San Antonio Express-News

November 25, 2001, Sunday , METRO

SECTION: A SECTION; Pg. 18A

Economy, elections might sink Social Security change

by Dan Freedman

BODY: WASHINGTON - Next month, President Bush's Social Security commission will propose several ways to fix the ailing system with a combination of cuts in future retirees' benefits and added income from private investment accounts.

However, with the economy soft, the stock market struggling and congressional elections looming, lawmakers may be loath to act on a commission report advocating these accounts.

"I think they're going to treat it like an anthrax-contaminated envelope," said Ross Baker, a political science professor at Rutgers University.

Although Bush and commission members have touted the long-term gains in retirement income that private accounts would bring, "the future has no constituency in American politics," Baker said. To get elected, members of Congress always "focus on the short run."

Whatever the reaction on Capitol Hill, personal investment accounts are certain to be a cornerstone of the commission's final report next month.

The commission is evenly divided between Republicans and Democrats. Social Security's fiscal health "is going to keep on getting worse if we don't fix it," said Olivia Mitchell, a Democratic commission member and professor of insurance and risk management at the University of Pennsylvania's Wharton School.

Noting Social Security's reputation as a risky issue for politicians to tackle, Mitchell added: "I see it as positive that we have a president willing to take on the issue even if a lot of his political advisers are saying, 'Don't go there.'"

How far Bush is willing to go to push private accounts is an open question.

Liberal-progressive groups and labor unions have labeled them a retirement income time bomb that would subject Social Security's bedrock financial guarantee to the vagaries of securities markets and would benefit Wall Street brokers more than everyday recipients.

Commission members are well aware of the political risks involved.

"There's no question that individual accounts are a harder sell when the market down," said Bill Frenzel, a Republican commissioner and former House member from Minnesota. "But our job is to recommend what's best for America."

Several commission members said the final report will include ways to protect low-wage earners who depend on Social Security for the bulk of their retirement income.

While the commission might stop short of guaranteeing the income of poorer retirees, "there's tremendous concern that benefits don't fall for low- and medium-income (beneficiaries)," said Estelle James, a Democratic commission member who is an economist and consultant for the World Bank.

For now, Social Security is in robust condition. Last year, the Social Security Trust Fund took $568.4 billion from payroll taxes and other sources in 2000, and paid out $415.1 billion in benefits.

However, that picture will darken considerably as the 76 million-strong baby boom generation born after World War II begins to retire.

According to the latest projections of the trust fund's trustees, Social Security in 2016 will cease to take in more in payroll taxes than it pays out in benefits.

By 2038, according to the same projections, Social Security will not be able to pay full benefits to all beneficiaries.

Social Security is a pay-as-you-go system with the 12.4 percent payroll tax - divided between employer and employee - flowing into the Social Security Trust Fund for payment to current retirees.

Now, in addition to the baby boomer bulge, the system is feeling the pressure of Americans living longer and collecting more in retirement than ever before.

In 1940, when the pay-as-you go system was new, there were 40 workers for every retiree. By 1960, that ratio had fallen to 5-1. Now it is 3.5-1. And by 2030, it will be 2-1.

Bush ran for president last year proposing private investment accounts as the solution to Social Security's woes.

He appointed as chairmen of his President's Commission to Strengthen Social Security retired Sen. Daniel Patrick Moynihan, D-N.Y., and Richard Parsons, co-chief executive of AOL Time Warner Inc.

Both were outspoken in favor of private accounts, as were virtually all of the 14 other appointees. Panel members argue that without private accounts, steep cuts and higher payroll taxes would be the only way to insure Social Security's financial future.

However, Hans Riemer, Social Security analyst with the Institute for America's Future, a liberal group that opposes private accounts, says they won't work.

"They're going to have to cut benefits for everyone to make private accounts work and balance the books," he contends.

"We object to cutting back on Social Security's guaranteed benefits and introducing an investment scheme that is risky and may or may not get you back to level of retirement income you need."

A study group led by Brookings Institution economist Henry Aaron last year concluded that in a privateaccount system, a middle-income worker turning 30 in 2002 could expect an average of 20 percent less in retirement than the worker would have received under the current system.