Generational Alliance: Social Security as a Bank for Education and Training

Generational Alliance: Social Security as a Bank for Education and Training by Barry Bluestone, Alan Clayton-Matthews, John Havens, and Howard Young Criticism of public programs in recent years has increasingly taken on the tone of a generational conflict. Critics point to the high cost of Social Security pensions, Medicare, and nursing homes and raise the specter of a feud between the generations, as if the old were living riotously off the young and the middle-aged.

Of course, the elderly are not really a separate special interest, since the rest of us hope to live long enough to become equally special. But the effort to frame social policy as an issue of "generational equity" has touched a raw nerve. Americans who are retired, or approaching retirement, are concerned about the commitment to Social Security, and many people of working age worry that they are paying higher taxes into a system that neither gives them any apparent current benefit nor provides them with a secure future.

Americans now have an opportunity, however, to turn generational conflict over Social Security into a generational alliance. The solvency of Social Security ultimately depends on the long-term growth of the American economy, and that in turn hinges on the skills and inventiveness of the American people. Social Security reserves are currently used to finance the budget deficit. Instead, we should invest a portion of that surplus in raising economic productivity -- specifically, by assisting students and workers to pay for postsecondary training and education. Young workers would then benefit from Social Security at the start as well as at the end of their careers.

The public policy initiative for reuniting the interests of the generations and strengthening the foundations for future economic growth is the education equity program outlined here. Under the program, part of the growing Social Security surplus would be borrowed to make awards for schooling beyond high school. Students could either cover college and university expenses or pay for vocational training, retraining, and apprenticeships. They would pay for their awards plus interest through a payroll withholding system, and the amount they repay would depend on their future earnings.

The entire program is designed so that all costs are covered by borrower repayments. Losses due to the low income, death, or disability of some borrowers are offset by repayments above cost by those who reap higher incomes. The demographic trends over the next half century or so work in favor of the program. In the program's early years, while Social Security surpluses are growing, education equity will borrow from Social Security. But about thirty years from now, when the Social Security system will need those funds to cover its obligations to retirees, education equity will be generating a positive cash flow back to Social Security Thus the system will be virtually assured of solvency while the entire economy benefits from a better educated and trained workforce.

The basic idea of an "income-contingent" system of student loans, to be repaid through the IRS, is by no means new. Indeed, one variant of the proposal comes from an eminently conservative source. Years ago, Milton Friedman outlined such a plan. More recently, Robert Reischauer, now the director of the Congressional Budget Office, put forward a similar proposal. Some universities, such as Yale, have experimented with the idea, and Michael Dukakis advocated one version of it in his 1988 campaign. We make no claims, therefore, to inventing the concept. But we have revised it considerably -- particularly as it relates to Social Security -- and worked out many of the details and long-term implications through a computer model. Here we explain how it would work and why it makes sense.

Education Equity

Ours is a plan for education equity in both senses of the term equity -- fairness and investment. The program would help to achieve fairness in education by making college and postsecondary training more widely available, particularly to the growing number of students from families that have difficulty affording the costs. It would also help to achieve greater fairness by expanding aid for training and retraining as well as higher education. The education equity program would not only augment our national and personal investments in education. The program's awards to students resemble equity investments like corporate stock more than they do any debt instrument, much less a welfare check. What students owe in repayments will depend on how "profitable" their education proves to be. They will pay back into the system in proportion to how much financial benefit they derive from it.

Under the plan we have developed, which we call "Equity Investment in America" (EIA), nearly all U.S. citizens, regardless of family income, could receive as much as $10,000 a year, up to a lifetime limit of $40,000, for education or training at an accredited or licensed school. Students would repay the education equity fund on the basis of a fixed repayment rate applied to their annual earnings, up to a cap of $50,000. (In future years the annual and lifetime limits, as well as the earnings cap, would be adjusted to take account of increasing earnings and educational costs.)

Today we rely on a baffling array of loan and grant programs to help students and their families pay for postsecondary education. However, because the aid is inadequate, many young people are unable to afford the training they need. Current loan programs also result in heavy, fixed obligations shortly after graduation, leading many borrowers to default. The result is a system that works badly for many families, young people, and the public. Families needing aid cannot qualify; young people receiving aid must repay when they have limited ability to do so; and the public finds that a significant portion of its investment in student loans is never returned.

