Social Security panel discusses a new deal

David Francis

Thursday, March 7, 1996 | 11:59 a.m.

Since 1926, investors in stocks have received an average return after inflation of about 9 percent a year. Federal government securities have had real returns of just 2.3 percent.

Knowing this, investors with some knowledge of the stock market have been saying for years they would prefer to take the money they pay in Social Security taxes and invest it themselves in a pension fund. They figure they would be better off financially.

One plan being considered by an Advisory Council on Social Security would allow just that. But the 13-person council, appointed in July 1994 by Donna Shalala, the secretary of Health and Human Services, is badly divided on how to get a portion of Social Security money invested in corporate stocks and bonds instead of only Treasury securities.

"I don't think we will come to an agreement on this," says Sylvester Schieber, a member of the panel.

Possibly the three factions on the council will agree to put forward their separate three plans in a report now planned for April publication. If so, it will launch discussion in Congress and the nation on changes in Social Security that Mr. Schieber describes as "revolutionary."

The Social Security retirement system runs mostly on a pay-as-you-go basis. It collects about $300 billion a year with a 12.4 percent tax on payrolls, half from the employee, half from the employer. All but some $60 billion of this goes out in pensions and, to a lesser degree, in benefits to the handicapped or widows with young children. The $60 billion is invested in Treasury securities and put in the Social Security fund, an investment pool to help cover financial needs in the next century when baby boomers retire and the much smaller generation X must support them.

All three plans deal with this financial problem. They are:

1. The Social Security fund itself would invest in corporate stocks and bonds. To avoid government influence on any company or business sector, the money would probably be put into index funds that attempt to match broad stock market or bond indexes. To raise more money for this purpose, some money would be taken from the Medicare account (which requires an additional tax on payrolls), from a reduction of 0.3 percentage points in the annual cost-of-living adjustment to pension benefits, from taxing all benefits as income (rather than a portion of benefits as at present), and an acceleration in the already scheduled advance in the age when a retiree qualifies for full benefits from 65 to 67. Also, in 2050 the payroll tax would jump two percentage points.

2. An additional 1.6 percent would be added to the payroll tax. The revenue would be invested by the Social Security system in accounts for each individual as requested by that individual. People could choose to put the money into stocks, bonds, or other investments that are approved in general by the government.

3. Five percentage points of the payroll tax would be rebated to the individual for investment in an individual pension account managed by that individual. It would be something like an individual retirement account. The payoff at retirement would vary according to how well it was invested. Another five percentage points would continue in the present system to provide a flat benefit, $360 to $400 a month in today's dollars, to retirees. This sum would grow in proportion to rising living standards. And at retirement, the benefit would be indexed to inflation.

Schieber, who is research director of Watson Wyatt Worldwide, a management consulting firm in Washington specializing in employee benefits, favors the third plan. It gives individuals the widest choice of investment options, he says. He has four supporters in the council, which includes business executives, labor union leaders, and pension experts. Two support the second plan and six the first plan. "There are strong feelings," Schieber says.

What would happen to share prices if $60 billion or more in new money went into stocks rather than Treasuries?

William Freund, director of the Center for the Study of Equity Markets at Pace University, New York, figures it would push up stock prices until a new equilibrium in the market was reached. At this point, the yield on stocks would drop. Instead of say 10 to 12 percent nominal per year, it might be 6 or 7 percent. But the new flow of money might make stock prices "less volatile." Interest on Treasuries and the cost of the federal debt could rise.

But Schieber argues that the additional savings under plan 3 would boost the nation's productivity sufficiently to bring about a real boost in pensions for the nation's workers.