This week President Clinton presented his proposal for Universal Savings Accounts (USAs) -- personal retirement accounts with federal seed money and a federal match for savings by low- and moderate-income families. The USA proposal addresses one of the most urgent problems affecting retirement security in the 21st century, and should become an integral element, not simply an add-on, to Social Security reform.

Social Security is intended to serve as a supplemental retirement program, with private employer-sponsored pensions and personal savings and assets providing the bulk of retirement security.

But there are two big problems with the assumption of a "three-legged stool" supporting retirement. The first is that nearly two-thirds of Americans over the age of 65 do not actually have employer-sponsored pension income -- a percentage that may soon rise due to increased workforce mobility. The second is that low-income Americans rarely have either private pensions or private savings, and rely heavily on Social Security benefits alone.

According to Timothy M. Smeeding and James P. Smith (in a November 1998 Progressive Policy Institute report, The Economic Status of the Elderly on the Eve of Social Security Reform) households headed by seniors in the bottom one-fifth of income depend on Social Security for 81 percent of their retirement income, as compared to just 20 percent for the top one-fifth.

More than a decade of Congressional experimentation with tax-preferred savings accounts have left the poor virtually untouched, since they have less income available after meeting essential living expenses, and also rarely have the federal income tax liability necessary to make IRAs cost-effective. IRAs have not even succeeded in increasing retirement savings for middle- or upper-income families, since most have shifted existing savings from non-tax-preferred vehicles to IRAs.

Any progressive approach to shoring up retirement security needs to address the private savings issue, especially for the poor. The issue transcends retirement: The most dramatic and growing class differences in the United States are not in earned income, but in wealth, including both assets (like homes) and savings. The U.S. economy of the 1990s has produced the largest upper-middle class in the history of the world, primarily because of the rapid expansion of wealth-producing private investment. The poor have been left out of this great American success story.

One of the major reasons the Democratic Leadership Council (DLC) has supported a two-tiered or partial privatization approach (one that maintains a government-provided retirement "safety net" while moving towards private savings accounts for individual pensions) to Social Security reform is to give the poor a means for accumulating income-producing wealth for retirement. In the past, we have praised the Moynihan-Kerrey proposal to carve out a portion of the Social Security payroll tax to seed private accounts, in part because that may be the only way to get low-income families onto the savings ladder.

President Clinton did not embrace the carve-out approach in announcing his proposal for extending the solvency of the Social Security system early this year. Rather, the President's proposal for private savings, Universal Savings Account (USA), would be an add-on to Social Security. It would give all lower- and most middle-income families an annual $600 federal tax credit to seed a tax-free personal retirement savings account. Most importantly, the federal government (through a refundable tax credit) would match private savings up to $700 per year per couple for low-to-moderate income families. That means an eligible household where the husband and wife each saved $350 per year would wind up with $2,000 a year placed in their USA account.

The proposal would let USA account-holders invest their savings in a range of government- regulated but privately operated investment funds, similar to the arrangement enjoyed by federal workers through the Federal Thrift Savings Plan. Assuming a 5 percent real rate of return, a two-earner family saving the maximum matched amount would have a $250,000 nest egg after 40 years, and obviously more if they chose to save beyond the matched amount.

The President proposes to pay for the USA accounts by reserving 15 percent of future federal budget surpluses for this purpose.

The reaction has been interesting. Many old-fashioned liberal politicians who have routinely blasted personal savings accounts as an element of Social Security reform have warmly endorsed the very same idea as an "add-on." This casts a less-than-flattering light on the Left's arguments that personal savings accounts are too risky, too complicated for the poor to handle, and too costly to administer.

On the Right, opinion is split. Some oppose USA Accounts because they are not integrated into Social Security reform. Some worry (accurately) that the proposal undercuts the GOP's pet tax-cut schemes. Some support it as a way to make millions of Americans capitalists.

Many Democratic centrists have mixed feelings as well. Fiscal hawks tend to view the proposal as a new and unfunded entitlement. Supporters of partial privatization remain convinced that carving out Social Security payroll taxes is a better way to make USA Accounts fiscally sound, while making the whole system more progressive.

We agree with these concerns, but urge New Democrats to support the proposal as a step in the right direction, not just in terms of Social Security reform and retirement security, but as an important commitment to address the single largest economic injustice in American life today, the exclusion of the poor from the accumulation of wealth. Maybe the proposal will help both the Left and the Right "get" one of the fundamental tenets of the Third Way: progressive goals can best be achieved through market means.