Social Security Council Favors Shift to Stocks

A Social Security advisory council wants to shift some of the retirement system’s investments from Treasury bonds to the stock market, a historic change that would expose the funds to greater risk but also would be likely to bring a higher return, council members told Congress Monday.

For the first time since the inception of Social Security six decades ago, council members are in broad agreement on the idea as a way to get more money for the retirement trust funds, said Sen. Daniel Patrick Moynihan (D-N.Y.), a member of the Senate Finance Committee’s subcommittee on Social Security, which conducted the hearing.

But there is deep division on the council over whether the federal government or individual workers should select stocks and bonds for investment purposes.

“Looking to the future, Social Security provides such a low rate of return that many workers want to have alternative investment choices,” council member Sylvester Schieber, vice president of the benefits firm Watson Wyatt Worldwide, said at the Senate hearing.

The council, however, has been unable to muster a majority to support any one of three plans for shifting to private stocks and will almost certainly send all three to Congress for consideration.

“The difference of opinion among us is whether investments in equities should be made by individual workers or by the trust fund,” said council member Edith Fierst, a Washington attorney.

“At least 75 million working Americans have never invested in the stock market,” Fierst warned. “How will they know what choices to make?”

Three council members who testified Monday represented each of the three plans. All agreed that, regardless of the solution, Social Security needs a higher rate of return on the payroll tax revenues collected from 125 million workers. The money is now invested exclusively in Treasury securities.

The financial appeal is considerable. Social Security’s retirement fund will have an enormous surplus of revenues over expenditures between now and 2013, when baby boomers begin retiring in large numbers. Equities have a long-run rate of return of about 10%, compared with 5% or 6% for Treasury issues. But the risk of a market decline is also daunting.

The advisory council, selected every four years by the secretary of health and human services, is the prime vehicle for proposing changes in the Social Security system. Its recommendations typically result in major legislation.

Investment in the market is part of a bigger discussion on assuring the future solvency of the Social Security system, which pays benefits to 43 million Americans. It is expected to come under fiscal strain in the next century, when the massive baby boom generation reaches retirement age. By the year 2029, the trust fund is projected to have insufficient funds to meet its obligations.

Each plan under consideration by the council depends heavily on stock market investments. Those plans are to:

* Continue the current tax-collection system, under which worker and employer each contribute 6.2% of payroll on the first $62,700 of annual income. But instead of investing exclusively in Treasury securities, an amount equal to 12 to 18 months worth of benefits would be kept in Treasury securities. All other investment would be in special broadly based stock and bond funds managed by a panel named by the president and Congress.

The panel would select investments and monitor performance. This approach apparently has the support of six of the 13 members of the council, including former Social Security Commissioner Robert Ball.

* Establish new personal security accounts for every worker. Under such a system, 5% of the 12.4% total payroll tax would be invested in stocks and bonds selected by the worker. The remaining 7.4% of contributions would remain in the basic Social Security system and continue to be invested in Treasury bonds.

This approach, devised by Schieber, is supported by five members. It would represent the most radical change for Social Security since its creation in 1935 as a system of universal social insurance.

The transition would cost more than $1 trillion, however, because the 5% diverted by workers into individual accounts no longer could be used to pay current retirees, as is now the practice.

To offset the loss, Schieber said, the government could impose a 1% national sales tax on all goods.

* Create a new individual account in addition to the current system. The 12.4% payroll tax and its benefit structure would be maintained. And a new mandatory charge of 1.6% would be levied for individual accounts. The worker would pick stocks and bonds for this account. Council Chairman Edward M. Gramlich, a University of Michigan economist, is the author of the plan, which is backed by two members.

Witnesses and senators alike emphasized that any changes would not affect current beneficiaries. All of them would continue under the current system.

“All promises to current recipients and those nearing retirement age must be fully kept,” said Sen. Alan K. Simpson (R-Wyo.), the subcommittee chairman.