Investments to Kick Off Social Security Discussion

Times Staff Writers

It will be months before President Bush and members of Congress agree on how to restructure Social Security, if they come to terms at all. But the rough contours of what Bush has in mind have begun to emerge, and battle lines are forming.

The president and his aides will present their initial thoughts during a two-day economic conference that begins today a few blocks from the White House. Administration critics were already voicing their opposition Tuesday to the apparent direction of Bush’s plans.

Bush has said he wants to shore up the finances of the Social Security program and allow workers to shift some of their Social Security payroll taxes into private investment accounts, but he has not endorsed a specific proposal. Some analysts expect him merely to state basic principles and leave Congress with the task of restructuring the program, which faces cash shortfalls as baby boomers begin retiring and benefit payouts exceed payroll tax collections.


Yet advisors and analysts say it is becoming increasingly clear that the starting point for discussions is the second of three restructuring options outlined in 2001 by an independent commission appointed by Bush. The commission’s co-chairman, Time Warner Chief Executive Richard D. Parsons, is listed first among speakers on Thursday’s Social Security panel.

“Administration officials have been talking to Wall Street about this,” said Ethan Harris, chief economist for Lehman Brothers, a major investment firm. “These are all trial balloons, but it adds up to a sensible package.... The ingredients are very clear.”

Princeton economist Alan S. Blinder, a former vice chairman of the Federal Reserve, said that although the outlines of Bush’s plan were becoming clear, the package was not desirable.

“Under these changes, Social Security would be neither social nor provide security,” he said. “This would be a piece of a program to expose people to more and more risk.... There are millions of Americans who have no desire and no ability to gamble on the financial markets, and they shouldn’t be pushed to.”

Under the presidential commission’s “Model 2,” younger workers, perhaps those under 55, would be allowed -- but not required -- to divert up to $1,000 of their annual payroll taxes into private accounts. Their investment options would be limited to diversified mutual funds containing mainly stocks and bonds.

When they reached retirement age, they could convert their private accounts into annuities that would provide a guaranteed monthly payment until they died. Their conventional Social Security benefits would be cut to reflect the reduced payroll taxes they paid.

Beyond that, the conventional benefits received by all Social Security beneficiaries below the age cutoff -- even those who didn’t set up private accounts -- would be calculated according to a new formula tied to price inflation rather than wage growth. Retirees would receive smaller checks than under current law.

Under Model 2, the stingier benefit formula for all participants would account for all the improvement in Social Security’s finances. Private accounts would not help bridge the long-term funding gap. In fact, the government would have to borrow as much as $2 trillion over the next decade to pay benefits to current retirees because that much payroll tax revenue would be diverted into private accounts.

Bush administration officials insist that private accounts must be included in any plan. They consider them an essential element of Bush’s “ownership society” agenda, which emphasizes greater individual responsibility for retirement savings, healthcare spending and other matters of personal finance.

But some analysts say they believe the administration also views personal accounts as politically necessary to persuade younger workers to swallow a substantial reduction in promised future benefits. The prospect of greater control and higher returns provided by private accounts might seem like an acceptable trade-off, in this view.

“It’s a bribe to get the real reform, which is cutting future benefits to levels they can manage,” said Lehman Brothers’ Harris. “What they’re doing is making a bargain with the baby boomers. The privatization is a sugar-coating to get the broader reform passed.”

It would be possible to fill Social Security’s future revenue gap without private accounts, and it would be possible to create private accounts in a way that would not improve Social Security’s long-term finances. For example, Congress could go along with the private account portion of the president’s plan but refuse to make any across-the-board changes in the benefit formula because of possible political opposition.

But administration officials and some analysts say it is a mistake to view Social Security reform only from the perspective of its effect on federal finances.

“It’s the classic conundrum of what do you look at,” said William W. Beach, head of data analysis at the conservative Heritage Foundation. “Do you look at the trust fund or do you look at the worker’s portfolio? I argue that you want to look at the outcome for the worker first, and the trust funds second. Others see it differently.”

One who does is Bill Spriggs, a fellow at the Economic Policy Institute. Bush’s style of Social Security reform, he said, would put pressure on Congress to make further domestic spending cuts in such programs as aid to education.

And some analysts expressed alarm at the effect of Bush’s private accounts on individual retirees. Lee Price, the Economic Policy Institute’s research director, said some people, such as those who retired when the stock market was down, would suffer through no fault of their own.

“For the vast bulk of the population,” said Brookings Institution economist Peter R. Orszag, “Social Security is the critical foundation upon which one should be building a comfortable retirement. You should be taking risks on top of this core foundation, not within it.”

Times staff writer Nick Anderson contributed to his report.