The education equity program helps to resolve these problems by changing the distribution, timing, and method of repayment. Unlike programs based on parental income, the education equity program is based on the future income of the student who receives the award. Indeed, the principle involved is not so much ability-to-pay as it is ability-to-repay. And because it is based on future income, the burden is not concentrated immediately after graduation. The shift in timing, the progressive distribution of repayment obligations, and the use of payroll deductions to collect repayments overcome the problem of high default rates that typically plague student loan programs.

Education Equity and Economic Growth

Hardly anyone today doubts the central contribution of education to economic prosperity. In a global economy where capital and technology are becoming infinitely mobile, the one factor that provides a nation with a comparative advantage is the caliber of its labor force. Politicians, corporate executives, and even our Japanese competitors continually remind us that the nation's prosperity will suffer if we fail to improve education at all levels. We need to reinvigorate our primary and secondary schools, overhaul training, and maintain our edge in higher education, the one area where the United States is preeminent.

Economic data provide corroborating evidence for the belief that education matters. The value of education beyond high school shows up in the enhanced earnings of those who attend college. Over the lifetime of the average worker, according to our calculations, a college degree has a "present discounted value" of approximately $500,000 in today's dollars.

Equally important is the role that access to postsecondary schooling plays in separating the haves from have-nots. The ratio of annual earnings of college graduates to high school graduates has risen from 1.5 to 1 in 1963 to over 1.8 to 1 in 1987. That increase reflects the economy's increasing need of educated people. In inflation-adjusted dollars, high school graduates have seen their annual earnings slip by 11 percent since 1973, and high school dropouts have experienced a 23 percent decline. College graduates, on the other hand, have been able to hold their own.

The widening income gap is especially pronounced in the service sector where most job growth is found. The introduction of advanced technologies into virtually all realms of production and the spread of global corporate investment strategies are driving up the demand for highly trained workers at one end of the occupational spectrum, while the excess supply of less-skilled workers readily available worldwide is pushing wages down at the other. Though supply and demand cannot explain all of the evolving patterns in the labor market, they dearly contribute to the polarization developing in some leading industrialized countries, particularly the United States.

Rising Costs, Limited Aid

While schooling beyond high school is becoming more critical than ever for individual advance as well as economic growth, the price of schooling is outpacing inflation. Public resources available for loans and grants have not kept up with the needs of either low- or middleincome families. According to Kenneth C. Green of the Center for Scholarly Technology at the University of Southern California, tuition "sticker shock" is forcing students to "buy down." Students who would have gone full-time are forced to attend part-time. Some whom four-year colleges would have accepted are dropping down to two-year schools, and more students from low-income homes pick vocational schools over college if they go anywhere at all. In a recent USA Today survey of high school graduates, one-third said they had put off college because of the expense.

College dropout rates tell the same story. According to the U.S. Department of Education, a mere 3 percent of students with family incomes over $38,000 drop out in their freshman year. The dropout rate for students from low-income families is closer to 15 percent. Black enrollment suffers most. The American Council of Education reports that college enrollment rates among blacks began to slide after 1976. For black men, the enrollment rate declined by 7.2 percentage points between 1976 and 1986. While intense college recruiting in the past four years has arrested the downward trend, black male enrollment has just barely recovered to its earlier level.

Anyone with college-age children can attest to the burden of college costs. The College Board reports that by 1988-89 the cost to an in-state student at a four-year public college or university averaged over $23,000, including tuition and fees, room and board, and other school expenses. The same education at a private four-year institution cost just under $50,000. At the elite schools, total expenses run closer to $90,000. Yet the amount of federal student aid available in the form of grants and loans has not kept up with these costs. In 1979, according to the American Freshman survey conducted by UCLA's Higher Education Research Institute, nearly 32 percent of all freshmen received Pell grants to attend college. Ten years later, the percentage was down to less than 22 percent. Meanwhile the proportion of students receiving Stafford and Perkins loans from the federal government has risen only marginally, from 21 to 25 percent between 1979 and 1989.

