WASHINGTON -- Fifty dollars isn't much of a retirement plan.
That's what each of the 145 million workers contributing to Social Sescurity would get under Rep. John Kasich's plan to use the federal budget surplus to set up IRAs.
Nonetheless, several leading economists are applauding the plan as a step in the right direction to recast the Social Security system.
Mr. Kasich, R-Ohio, chairman of the House Budget Committee, has not yet offered details of his proposal.
"It would be a relatively painless way to get the ball rolling to give people more choice and more control on how their retirement is funded," said Bruce Cutherbertson, a spokesman for Mr. Kasich.
Mr. Kasich got his idea from Martin Feldstein, a professor of economics at Harvard University and former chairman of the Council of Economic Advisers to President Ronald Reagan.
Mr. Feldstein suggested projected federal budget surpluses are large enough to let the government divert from Social Security 2% of each worker's pay (on earnings up to the $68,400 Social Security wage cap) to invest in individual retirement accounts. All working Americans then would receive an income tax credit for these IRA deposits, resulting in a tax cut.
The money in these IRAs would grow tax-deferred until retirement age. When those workers retired, the Social Security benefits they received would be reduced by a dollar for every two dollars they received from their IRAs.
"I applaud John Kasich because we need some bold leadership (on Social Security reform) and he's starting to provide it," said Laurence J. Kotlikoff, a Boston University economist who has been studying the problems afflicting Social Security.
"It's a much better idea to try and help people shore up their retirement income for the future than to dissipate the surplus in new spending," Mr. Kotlikoff said.
He is advancing his own proposal to fix Social Security. He would divert eight percentage points of the Social Security payroll tax into individual accounts, which would be invested in a single global-index account so that everyone would get the same return on their investments. Lower-income earners would get a matching contribution from the federal government.
As workers hit 60, their account balances would be converted into annuities. At the same time, the accrued liability for people in the system would be frozen.
Michael Tanner, director of health and welfare studies at the Cato Institute, a Libertarian think tank in Washington, also supports a move toward IRA-like investments.
"There's no way to save Social Security except to go down the road of individual accounts," he said.
Mr. Tanner prefers a different wrinkle. He would like to see the income the Social Security system loses through the diversion of money into the IRAs be made up by reimbursing the Social Security trust funds with part of the budget surplus.
"If that (reimbursing the Social Security trust funds with the budget surplus) is what they intend to do, it's a very good idea," he said.
At the same time, Lawrence Kudlow, chief economist at American Skandia Life Assurance Co., in Shelton, Conn., and a vocal supporter of individual rights, called Mr. Kasich's proposal an attractive idea.
"Republicans have started to come to their senses and are starting to say we agree with you (President Clinton) that something has to be done about Social Security," he said.
BUYING FORD EXPLORERS
Mr. Kudlow offered an even more radical approach, suggesting the budget surplus be used to cut the Social Security payroll tax rate by one percentage point or more.
He readily acknowledges Americans would be free to spend, rather than save, that extra money. "If you want to spend the tax cut on a Ford Explorer, that's up to you."
Meanwhile, Mr. Kasich's idea, along with dozens of other Social Security reform proposals, probably will get an airing at the first of President Clinton's forums on Social Security on April 7.
The need to fix Social Security is made even more pressing by a yet unpublished study by the Federal Reserve Bank of Cleveland. That study points out future generations of Americans will inherit the unpaid bills of baby boomers if the spiraling cost of such programs is left unchecked.
The forthcoming study -- by Jagdish Gokhale, economic adviser at the Cleveland Fed, and two Congressional Budget Office analysts, Benjamin Page and John Sturrock -- predicts those born after 1995 will pay a 49.2% lifetime tax rate, compared with a 33.4% lifetime tax for those born in 1950. The lifetime tax was computed by examining how much of the government's outstanding bills (for such programs as Social Security) will be paid by those now alive over the remainder of their lives, as opposed to by future generations.
"Something has to give," Mr. Gokhale said, pointing to the enormous increase in payments the Social Security system will have to pay out as the vast generation of middle-aged Americans start retiring in the next decade.
PLENTY OF DRAWBACKS
Still, while Mr. Kasich is attempting to address the problem, his proposal has several drawbacks, experts say.
For one thing, the Kasich IRAs might not be economical because they would have small account balances, probably no more than several hundred dollars, and high administrative costs.
Even if the CBO projections for the budget surplus are too conservative and the surplus comes in around $80 billion as Mr. Kudlow estimated, working Americans would receive only $550 apiece for the Kasich IRAs.
Then, too, taking away the government's role in providing an old-age security blanket and handing it to individuals could mean people who invest wisely might have more money than those who turn out not to be such savvy investors.
Finally, there is no guarantee the federal government will produce budget surpluses for years on end.
If the Medicare program goes into the red -- predicted to start happening at the turn of the century -- "all bets are off" on federal budget surpluses, said Bill Beach, an economist at the Heritage Foundation, a conservative think tank in Washington.
Assuming the government's policies do not change and the economy stays healthy, the CBO estimates the surplus could grow to $138 billion in 2008.
FUNDAMENTAL FLAW
Of course, none of this takes into account the most fundamental flaw of proposals such as Mr. Kasich's -- that the federal government's budget surplus is generated on the back of the Social Security system, and siphoning money out of the system to set up IRAs actually would exacerbate its financial crisis, according to some experts.
Because the Social Security trust funds are taking in more money than they are now paying out, the system is expected to continue generating large surpluses for the next several years.
But lawmakers don't mention that Social Security surpluses pay for government programs that go over budget. The Social Security system is expected to generate a $30 billion surplus this year, eroded to $8 billion by the rest of the federal government, explained Kenneth A. Steiner, vice president of pensions at the American Academy of Actuaries in Washington.
"The concern we would have is that you would worsen the long-range actuarial balance of the program, and accelerate the date the trust fund would be exhausted," Mr. Steiner said.
