Private investments may replace ailing Social Security system

Editor's Note: This is the second report in a two-part series on the nation's Social Security system.

From Reporter Jim Angle

WASHINGTON (CNN) -- If you've ever studied your paycheck and noticed the chunk of change FICA takes out of it, the question has already crossed your mind. When you retire, will Social Security be there for you?

John and Shirley Henderson worry about it. The couple, both under 40, watch their mutual funds, save what they can and are convinced they will get no Social Security payments under the Federal Insurance Contributions Act. (4 sec./51K AIFF or WAV sound)

When the Hendersons are ready to retire, Social Security will be unable to pay promised benefits. In the past, when Social Security got into trouble, Washington raised taxes, trimmed cost-of-living adjustments or pushed back the retirement age.

Under the old system, those are the only options for keeping the program afloat. A number of proposals to overhaul Social Security are being proposed, however, that wouldn't require you to give up more money from your paycheck nor delay your retirement.

Rep. Mark Sanford Jr., R-South Carolina, supports a plan that gives people the option of putting payroll taxes into private retirement accounts, and is trying to drum up support for it among his constituents.

His is one of several plans in Congress that would allow payroll taxes to be placed in private retirement accounts such as 401(k) plans. That would let workers invest retirement funds any way they see fit -- for the best return.

Even a council of experts advising the Social Security Administration likes the idea. Two of three proposals headed for the president call for private accounts. One would set aside half a worker's taxes to invest in stocks.

"The rates of return in Social Security today are about 1 percent real. One percent over the rate of inflation in the economy. We're talking about 3 percent real," said Sylvester Schieber, a member of the Social Security Advisory Council.

Many believe the stock market could easily double or triple monthly benefits checks.

What about poor investments?

Critics wonder what would happen to workers who don't do that well.

"If they invest poorly and there isn't an adequate income for their retirement, just what would we do with them?" asked Tom Jones, also a council member. "Will society turn its back or will we have to pay again? Will we pay twice?"

Others say there is no more risk in the stock markets than there is with the government.

"(FICA) taxes have gone up in constant dollars 1000 percent, but the benefits have only gone up 188 percent. That's what individuals are exposed to in the government system," said William Shipman of State Street Global Advisers.

Nobody knows yet what form Social Security will take, but sweeping change of some sort is clearly coming. Even the hard-line defenders of the old system are proposing a radical change: taking 40 percent of your tax money and letting the government invest it in stocks.

For people who have not yet entered the work force, the return from the current Social Security program is likely to be even lower than it is for people contributing today. It is that reality, not the program's successful past, that is fueling the drive to completely remodel the most popular government program ever.

Related stories:

• CNNfn - U.S. retirees owed $$$ - October 4, 1996
• Social Security: on its way to bankruptcy - October 3, 1996
• Panel at odds on securing Social Security - July 29, 1996
• Trustees: Medicare could be broke in 5 years - June 5, 1996

Related site:

• Social Security Online

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