Originally created 01/20/99

Clinton proposes to use budget surpluses to preserve Social Security



WASHINGTON -- President Clinton's long-awaited proposal to shore up Social Security would use budget surpluses to ensure the retirement system can pay promised benefits. But it also would create separate 401(k)-style accounts for most working Americans.

For the first time, the government could invest some of Social Security's cash reserves in the stock market -- a plan that immediately generated controversy.

"No, no. A thousand times no," said House Ways and Means Committee Chairman Bill Archer, R-Texas. "It will open the doors to all kinds of mischief involving government dictates, favoritism and cronyism."

Nevertheless, the overall plan was judged by Clinton to be most likely to satisfy both Democrats and Republicans, aides say.

"It protects the traditional guaranteed benefit of Social Security ... while giving all Americans the ability to participate in wealth creation and added savings," said presidential adviser Gene Sperling.

The proposals, included in his State of the Union address, are part of Clinton's blueprint for using about $4.4 trillion in government surpluses now expected over the next 15 years. He proposes adding about62 percent directly to Social Security's cash reserves and using about 11 percent for the new retirement accounts.

Another 15 percent would be earmarked forMedicare, the health insurance program for the elderly and disabled that, like Social Security, is expected to be financially burdened by the nation's huge, aging baby boom generation.

Clinton proposed that the remaining $500 billion or so in surpluses go to military and other domestic programs, angering many Republicans who want an across-the-board income tax cut.

"He wants to spend a lot more money; he wants government to grow," said Assistant Senate Majority Leader Don Nickles of Oklahoma. "If we're going to have a surplus, we think that taxpayers should be the primary beneficiaries."

But Republicans have made reforming the nation's retirement system a priority too this year, with party leaders even offering to introduce legislation Clinton recommends.

"We have a commitment to work together in a bipartisan way to come to an agreement," said Senate Majority Leader Trent Lott, R-Miss.

Administration officials estimate the cash infusions Clinton is proposing will keep Social Security financially sound until 2055 -- more than 20 years longer than now expected. Medicare's crisis date would be postponed from 2008 to 2020.

However, the White House still plans to pursue negotiations with lawmakers on additional structural changes. Among the administration's goals will be 75 worry-free years for each program, which could require controversial changes such as a higher retirement age.

Other priorities Clinton outlined include:

--Lifting penalties that now mean smaller Social Security checks for senior citizens who continue to work. Aides said the penalties would probably be phased out slowly, but beginning soon.

--Adding a prescription drug benefit to Medicare.

--Providing extra financial help to single elderly women, now the poorest retirees.

Clinton first pressed lawmakers in his State of the Union address a year ago to save budget surpluses for Social Security. But until now, he has frustrated Republican lawmakers by managing to thwart their plans to use surpluses for a tax cut without endorsing any specific Social Security plan.

Under Clinton's proposal, the biggest portion of the expected surplus would be added to Social Security's cash reserves. Out of that, he is suggesting about a quarter be invested, in bulk, in the stock market in hopes of increasing its value.

The remainder of the surplus going to Social Security would be kept -- as the program's cash reserves have been traditionally -- in safer, but historically lower-yielding, U.S. Treasury bonds.

Many Republicans strongly disapprove of government participation in private financial markets, preferring to see Social Security money diverted into personal accounts that Americans would control. But Clinton has sided with Democrats who say that would expose individuals to too much financial risk.

Clinton will ask lawmakers to help devise a way that bulk investment decisions could be made by an independent board, insulated from politics and limited to relatively neutral options such as stock index funds.

But the president also is joining influential Republicans who propose starting new personal retirement accounts using budget surpluses, not Social Security money.

The accounts would work something like the 401(k) plans many companies offer, allowing workers to choose from investment options such as stock and bond funds.

Clinton's version -- dubbed Universal Savings Accounts -- would give people an annual lump sum from the government, then additional contributions paralleling their own savings up to a limit. A sliding scale would mean bigger subsidies for those with lower incomes and might disqualify the wealthiest -- perhaps 5 percent -- from the money altogether.

Details of the proposed Social Security plan:

President Clinton is proposing a two-pronged plan using federal budget surpluses expected over the next 15 years to bolster the system Americans depend on for retirement income. The plan would:

--Push about 62 percent of the surpluses into the Social Security programs' cash reserves. That amount is now projected at more than $2.7 trillion.

The government would invest about a quarter of the money in the stock market to try to increase its value -- a first for Social Security. Investment decisions would be made by an independent board.

The rest of the cash infusion would be kept, as Social Security's reserves have been in the past, in safer, but historically lower-yielding, U.S. Treasury bonds. There would be one difference, however, as those bonds are purchased in the future: Lawmakers could use the proceeds -- essentially money borrowed from Social Security by the rest of the government -- only to pay down the national debt, not for other spending, as is the practice now.

If the plan is enacted, officials estimate a cash shortage now expected to hobble the nation's public pension program starting in 2032 would be put off by more than 20 years to 2055. Also, the nation's publicly held debt by 2014 would drop to its lowest level as a percentage of gross domestic product since 1916.

Still, Congress and the White House would consider additional structural changes to Social Security, such as raising the retirement age.

--Devote about 11 percent more of the surplus to new retirement savings accounts for most American workers that would be separate from Social Security, giving people a new source of old-age income. Based on current projections, government contributions to the accounts would total about $500 billion.

The accounts would work much like the 401(k) savings plans many companies offer workers, with a range of investment options such as stock and bond funds.

The government would give each person an annual lump sum for his account, then additional contributions paralleling his own savings up to a limit. A sliding scale would mean bigger subsidies for those with lower incomes and might disqualify the wealthiest, perhaps 5 percent, from the money altogether.

For example, a worker earning $45,000 a year might get an initial government payment of $100, then a 50 percent government match of the contributions the worker makes up to a maximum of $600. The result would be $1,000 in the worker's account at the end of the year, with $400 of it coming from the government.

The lowest-income workers might have their savings fully matched.