College enrollments have not fallen off precipitously only because colleges and universities are providing more grants and scholarships out of their own revenue. The UCLA survey notes that between 1979 and 1989 the percentage of freshman receiving college grants and scholarships increased from 11.3 to 20.3 percent. The colleges are charging higher tuitions to affluent families in order to subsidize students from low- and lower-middle income backgrounds.

Part of the difficulty stems from the cut-off of federal assistance to middle-income students. In 1979 the government set a $32,500 ceiling on family income for college grant support. Today, despite inflation, a family must have an income under $28,000 to qualify for aid. Even if a student is eligible, grants have not kept up with college costs. Stafford student loans, the largest of the federal programs, provide a maximum of $2,625 per academic year for the first two years of undergraduate study and $4,000 for each subsequent year, up to a five-year maximum of $17,250. A student who takes out the maximum in Stafford loans over four years still must come up with another $9,750 on average to attend a public university and at least $26,750 to attend a private institution. Perkins loans have higher ceilings, but fewer than 3 percent of all freshmen take advantage of them.

For those not eligible for federal aid, going to the private market can cost a bundle. One example is the Education Resources Institute TERI loan, which provides a student up to $20,000 a year, typically at the prime interest rate plus 2 percent. The current annual percentage rate (APR) comes to 15.3 percent at regular commercial banks for a typical fiveyear TERI loan with interest and principal deferred while in school.

Besides carrying high interest rates, all these loans require students to begin repaying almost as soon as they finish school, despite their generally limited initial earnings. Unsurprisingly, the default rates are very high: 18 percent for those who attended two-year public colleges, 14 percent for those from two-year private schools, 7 percent for those who went to either private or public four-year colleges, and a whopping 33 percent for those who used their loans to go to trade schools.

The Basics of the Program

Unique to the education equity program is the structure of the awards. Each student repays according to the individual return on his or her investment in education. But no matter how much any particular student repays, the system as a whole is assured full repayment. The repayment rates are explicitly set so that, on average, for each cohort of program participants (grouped by the year in which they receive an award and their age), the total principal plus accrued interest on the awards will be repaid to the education equity fund. To cover the administrative expenses of the program and to recapitalize it to ensure it is out of debt to Social Security before the middle of the next century, the repayment schedule includes a 1.75 percent premium over the U.S. Treasury bond rate (.25 percent for administrative expenses; 1.50 percent for recapitalization). Under these terms, in 1991 the implicit interest rate in the program is expected to be 9.95 percent.

Organizationally, the education equity plan is relatively simple. It would replace the current Stafford and Perkins loans. On the other hand, direct federal subsidy programs, such as College Work Study and the Pell and Supplemental Educational Opportunity Grants (SEOG), would be retained as incentives for students from low-income families. Education equity would be implemented by a new agency of the U.S. Department of Education, the Equity Investment in America (EIA) Fiduciary Trust. The trust would receive funds from Social Security's Old Age, Survivors, and Disability Insurance (OASDI) Trust Fund and from repayments from individuals who receive education equity awards for their education. In addition, the EIA Fiduciary Trust would have authority to float U.S. Treasury bonds in the unlikely event student demand for funds so exceeded expected levels that the EIA Trust Fund would require more than 50 percent of the outstanding OASDI surplus.

To avoid what economists call "adverse selection" -- in this case, the tendency among those who expect to have high earnings not to use the program -- education equity repayments would be required only on the first $50,000 of earnings each year. This cap somewhat reduces the redistributive effect of the plan, but it makes it more attractive to those with higher expected earnings and thereby adds to the program's payback. A buyout provision permitting early completion of repayment obligations is also available to all participants.

Program participants repay their education equity obligations through payroll withholding, or if self-employed keep annual account through a special form included in their regular income tax filing. The Internal Revenue Service would credit repayments to the EIA Fiduciary Trust for a small service fee.

Ten Reasons

Such a radical restructuring of postsecondary education finance deals directly with at least ten problems inherent in current methods of supporting students in their quest for schooling.

(1) Education equity eliminates much of the morass of current federal loan programs in favor of one universal, comprehensive plan available to all postsecondary students.

(2) Education equity provides a substantially greater amount of funds under more favorable terms than most current programs, thus allowing students to better meet the rising cost of postsecondary education.

