Forbes Sees Wall Street as Social Security Solution

Insisting that Republicans cannot win back the White House without winning the voters’ trust on Social Security, GOP presidential hopeful Steve Forbes on Tuesday laid out a sweeping plan to allow workers to invest most of their payroll taxes in the stock market.

“The problems facing our Social Security system . . . are really a source of opportunity . . . to spread ownership and harness the markets to deliver increased retirement income for every American worker,” Forbes said in a speech to a small business group here.

Several of the GOP contenders back the concept of privatizing Social Security, as Forbes himself did in his 1996 bid for the GOP nomination. But Forbes’ new plan is more thorough and ambitious than any yet offered by his rivals.

Still, Forbes instantly faced sharp questions about how he would pay for the plan’s potentially significant costs. “As it stands now, this is not a coherent package,” charged Dean Baker, an economist at the Preamble Center, a liberal think tank. “Right now, it’s so far from adding up, you cannot treat this as a serious proposal.”

A Sudden Flurry of Issues

Forbes’ speech marked a continued intensification of the issues being debated among presidential contenders in both parties. On Sunday, Vice President Al Gore offered a detailed agenda for education reform; former Vice President Dan Quayle is to give a major address on cultural issues today, and Sen. John McCain (R-Ariz.) on Thursday is to unveil a plan for reviving troubled inner-city neighborhoods.

Like many Social Security privatization proposals, Forbes’ plan attempts to build support by maximizing opportunity and minimizing risk for workers. But to accomplish that, Baker and other privatization critics argue, it would impose potentially severe financial risks on the government.

Forbes’ plan would fundamentally change the nature of Social Security, transforming it from a system in which today’s workers pay for the retirement of today’s elderly into one where workers would largely fund their own retirement.

Currently, workers and their employers pay a total of 12.4% in payroll taxes into the Social Security trust fund; the money is used to pay benefits for current retirees. The system is running a surplus now because it is collecting more than it pays out each year. But as baby boomers retire, expenditures are expected to exceed revenues in about 2014, and the trust fund faces depletion by 2034.

Under Forbes’ plan, which would be phased in, workers could choose to divert as much as two-thirds of the payroll tax into “personal retirement accounts.” The accounts would be invested in stock and bond funds approved by the government.

Forbes would allow that money to grow tax free--and remain free from any federal taxation when workers retire and withdraw it. Unlike Social Security benefits, workers would own their accounts and be free to pass on any remaining assets to their survivors, or children, when they die.

Plan Allows Access to Money at Age 60

In an interview after his speech, Forbes added that workers would be allowed to retire, and have access to their accounts, at around 60--five years before the current age for full Social Security benefits.

To assuage concerns that shifting toward private accounts could leave workers without enough money to live on during retirement, he proposed maintaining current benefits with “no benefit cuts” for all workers now in the system. Also, he said government should guarantee future retirees “a minimum benefit” of about $600 or $700 a month in case the investments in their personal accounts performed poorly.

But those efforts to minimize risk for individuals could increase the financial risk for government. Since the plan would gradually divert much of the payroll tax revenue into private accounts, Forbes would have to find another source to pay benefits to current retirees.

Forbes maintains the current Social Security surplus could fund those benefits, although Baker says the surplus would not be sufficient if more than about a third of workers opted to shift their payroll taxes into the private accounts. That could force tax hikes or benefit reductions, he argued.

Likewise, Baker said, Forbes’ promise to maintain minimum benefits for retirees even if their investments fizzled would impose large financial obligations on government that the plan did not explain how it would meet.

Forbes said the minimum benefit could be paid for with the remaining 4% of the payroll tax not applied to the personal accounts, or, in a worst case, by floating long-term government bonds. “It is absolutely doable,” he contended.