Time To Grip That Electric Third Rail?

By Senior Washington Correspondent Charles Bierbauer

WASHINGTON (Dec. 16) -- Take a look at that latest Social Security check. You'll never see another one like it!

Got your attention? The statement is true, though not alarmist. January's checks will be bigger, reflecting a 2.9 percent cost-of-living adjustment for the new year.

Social Security payments, for all the alarms of pending bankruptcy, are not facing immediate change. But change is very likely on its way. It need not be for the worse.

Health and Human Services Secretary Donna Shalala should soon release the months overdue report of her Advisory Council on Social Security. Its 13 members cannot agree on what to do precisely to extend and expand Social Security. They are, though, all pointing in the same direction toward some degree of "privatization" of the nation's retirement plan in the hope of extending it a couple decades beyond its now anticipated bankruptcy in the year 2029.

Today employer and employee payroll taxes are all conservatively invested in government bonds. That's all the law allows. Shalala's council would open the Social Security trust fund up to investment in the stock and bond markets. But there is no consensus on three different approaches.

One would amount to dipping a toe in the markets. A second would let Social Security contributors wade in about knee deep. A third would throw 'em in and see if they can swim.

Toes First?

-- The simplest and least risky plan would maintain current benefits and seek higher returns by investing 40 percent of the trust fund in stock and bond markets.

"The purpose of the program is the protection of the American family, something they could depend on," says council member Roger Ball. "I wouldn't want to increase the risk of their getting a defined benefit that they could count on."

Knee Depth:

-- A more adventuresome plan would set up "mandatory savings accounts." Current benefits would be scaled back to levels keeping the trust fund solvent. An additional 1.6 percent in payroll taxes would be collected for the savings account which would be managed by the government. Individuals, though, could choose from a menu of investment options for their savings accounts.

There's a dilemma for Republicans who might espouse such privatization but despise any higher taxes. And libertarians don't like the idea of the government actually owning and managing such a large amount of the stock market.

Over Their Heads?

-- "Personal Security Accounts" would be set up using forty percent of the fund. The rest would fund a reduced flat rate guaranteed benefit. But individuals would have to invest and manage the personal accounts themselves.

Too risky?

"Part of the problem, as we see it, that people are ignorant about investing today is that many of them have never had any money to invest," says advisory council member Sylvester Schieber. He says investors' experience with 401-K retirement funds shows "they do learn to invest."

"People could not go off and invest in their Uncle Harry's sandwich shop or rugs or art," says Schieber. "There would be a regulatory environment around this."

There are reservations within the Clinton Administration about moving toward privatization of Social Security.

"There is so much money involved with regard to Social Security that Wall Street is salivating," warns Labor Secretary Robert Reich. "We are going to see over the next few years a strong concerted effort on the part of the better off to secede from the system."

HHS Secretary Shalala, though, raises a reason to look at this.

"We need to make sure that government policy encourages people to save," Shalala says. "We have our IRA's, we have some things out there. But we need some other instruments."

Except for the plan with 1.6 percent in additional payroll taxes, the advisory council's ideas do not necessarily generate more savings. They simply put the same amount of savings into different vehicles. It's the returns that should be better in the private markets, and compounding those over the long stretch through which most Americans prepare for retirement would increase savings.

Is this imminent? No.

"What's clear about this report," says Shalala, "is if (the council) can't come to a conclusion, they're reflecting the American public that hasn't thought about this yet, hasn't thought it through."

Shalala wants a national dialog on what to do about Social Security. She and president Clinton also have other priorities.

"Entitlements are a top priority. We need to start with the Medicare program because the Medicare program clearly runs out of money at the end of this century," Shalala says.

That's where the Washington dialogue between Congress and the White House will take place in the coming year. Both Republicans and Clinton Administration officials insist they are committed to balancing the budget. After curbs were made on welfare programs during the last Congressional session, Medicare and Medicaid are the two big entitlement programs where savings can be found by limiting growth in spending. No, not by cutting back spending. In dollar terms, it will still go up.

But the wild card is now out of the deck and on the table.

"We want to see what the president will do about CPI," says Rep. Bob Livingston (R-Louisiana), the House Appropriations Committee chairman.

The Consumer Price Index is used to gauge inflation and set cost of living adjustments -- COLAs -- to many government benefit programs. Social Security is one of those.

CPI is broadly agreed to be overstated by the Bureau of Labor Statistics which calculates it. A Senate commission this month pegged the overstatement at 1.1 percent. That 2.9 percent COLA in the new year might justifiably be only 1.8 percent. Initially, the Clinton Administration was reluctant to sign on to a CPI adjustment.

"We don't view CPI as a budget question," says Budget Director Franklin Raines.

But there is a distinct twinkling in the eyes around Washington these days that says Santa Claus may have dropped a magic key into every budget calculator's stocking. Santa's non-partisan. Republicans and Democrats are all ripping the gift wrap off CPI to see if it's what they really did want for Christmas.

So Social Security checks in some future January may look like none you've ever seen before. The COLAs could be a little smaller. And the check could come attached to a broker's statement for those Social Security mutual funds.

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