Study Suggests Plan for Social Security Surplus

A study by Morgan Guaranty Trust Co. recommends a partial privatization of Social Security to avoid the temptation of squandering the huge surpluses now piling up in the system’s trust funds.

It says such a move would give the United States a chance to dramatically increase its savings rate.

But the study warns that the nation must “strenuously resist” the temptation to splurge and spend the Social Security surpluses on Medicare or other programs.

The study suggests that workers be allowed to divert 2 percentage points of their payroll tax into individual investment accounts starting in 1990, when the tax climbs from 7.51 to 7.65 percentage points.

“For the typical taxpayer the diversion would amount to about $500 to $1,000 per year,” the study suggested, with the money invested in accounts “similar to today’s Individual Retirement Accounts, but subject to tougher tests of investment suitability and tighter restraints on early withdrawals.”

In exchange for the opportunity to build up private accounts, the workers would eventually get reduced Social Security benefits.

But this approach would free up money for private investment and “ensure that most of the Social Security reserve is productively invested,” said the study in the July issue of Morgan’s World Financial Markets report. The report is published by Morgan Guaranty Trust Co., a subsidiary of J. P. Morgan & Co. Inc.

After encountering severe deficits in the late 1970s and early 1980s, Social Security’s funds are growing rapidly--$20 billion last year alone and an estimated $500 billion a year by 2015. The system is expected to have $12 trillion in reserve in 2030--or about $2.5 trillion in today’s dollars. By law, all of that money must be invested in Treasury securities. Each year’s Social Security surplus reduces the overall federal debt by an identical amount.

The Morgan study said it is possible that by 2005, Social Security’s trust funds “could absorb all outstanding federal debt.”

The Social Security system expects its outgo to start exceeding its income around 2020, and would cash in its federal securities over the next three decades to help pay for the retirement of the post-World War II baby boomers.

The report said: “The temptation to squander the looming Social Security surpluses for immediate gain must be strenuously resisted. With careful husbandry, (they) present an unequaled opportunity to boost the U.S. net savings and investment rates, perhaps to as much as 8% of GNP.”

The national savings rate has averaged 3% in the 1980s, and dipped to just 1.9% in 1987.

“Wisely handled, Social Security surpluses could make a dramatic difference for U.S. economic prospects. Higher domestic savings not only would help eliminate the trade . . . deficits, and the associated dependence on foreign saving, but also would help build up the nation’s productive capital stock,” it said. “That is the only convincing assurance of retirement security.”

The study also suggests the possibility of restraining costs by reducing future benefits for middle- and upper-income retirees, and by raising the retirement age to 68 or 69 in the next century.