Let the debate begin! The future of Social Security is too important to be decided without a thorough, hard-fought discussion of the advantages and disadvantages of the proposals President Clinton made in his State of the Union address last week, and the proposals that have been made by others within and outside government.
There have been three competing schools of thought on Social Security reform:
First, leave the basic structure alone and simply raise payroll taxes, cut benefits or push back the normal retirement age, or a bit of all three.
Second, have the Social Security Administration invest a significant part of the system's assets in the stock market, seeking the higher returns the stock market historically has provided.
Third, give individuals the right to invest at least part of their Social Security taxes in the stock market.
Mr. Clinton rejected the first proposed solution, adopted a lot of the second proposal and a little bit of the third.
He proposes investing at least $650 billion of Social Security revenue in the stock market over the next 15 years. And at the same time he proposes giving everyone another tax-favored (presumably) individual savings vehicle -- but separate from Social Security.
There are problems with both proposals.
The prospect of an arm of government investing $650 billion of Social Security money in the market raises concerns about socialism by stealth.
Would the government at some point be tempted to use its share ownership to influence corporate decisions?
Who would make the investment decisions?
Presumably the money would be invested in an index fund, but which index fund?
Would such investment cause market distortions?
While the $650-plus billion is a lot of money for the market to digest, it would be only 15% of the assets of the Social Security System.
Would that provide sufficient increase in the investment returns of the system to make the whole exercise worthwhile?
As for the second proposal, if Mr. Clinton insists on not privatizing part of Social Security, do we really need another IRA-like savings vehicle? Couldn't the same effect be achieved with less bureaucracy by simply changing some of the rules that currently apply to IRAs and 401(k) plans?
Mr. Clinton's proposals offer illusory improvements to Social Security, initiating potential government interference with the capital markets without improving retirement security for individuals by giving them control of their money.
Congress, ultimately, still would control the funds, opening opportunities to use, or abuse, them for non-Social Security spending if the investment returns grew beyond needed benefit levels.
Last year, Mr. Clinton proposed saving 100% of the budget surplus for Social Security. This year, he's cut it to 60%, showing the government can't keep its hands off of the extra money.
While Mr. Clinton's proposals appear ill-thought-out (were they really thought about at all, or simply thrown together?), at least he might have done enough to ensure the debate on Social Security reform is joined and legislation is passed this year.
That alone is worth applauding.