Cut Social Security?
No. Expand It.

By ROBERT EISNER

Don't sock the elderly; help them. Old age is hard enough.

Any poll would almost certainly show strong support for this proposition, despite countless attempts to rein in Social Security. Conventional wisdom has been prodding us to begin cutbacks now, presumably to face a future crisis: Social Security trust funds will go broke in the year 2030. We are warned that we must reduce cost-of-living adjustments, raise the retirement age, tax benefits more and even trim payouts directly.

There is, in fact, no good reason to reduce Social Security benefits at all. The projected shortfall in the trust funds in 32 years--aside from the uncertainty of any long-term projections--is an accounting problem with easy solutions. Credits to the trust funds come chiefly from a 12.4% tax on payrolls along with interest the Treasury awards on trust-fund balances, currently well over $600 billion. But it was Congress, not God, that decreed that only the 12.4% payroll taxes be credited to the funds. If we also credited some 1.5% of taxable income from our income taxes, we could handle all of the pessimistically projected shortfall.

And it was Congress and Treasury officials, not God, who determined the interest rate to be credited on the nonnegotiable Treasury notes of the fund balances. Those seeking to privatize Social Security tell us returns would be greater if workers took some or all of their Social Security "contributions" and invested them in the stock market. Well, why not save workers the problem of finding private investments and risking the loss of some benefits? Why not award balances in the trust funds, credited with only 6.6% on assets acquired in 1996, the higher returns often earned in equities? This again would be a simple accounting matter, with no real effect on the measured budget deficit. But it would solve that presumed problem of a future shortfall.

There is a real problem of an aging population, which after 2010 will give us an increasing proportion of dependents to be supported. But that's also manageable. Even conservative projections of growth show so much more output per capita in that 2030 year of doom that income for all--young, middle-aged and elderly--should be far greater then. And, furthermore, we cannot eat trust fund balances--or stock certificates--now or in the future. The bread consumed by those not working--elderly or young--must always be baked by those working. What we can and should do is promote policies that will give us an ample body of productive workers.

Some analysts want to replace Social Security with private investment in a booming stock market. However, private investment, whether directly or in 401(k)s, 403(b)s, IRAs or Keogh plans, doesn't provide what Social Security has offered for six decades: 1) social insurance for all; 2) actuarially fair annuities at retirement; 3) automatic cost-of-living adjustments; and 4) the most efficient insurance system to be found, with administrative costs for over 140 million participants running at about 0.8% of benefits.

Privatizers do have a point, though. Average Social Security benefits are too low, coming to only about $10,000 for a family with a retired worker. Millions of middle-class Americans are concerned that their retirement income will be inadequate.

There is a way to meet their needs--a way that wouldn't take a penny from Social Security but would offer all the promised benefits of privatization. I would propose what might be called "public-ization."

I would offer all participants in the Social Security system, which hopefully would include almost all of the population (those who earn their income from capital as well as from labor), the chance to make additional, entirely voluntary, contributions to Social Security. These would be credited to individual accounts, with contributors offered a choice of investments: a) a passive, indexed stock fund; b) a passive, indexed bond fund; or c) Treasury securities.

The contributions would be tax-deductible, like current IRAs and 401(k)s, but ultimate benefits would be taxable. Contributors would be credited with the income and capital gains on their investments, both up to retirement and afterward. They would, on retirement, receive actuarially fair annuities with cost-of-living adjustments or, even better, adjustments related to changes of wages of those working.

Suppose these supplementary contributions amounted to 25% of those now taken in payroll taxes and the rate of return were a meager 8%. People contributing for 30 years would then, on retirement, receive one-third more in benefits than they would get from their mandatory contributions alone.

But total annual returns from the S&P 500 over the past 30 years have averaged more than 12%. If we assume only a 10% return for those electing the indexed stock fund for the 25% increase in their contributions, their retirement benefits would grow by more than half. What's more, budget deficits as conventionally measured would be sharply reduced--or surpluses increased--and the trust-fund balances would soar.

This would happen because contributions would be pouring into the funds along with income from the supplementary investments before benefits were paid out. And that would not be merely a transitional phenomenon. It would likely go on indefinitely, even after the system matured. Continued increases in surpluses and fund balances would require only that investment returns exceed the rate of growth in contributions.

We'd have the best of all worlds. Retirement benefits for tens of millions of Americans would soar. We'd fully preserve the social-insurance aspect of the system while encouraging private savings and investment. Financially, we'd be reducing our measured budget deficit and even building a surplus. All or most of the projected shortage in Social Security trust funds could be eliminated. And all this with no new taxes!

Mr. Eisner, professor emeritus at Northwestern University and a past president of the American Economic Association, is the author, most recently, of "The Great Deficit Scares: The Federal Budget, Trade and Social Security." Details of the proposal in this article will be presented in a publication he is preparing for the 20th Century Fund.