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Private accounts would
damage Social Security

THE ISSUE President Bush is urging Congress to allow workers to divert some Social Security taxes to stock market investments.

SOCIAL Security reform is President Bush's top domestic priority, as explained in yesterday's State of the Union speech. Having previously described the government retirement program as being in a "crisis," the president has called for diverting a percentage of payroll taxes now paid into the program into personal retirement accounts. That would turn a relatively small problem into a real crisis.

The president sounded the alarm that the Social Security System is "headed toward bankruptcy." The system's trustees project that payouts will exceed payroll taxes paid into the program by 2018, and that the reserves will be exhausted by 2042. Using different economic assumptions, the Congressional Budget Office reckons that the system will stop growing a surplus in 2020 and will go belly-up in 2052.

The Bush administration forecasts a total long-term shortfall of $10 trillion into the distant future, while the trustees project a deficit of $3.7 trillion over 75 years. Both are scary numbers, but the trustees have cited smaller ones sufficient to make the problem go away, making the system solvent.

Either an immediate increase of 1.89 percent to the payroll tax -- now 12.4 percent, shared by employer and employee -- or a benefit cut of about 13 percent would fix it. Adjustments in those directions could be softened by a rise or removal of the $87,900 earnings cap on payroll taxes. A mix of all three would be an effective and bearable remedy, if done promptly.

Bush said a variety of options are "on the table." However, he rejects any increase in the payroll tax rate or lifting of the earnings cap. Instead, his advisers have suggested lowering benefits for future retirees by indexing benefits to inflation rather than to wages, which generally rise faster.

He stresses that young Americans should have an opportunity to divert a percentage of the payroll tax into personal retirement accounts, an ingredient of his envisioned "ownership society." The diverted money would be put into stocks and bonds.

Although Bush has not provided details, advisers have said the diverted money would go into one of three to five diversified funds. The plan would be modeled after the Thrift Savings Plan for federal employees, similar to 401(k) plans used by many private companies.

Most of the workers likely to take advantage of the opportunity already have 401(k) accounts in the workplace or Individual Retirement Accounts. The tax code offers an incentive for workers to invest in private pension plans by deferring taxes on those savings.

The president proposes taking money from the Social Security System while sounding the alarm about its lack of long-term solvency. The cost of moving to partial privatization is estimated at $2 trillion, added onto the scary amounts that Bush says have created a crisis.