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Tackling Social Security
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January 11, 1999: 10:10 a.m. ET
Stock investing, tax hike, benefits cuts are all options for reforming the system
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NEW YORK (CNNfn) - You pay $500 a month in Social Security taxes and get back $1,000 a month when you retire for the rest of your life, or about $120,000.
Put that money in an S&P 500 index fund and you've got $1 million.
That's the thinking behind one of the most radical ideas to overhaul the nation's struggling Social Security system, which will run out of money sometime around the year 2020 by some estimates.
But changes won't come easy to the massive social program started in 1935 in the shadows of the Great Depression.
"It's unbelievably complicated, and so many of the ideas are based on theory that hasn't been tested," said Mark Maselli, a principal at PWC Kwasha HR Solutions in Fort Lee, N.J. "There are so many different options out there. I have no idea what the right option is."
A safety net for the poor
Social Security was the government's way to provide a safety net to protect the elderly from poverty. Under the current law, employers and employees split the cost of a 12.4 percent payroll tax.
The Social Security trust fund invests in low-risk Treasury bonds -- and the U.S. government borrows from it at a low interest rate to pay other budget tabs. There's a surplus in the fund now, but by 2013 benefits will start to exceed payroll revenues as millions of Baby Boomers start retiring. Experts predict the fund could run out of money between 2020 and 2030.
The program provides higher benefits to people at the bottom of the wage scale, so people earning $20,000 a year will get about 40 or 50 percent upon retirement. By contrast, wealthier people might get only 10 percent of their base pay. The figures also depend on how long a person works.
The average person pays $400 to $500 a month to Social Security, said Ken Stern, author of "The Comprehensive Guide to Social Security and Medicare." You might get $1,000 a month after you retire, or about $120,000 if you live for 30 years. Many people get less back than they pay into the system, he said.
The White House in December held a conference to help warm up negotiations with the Republican-controlled Congress. At the conference, President Clinton said he supported some form of stock market investments to boost Social Security. Republicans have also made reforms a priority.
But amid the thorny debate, senators are beginning an impeachment trial against Clinton that could overshadow other national issues.
Many options, many questions
Robert Viceconte, a tax attorney at MR Weiser in New York, thinks the most likely reform will be some form of "privatization," or use of stock market investing to raise returns.
For example, the government might invest a portion of the Social Security trust fund in equities.
Or, each person will be allowed to invest a portion of their contributions in individual accounts that would be highly regulated. In some proposals, up to 2 percent of the 6.2 percent you pay in taxes would go to a personal account, Maselli said. The rest would go into the general Social Security trust fund.
"The advantage is it would have the look and feel of a 401(k)," Maselli said.
Other, more radical proposals would put most or all of a person's contributions into a private investment account. You might also be able to contribute more.
But critics say the government can't trust people to control their own investments, Stern said.
Other opponents question having the government involved in investing -- essentially becoming stockholders with proxy votes, he said.
In another scenario, the government could allow money managers to win contracts through competitive bidding, Stern said. But that option would require ticklish regulatory controls.
Another way to fix the problem would be to simply raise the Social Security tax -- but it's already an onerous burden, Maselli said.
"It's a big, heavy tax, and that's why people don't want to raise it," Maselli said.
The government could also lower benefits for some or all recipients. For example, the Social Security Administration could raise the retirement age. (The government in 1983 agreed to raise the age from 65 to 67 by 2027).
Or, Uncle Sam could limit benefits for the very wealthy -- but critics say this is less likely because of the argument that people feel they should get something back after paying into the system.
"Right now, everything is on the table," Viceconte said.
Of course, yet another option could combine a number of different approaches. For example, the government may raise the social security tax and put the increase toward an individual investment account, while at the same time raising the retirement age.
"It has to come to a head," Stern said. "We won't have Social Security if it doesn't."
-- by staff writer Martine Costello
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