President Clinton's scheduled town hall meeting tonight on Social Security will make it clear that fundamental reform of the nation's pension system is on its way.

Without that reform, future increases in life expectancy will drive up the payroll tax from its current rate of 12.4 percent to more than 18 percent. That means a tax increase of $4,000 a year for a couple who each earn $35,000 a year. If taxes are not raised, the benefits themselves will have to be cut by a third.

As things now stand, employees in their 40's or younger will actually get less in benefits than they and their employers will have paid in taxes, a negative return on those tax dollars. By contrast, money invested in a broad portfolio of stocks and bonds has historically earned a 5.5 percent return even before the stock market surge of the past few years.

That is why Mr. Clinton has proposed using the projected budget surplus to help finance future Social Security benefits. The Administration now forecasts that the budget surpluses will rise from nearly 1 percent of gross domestic product this year to more than 2 percent a decade from now.

Investing just 1 percent a year of gross domestic product in stocks and bonds to supplement the existing tax-based Social Security would eliminate the need for any future cuts in benefits or payroll tax increases.

The most important question, then, is how those investments should be made. Should taxpayers be enrolled in individual accounts like IRAs and 401(k)s, or should the Government own the stocks and bonds in an enormous new investment fund?

The best approach would be a system of privately managed accounts regulated by the Government, which would also guarantee that retirees receive at east as much as Social Security now promises.

Here is how such an approach would work. The Government would deposit a percentage of each person's earnings (up to the maximum covered by the Social Security tax, now $68,100 a year) in an account similar to IRA and 401(k) accounts.

The money for these deposits would come from the budget surplus. Each taxpayer would decide the mix of specific stock and bond funds with the help of a Government approved private fund manager -- a mutual fund, bank or insurance company.

While the growth of the account would depend on the stock and bond returns, the Government would guarantee that the combination of this supplementary investment-based pension and the traditional tax-based pension would be at least as much as the future Social Security benefits promised under current law.

Proponents of using a single Government investment fund to finance future benefits say that it would have the advantage of lower administrative costs. I'm not convinced. Although the Government currently runs a low-cost pension plan for Federal employees, it has no experience in running such a plan for a much larger population.

The notorious inefficiency of Federal bureaucracies suggests that the Government could not operate a system of individual accounts at lower cost than private managers would.

These money managers now provide mutual funds to more than 40 million Americans and offer stock funds with a cost of less than one-half of 1 percent of assets. And private managers are much more likely to find new ways of reducing costs and of improving consumer services like permitting individuals to gain access to account information and make investments by automated phone systems.

But the biggest advantage of individual accounts handled by private fund managers is that such a system would prevent the Government from misusing the retirement funds.

When Social Security was first established, it was supposed to accumulate a trust fund that would meet future benefit obligations. It wasn't long, however, before that money was being tapped to pay increased pensions and to expand benefit eligibility. That history could easily repeat itself, with the Government taking money from the new investment fund to meet the rising costs of Medicare and Medicaid.

A single Government fund that could grow over the next 30 years to more than $5 trillion would be too tempting for an Administration or Congress looking to pay for roads, schools, health care, housing and the like -- thus ignoring the obligation to earn a high return for retirees in a stock-bond portfolio.

Or what if Congress should decide that the investments should be spread to every Congressional district, just as so much defense spending is allocated today? And although we are now anticipating budget surpluses, in the future Congress will be tempted to increase spending and cut taxes, using the large Government Social Security fund to finance the resulting budget deficit -- just as Congress did in past decades.

There is a growing consensus that investment based reform of Social Security is the key to maintaining future benefits and avoiding higher payroll taxes. A system based on individual accounts managed by regulated private fund managers is the best way to protect this money for future retirees.