How privatization will affect pocketbooks - and politics

Sometime this week, George W. Bush will outline a radical revamp of the one federal program that Americans almost universally revere.

Treading where no one in his place has gone before, his pitch could split voters along generational lines - and make or break his candidacy for president.

His target is Social Security, and while other politicians have proposed changes, Governor Bush will be the first major-party nominee to risk a White House bid on the issue.

His success may hinge on this question: Will Americans fixate more on the plan's risks -or its potential rewards?

Bush will propose a plan that lets individuals put a portion of their Social Security tax into a personal retirement account, which they could then invest in the stock market - an idea that would have been thought radical just a few years ago.

The stakes - both for the presidential election and the nation's fiscal health in the decades to come - are massive. Social Security accounts for a quarter of federal expenditures now, a figure that is growing.

And after political sniping over the issue ignited last week between Bush and Vice President Al Gore, observers expect Social Security to be a defining issue of the fall's campaign for the first time in decades. Voters are left to decide whether partial privatization of the system is an idea whose time has come.

"It's almost guaranteed to be a major issue," says Bush pollster Fred Steeper.

Extent of the 'crisis'

As millions of baby boomers start to retire, and thus receive payments rather than paying Social Security taxes, it will create a strain on the system. The Clinton administration predicts that the Social Security Trust Fund will run out of money in 2037.

Keeping the system solvent is the underlying goal of both candidates' reform plans.

Others doubt the severity of the crisis, arguing that forecasts of events decades in the future are unlikely to be correct.

"There may be some basis for long-term concern," says Dean Baker of the Economic Policy Institute here. "But we're really shooting in the dark because we don't know what the world looks like 30 years from now."

Bush's blueprint

Details won't be announced until later this week. But aides say that under the Bush plan a worker would have the option of dedicating some portion of his or her 12.4 percent Social Security tax - probably 2 to 2.5 percent of income - to a self-managed retirement account instead of to the Social Security Trust Fund.

The benefit: Unlike the existing system, the income in the retirement account could pay higher returns, due to the relatively large returns historically generated by stock investments.

Moreover, those who favor privatization see it as a way to fix long-term money problems with Social Security. Personal accounts, they hope, will bolster the system by lowering the government's financial responsibility.

"It not only helps put the program on a course toward long-term solvency," says Michael Tanner of the Cato Institute's Project on Social Security Privatization. "But it also will help raise the rate of return to young workers and provide them with higher retirement benefits."

Risks of privatizing

For the individual retiree, the potential for high returns in the stock market comes at the risk that the account could lose money. (Although in some plans, the government would mitigate that risk by guaranteeing a certain level of benefits.)

Moreover, skeptics believe privatization would actually weaken the financial shape of the system by diverting into private accounts tax revenue that is needed to pay obligations to retirees.

"Unless the loss of money going into the trust fund is offset by a reduction in how much Social Security has to pay off in future years, Governor Bush will just be making a bad situation worse" says Gary Burtless at the Brookings Institution.

Gore's alternative

Mr. Gore portrays himself as a defender of the current system, characterizing privatization plans as risky schemes.

He favors putting budget surpluses into the Social Security Trust Fund, and expanding benefits slightly. He announced recently that he would increase benefits for women who take time off work to raise children and for widows.

Gore characterizes the Bush plan as a risky attempt to undermine Social Security and his own approach as essential to preserving it. "Democrats had to fight to create Social Security, and there are still those who want to cut it, tear it down, or take it away," said Gore in a speech last month.

Privatization advocates see risks in Gore's conservative approach. "Al Gore has sort of adopted the Alfred E. Neuman school of Social Security reform," says Mr. Tanner. "What, me worry? He hasn't proposed any real long-term reforms."

And the winner is...

It's anybody's guess. In public opinion polls on reform, the results can differ wildly with the language used.

"I'm positive Bush could phrase his plan in such a way as to appeal to two-thirds of the public, and Gore could phrase his opposition to it in such a way as to appeal to two thirds of the public," says Mr. Burtless.

Bush is helped by widespread participation in the stock market and a belief among young Americans that Social Security won't be there to support them once they hit retirement age. On the other hand, recent turmoil in the markets might make voters less inclined to support a plan that hinges on strong returns from those markets. Moreover, polls find that Americans trust Democrats more than Republicans on issues involving Social Security.

In a Zogby poll sponsored by the pro-privatization Cato Institute, 44 percent of voters said they would be more likely to support a candidate who favored some form of privatization, versus 22 percent who would be less likely.

While Republicans were more likely to favor privatization than Democrats, more union members also favored privatization than did not, as did women who work.

The Gore camp believes that those numbers will swing as their campaign highlights the problems with privatization.

But with prominent Democratic Senators Bob Kerrey and Daniel Patrick Moynihan endorsing private retirement accounts, momentum could be on the side of privatization advocates.

Still, previous Republican efforts to change entitlement programs - as with Medicare in 1995 - have proven to be losers at the ballot box.

Says Mr. Steeper, the Bush pollster: "There's a real difference between the candidates on this issue, and neither one is going to back off their position. Both think they're right, both substantively and politically. This will be interesting."

(c) Copyright 2000. The Christian Science Publishing Society