By Congressman Earl Pomeroy (D-ND)

As political parties debate how to "fix" Social Security, the vast majority of Americans agree that the program has successfully protected millions of families by providing guaranteed benefits. With personal savings at record lows, and only half of Americans covered by workplace pension plans, America needs Social Security more than ever. While Congress debates the long-term fixes to make the program financially sound in the future, I believe we must maintain Social Security's core protections.

The President's plan not only brings us substantially closer to saving Social Security, but it also puts the economy our children will inherit on sounder footing by greatly reducing the national debt. The President has proposed using projected budget surpluses to reduce the national debt, now pegged at about $4 trillion, as the first step in saving Social Security. Paying down publicly held debt to about $1 trillion in 2014 will lower interest rates, increase savings and spur additional private-sector business activity, creating a better opportunity for the Social Security program to meet the needs of future retirees.

Dedicating a portion of the surplus to Social Security and debt reduction will be a tremendous advance in this unfolding debate. However, Congress must still turn to three basic policy choices to shore up the system: increase taxes, cut benefits, or boost investment returns. Investing a modest share of Social Security reserves in the stock market would strengthen the program's financial position to the benefit of future generations and reduce the magnitude of the Social Security benefit reductions that would otherwise be needed.

President Clinton has proposed a plan for transfers to be made from the U.S. Treasury to the Social Security trust fund each year for 15 years. The amount transferred each year would be specified in law, so that by 2015, about $2.8 trillion would have been transferred. A portion of these funds would be invested in the private sector each year, from 2000 through 2014. The remainder of the trust fund, more than 80 percent, would continue to be held in government securities. This allows the trust fund to achieve a higher rate of return without assuming undue risk.

Investment of the trust fund in equities would extend solvency to 2059, and bring Social Security in line with the best practices of both private and public sector pension plans. An overwhelming number of private-sector defined-benefit pension plans invest part of their reserves in equities. State and local pension plans currently invest $1.3 trillion in equities, amounting to 10 percent of the stock market. At its peak, this safe, diversified investment strategy for Social Security would mean that total holdings on behalf of the program would equal 4 percent.

Additionally, federal funds are already privately invested free from political interference. Pension reserves of the Tennessee Valley Authority and the Federal Reserve system, as well as assets of participants of the Federal Thrift Savings Plan (TSP) are now invested in common stocks. The Federal Reserve's pension plan for instance, has 65 percent of the portfolio backing their defined-benefit pension plan invested in equities.

Despite these successes, questions have been raised as to whether it is possible to invest a small part of the Social Security reserves in common stocks without risking political interference in private business decisions. I believe that we need to - and we can - provide the strongest safeguards against such meddling. The safeguards outlined by the President would add, as Treasury Secretary Robert Rubin says, "two layers of protection against political interference." The two layers are an independent oversight board, and the selection of private fund managers.

The first layer -- the independent board -- the members of which would be top-notch financial experts, would be established to select and oversee private fund managers. Board members would be appointed for lengthy staggered terms, and neither the President nor Congress would be able to remove them. As the second layer of protection, the private fund managers would be selected through competitive bidding and would be charged with investing a small portion of the Social Security reserves in broad market index funds. Secretary Rubin has emphasized, "the government will be involved absolutely not at all in the investment."

In reality there is a third restriction on political interference created by the fact that all funds would be passively invested in very large index funds. Similar to the Thrift Savings Plan, it is likely these indexes would also contain investment funds from a number of private parties, further guaranteeing the strictest fiduciary standards in the investment of those funds.

This plan mirrors the existing structure of the Federal Reserve Board and the Thrift Investment Board that oversees the federal employee retirement savings plan. Under this structure, the Fed has successfully remained independent, establishing monetary policy without interference from Congress or the executive branch. Likewise, the Thrift Investment Board has kept its autonomy, to the clear benefit of federal retirees.

This investment strategy is a way to professionalize the management of Social Security reserves, diversifying the trust fund's investments so nearly 150 million American workers and retirees get a better return and removing the process from political interference.

While some say the way to pursue higher investment returns for the Social Security program is to create individual private accounts, closer scrutiny reveals individuals would face increased risk without the guarantees of the current program.

In addition, the administrative costs of privatized individual accounts are substantial -- estimates reach between 30 and 40 percent counting annuitization costs. And for those plans that propose private accounts using the Thrift Savings Plan as a model, administrative expenses add up to eight percent. This is still substantially higher than the nominal cost of investing a portion of the trust fund.

As more studies bring to light the higher costs of privatization and the greater risk for America's workers (as shown in a flow chart depicting the risk, cost and complexity of the Archer-Shaw partial privatization plan), Congress should turn to increasing the returns of the trust fund.

Professionalizing the investment of a small portion of the trust fund and removing it from political interference with specific safeguards is an important "fix" for addressing the program's shortfall without sacrificing Social Security's guarantees.