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Sinking Social Security

President Bush is planning an election-style campaign to convince Americans they should "reform" Social Security by allowing workers to put some of their retirement money in the stock market. Critics of his privatization plan say "dismantle" is a more accurate description of what Bush wants to do to the 70-year-old retirement program. What are Americans young and old to think?

It doesn't help the campaign's credibility that it is based on a faulty premise _ that Social Security is in imminent danger of financial failure. Actually, as government programs go, Social Security is the picture of stability. Yes, demographic changes in the coming decades _ more retirees, fewer workers _ will strain the system. Yet even the most sober projections say payroll taxes alone will sustain the program until 2018, and the accumulating trust fund, which is invested in treasury bonds, will support the current schedule of payments at least until 2042. Adjustments that are far more modest than Bush is expected to propose could extend the solvency of Social Security indefinitely.

So what's the rush to replace a program that offers predictable, steady retirement income with one that is more speculative and based on Wall Street's boom-and-bust cycles? The answer is not clear, but there is evidence that Bush's emphasis of the issue has more to do with ideology than economics. Two conservative organizations backing the campaign _ the Heritage Foundation and Cato Institute _ have long been hostile to Social Security. Along with the Club For Growth, whose fundraising activities usually help elect conservative Republicans, they are putting their considerable resources into the effort.

A recent memo on the subject from Peter Wehner, Bush's director of strategic initiatives, sets a partisan tone. "I don't need to tell you that this will be one of the most important conservative undertakings of modern times," he wrote to selected supporters. The memo also reveals the coming strategy, including speeches "to establish an important premise: the current system is heading for an iceberg."

Equating Social Security to the Titanic is uncalled-for hyperbole. Democrats are guilty of demagoging Social Security, too, but most Americans probably care little about the politics and a lot about the outcome.

Smaller checks, bigger risks

While the campaign's backers are plotting their strategy, Bush has yet to reveal important details of his plan. However, there have been selective leaks from the White House that are filling in some of the blanks.

Two key elements are at the core of the privatization plan: revision of the benefit formula and creation of individual investment accounts. Both are dramatic changes that would fundamentally alter the covenant between retired workers and their government.

Most important is the proposal to calculate an individual's Social Security benefit using a different formula. Currently, the initial payment (the amount a new recipient gets before any cost-of-living adjustments are made) is tied to the growth in wages. That makes sense, because Americans measure prosperity by their paychecks. The Bush plan would use a "price index" instead. While that may sound like a harmless change, it isn't.

The benefits for future recipients would be reduced from 10 to 50 percent over the coming decades under that proposed formula _ because price inflation lags rising wages. Would workers be able to make up the difference by investing some of their Social Security money in the stock market?

There is no guarantee, and that is one of the shortcomings of privatization. Workers 55 and older would stay in the traditional retirement program, but those below that age would be allowed to put a portion of their payroll taxes into funds that would invest in stocks and corporate bonds _ probably no more than $1,000 to $1,500 a year. That doesn't give workers in their early 50s and late 40s much time to build up a substantial nest egg. And while historical gains in stocks have achieved a yearly average of about 7 percent (before commissions and fees), there is no guarantee over a period of years or decades that returns will even stay in positive territory. And when faced with volatility in the stock market, many individual investors let emotion rule their choices, which is almost a guarantee for failure.

Rolling the dice

As the privatization plan has been laid out so far, the only certainty is that retirement benefits would be cut dramatically over time, while the ability of workers to keep up would be left to the vagaries of the marketplace. The likely outcome is that some sophisticated investors would do well while many others would come up short, and that could be a formula for disaster.

A third of all current retirees rely almost entirely on Social Security, while another third count it as the largest component of their income. In other words, Social Security provides the only guarantee of a comfortable retirement for tens of millions of Americans, a situation that is unlikely to change in coming generations considering the nation's low savings rate.

Yet younger workers are most likely to favor privatization. That could be because they have grown up during a record bull market (which may not repeat any time soon) or because they've been led to believe that Social Security won't be there when they need it. Breeding such generational distrust is shameful and should not be a part of any sales campaign.

Beyond that, there is a recklessness to the administration's agenda that could harm the entire economy. The cost of converting to private accounts has been estimated at up to $2-trillion, a staggering amount that would make the current $400-billion budget deficit look insignificant by comparison. As it is, Bush has yet to account for the additional billions it will take to fight the Iraq war, make his tax cuts permanent and fund the Medicare prescription drug program that begins next year. Meanwhile, Bush has ruled out the most obvious source of revenue for his plan _ raising the salary cap on payroll taxes, which tops out this year at $90,000. That means individuals with six-digit incomes pay no more into Social Security than those making much less.

Even the White House memo acknowledges the potential threat, noting that if Social Security were to borrow the money needed to offer investment accounts without reducing benefits, the result "could easily cause an economic chain-reaction: The markets go south, interest rates go up and the economy stalls out."

A rational resolution

There is a better way. Smaller, less-wrenching adjustments to Social Security that begin soon and are stretched out over many years would bring the program under control while causing little pain. It could be accomplished with subtle adjustments to benefits and could even involve putting some retirement funds in safe but higher-yielding investments. If that last step is taken, however, Social Security should assume the risk and make the investment decisions.

Those points are worthy of public debate. What we are likely to get instead is a campaign that looks a lot like the past presidential contest, where rhetoric and emotion elbowed out rational conversation.

Social Security may be a subject that puts young workers to sleep and helps older ones sleep more soundly, but it is time for both groups to wake up. The retirement they save may be their own.