SYNOPSIS: A pay-as-you-go system requires honest and workable solutions

Oh no, not another column on Social Security! But the mailbag suggests that the issue needs one more go-round, because some readers still think Social Security is just a pension fund -- one that compares unfavorably with private retirement plans. And it's true that lately it is being run more like such a fund than before. But the many decades in which it was run on a pay-as-you-go basis hang heavily over the system's prospects, and any honest plan for reform must come to grips with that legacy.

For most of its existence, Social Security was basically "unfunded": it didn't invest the contributions workers paid in, it simply paid them out to retirees. This hand-to-mouth operation worked because the nation's working population was steadily growing; so each generation, when it reached retirement age, could count on being supported by a much larger generation of workers. For those who worked in the system's early years it was a terrific deal.

But baby boom was followed by baby bust. In the decades ahead, a huge number of retirees will need to be supported by a rather small number of workers. Pay-as-you-go would require either slashing benefits, sharply increasing required contributions, or both.

Of course officials have known for a while that this was coming, and they actually -- surprise! -- took some responsible precautions. In 1977 required contributions were increased without a corresponding increase in benefits, and as a result the system has been steadily accumulating a fund that will greatly delay the date at which it runs out of money. But the fund still isn't big enough, and the increased contributions mean that the implied rate of return for today's workers is low compared with what they could get if they were free to invest their money for themselves.

The reason for that low return, once again, is not that the Social Security Administration is a lousy investor; it's that today's workers must over-contribute because previous generations of Americans didn't put in enough to finance their own retirement. It's a legacy of the pay-as-you-go past.

Now what could a politician who wants to let workers invest their own money honestly propose? He might say: "I think that workers should be free to invest their own money. Of course, that means that we won't have enough money coming into the Social Security system to pay the benefits currently offered to Americans over 65; so I'm slashing those benefits, starting today. After all, the future belongs to the young!" Before making that proposal, however, the politician should learn a trade; he's going to be looking for another job very soon.

Or he might say: "I think that workers should be free to invest some of their contributions, say 15 percent, on their own. Of course, we have to maintain the benefits of today's retirees. So in return for giving today's workers the privilege of investing 15 percent of their contributions, I'm going to cut their guaranteed benefits by a lot more than 15 percent -- 30 percent, 40 percent, whatever it takes to keep the system actuarially sound. I believe that today's workers can make enough money in the stock market to compensate. And if you can't, my fellow Americans, that's your problem!"

That, as far as I can make out, is what George W. Bush is actually proposing -- though he has been more than vague about the details. He hasn't specified how much guaranteed benefits would be cut, let alone clearly stated that the percentage cut would have to be a lot larger than the share of contributions workers were freed to invest. (The plan described by Senator Daniel Patrick Moynihan on this page yesterday would in effect impose cuts on that scale, mainly through reduced cost-of-living adjustments and increased taxes on benefits).

What a politician can't honestly say is something like, "Even if a worker chose only the safest investment in the world, an inflation-adjusted U.S. government bond, he or she would receive twice the rate of return of Social Security" -- as if that were a meaningful comparison, as if the obligations to today's older Americans didn't have to be met. But that quote isn't made up -- it's what Mr. Bush actually said.

All I can say is that he'd never be able to get away with it if Al Gore were still alive.

Originally published in The New York Times, 5.31.00