Milwaukee Journal Sentinel

December 16, 2001 Sunday ALL EDITION

SECTION: BUSINESS; Pg. 01D

Social Security draft ignores big losses

by AVRUM D. LANK of the Journal Sentinel staff

Last week, I took to task the President's Commission to Strengthen Social Security for thinking too narrowly.

Its only, and predetermined, answer to the looming underfunding of the Social Security system is partial privatization. While admitting that one could honorably argue that is a legitimate solution, I said proponents have to explain "what happens if people make the wrong choice with their money" in private accounts.

The final draft report of the group, released Tuesday, hardly admits that possibility. Rather, with the blithe assurance of a life insurance salesman presenting a proposal, the report assumes the voluntary private accounts allowed under its system will never lose money. In fact, it assumes that the accounts will more than make up for the guaranteed Social Security benefits that account holders agree to give up.

Give the report that much credit -- it admits that cuts in guaranteed benefits would go hand in hand with setting up the private accounts. And it also outlines a set of safeguards to make sure the accounts are invested diversely and not raided prior to retirement.

But it does not say what happens if the accounts fail. My bet is that if the failures were widespread enough, the government would have to provide a bailout for the old folks who lost money.

So in reality, the scheme would not remove social responsibility for the welfare of the elderly. But it would generate fees for Wall Street, a matter discussed at some length in the report.

The possibility of private accounts losing money is why I wish the commission had thought more broadly.

It should also have explored how money could be found to maintain promised Social Security benefits levels, or how benefits could be cut to keep the system solvent.

Combination needed

I believe a combination of those two actions is the proper way to proceed, and not just because private accounts could fail.

Social Security is the bedrock of retirement planning for millions of Americans. It is intended to provide them with income, not to let them build wealth to leave their descendants. Furthermore, it fights elderly poverty by providing higher benefits in relationship to contributions to those who earned the least during their working lives.

Those worthy goals are too important to be left to the whims of the private market.

But how to continue to accomplish them when it is unarguable that Social Security as now structured will run a shortfall sometime in the next 45 years?

One way is to broaden the tax base.

Now, Social Security taxes are paid only on the first $80,400 in wages each year. Remove the wage cap and the tax rate could be lowered while the amount of money collected expanded.

The base also could be expanded, and the tax rate lowered, by making all income, not just wages, subject to the Social Security tax. That would include dividends, interest, capital gains and Social Security payments.

That way, richer older Americans, who need Social Security less than poorer ones, would in essence have their benefits cut, but only as long as they were living comfortably from other income.

Changes in wages

This should be coupled with a cut in how the guaranteed benefit is increased annually for inflation. As the commission rightly points out, the increase is based on changes in wages rather than in the cost of living. Assuring that payments kept up with the cost of living would not work any hardship and would save the program money in the long run.

My plan is broad enough to upset everyone -- seniors who would see benefits cut, workers who would pay more taxes and Wall Street, which would lose fees.

But that is the way statesmanship works -- people have to think broadly enough to realize that the greater good requires seeing beyond their own narrow interests.

------------ Avrum D. Lank is a financial columnist for the Journal Sentinel. He can be reached at (414) 223-5333 or alank@onwis.com.