(3) Education equity is available to all students in accredited postsecondary schools regardless of family income. There is no "needs test." It is a middleclass program every bit as much as one aimed at the low-income student.

(4) Since repayment is based on actual earnings, there is effective deferral of principal and interest as long as the student is pursuing full-time studies and has little wage and salary income.

(5) Income contingency, the shift in timing of repayment, and IRS collection should virtually eliminate defaults. Defaults on student loans now cost the U.S. Treasury in excess of $1.5 billion a year.

(6) The education equity program applies equally to all forms of post-secondary schooling from apprenticeships and training programs to graduate and professional schools. It does not discriminate between the student who pursues an undergraduate degree in political science and one who seeks retraining as a welder or office machine repairer. Under this program, the U.S. could follow the example of Sweden, where up to 3 percent of the labor force are in training or retraining in any given year. Many observers cite this "active" labor market policy as one of the principal reasons for Sweden's productive work force and high national income.

(7) The program does not reinforce racial and gender discrimination in the labor market, as do current programs that impose fixed obligations on those with lower earnings prospects. Under the education equity program, anyone whose earnings are depressed as a result of discrimination automatically owes less than if their earnings were higher.

(8) Because the education equity program is income-contingent, students will be more likely to enroll in programs that conform to their strengths and career goals than in programs that provide high earnings quickly and thereby help to repay fixed short-term loans. As a result, slightly more students may opt for careers in teaching, nursing, and other fields where the monetary rewards may be smaller than in law, for example, but where the contribution to society is arguably no less -- and some would argue, considerably more.

(9) Under the education equity program, students pay for their own education as the benefits from that education become manifest. In most cases, the program will remove a major financial burden from parents and place it on their children who benefit directly from the educational investment.

(10) Finally, the education equity program, by eliminating the need for the Stafford and Perkins loan programs, frees up $5.1 billion of federal education spending per year. These dollars -- or at least a portion of them -- could be used to expand the Pell and SEOG grant programs for the most financially disadvantaged students.

There are likely to be other benefits as well: simplified and cheaper administration of education loans is surely one of them.

The Social Security Link

Linking education equity to the Social Security Trust Fund is not an absolute requirement for successful implementation. The EIA Fiduciary Trust could float bonds on its own and thereby capitalize the plan. Nevertheless, the link to Social Security is, in our opinion, singularly appropriate, given the debate over the disposition of Social Security's growing surplus.

Education equity, as presently outlined, presents a politically attractive alternative to both the Moynihan and the White House positions in the current Social Security debate. Moynihan suggests reducing the payroll tax rate to 6.06 percent for both employees and employers in 1990 and to 5.1 percent in 1991. Instead, we suggest keeping the rates presently in the law or reducing them only slightly. However, unlike its current use as an implicit deficit reduction measure' a portion of the OASDI surplus generated each year would be transferred to the EIA Fiduciary Trust. That way at least a portion of all OASDI funds will serve investment purposes, as they were originally intended, rather than for government consumption, as is the current practice.

The rationale for capitalizing education equity through Social Security is summarized best in a recent editorial in The New York Times. Responding to the Moynihan proposal, the Times reiterated a basic truth concerning virtually any public pension system: future benefits do not flow from retirement account surpluses but are ultimately paid for by future taxpayers. No matter how many trillions of dollars Social Security has in surplus on the books, the dollars that go out to beneficiaries must come from taxes paid by the productive, working-age population. The Times explains: "How much pain that causes [future taxpayers] depends on how much the economy grows between now and then. Future taxpayers won't mind the tax burden if they feel well off. The best way to guarantee that is for the nation to invest in education and capital equipment." (emphasis added)

If the education equity program contributes to future taxpayers' income, those taxpayers should also willingly contribute to the pensions of the generation that retires just before them.

How Education Equity Would Work for Individuals

To demonstrate the impact of the education equity program on individual participants, we have developed a computer simulation model. In the four following illustrations, the necessary repayment rates are based on forecasts of expected inflation and interest rates and future growth in annual average wages and the cost of postsecondary education. The forecasts of inflation, interest rates, and wages are drawn from a Social Security Administration scenario, known as Alternative II-B. That scenario projects longrun annual real wage growth of 1.3 percent, inflation rates of 4.0 percent per year, and average interest rates on U.S. Treasury Bonds falling to 6.9 percent by 1995 and 6.0 percent by the next century. All of the figures are in constant 1990 dollars, with education equity awards based on expected increases in the cost of education.

