Can America Save Elderly Safety Net?

FROM its humble beginning as a blue card with a nine-digit number, Social Security has evolved into something far more significant: a guarantee that no American will be left indigent after a lifetime of labor.

But in the years ahead, as the baby-boom generation begins to retire, the number of Americans collecting benefits will rise substantially, leaving fewer workers behind to foot the bill. If nothing is done, Social Security will begin to spend more money than it receives in just 17 years.

This projection, combined with a growing public awareness of the problem, has opened a window for lawmakers to reform this 60-year-old social program.

With bills pending in Congress, an advisory council crafting a report, and continued attention from the White House, 1995 could become the year that Americans looked ahead, banded together, and ensured that Social Security will serve tomorrow's retirees as admirably as it has served their forebears.

Getting there, however, won't be easy. With Republicans running Congress, a Democrat in the White House, and an election approaching, politics stand to play a central role in the debate.

In addition, powerful lobbying groups like the American Association of Retired Persons are set to unleash their angry memberships on Congress if the current system is threatened, and youth advocacy groups are poised to protest if the system is not reformed.

While some modifications are likely, policymakers differ widely on the proper size and scope.

This week, the Washington-based Cato Institute, a libertarian think-tank, unveiled its plan for radical reform. The problem with Social Security in its current form, says project adviser William Shipman, is that it constitutes a ''pyramid scheme'' that penalizes younger workers.

''Social Security is a misguided political construct,'' he writes, ''wherein one's retirement benefits are dependent on the willingness of future generations to be taxed.''

Under the Cato plan, patterned after reforms Chile instituted in 1981, Social Security would be turned over almost completely to private hands.

Throughout each worker's career, money normally paid into the Social Security trust fund would collect in a personal account.

Although the individual would not have complete access to the money until they retire, each worker would be able to invest it in capital markets instead of paying into Social Security. Not only would this plan eliminate bureaucracy, says Cato's Michael Tanner, it would ''de-politicize'' the issue.

But most important, Mr. Tanner says, it would allow individuals to set their own goals for retirement, retire when they want to, and accumulate a substantial nest egg for their children. Assuming normal returns on their investments, he says, someone who works for minimum wage his or her entire life could retire a millionaire.

The problem, is how to manage the transition from today's method - whereby workers pay 12 percent of their wages into a general pool - into the market-based scheme, according to Gary Burtless of the Brookings Institution, a Washington-based think-tank.

When the new plan was first enacted, the government would still be responsible for paying the benefits that all workers have already become entitled to.

In essence, the first workers to begin under the new rules would be paying for two retirements, that of the current and future retirees, and their own.

Another problem, Mr. Burtless says, is that low-wage workers who cannot accumulate enough money for a comfortable retirement would still have to be compensated from the common pool. He adds that such a plan could allow shortsighted workers to squander their savings and would leave millions of Americans vulnerable to a downturn in capital markets.

Authors of the study counter that even workers saddled with paying for the transition would still receive more money when they retired than they would otherwise. In addition, they say, workers would be required to maintain enough of their nest egg to live on.

The prospect of a downturn in the market, they add, is less of a risk than continuing the program as it is now.

But most proposed changes are more gradual. Democrats would save Social Security by raising the retirement age over time and cutting benefits slightly. Some Democrats have even proposed raising the payroll tax - an option not likely to win support in the current tax-queasy climate.

The Clinton administration supports such small-scale reform. This week, first lady Hillary Rodham Clinton began a campaign to highlight the importance of Social Security and dispel the idea that it faces a deep crisis.

Administration officials argue that while some savings need to be found, privatization is not necessary.

''We should be discussing how to encourage private investments as a supplement to Social Security,'' says Social Security Commissioner Shirley Chater, ''not as a substitute.''

Indeed, Burtless of Brookings notes that Social Security will never run out of money, and there is enough of a surplus in the Social Security trust fund to maintain current payment levels for the next 35 years. Even at current levels, he says, workers who retire late in the 21st century would only receive 25 percent less than current retirees.

But the president's position is likely to be shaped by the conclusions of the 13-member Quadrennial Advisory Council on Social Security. This group, led by University of Michigan Economist Edward Gramlich, is expected to present a report this fall on revamping the program.

According to Professor Gramlich, divisions on the panel have arisen between labor representatives who advocate raising the payroll tax, and those who favor keeping taxes and reducing benefits slightly.

Gramlich says privatization has not figured into their discussions because ''the numbers don't add up.''

The wisest solution, he argues, is to gradually lower benefits for more affluent people (those making more than $60,000) while freezing the payroll tax at 12 percent.

Gramlich says this would render the system viable for an additional 35 years with only a slight change in the level of benefits.