President wants to use surplus to preserve Social Security system; Proposal puts $700 billion into stock market, sets up new retirement accounts; STATE OF UNION

THE BALTIMORE SUN

WASHINGTON -- President Clinton yesterday proposed to use nearly all of the federal government's burgeoning budget surplus to shore up Social Security and create new individual retirement savings accounts for most American workers.

Following up on last year's pledge to "save Social Security first," Clinton again made the popular retirement security program the centerpiece of his State of the Union address, with a dramatic proposal that is sure to irk Republicans and Democrats alike.

The plan, which calls for investing up to $700 billion in federal budget surpluses in the stock market, would be the most far-reaching change in Social Security financing since the system was created 64 years ago.

"You really have a fundamental choice," said Gene Sperling, chairman of the president's National Economic Council. "We have over $4 trillion in budget surpluses over the next 15 years. We could consume that now and let our children figure out what to do with Social Security and Medicare, or we can use this moment, when the sun is shining, to lift the burden off future generations."

Clinton's proposal would tie up those budget surpluses for more than a decade, potentially foreclosing GOP plans for an across-the-board election-year tax cut next year. Under the plan, about 62 percent of the surplus -- or $2.7 trillion -- would go directly to bolster Social Security's cash reserves, which are expected to dwindle rapidly once the baby boomer generation begins to retire around 2010.

Another 11 percent, or $500 billion, would go to new, government-subsidized retirement savings accounts. Some 15 percent of the surplus would be dedicated to strengthening Medicare, the federal medical program for disabled and senior citizens that faces the most immediate cash crunch.

The rest -- about 11 percent -- would be spent on military and domestic programs.

Sperling estimated yesterday that the proposal would keep Social Security solvent until 2055, 23 years past the date that the program is now expected to go broke. Medicare would be kept afloat through 2020.

Other structural changes may be needed, such as raising the retirement age, taxing more of the income of the rich, or subjecting more taxpayers, including some government workers, to the Social Security payroll tax. But White House aides say those tough decisions will have to be negotiated with Congress.

Those blanks in the proposal are sure to incur the rhetorical wrath of the GOP. Senate Republican Leader Trent Lott yesterday repeated his demand for a detailed Social Security reform bill in legislative language.

"That is presidential leadership. That's the leadership that is required in order to get an important job like this done," Lott said. "It's not enough to say we need to do it. He's got to give us the specifics."

Clinton's proposal is significant in part because it could bridge a deep partisan divide on the politically treacherous issue of Social Security. As part of any reform plan, Republicans have demanded some savings account component, in which individuals can control some tax money and invest it as they choose. Democrats have said such accounts would subject retirement security to the caprices of the stock market, while enabling knowledgeable, high-income Americans to increase the already growing gap between rich and poor.

Clinton's plan would give Republicans something of what they wanted, but funding for the accounts would not come from the existing Social Security system, whose guaranteed benefits would remain intact.

Still, even some Democrats believe the White House plan is too timid. Rep. Benjamin L. Cardin, a Baltimore Democrat who is completing his own Social Security proposal, noted that although 62 percent of the budget surplus would be roped off for Social Security under the proposal, no more than a quarter of that would be available to invest in stocks.

The rest of the money would be used to draw down the federal debt by retiring outstanding Treasury bonds without issuing more, as the government has done for years. By reducing the debt now, administration officials say, the nation will make more money available for Social Security when baby boomers begin to retire.

"I personally would be more aggressive," Cardin said.

Almost all the money going into the stock market would be controlled by fund managers under contract with the federal government, a proposal that key Republicans vehemently oppose. The $700 billion in federal money that would flow into the markets over the next 15 years would represent just 4 percent of the total money currently in the nation's stock markets, Sperling said, about the same amount controlled by mutual fund giant Fidelity Investments. And the funds would be channeled mainly into mutual funds tied to the performance of the broad stock market and not to the stocks of individual companies.

The proposal prompted a sharp response from Rep. Bill Archer, chairman of the powerful House Ways and Means Committee, which has jurisdiction over Social Security reform.

"No, no, a thousand times no," Archer declared. "If you thought a government takeover of health care was bad, just wait until the government becomes an owner in America's private sector companies. Government-controlled investment in markets is contrary to free enterprise, and it will open the doors to all kinds of mischief."

The individual accounts -- or Universal Savings Accounts -- would be similarly conservative, working something like the 401(k) savings plans many companies offer. Under the proposal, the federal government would match workers' contributions up to a limit and in some cases make a modest lump sum contribution.

That limit may be restrictive, however. Cardin, who has worked closely with the White House on Social Security reform, said Clinton may never provide the details. Instead, the president may leave that to Cardin and the co-sponsor of his plan, Ohio Republican Rep. Rob Portman.

Under the Cardin-Portman plan, workers earning up to $10,000 a year would get federal matching contributions equal to 2 percent of their wages, if they contribute at least 1 percent of their pre-tax wages to their own individual savings accounts.

Workers earning between $10,000 and $40,000 a year would get a one-time, $200 contribution from the government to establish their accounts, then a government match of their contributions each year that would vary according to income levels.

Under Cardin's proposal, workers earning more than $40,000 would be allowed to invest 3 percent of their pretax income in retirement accounts, but would receive no government matching funds. That would be on top of existing retirement-savings incentives such as 401(k) plans.

Workers would likely have a menu of investment choices.

The proposal is not likely to satisfy many Republicans, who have demanded diverting at least some of the 12.4 percent payroll tax to individual accounts that would be controlled by the workers. But, Cardin said, it is a strong starting point for the difficult negotiations ahead.

"This is not the end game," he said, "but it's the way to get to the end game."

Pub Date: 1/20/99

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