Two radically different visions of Social Security's future appeared almost simultaneously in print this past summer. Together, they highlighted the choice Americans will soon be asked to make regarding the nation's most venerable social program. One view was advanced by Newt Gingrich, former speaker of the US House of Representatives. Gingrich, whose input influenced the Bush administration's free-market "fix" of Medicare last year, has now set his sights on a similar so-called reform, more far-reaching in its implications, of the federal pension system.
Most observers agree that because of looming demographic imperatives (more people retiring, fewer paying payroll taxes) the Social Security system needs shoring up. The question is whether the job will require merely a timely uptick in maintenance or a total structural revamping. Gingrich, now a fellow at the conservative American Enterprise Institute, favors the latter. The privatization scheme he is championing revolves around the introduction of what are called personal accounts, leading to a drastic reduction in the role of government; it would totally alter the nature of the program, changing it from a form of cooperative social insurance into a collection of private, self-financed retirement plans.
Presently, the Federal Insurance Contribution Act (or FICA) tax on worker salaries funds both Social Security and Medicare. The employee half of the Social Security portion -- the employer pays a matching share -- is now 6.2% of an individual's wages; that money goes directly into government coffers and returns in the form of retirement and other benefits. Gingrich would optionally redirect those individual payroll taxes (if employees so chose) into personal retirement accounts that workers would then invest in corporate stocks and bonds, selecting from a list of officially approved funds. The federal government would eliminate risk by guaranteeing to match lost benefits should the investments not pan out, providing a return equal to today's Social Security.
In theory, the Gingrich proposal, which was actually developed by Congressmen Paul Ryan (R-Wis.) and John Sununu (R-N.H.), offers the enticement of capital accumulation for investing workers (supposedly, an average of $400,000 over an employed lifetime), while eliminating uncertainty by establishing a benefit floor. Participants would all join the "ownership society" and live happily ever after on their burgeoning unearned incomes; the remaining Social Security program, meanwhile, would avoid bankruptcy because the stock market would be paying much of the bill for the nation's retirement system.
On a superficial level, the idea sounds plausible, and it's been a favorite cause of Washington's right-wing think tanks since the late 1990s. The market-oriented Cato Institute, funded in part by the securities industry, a potential beneficiary -- it would manage the private accounts on a fee-for-service basis -- has played a particularly active lobbying role. Nevertheless, there are a few flies in the privatization ointment. For starters, the proposal, already formally introduced into Congress as the Ryan-Sununu bill, relies for its success on a constantly rising stock market. Should the market fall, activating the investor-bailout provision of the plan, the FICA tax money needed to fulfill the government guarantee of a benefit safety net wouldn't be there; it would already have been distributed, invested, and lost.
The likelihood of that happenstance is impossible to predict, but consider this: the Dow Jones industrial average, after going up through most of the 1990s, fell for three consecutive years between 2000 and 2002, losing 27% of its value. There was a rebound in 2003, but in late February of this year, the Dow resumed its decline, losing another 5% over the ensuing seven months. The NASDAQ is also down for 2004 (by 5% through Sept. 30), as is the S&P 500. In such a roller-coaster environment, the Gingrich-backed plan loses much of its allure.
There are also automatic costs associated with any transition to private accounts irrespective of what the stock market does. Because the Social Security Administration would have to continue paying non-investing retirees at current benefit levels while at the same time diverting a sizeable portion of payroll taxes to the financial markets, replacement monies would have to be added to the program from general revenue. The Washington Post reports estimates by policy experts that place this potential cost to the Treasury at $1.5 to $2.0 trillion over 10 years -- or up to $200 billion annually.
Fortunately, there is an approach to dealing with Social Security's prospective problems that doesn't involve bankrupting the federal government or asking future pensioners to take a flier in the stock market. This summer's counterpart to the policy gamble endorsed by Newt Gingrich was presented by Robert Ball, former commissioner of Social Security during the KennedyJohnson years. Ball, long regarded as one of the country's leading experts on the retirement program, recognizes the need for change, but his prescription is in marked contrast to the chancy privatization plan.
Starting from the premise that Social Security doesn't need extremist reforms because it hasn't failed, Ball offers four relatively modest adjustments designed to carry the program safely through the baby-boom generation's retirement and beyond. First and most important, he would substantially raise FICA's annual tax ceiling or "cap" to cover more of what high-income earners make, thereby reducing FICA's regressive nature and enhancing revenue. Currently, no salary or wage income over $87,900 is taxed, and, consequently, only 85% of the nation's total earnings are subject to the payroll levy; Ball would gradually increase that to 90% over a period of several years.
Ball would supplement his tax-cap expansion with three other practical innovations: a change in how Social Security's annual cost-of-living adjustments (COLAs) are calculated in order to slow their growth to a manageable level, a retention of the federal estate tax on bequests over $3.5 million as dedicated revenue for Social Security, and the creation of a failsafe mechanism for the program's problematic out years in the form of a flexible payroll-tax rate that would automatically adjust upward, if needed, to balance the trust fund's books.
The Gingrich and Ball presentations offer two stark alternatives for dealing with Social Security's future: a pure riverboat gamble on the one hand versus some commonsense reforms to a program that has served us well for 70 years on the other. The gauntlet has been thrown down. Let the debate begin.
Wayne O'Leary is a writer in Orono, Maine.