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Social Security: Clinton's Plan Is Right On The Money


Economic Viewpoint

Social Security: Clinton's Plan Is Right on the Money

As a member of the first wave of the baby boom, President Clinton has offered the nation a set of innovative, centrist, and economically sound proposals to address the financing challenges for Social Security posed by his generation. His ideas will ensure that with a few sensible adjustments, Social Security will be there when both the baby boomers and the Generation Xers retire.

Clinton's plan to save Social Security tackles two distinct problems at the same time. By dedicating nearly two-thirds of projected budget surpluses to Social Security reserves over the next 15 years, it would increase the nation's net national savings rate by as much as two percentage points, reversing three decades of decline. Increasing America's paltry savings rate is the only sure-fire way to bolster future living standards while reducing our dependence on foreign borrowing. Using the hard-won budget surpluses for tax cuts or government spending won't do the trick; isolating them for Social Security will. In addition, the President's plan allows Social Security to cover its projected expenditures through 2055.

Moreover, the President's policies accomplish this while honoring the basic promise of Social Security: to provide every American worker with insurance against the adverse effects on retirement income of unforeseen developments like disappointing earnings, disability, or death of a spouse. President Clinton's plan also safeguards Social Security's three distinctive and morally compelling features: First, that benefits paid to individual workers are linked to average lifetime earnings. Second, that risk is pooled by providing extra benefits to low-income earners and families with children. Third, that Social Security retirement income is protected from the dangers of unanticipated inflation for the duration of retirement, however long.UNLEASH PRESSURES. The President's plan also calls for investing a share of Social Security's reserves in the stock market. The returns from diversification are substantial, since the annual rate of return on equities has been about 7%, compared with about 2.5% on bonds over the long run. Under the President's proposal, all of Social Security's assets and the returns earned on the invested portion would be available to cover the program's benefits. In contrast, privatization proposals that replace Social Security with mandatory individual retirement accounts would have quite different consequences.

Under such proposals, some or all of an individual's payroll tax payments would be deposited in individually owned defined-contribution accounts whose funds would be managed by private financial institutions. These funds would be removed from the social insurance system, thus no longer available to pool risk and transfer income between high- and low-wage workers, between families with and without children, between the able and the disabled during retirement. Instead of a guaranteed government benefit, Social Security payments to individual workers would depend on asset values, interest rates, and investment strategies as well as lifetime earnings. Finally, privatization would mean that individuals would pay sometimes hefty management fees to financial institutions.

What about the concerns voiced by Federal Reserve Chairman Alan Greenspan and others that the President's diversification plan would unleash political pressures on financial markets? Similar plans administered by state and local governments do not perform as well as privately owned funds for two reasons: Government funds are usually--and understandably--invested more conservatively, and on occasion they are allocated according to political as well as fiduciary considerations. But there are some straightforward administrative fixes to the latter problem. Indeed, the federal government already has a model--the Federal Retirement Thrift Investment Board--that manages the savings of federal employees according to sound principles. Another approach would restrict Social Security's investments on private markets to index-fund instruments and would choose several private companies to manage these investments through competitive bidding.

Social Security is the crown jewel of our government's programs. It does not need fundamental restructuring. It needs some additional revenues that the President's plan offers through an increase in saving--something long overdue and salutary for future living standards--and partial diversification. The baby boom helped produce the projected budget surpluses. Devoting a substantial fraction of them to fund Social Security will provide a strong retirement foundation for that generation and their children.BY LAURA D'ANDREA TYSON


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