, Mr. Clinton might have to renege if he promises to keep the system largely intact then undertakes a restructuring in his second term.

    Edward Gramlich, chairman of the 13-member council and a University of Michigan economist, admitted the report - originally slated to come out in January 1996 - could very well be delayed until after the elections. But he denied any overt political pressure to postpone the report. "The delays (so far) have been internal. It's gotten to be a fairly complicated mathematical exercise," he said.

    Even so, some sources close to the council suggest some members might be deliberately slowing the process by asking for reams of unnecessary statistics.

    In the meantime, a lively debate has begun over the merits of the council's proposals.

    To those who believe the program is no more than a government-run Ponzi scheme, the answer lies in giving workers the freedom to invest part of their taxes in stocks and bonds held in separate accounts, similar to IRAs.

    But there are just as many who insist the system can be resuscitated without fundamentally altering its structure through tax increases, benefit cuts and raising the age eligibility.

    "Only someone who was a fool or irresponsible would make radical changes in a program so fundamentally important as Social Security, based solely on declines in the trust funds not projected to begin for more than a quarter of a century," said Henry J. Aaron, an economist at The Brookings Institution, Washington.

    Proponents of privatization argue it is the only fair solution to the problem of emptying the pockets of millions of younger workers to keep the older generation from slipping into poverty.

    If the youngest of those now paying into Social Security could invest their contributions in the stock market, their nest eg would grow nearly six times as large as the benefits they are scheduled to receive from Social Security, according to an analysis by The Cato Institute, a Libertarian Washington think-tank.

    Pros, cons of privatization

    "For governments, privatization is the only viable answer to Social Security's inherent problems; for individuals, it is a profitable one," William G. Shipman, co-chair of the institute's Social Security project, wrote in a recent paper. Mr. Shipman, who is a principal with State Street Global Advisors in Boston, has written a book that advocates turning over the investment management of Social Security contributions to individuals.

    Although the various do-it-yourself proposals differ in their details, the underpinnings are the same - a two-tier system that would give individuals the freedom to invest some of their Social Security contributions in the private capital markets.

    In the opposing camp are dozens of equally prominent economists, academicians, actuaries and other experts who find "privatizing" Social Security frightening. They cite reams of statistics to show workers would lose more than they would gain through investing in inappropriate investments or by failing to keep up with inflation.

    Then too, the chairman of a new advisory board set up earlier this year to advise the Social Security Administration commissioner is averse to privatization.

    "I don't think a dramatic overhaul is called for," said Harlan Mathews, a former U.S. senator and onetime state treasurer of Tennessee who now chairs the seven-member permanent Social Security advisory board.

    "The craze and discussion going on now for privatization of Social Security is something we are going to need to discuss and examine, but I don't think the board is going to jump out there and say this is the solution," he said.

    Detractors of privatization proposals say there is no guarantee investments in the stock market would produce the historically high returns they have logged since the beginning of the century. Moreover, high administrative costs could erode returns. And many workers could see their nest eggs vanish overnight if the stock market dives just as they are getting ready to retire.

    "It didn't come down on a stone tablet from the mountain that stocks will always earn high returns," said Bruce Schobel, an actuary with New York Life Insurance Co., New York.

    But advocates of the privatization proposals say that is a specious argument.

    Diversification suggested

    A ceiling on investments that could be made in any asset class, any industry, or even a ban on some securities, would be one way of achieving diversification. Another way to cut the investment risk would be to limit investments to a basket of securities, and only through mutual funds.

    What's more, proposals that rely on investing in the private capital markets assume modest returns.

    Members of the advisory council, the Cato Institute and others supporting privatization are betting that even if Americans earn only a 4% inflation-adjusted return on their privately invested taxes, they still would come out ahead. And even if the costs of managing private investments are as much as 100 basis points, individuals would still stand to earn 3% on their contributions, way ahead of the less than 1% most can expect to receive on their Social Security contributions.

    At the end of 70 years, individuals would have built up 1.7 times the nation's gross domestic product in such private investments, said Sylvester J. Schieber, a member of the Advisory Council on Social Security, and director of research at Watson Wyatt Worldwide, Washington.

    "If we had those kinds of accounts today, we would have $10 trillion behind the system instead of an $8.5 trillion unfunded liability," he said.

    Investors might cash out

    But critics of privatization say the potential success could tempt some individuals to cash in their accounts before retirement for medical emergencies, unemployment or to buy a house.

    "It's a funny argument that if you end up doing well on your Social Security, that's a bad thing," said Ann L. Combs, a consultant with William M. Mercer Inc., Washington, and a member of the advisory council who backs individual choice.

    Proponents of privatizing Social Security say they would require people to maintain enough in their accounts to stay above the poverty line for the remainder of their expected life.

    Mr. Schieber and other authors of the privatization proposals also would prohibit people from emptying their accounts at retirement.

    Even so, it is conceivable some individuals might outlive their savings, especially if inflation is rampant, leaving them to rely on a wafer-thin, government-provided safety net. Plus, older people frequently incur huge expenses, especially on health care.

    "Do you really believe that someone can live at that age on half their income?" asked Larry Zimpleman, vice president of pensions at the Principal Financial Group in Des Moines, Iowa, and the new head of the American Academy of Actuaries, a Washington trade group.

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