Case 1: Traditional College Undergraduates

Manuel and Mary both enter college in 1991 and in each of four years of undergraduate study receive the equivalent of $5,000 (in 1990 dollars) in education equity awards. Under the model's assumptions, both will pay 6.53 percent of their earnings over the next 25 years in order to meet their EIA Fiduciary Trust obligations.

A portion of Manuel's repayment schedule looks like this:

*The earnings cap ($50,000 in 1990 dollars) is $66,500 taking into account the average expected growth in earnings.

Mary's repayment schedule reflects a lower earnings stream:

Both Manuel and Mary complete their obligations to EIA when they reach age 45 in the year 2018. Note that while Manuel and Mary both pay 6.53 percent of their earnings in education equity repayments at age 25, Manuel pays 27 percent more than Mary because of his higher income. Moreover, in this example, Mary pays only $1,143 when she is 30, since in that year she worked half-time immediately after the birth of her first child.

Case 2: Advanced University Degree

Alex and George make the same education equity investment of $20,000 in their undergraduate careers and then add three years of graduate training for an additional $20,000 in education equity awards. The calculated repayment rate on this sizable total award is 11.60 percent of earnings up to the earnings cap of $50,000.

Alex's dollar repayments rise as his income increases (and as the earnings cap rises with the average wage in the labor market). However, because Alex reaches the cap soon after his thirtieth birthday and his earnings continue to grow faster than the increase in the cap, his repayment rate as a percent of income declines. At age 40, Alex wins a promotion within his firm along with a large raise. Since he is already at the earnings cap, his annual payment increases by less than $500 between the age 35 and 40:

George's repayment rate declines, but more slowly than Alex's. By age 40 he is paying the maximum like Alex, but because of his lower annual wage, he pays a slightly higher proportion of his income:

Case 3: Non-traditional Part-Time Undergraduate

The education equity program works just as well for a non-traditional student. At age 30, Barbara decides to earn her B.A. degree on a part-time basis while continuing to work. Beginning in 1991, Barbara takes out an education equity award of $2,500. Over the six years it takes her to graduate, she obtains $15,000 worth of education equity awards. At age 36, Barbara has just graduated and she is earning $25,070 (in 1990 dollars). Her repayment is $1,087 or 4.34 percent of earnings. Had Barbara not gone to college, she would have earned at age 36, according to our simulation, $3,187 less. As a result, her education equity repayment that year was equal to about 34 percent of her additional earnings. Later in her career at age 52, Barbara is earning $40,460. Her repayment is now $1,755, still 4.34 percent of earnings. If for some reason Barbara did not work at all when she was 52, her repayment would be zero.

Case 4: Vocational Training

Bob decides to enroll in a vocational retraining program at age 45 after losing his job at an auto parts manufacturing firm. Bob takes an education equity award of $2,500 in 1991 to invest in his training. After completing a training program in computer programming, he gets a full-timejob that pays $28,371. That year he repays $324 to the EIA Trust Fund or 1.14 percent of his new earnings. Ten years later at age 56, Bob is still working as a programmer and making $36,898. His repayment is $421. Relative to what he would have made without the training, we calculate that Bob is paying only about 6 percent of his additional earnings in education equity repayments.

These are but four of literally thousands of "cases" that could be simulated. The basic point is the same. By spreading out repayments over an extended period and by protecting participants against high costs when they are unemployed or their incomes lag, the EIA program provides students with an affordable and equitable method for financing their own educations with built-in insurance against what financial experts call "downside risk."

Will Education Equity Break the Social Security Bank?

Financing a program as large as education equity will not be cheap, particularly given the size of the potential market for education equity awards. It will take hundreds of billions of dollars over the first decade to fund the program. Will there be sufficient funds to cover its cost? Will the EIA Fiduciary Trust be in a position to repay the money it borrows from the Social Security surplus? By the middle of the next century will the education equity fund or Social Security be in jeopardy of bankruptcy?

