SOCIAL SECURITY REFORM URGED

With Social Security facing a $9 trillion shortfall over the next 75 years, business leader Leanne Abdnor says it's time "to tell the truth" to American workers. Abdnor's truth, as she related Tuesday to a Colorado business group, is that allowing workers to invest in their retirements is a winner, while Band-aid fixes to Social Security are a long-term loser. Abdnor is executive director of the Alliance for Worker Retirement Security, a business coalition created by the National Association of Manufacturers to lobby for creation of personal retirement accounts as a partial alternative to the Social Security system.

"We've got a promise on the table that we can't keep," Abdnor said of the underfunded Social Security system, in a Denver speech sponsored by the Colorado Association of Commerce and Industry and the National Association of Manufacturers. "We don't have enough money coming through the pipeline to pay for future retirees," she said.

Advocates for personal retirement accounts maintain that Social Security is a "pyramid scheme," with most of today's payroll-tax contributions going immediately to current beneficiaries. Less of the tax is set aside to pay for future benefits of today's workers. Economists project that by 2013, Social Security's revenues from payroll taxes will not be enough to support benefits for retirees. Without changes, the program would have to cut benefits by 25 percent in 2032. Alternatively, payroll deductions to fund the existing level of Social Security benefits would have to increase from the current 12.4 percent of wages to 18 percent. "I don't know of any employer who could stand that kind of increase," Abdnor said. The 12.4 percent tax is paid equally by employers and employees.

The problem stems from Americans living longer and having lower birth rates. That means fewer workers are coming into the job market to support more retirees. In 1950, there were 16 workers for every beneficiary; currently there are 3.3 workers per retiree. By 2025, there will be fewer than 2. The Social Security system now consumes 3.4 percent of gross domestic product, and with the gradual retirement of the baby boom generation, it is projected to increase to 5.1 percent of GDP.

But according to Abdnor, privatization of Social Security through investment in stocks and bonds would increase the GDP instead of draining from it. Privatization has widespread support from business and conservative political groups. It is widely opposed by organized labor, seniors groups and liberals, who prefer a collective retirement system that covers all people equally.

Opponents of private accounts have highlighted the potential risk of a sustained market downturn and the considerable costs of administering millions of personal accounts. In addition, critics have asked how benefits for current retirees will be maintained if existing Social Security payroll taxes are diverted to personal accounts.

President Clinton, in his State of the Union address in January, 1999, suggested that the federal government invest part of Social Security funds on Wall Street. Investing in stocks, Clinton said, would yield a better return than the loans to the Federal Government in the form of U.S. Treasury securities in which Social Security funds are now invested.

However, Federal Reserve Chairman Alan Greenspan and other political and business leaders said the government investing in equities would create more problems than it would solve, largely from the danger of using investments as a way to implement political policy.

Advocates of personal retirement accounts say they would work like this:

• Individuals would be given the option to redirect a portion of their payroll taxes into individually owned, privately invested accounts similar to 401(k) or IRA plans.
• At retirement, the assets could be used to purchase an annuity that would provide a monthly payment. A portion of the funds would be used to purchase disability and life insurance.
• The government would approve broad investment alternatives and provide a "safety net" to ensure a minimum benefit at retirement.
• No changes would be made to the benefits received by those in or nearing retirement.
• Individuals would be given the option of putting additional amounts into their retirement accounts. Once the fund was large enough to provide an adequate monthly payment, workers could choose to retire early and begin drawing benefits.

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"On Opting Out"  Alan Greenspan  Fed. Reserve Board Chmn.  "My own preference is strongly in the direction of moving towards a privately financed system."  Edward H. Crane  Pres., Cato Institute  "Social Security privatization is, nowadays, the single most important step toward a society of liberty. It combines personal freedom with widespread property ownership, and those are the pillars of a free society."