Investing in Social Security: new opportunities for CPAs.

In January, a Social Security advisory group published a report on the long-range solvency of the Social Security system. The Report of the 1994-1996 Advisory Council on Social Security included three different recommendations on how Social Security payroll taxes should be invested, all of which suggested supplementing benefits by investing in the stock market. If some of the Social Security payroll taxes were invested in stocks in an effort to obtain much higher returns, it is likely that taxpayers would have to assume much more-responsibility for their own retirement security.

"Whatever happens to Social Security will have a domino effect on employers and individuals," said David M. Walker, a partner of Arthur Andersen in Atlanta. "Under some of the proposals to restructure the Social Security system, employers and employees will need more education on planning, saving and investing, which means more assistance, and that's where CPAs can help."

However, Walker said major changes in the Social Security system were not likely to occur any time soon. "Nonetheless, there might be some effort to assemble a bipartisan commission to revisit Social Security," said Walker. He also said a congressional commission would have to organize a massive public education campaign on the nature and extent of the problems facing the Social Security system and what the options would be for employers and individuals.

Taking stock in retirement

All three of the advisory council recommendations were intended to increase the advance funding of Social Security's long-term obligations. One of the recommendations was to have the government invest roughly 40% of the trust fund's assets in stocks as opposed to long-term government bonds. This plan, known as the maintenance of benefits plan, also would involve an increase in income taxes on Social Security benefits.

Another plan, known as the individual accounts plan, would reduce the growth of future Social Security benefits for middle- and high-wage workers, increase the payroll tax and set up defined contribution accounts that would be held by the government but offer workers approximately 5 to 10 investment options.

The third plan would divert up to five percentage points of workers' payroll taxes into individual accounts, known as personal security accounts, that would offer workers a wide range of investment options. According to Walker, the personal security accounts plan would cut deepest into Social Security's base benefits. "We need to ensure that the defined benefits maintained under Social Security are adequately financed," said Walker. He also said that some investors may not invest their funds wisely. "Certain account balances could be subject to significant market fluctuation by the time the taxpayer retires."

According to the Clinton administration, the Social Security trust fund will be depleted by 2029 if the system goes unchanged, and revenues will cover only three-fourths of benefit costs, Nonetheless, members of Congress--and the Clinton administration--have said they were more likely to address the problems facing Medicare before they tackle Social Security. If there are no changes made to Medicare, its trust fund (the Hospital Insurance Trust Fund) is expected to run out of money by 2001.