Clinton's Retirement Plan Falls Flat

by Darcy Ann Olsen

Darcy Olsen is an entitlements policy analyst at the Cato Institute.

When President Clinton delivers his State-of-the-Union Address, expect to be mesmerized. The Don Juan of promises will say, "women," "children" and "21st century" so often that you may get the impression that he's leading us somewhere.

This year I won't be taken in. I'll be listening closely for one thing: a plan for Social Security. Not a plan to "improve retirement security," but a specific plan to address the problems of a program that affects every single American.

For many of us, particularly women, how Clinton tackles this issue will determine whether we retire comfortably or in poverty.

Everyone knows by now that Social Security's financial health is in jeopardy. Uncle Sam's credit card has reached its limit, and payments are coming due. In budget speak, Social Security faces a $9 trillion unfunded liability.

If President Clinton and Congress don't change the system, benefits will have to be slashed 33 percent or the payroll tax increased to nearly 20 cents on the dollar, according to the Social Security Administration. Neither option is acceptable.

By far the best solution is to transform Social Security into a system that is based on saving and investing. Instead of sending the 12.4 percent payroll tax to Washington where it is immediately spent on government operations, workers should be allowed to put their money in personal accounts, like individual retirement accounts or 401(k) plans, where it would be saved and invested until it grew into a substantial nest egg.

Einstein once said that compound interest is the most powerful force in the universe. And President Clinton understands that. That is why he says he favors a system that will give workers higher returns on their payroll taxes -- higher returns that virtually every pension plan in the U.S. is able to achieve. But will he pay this issue more than lip service?

Not likely. Given Clinton's delicate situation, Washington players expect him to tread lightly around the issue to avoid offending anyone. So they say, perhaps he'll offer up a supplemental retirement program without touching Social Security itself. But such timidity would ruin his chance for a brilliant legacy -- that of virtually eliminating poverty among the elderly, particularly elderly women who are disproportionately poor.

Right now, nearly 15 percent of elderly American women retire in poverty. But research shows that virtually all women would be better off in retirement if they were allowed to place their taxes in personal accounts that could be invested. For example, a single woman who earns $13,500 a year would get just $815 per month from Social Security but would receive $2,292 if she invested in a mixed fund of bonds and stocks that earned a 5.75 percent return (which is below the historical rate of return).

The average, full-time working woman in U.S. earns $22,412 per year and pays $2,779 FICA tax. If she were allowed to invest her money in a mixed bond and stock fund that earned a 6 percent return, her monthly retirement benefit check would be $4,036 compared to $1,123 that Social Security promises but can't yet pay. The better deal seems clear.

Die-hard defenders of Social Security say it's much safer because it offers a "guaranteed" benefit. But women should not buy that tired old line. We've seen that Social Security isn't guaranteed at all -- that's why there's so much talk about cutting benefits, raising the retirement age, and increasing taxes. The money that is supposed to pay for that "guarantee" isn't there.

So when you listen to the State-of-the-Union Address, pay special attention to what the president has to say about Social Security. If he uses all the right buzz words, but ends up leaving the present system alone, you'll know he's decided to pass up a historic opportunity for fundamental reform.

This article originally appeared in the Detroit News, January 21, 1999. . It also appeared as a Cato Daily Commentary, State of the Union -- Listen Carefully, January 19, 1999.