This week Vice President Al Gore detailed an approach to retirement saving policy that is radically different from the Social Security privatization plan embraced by his rival, presumptive GOP presidential candidate, Gov. George W. Bush. Although Bush supporters immediately accused Gore of a desperate "me-too" embrace of private accounts, in reality it is Republicans who should be worried that this debate will alert ordinary voters to the stark differences between the two candidates' plans. Like Bush, Gore proposed that every American should have the option of opening a tax-subsidized savings account. The most critical difference between their positions is that with Gore's "Retirement Plus" accounts, individuals would accumulate wealth on top of -- and not in place of -- the poverty-level benefit currently guaranteed under Social Security (the average benefit is $825 a month).

Bush wants to allow individuals to invest a portion of their Social Security taxes in the stock market. Gore wants to leave Social Security as it is and encourage increases in private saving with new tax breaks tilted toward less affluent families. By relying on entirely different revenue sources, the candidates adopt sharply divergent positions on three big issues: whether to cut Social Security benefits, how best to increase national saving and whether a tax cut should be targeted toward the top 20% or the bottom 60% of earners.

Gore shovels the surplus into savings

Gore's Retirement Plus accounts would be funded by a refundable income tax credit targeted to reward voluntary retirement saving by middle-- and low-income people. Under Gore's plan, the government matches voluntary saving by as much as $3 for each $1 saved by couples earning less than $30,000 a year. Couples earning from $30,000 to $60,000 would get a dollar-for-dollar match on deposits, while those earning up to $100,000 would get a $1 match for every $3 deposited. Income limits for single filers would be half these levels. Gore would cap annual contributions at $1,000 initially and $2,000 starting in 2009. Total cost: $200 billion over the first 10 years.

It is important to view Gore's "Plus" accounts proposal in the context of his (and President Clinton's) position on reforming Social Security. Without new sources of revenue -- or cuts in benefits -- actuaries project that the Social Security system will be able to pay only 70% of promised benefits after the year 2037. This solvency gap has become the occasion for proposals, such as Bush's, to partially privatize Social Security by allowing workers to invest a portion of their payroll taxes in corporate stocks and bonds.

Gore and most Democrats have opposed conservative privatization proposals because the price tag inevitably entails a reduction in today's guaranteed level of benefits and an increase in risk. Social insurance, they argue, is intended to be a "safety net" -- the foundation upon which individuals add private pension and personal savings -- not the money we encourage individuals to risk in the stock market.

Digging a second hole in Social Security

According to a recent analysis (PDF File) published by the Century Foundation, Bush's plan implies an average 40% cut from currently promised Social Security benefits for all workers age 55 or younger. The reason is that the pieces of Bush's plan that are public suggest a doubling of the system's solvency gap.

Remember that most payroll taxes go right back out the door to pay current benefits -- two-thirds to retirees, one-third to dependent survivors and the disabled. To pay promised benefits over the next 50 years, Social Security already needs another $1.4 trillion in revenue. On top of that deficit, Bush's plan diverts another $2.3 trillion in revenue. Total transition cost: $3.7 trillion.

Because Bush promises neither to raise new revenues nor to cut benefits for current recipients -- not even for workers nearing retirement -- his only other option is a bigger benefit cut on future retirees (i.e. today's workers under 55). Of course, over time his individual accounts will offset part of this 40% benefit cut. Still, the Century Foundation study concludes that the average 30-year-old worker retiring in 2037 will receive 20% less in total retirement income. Worse, the average low earner would be 29% worse off, while the average high earner would lose only 3%.

In contrast, Gore would maintain current benefits under Social Security. Instead of putting today's surplus payroll-tax revenue into private accounts, he would use it to pay off the national debt held by the public (including by foreigners). Reducing federal debt saves hundreds of billions in interest expense. By transferring those interest savings to Social Security, Gore would extend the system's solvency until 2050. Paying down public debt also allows the nation to borrow again, if necessary, to stretch out the burden of paying benefits to the outsized boomer generation.

One reason Bush cannot save Social Security as we know it is his promise to cut income and estate taxes by at least $1.5 trillion over 10 years. Roughly two-thirds of Bush's tax cuts would go to the most affluent 10% of taxpayers, according to an analysis by Citizens for Tax Justice. His tax cut would also add $365 billion to federal interest payments on the national debt.

Boosting national savings and investment

Another critical difference is that Gore's plan would increase national saving and investment, while Bush's plan only redistributes the benefits and burdens of Social Security. While both candidates would save the short-term surplus in Social Security revenues, Gore's refundable tax credit should encourage many younger and lower-wage workers to save. Since they do not save now, Gore's Plus accounts will directly increase national saving.

Gore's refundable tax credit also reaches a population that is not motivated by existing incentives. The federal government already spends more than $90 billion annually on tax deductions for private pension saving, but two-thirds of that goes to the wealthiest 10% of households, most of whom would save with or without a generous tax break.

Finally, the Gore plan also addresses the rapidly widening inequality of financial wealth that threatens the retirement security of half the nation -- while Bush's plan would aggravate that inequality. The sad fact is that the typical family earning less than $50,000 (70% of all households) has a net worth less than the equity they own in their primary residence. This means most working families have more consumer debt than financial assets -- and their positive net worth is primarily due to home ownership. Even including home equity, the average net worth of the bottom 40% fell to just $1,100 in 1998, according to a recent analysis (PDF File) of the Federal Reserve data.

Not since 1980 have voters faced such a clear and dramatic choice between the ideologies of the two leading presidential candidates on issues as important as retirement security and tax policy. If congressional candidates follow suit, maybe our new government in January will have a mandate for a change.