To answer these questions, a computer simulation of the overall education equity program was conducted. The simulation was based on the same economic assumptions as in the individual participant cases. Additional assumptions about potential college enrollments were obtained from the U.S. Department of Education. Social Security Trust Fund projections were taken from the 1990 OASDI Annual Report.

As it turns out ' the demographic trends are definitely in our favor. Population projections indicate that the traditional college-age population will not grow significantly during the rest of this century or well into the next. We assume, nonetheless, that college and university enrollments may rise by 10 percent as a result of the incentives of the education equity program, that 50 percent of those eligible will participate, and that 3 percent of the labor force will use education equity assistance for training and retraining each year. On those assumptions, annual awards will increase in number by no more than 400,000 between 1991 and 2010. After that, enrollments will slowly decline. As a result, an unanticipated explosion in the size of the program is unlikely

We project that education equity will assist about 9 million students each year, including 7 to 7.5 million at colleges and universities and about 1.7 million in vocational programs. We assume an average annual award that rises from approximately $4,400 in 1991 to over $8,500 (in 1990 dollars) adjusted by the expected increase in education costs.

Even with participation of this magnitude, the program fits well within the size of projected OASDI surpluses. According to the simulation, education equity's debt to Social Security will grow over the next thirty years, reaching a peak of about $1.6 trillion in current dollars ($494 billion in 1990 dollars). Thereafter, repayments into the education equity fund will finance new advances to students and reduce the net outstanding balance owed Social Security. By the year 2032, education equity will no longer need to borrow from Social Security and will begin to accumulate assets. By the year 2039, the loans from Social Security could be fully repaid. After that, the education equity fund could provide a substantial subsidy to Social Security. In this way, OASDI could eventually make a "profit" over and above the interest on the loans it made to EIA (see Appendix).

Moreover, in the short run, education equity will not break the Social Security bank before large-scale student repayments begin. The 1990 OASDI Annual Report forecasts that the Social Security Fund surplus will increase from $297 billion in 1991 to nearly $9.2 trillion by 2025 before declining back toward zero (see Figure 2). As a result, total cumulated education equity borrowing from Social Security, under the liberal assumptions used in this simulation, never amounts to more than 42 percent of the OASDI surplus. The percentage falls rapidly after the turn of the century.

Some Tough Questions

A program as ambitious as education equity is bound to raise a number of questions about its funding, its impact on public and private institutions of higher education, and latent adverse side effects such as tuition cost inflation.

Q. Won't the implementation of such a large-scale program as education equity add too much to what we spend on postsecondary education?

A. No, for three reasons. First, education equity will not dramatically increase the total amount of money being spent on postsecondary education by those already planning to attend college or university. For many of them, the program will simply mean the substitution of a better financing mechanism for an inferior array of current funding programs. Second, an increase in the number of high school graduates electing higher education is warranted by the superior rates of return that college and university graduates now obtain. We are certainly no longer "overeducated" as was the belief during the 1970s when returns to higher education temporarily waned. And third, where education equity may turn out to provide the greatest new advantage is in boosting human resources in vocational training and retraining, where the U.S. clearly lags behind the competition.

Q. Won't the education equity program jeopardize public higher education by encouraging students to enroll in more expensive private schools?

A. No. While the repayment rates are reasonable, students will still be forced to pay a significant amount of their earnings over their lifetimes in education equity dividend repayments. As a result, students will not automatically abandon public higher education for higher priced private schools. Likewise, the $40,000 lifetime limit on awards forces students to be price conscious in making their investment decisions. Moreover, it is not unreasonable to expect that the overwhelming majority of individuals who decide to pursue higher education precisely because of education equity will choose lower-priced public colleges and universities.

Q. Won't education equity lead to enormous increases in the level of tuition and fees?

A. Not necessarily The EIA Fiduciary Trust could be a powerful ally against college cost inflation by refusing to permit students to use education equity funds at schools that persist in raising tuition and fees to unacceptable levels. Moreover, because students, rather than their parents, will be assuming more of the financial burden for their education, they will likely become a more significant source of tuition resistance. If tuition does continue to skyrocket at private schools, the antitrust action now tentatively under way may provide a partial check.

