Stocks Called a Risky Fix for Social Security

The investigative arm of Congress will warn today that letting the Social Security system invest in the stock market is a risky strategy--and not the magic button that would dispel the financial clouds hanging over the huge retirement program.

The admonition from the General Accounting Office comes as many members of Congress are expressing enthusiasm about proposals to allow workers to funnel some of their Social Security payroll taxes into personal investments to help bolster their retirement income. Other proposals would permit the Social Security system to do the investing, rather than individuals. Either way, the GAO is skeptical.

“Although stock investing could delay the [Social Security] trust fund’s exhaustion, it cannot fix Social Security by itself,” the GAO said in testimony prepared for a hearing today of the Senate Special Committee on Aging.

“Restoring the program’s long-term solvency will still require difficult choices about benefit cuts and tax increases,” according to the GAO testimony, a copy of which was obtained by The Times.

Sen. Charles E. Grassley (R-Iowa), the committee chairman, is equally cautious. Investment in the stock market “is not a silver bullet to solve Social Security’s problems from here to eternity,” he said in an interview Tuesday. But investments could help as part of a bigger package that also involves some politically controversial steps, he suggested.

To truly ensure Social Security’s solvency, Grassley said, Congress and the public must be willing to consider raising the age of retirement, adjusting the annual cost-of-living increases granted to beneficiaries and imposing means testing, which would reduce the benefits given to affluent persons.

“We have to address all of these issues because we have an aging society--just focusing on the rate of return from the stock market is not enough,” said Grassley.

However, for many of his congressional colleagues the booming stock market looms as a cure-all for Social Security.

Under the current system, workers and their employers each pay 6.2% of a given employee’s annual salary--up to $68,400--in Social Security payroll taxes. Under the private investment idea, a worker would place part of the tax--perhaps as much as 3%--in individual accounts to be invested in stocks and bonds. The money and any profits earned would be available at retirement.

Although Republicans have been the most eager to embrace such proposals, President Clinton earlier this month acknowledged at a town hall meeting that such ideas could be part of the solution to reforming Social Security. But like the GAO, he rejected relying exclusively on them.

The Social Security system now collects more tax revenue than it pays out in benefits. The surplus is invested in special Treasury securities, which carry a 7% interest rate.

But the aging of the baby boom generation will generate immense pressures on the system. Federal officials have predicted that the rapid growth of the ranks of retirees, combined with expected slow growth in the work force, will produce a fiscal crunch by 2029, at which time Social Security will only have enough revenue coming in to pay 75% of promised benefits.

The GAO looked at two stock investment scenarios that could ease this squeeze. If Social Security invests its cash surplus and the interest from the Treasury securities in the stock market, it could postpone the trust fund crisis rate from 2029 until 2040, the GAO said.

If the trust fund invested only its cash surplus, it could delay the crisis until 2032, the GAO said.

The potential returns are promising but the risk is real, the GAO said. “Riding out a stock market downturn could be difficult for the trust fund as it faces growing numbers of retirees. The more the trust fund is counting on stock sales to raise cash, the greater its vulnerability in the event of a general market downturn.”

The GAO offered a historical reminder to stock market enthusiasts. Stocks fluctuate, a reality some may overlook in the current bull market. “There is no guarantee that investing in the stock market, even over two or three decades,” would match the market’s long-run average return, the GAO said.

The office’s report is likely to make the debate over the future of Social Security more intense.

That discussion already is heating up, as the Clinton administration Tuesday rejected a request by congressional Republicans that the White House endorse their plan for a bipartisan commission to propose a long-term fix for the program.

The GOP request reflected the party’s wariness of being accused of callousness toward the elderly or having their proposals for reforming the system derided in partisan terms as congressional elections creep closer.

In a letter to Clinton, House Ways and Means Committee Chairman Bill Archer (R-Texas) and Rep. Jim Bunning (R-Ky.), who heads the panel’s Social Security subcommittee, said that the issue of preserving the program “is too important for any one party or branch of government to use as a ‘wedge issue’ or as a forum for gaining political advantage. . . . An issue this complicated and important requires a cooperative, bipartisan approach.”

Under the GOP proposal, scheduled for a vote today in the Ways and Means Committee, a panel of four Democrats and four Republicans would make reform recommendations by Feb. 1, 1999. The administration, for its part, has sanctioned a series of Social Security forums around the country. These sessions are meant to pave the way for a White House conference by the end of the year, and legislation in 1999.

Times staff writer Jonathan Peterson contributed to this story.