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Social Security Teeters at Edge of Big Changes

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TIMES STAFF WRITERS

As Congress and the White House prepare to debate Social Security reform, new ideas of risk and reward for workers could lead to the most dramatic changes in the massive retirement program since its creation in 1935.

In particular, the Clinton administration is considering whether to endorse giving workers personal choice over the investment of some of their payroll taxes. Republicans embrace the idea, but much of the Democratic Party regards it as the beginning of the end of the elderly’s social safety net.

Although the formal debate has not even begun, Social Security experts now expect President Clinton’s State of the Union address in January to kick off the most serious effort to overhaul the system in decades. Even before that, a panel of experts and politicians will meet at a White House conference on Dec. 8 and 9 to discuss the options.

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“The planets are aligned about as well as one could hope for,” declared Robert D. Reischauer, former head of the Congressional Budget Office who is now at the Brookings Institution, a Washington think tank. “Both political parties and the public are willing to take on Social Security, decades before it becomes a full-blown crisis.”

If there is to be a deal between the Democratic White House and the Republican Congress, it will probably have to come next year, before the 2000 presidential campaign polarizes politics and makes compromise nearly impossible.

Social Security’s trustees forecast that the program’s huge surplus will be exhausted in 2032, at which point revenue from the payroll tax will be enough to pay only 75% of benefits promised under current law. Republicans and Democrats would like to close that 25% gap--but without major benefit cuts or tax increases.

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That’s a tall order, and many Republicans and even some Democrats are looking to the booming stock market to fill it. The Clinton administration is analyzing the possibility of individual investment accounts, a step that would constitute the biggest single change in the program’s history.

Such accounts could be created by “carving out” 1 or 2 percentage points from the Social Security payroll tax, which is now 12.4% (evenly divided between employer and employee) on the first $68,400 of annual salary.

Benefits would be paid in two tiers. Traditional Social Security benefits, reduced according to the size of the carve-out, would be combined with payments from the proceeds of each worker’s individual investments.

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As an alternative to a carve-out from the payroll tax, personal accounts could be fed by an “add-on”--a new source of funds, such as a portion of the federal budget surpluses that are forecast to grow into hundreds of billions of dollars annually in the coming years. Each worker would be given a share of the annual surplus to place in a personal account. The payroll tax would remain untouched, and Social Security would continue to provide benefits based on its current formula. New accounts paid for by the surplus would add a new source of money to supplement what comes from traditional Social Security.

Under either the “carve-out” from current payroll taxes or the “add-on” from the budget surplus, the government would limit the permitted investments. It would probably allow investments in stocks traded in major exchanges and corporate bonds with sound ratings, but not highly speculative and risky investments.

Either way, the innovation would represent a historic departure from the current system, in which the government automatically invests payroll tax revenue in risk-free Treasury securities.

Within the White House, officials view some version of the accounts, however modest, as a key to winning Republican support in Congress for the Social Security overhaul that Clinton seeks as part of his legacy.

“I think there is a very real question whether any sort of Social Security reform can occur if there is no inclusion of individual accounts,” said one person familiar with the internal White House deliberations.

“Obviously, a bipartisan process is going to put a whole set of issues on the table--including individual accounts--which are not part of the traditional Democratic agenda . . . ,” the source added. “The issue is, ‘What does the whole package look like?’ ”

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GOP leaders say they want to make a deal with the president, but the issue retains an enormous potential for partisan disputes. Sen. Phil Gramm (R-Texas) warned that if the White House doesn’t offer a detailed plan early next year, “either we will make an effort to move ahead without them, which will be difficult . . . , or we will conclude it was a political ruse to avoid a tax cut.”

Despite the White House’s interest in innovation, the liberal base of the Democratic Party regards any movement away from Social Security’s historic approach as a foot in the grave for the social insurance that the program now offers.

“You’d end up with a lot of people in uranium stocks . . . ,” cautioned House Democratic Leader Richard A. Gephardt of Missouri. “We’d have no safety net pension plan.”

A coalition of labor and civil rights organizations and other groups that provide many of the Democrats’ most loyal organizers and voters will mount a campaign next month to warn against making major changes.

If Social Security tax money is placed in accounts that workers can invest on their own, “you are putting risk into the system; some people will do well and some will do terribly,” warned Roger Hickey, co-director of the Institute for America’s Future, a liberal, labor-backed group that is organizing the campaign.

The AFL-CIO, Catholic Charities, the Urban League, the National Organization for Women, the Children’s Defense Fund and Democratic Party luminaries such as former Labor Secretary Robert B. Reich will be among those joining the drive.

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The liberals would be willing to allow the government to invest some of Social Security’s surplus in the stock and bond markets, as long as the risk would be borne by the government if the market went down and individual benefits would still be guaranteed. But Republicans would regard government investment of Social Security funds in the stock market as a sort of back-door socialism, with the government becoming a big shareholder in American business.

Individual accounts would be both the most dramatic and the most controversial part of any package that Clinton and Congress could agree on. But there are other steps that could help close the long-range funding gap.

Possibilities under discussion for the rescue package are an increase in the retirement age, now 65 for full benefits, but scheduled to reach 67 by the year 2027.

Another option would be an increase in the wage base--the amount of salary subject to Social Security taxes--which is now $68,400.

The only thing that has been ruled out is an increase in the 6.2% tax rate paid by workers and employers, Assistant Treasury Secretary David W. Wilcox said at a recent House Ways and Means Committee hearing.

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