The New York Times

August 12, 2001, Sunday, Late Edition - Final

SECTION: Section 4; Page 13; Column 1; Editorial Desk

A Social Security Solution

by Thomas R. Saving
(professor of economics at Texas A&M University, a Social Security public trustee and member of President Bush's Social Security reform commission.)

The overriding questions facing all Americans concerned that Social Security survive and thrive in the 21st century are fairly simple: Should Social Security save and invest for the future? And if so, who should do the saving, individual workers or the federal government? The President's Commission to Strengthen Social Security, on which I serve, dealt with these questions in its report released last month. The answers will determine the direction Social Security takes in coming decades.

Beginning in 2008, the baby boom generation will start collecting Social Security benefits. By 2016, Social Security costs will be 25 percent higher as a percentage of workers' wages than they are today: by 2025, 54 percent higher; by 2050, 69 percent higher. The Social Security trust fund does not provide the resources to close this financing gap. The non-negotiable bonds in the trust fund are essentially i.o.u.'s from the government to itself and must ultimately be repaid by taxpayers. In 2025, for instance, the federal government will need $419 billion in extra revenue to pay full benefits, regardless of whether there is a trust fund. That revenue can come only from higher taxes, lower spending on other programs or increases in publicly held debt.

The nation must choose either continuing with Social Security's pay-as-you-go financing, which would impose these large cost increases on our children and grandchildren, or making Social Seurity a vehicle for true saving and investment, which increases the nation's productive capacity and helps pay benefits tomorrow. A strong consensus exists across the political spectrum that prefunding Social Security through real economic saving is the path to sustainability for our nation's public pension system.

Increased saving does not necessarily mean personal retirement accounts. Some have proposed letting the government invest in the stock market to prefund benefits. On paper, there's nothing wrong with this. But Alan Greenspan has strongly warned that government investment in private securities risks undue government influence over the private sector, and in 1999 the Senate unanimously passed a resolution expressing the opinion that the federal government should not directly invest the Social Security Trust Funds in private financial markets. The American public, with a skeptical eye toward government, has never been enthusiastic about the federal government owning shares in American businesses.

The alternative is individual saving. A dollar of saving through a personal retirement account is just as real as a dollar saved by the government. Moreover, personal accounts provide workers with the security of knowing that their savings cannot be used to finance other government programs, which is how the trust fund was effectively used for most of the 1980's and 90's. By enabling workers to save more today, we ease the burden on future generations and enable government to more effectively tackle other problems the nation will face.

Personal accounts are not a panacea. Saving more for tomorrow means consuming less today. The commission must also address questions of administrative costs, risk management and investor education. But America already has extensive experience with individual management of retirement money, through individual retirement accounts and 401 (k)'s. Investing through broadly based index funds can minimize administrative costs. Creating personal accounts within Social Security can give every American a stake in the economy, making every worker a part owner of the nation's means of production.

The commission's task is to reform and strengthen Social Security's retirement program without weakening the system's important protections for people with disabilities and dependents of breadwinners who have died. The public is understandably uneasy about reform, and part of the commission's charge is to encourage a national discussion on where Social Security is, where it has been and where it should be going. We won't solve Social Security's real problems by putting our heads in the sand or hoping the problems solve themselves. The bridge ahead is out, and continuing to speed toward it simply invites a wreck.