Can Newt Gingrich Save Social Security?

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March 27 1998 3:30 AM

Can Newt Gingrich Save Social Security?

His approach looks positively moderate compared with the radical one being offered by Sen. Moynihan.

House Speaker Newt Gingrich has been gently tapping the "third rail" of American politics--Social Security reform--to see if the electricity it generates is truly lethal. Earlier this year, Gingrich impressed a group of journalists at the World Economic Forum in Davos, Switzerland, with a disciplined description of his thoughts on the subject. At the time, the speaker's remarks were "off the record." That he has now agreed to let them be reported may be due in part to the cover provided by two Democratic senators, Daniel Patrick Moynihan of New York and Robert Kerrey of Nebraska, who have unveiled a Social Security plan that is, in certain ways, more radical and less socially conscious than what the speaker seems to have in mind.

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Gingrich's approach will not placate die-hard defenders of the current system, who are already up in arms about the Moynihan plan. Nor will it satisfy fire breathing "privatizers" who would dump the whole thing and set every wage earner free to make a killing on Wall Street. But the speaker, like Moynihan and Kerrey, would start to move some of Social Security's current surpluses into private sector investments. He would do it by setting up "Social Security-plus" accounts for each participant. These could be invested in a "broad based" portfolio of private securities with low risk but a higher rate of return than government bonds.

The basic idea is not new. Last year, for example, all 13 members of the Social Security Advisory Council agreed that some part of the trust funds should be invested in the private market (though they didn't agree on how). The reason is simple: The Social Security system is missing out on its own "golden years"--the one period in the program's lifetime when it should be possible both to keep paying benefits to current retirees and to make prudent provision for future claimants.

That's because, over the last several years and for several to come, Social Security payroll taxes have far exceeded, and will continue to far exceed, the benefits paid out. Those surpluses, totaling more than $1 trillion by the end of this decade, are supposed to be "invested" against the rainy day when the baby boomers retire. Instead, they are simply transferred to the Treasury in exchange for IOUs (plus IOUs for interest on past loans). The money is then used to help cover the costs of everything from Black Hawk helicopters to White House spinners. Social Security is thus doing the rest of the budget--and--a huge favor since, without its loans, the much touted budget surplus would be a triple-digit deficit.

This is like replacing the money you'd been saving for your kids' college tuition with an IO-me note, buying a new car, and then congratulating yourself on your financial prudence. But in the case of Social Security there's an added problem: A payroll tax is a lousy way to pay for most of what government buys. It's fair enough to use such a tax to pay for a social insurance program that provides coverage in rough proportion to contributions. This is especially so since Social Security's retirement and disability benefit formulas are heavily weighted to favor low earners. But there's no justification for paying for defense or environmental protection or the weather bureau with a regressive tax that hits only the lower part of earnings and hits investment income not at all. (Well, there is one justification: Otherwise, Congress and the president would have to cut spending, raise taxes, or just admit they can't come close to balancing the budget.)

In their plan, Moynihan and Kerrey would address this inequity by cutting payroll taxes by some $800 billion over the next decade, thus eliminating the trust fund surplus. To keep the deficit in the rest of the budget from being laid bare for all to ogle, they propose both tax hikes and benefit cuts. (Click for a summary.) Some savings would come from higher income and payroll taxes, especially on well-off workers and retirees. (Expect a hue and cry to be raised among tax cut advocates against the plan's provisions calling for smaller inflation adjustments in the income tax code.) But much would come in the form of reduced Social Security benefits, notably accelerated increases in the retirement age and a one-percentage-point cut in annual cost-of-living benefit adjustments. Most economists do agree that the Consumer Price Index significantly overstates inflation, and the system currently adjusts retirees' initial benefits for real economic growth as well as for inflation. But the senators' cut is toward the high end of the consensus, especially if sustained long into the future.

How plausible are these proposals? A truly honest reform would force the general budget to pay for itself and let Social Security reserve its past as well as its future surpluses for the system's next-century needs. But the senators would soften the benefit cuts by offering workers a shot at higher private sector returns. Beginning in 2001, workers could take the full two-percentage-point cut in payroll taxes they propose, including the employer share, and invest the money in personal savings accounts. (Otherwise workers can pocket their own half of the payroll tax cut.) That would make Social Security look much like the current government employee retirement plan--and many private sector plans--in which a fixed benefit pension is supplemented by a savings plan in which worker contributions are matched by employer contributions up to certain limits.

The trouble with this, as former Social Security Commissioner Robert Ball points out, is that making the savings accounts voluntary means that many lower-wage workers will surely choose not to participate. Moreover, if workers are allowed a wide range of investment choices, then administrative costs, error rates--and risk--will soar. And even if investments are limited to a relatively small menu of government-supervised options, the timing of their contributions or retirement will disadvantage some workers. In case you've forgotten, the stock market doesn't always go up.

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G ingrich, however, addresses these concerns, if only in general terms. At Davos he said he didn't even want to use the loaded term "privatization." A basic social insurance system is a hallmark of a civilized society, he said, and it must be government-run and mandatory. Otherwise, for reasons laudable or frivolous, many people won't save the money needed to provide for their old age or unexpected disability, and society will end up paying to keep them on welfare. Nor should any current retirees fear for their benefits, especially at a time when the system is generating huge surpluses that ought to be reserved for the system's future needs. "No one has to worry. No one should get scared."

Still, as traditionalists such as Ball acknowledge, private investments--even the broad-based, relatively conservative portfolios selected by insurance companies and banks--do offer significantly better returns than government bonds. The National Bureau of Economic Research estimates that stocks outpace Treasury securities by a range of 3 percent to 13 percent a year. Even the lower limit of that differential compounds to a hefty sum over time. Moreover, redirecting trust fund surpluses into the private market (which is what the Moynihan-Kerrey plan essentially does) has one large potential advantage--when the time comes to redeem the securities, the money should really be there.

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