It is true that public colleges and universities may use the education equity program to reduce the size of state government subsidies. On some grounds, particularly given the interstate mobility of students after graduation and the subsidy of middle-class students from funds raised by regressive state taxes, higher in-state tuition may be justified. In an era of restrictive state budgets, education equity would relieve states of some of the tuition burden. Yet, to maintain a "good business climate," one can expect state legislatures to maintain relatively low college and university tuition and fee rates in order to provide strong incentives for their citizens to pursue productivity-enhancing higher education.

Q. What keeps unscrupulous operators from setting up "sham" training schools to take advantage of education equity-funded students?

A. The education equity plan requires that all institutions eligible for funded students be fully accredited and licensed by the states where they operate. The trust fund could be given oversight authority to do spot checks on state accreditation and licensing. To keep tuition and fees in line, the cost of education could be made one criterion for education equity accreditation.

Q. Won't use of the Social Security surplus for education equity reduce the funds available for current deficit reduction?

A. Absolutely. But, like Senator Moynihan, we believe that the Social Security Trust Fund surplus should not be "raided" to cover current government expenses. The federal government could continue to cut defense spending, using part of the "peace dividend" to cover the diversion of Social Security surpluses from deficit reduction. Alternatively, the federal government could raise taxes to cover current spending needs. Strengthening the progressive income tax by boosting the top rate for the highest income families back to 33 or even 38 percent would be a step in the right direction.

Q. Why should the Social Security surplus be used to fund education equity when there are so many other unmet needs in America that require funds?

A. To be sure, there are other unmet needs, such as preschool programs, primary and secondary schools, medical research, environmental protection, and housing for the homeless. However, postsecondary education with a repayment mechanism involving the program's own beneficiaries is perhaps the only one that assures the integrity of the Social Security Trust Fund. For other social programs, the Social Security Trust Fund is simply the wrong instrument.

Q. Isn't the payroll tax that funds Social Security terribly regressive? Why should we finance an education program on such a regressive tax?

A. Yes, the payroll tax is regressive and probably should be reformed, perhaps by raising the earnings cap and lowering the rate. But that is a separate issue and should not obscure the advantage of an ability-to-repay plan for education finance.

Q. How will the education equity program likely affect low-income students?

A. Education equity should provide additional resources to low-income students. First, the program permits students to borrow more funds with more reasonable repayment schedules. Second, Congress should take a portion of the $5.1 billion saved by eliminating the Stafford and Perkins loan programs and transfer it into the Pell and SEOG grants, which have been especially helpful to low-income students.

Q. Will the education equity program make state college prepayment programs like that in Michigan obsolete?

A. No. States that wish to set up college prepayment programs can still do so. Parents who wish to make substantial contributions to their children's education can do so using this mechanism.

Q. Won't education equity have a negative effect on philanthropic contributions to institutions of higher education?

A. Probably not. Most corporate and individual giving to higher education is for capital expansion, not current expenses. One suspects that corporations and individuals will continue to contribute to college and university endowments for such purposes.

Answering these questions obviously will not mollify all those who would oppose the education equity program. Moving toward such a radical restructuring of education finance will certainly have its detractors. Private banks, subsidized by government-guaranteed student loans, will certainly balk at losing this lucrative market. Those who are part of the vast bureaucracy involved in servicing the current array of loans may also object to a system that makes their efforts largely unnecessary. However, gains from the plan for students, their families, and the corporate sector should carry the day.

It is the rare government program that simultaneously satisfies a number of disparate public policy goals and at the same time has the opportunity to garner broad bipartisan support. The education equity program has the potential for being one of these.

The specifics of the program can, of course, be debated and revised, but the basic structure provides a sound basis for promoting education, economic growth, and equal opportunity Education equity achieves generational equity, moreover, not by retrenching on the elderly, but by putting our reserves for the elderly to work for the entire society

Fifty-five years ago, we established Social Security to provide for older Americans retiring from work. A decade later, we established the GI Bill for younger Americans returning from the war and wishing to improve their skills and education. No one in those days envisioned linking these two types of government programs. Now we can create a positive link between those coming of working age and those coming of retirement age.