Clinton Links Social Security Solvency to Budget Surpluses
President Clinton’s plan to fix Social Security and provide every American worker with hundreds of dollars a year to build a new nest egg for retirement rests entirely on an ever-increasing surplus in the federal budget.
At the same time, it would fence off $2.7 trillion--the bulk of the projected surpluses--for the Social Security system, with a significant chunk of cash going into the stock market for the first time.
Clinton’s ambitious plan is the centerpiece of an agenda that also includes diverting government surpluses to Medicare and national defense.
The Social Security plan, like these others, relies critically on budget surpluses of more than $4 trillion over the next 15 years. That is an average of $250 billion a year, or more than triple the $70 billion recorded last year and the $76 billion projected for this year.
It is also substantially more than many economists believe can be sustained over so many years, especially if tax revenues are dragged down by the recession that many economists believe is inevitable at least once in the next 15 years.
The plan also requires the assent of the Republican Congress--the same Congress that is only one step away from evicting Clinton from office over the Monica S. Lewinsky scandal--and Republicans promptly poured cold water on several of his central ideas.
Rep. Jennifer Dunn of Washington, in the Republicans’ formal response to Clinton’s address, particularly faulted his plan to let the government--rather than individual payroll taxpayers--invest some Social Security funds in the stock market.
Administration officials estimate that the infusion of revenue would allow the Social Security system, which is now estimated to be unable to fully meet current commitments in 2032, to postpone the day of fiscal reckoning to 2055.
Democratic analysts, by contrast, were enthusiastic. “This is his biggest proposal since health care reform and he can think big because the surplus is big,” said Princeton economist Uwe Reinhardt. “These are popular proposals. This is what people want.”
Clinton’s plan would pour as much as $1.2 trillion into the private stock and bond markets over the next 15 years. About $500 billion would come from the new, individual savings accounts and the other $700 billion would come from the Social Security system itself.
The infusion of up to $80 billion a year could provide a further boost to an already booming stock market. By comparison, net new cash deposits into stock mutual funds totaled $211 billion in 1997.
For the most part, the administration gauged its plan to appeal to the Democratic Party’s liberal base, which opposes any tinkering with the basic structure of Social Security.
Most Republicans and some Democrats, by contrast, want to carve out a portion of today’s Social Security payroll tax to finance private retirement accounts.
But Clinton adopted one very important Republican idea--the belief that the stock market provides a better return in the long run than the Treasury securities in which the Social Security system must now invest its surplus. Historically, the average real return on stocks--the gain after taking account of inflation--exceeds 6% a year, compared with a real return of less than 3% on Treasury securities.
Called Universal Savings Accounts (USAs), the new savings instruments would have some features in common with popular salary set-aside programs such as 401(k) accounts, which are now available to about 30 million Americans. A worker in a 401(k) plan can contribute part of his or her salary to a savings account and the employer can match part of the contribution. Funds are taxed only when they are withdrawn.
However, individuals with the new USA accounts could invest their funds in stocks, bonds or mutual funds, subject to the rules now governing individual retirement accounts. By contrast, 401(k) plans typically offer only a handful of mutual fund investment choices.
Under the Clinton plan, every worker would receive the same basic sum from the government. Workers could add more of their own money, and the government would match part of the contribution. Lower-income workers and workers with families would get larger matching shares than higher-income and single workers.
For example, worker Jane Doe, who earns the median wage of about $28,000 a year, might get $300 in her USA account from the federal government. If she put in another $400 of her own, the government might match it with $400 in public funds, leaving her with $1,100 to invest.
The new savings accounts, by providing every worker with the resources to build a personal retirement fund, could become popular with both Democrats and Republicans.
But the other part of the Clinton plan--in effect, letting the government invest some of the surplus in the stock market--is derided by its opponents as a sort of back-door socialism. If the government did the investing, this argument goes, it would not be able to resist meddling, for example, in a company’s political and environmental policies.
“No, no. A thousand times no,” said House Ways and Means Committee Chairman Bill Archer (R-Texas). “It will open the doors to all kinds of mischief involving government dictates, favoritism and cronyism.”
The president also wants to abolish the earnings test, which reduces Social Security benefits for some elderly persons who continue to work. The test “primarily serves to confuse people and to discourage them from working,” according to the White House fact sheet on the president’s plan.
Times staff writer Alissa J. Rubin contributed to this story.
