St. Louis Post-Dispatch David Nicklaus Column.

By David Nicklaus, St. Louis Post-Dispatch Knight Ridder/Tribune Business News

Jan. 23--SOCIAL SECURITY PROPOSAL SEEMS MORE SLOGAN THAN SOLUTION: If Social Security is the electrified third rail of politics, President George W. Bush isn't afraid to touch it. In the State of the Union Address, he said workers should be able to divert some of their Social Security taxes into private accounts.

His proposal should start a debate about Social Security, and that's important. With the baby boomers nearing retirement, we're only 14 years from a time when Social Security will pay more in benefits than it collects in taxes.

If changes aren't made soon, future generations will be saddled with $25 trillion in unfunded liabilities. That's more than two years' worth of U.S. gross domestic product.

At this point, Bush's proposal is more slogan than solution. He hasn't said how much workers should be able to keep in private accounts. Some people suggest as much as half of the 12.4 percent payroll tax that workers and employers pay to Social Security.

Bush also hasn't said how he would handle the transition. If tax revenue is diverted, how do you continue paying current retirees? And what about people close to retirement, who wouldn't have time to save much in the private accounts?

"Transition costs tend to be downplayed or ignored by those who advocate partial privatization," says Murray Weidenbaum, an economist at Washington University. "Private accounts are not a panacea, and they have some downside problems."

One of those problems is protecting people from their folly. Suppose we had privatized Social Security a few years ago and some poor fool, planning to retire in 2001, had put his nest egg in the Jacob Internet Fund, which lost 79 percent of its value in 2000. Should taxpayers bail him out?

Or, as some privatization proponents suggest, perhaps the government should set rules about where we can invest.

That would be Big Brotherism at its worst, says David C. Rose, professor of economics at the University of Missouri at St. Louis. Government-anointed safe investments would have a huge advantage in the capital markets.

Suppose you can invest your private Social Security account in A-rated corporate bonds, but not in BBB-rated bonds. Imagine the pressure companies would put on rating agencies and the accounting gyrations just to avoid falling a notch on the scale.

Asking the government to set such rules "would strike at the very integrity of property rights and at the heart of the capitalist system," Rose says. "How firms are owned and by whom should not be a government decision."

Rather than mandating private accounts, Rose would prefer that the government cut the Social Security tax dramatically, collecting just enough to provide a decent living to people who are elderly and poor. Society doesn't want old people to starve, but there's no public-policy reason to send checks to people who are well-off.

His solution might be too radical for older voters, who are used to thinking of Social Security as an entitlement that everyone earns by paying into the system.

On the other hand, many 25- and 30-year-old workers say they never expect to get their money back under the today's setup. So, they might be attracted to a system of private accounts.

Bush's proposal sounds appealing in theory, but the devil will be in the details. And he hasn't given us any yet.

E-mail: dnicklaus@post-dispatch.com or phone: 314-340-8213.

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(c) 2004, St. Louis Post-Dispatch. Distributed by Knight Ridder/Tribune Business News.