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Published: Sunday, 12/12/2004

Fix the safety net

PRESIDENT Bush may very well be planning to make Social Security reform the centerpiece of his second-term domestic program. If so, he will set off a policy debate rivaling the magnitude of President Bill Clinton's failed effort to reform health care.

Social Security is complicated and sensitive in social terms, not to mention all of the financial issues involved.

Mr. Bush's position that a reform of Social Security is needed is to some degree a response to a problem of his own making. In those faraway days of the Clinton Administration, everyone understood that the Social Security account was underfunded. The solution proposed at that point was simple: use the budget surplus to beef up funding of the retirement program.

Those days are gone. Mr. Bush's tax cuts, his big spending on the Iraq war, and the continued budget deficits being run up by the Congress mean that replenishing or reforming Social Security will mean even more deficit spending.

The President wants today's workers to be permitted to direct some of their Social Security payroll tax payments into private savings accounts. These deductions, which might earn a higher rate of return but would also be subject to greater risk, would then eventually make up part of their Social Security payout upon retirement.

There are problems with that. The basic point of Social Security is to provide a safety net for workers and their families when they become older. Would this new approach meet that need? Would participants manage their private accounts well? Or would they mismanage them or get cheated out of their retirement nest egg by poor advice from financial managers?

One thing for sure: Investment counselors, one of Mr. Bush's favorite groups, would get a big boost if his approach to Social Security reform were adopted.

It is also the case that the Bush Administration's current economic approach - deficit spending and heavy borrowing, a weak dollar, and a big trade deficit - is inflationary. Future retirees will need more dollars to live decently, increasing the need for a government-controlled safety net under which payouts can be adjusted to meet rises in the cost of living.

The primary short-term problem of the Bush approach is the funding gap that will be created when workers reduce their contributions to Social Security and funnel some of the withholding into private accounts instead. It is the contributions of today's workers that pay the Social Security benefits of retired people.

The federal government may have to borrow as much as $2 trillion during the transition to a new system to cover that gap. It is also unclear who will pay for the borrowing in the long term, particularly since taxes continue to be cut.

Changing Social Security in order to preserve it is not a concept that older people resist. Most of them probably agree that it is only fair to realize savings by raising the age for collection of full benefits as life expectancy increases.

Many Americans also probably favor reducing Social Security payments to wealthy retirees, although someone who has contributed to the program all his working life might be resentful at not being able to collect benefits because of financial success.

As Americans launch into this debate, with the kick-off probably coming in Mr. Bush's State of the Union speech next month, there are a few critical points to keep in mind.

First, this country needs to continue to provide for its aging population. Second, without action Social Security is headed over the cliff in terms of financing. At the heart of it all is the need for a firm commitment by our elected officials to fund the system adequately.



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