Thursday, October 28, 2004

What Social Security Reform Should Democrats Propose?

In my last post on Social Security, I criticized Congressional Democratically leadership, specifically Congressmen Rangel and Matsui, for failing to play a more constructive role in the debate about how to restore long-term solvency to Social Security. What if you are a Democrat (or not) who recognizes that there is a $10.4 trillion hole in the program's finances, but you don't want to rely on equity investments in the Social Security trust fund or personal accounts to restore the program to solvency.

Fortunately for you, two very smart economists have done the heavy lifting for you. Peter Diamond of MIT and Peter Orszag of the Brookings Institution have written a book laying out the rationale for a reform of Social Security based on modifications to its existing structure that don't include personal accounts or trust fund investments in equities. You can buy the book, Saving Social Security: A Balanced Approach, read a detailed summary, or view some slides from a presentation at the American Enterprise Institute last January. The plan is one of those that has been scored by the Office of the Chief Actuary at the Social Security Administration.

I have my reservations about this plan--specifically that it is less "balanced" between increasing revenues and decreasing expenditures than the authors suggest. (See the commentary by Eric Engen and Maya MacGuineas from the AEI presentation for some graphical illustrations.) But their plan does meet the key test of plugging the whole $10.4 trillion shortfall, while carefully explaining how and why it would change the program to accomplish this. That makes it a reasonable contribution to a new bipartisan attempt at reform.

This plan was made public in December 2003. I think it is particularly telling that none of the Democrats who claim to be vanguards of Social Security as it has traditionally been implemented have shown the leadership ability to propose this plan as a bill, let alone build the support to move it through Congress. A bipartisan, legislative discussion of the merits of Commission Model 2 (or some alternative with personal accounts) compared to the Diamond-Orszag plan would be quite a sight to see. I might even call it statesmanship.

2 comments:

Andrew Samwick said...

In the process of adding Trackback features to the blog, I inadvertently switched over the commenting features to HaloScan. Switching them back to Blogger caused the following comment to be deleted, so I have reposted it. My apologies to Brian, whom I thank for the comment.

"What if you are a Democrat (or not) who recognizes that there is a $10.4 trillion hole in the program's finances, but you don't want to rely on equity investments in the Social Security trust fund or personal accounts to restore the program to solvency."

What if you are a member of the reality-based community, which recognizes that diverting revenues into personal accounts can only add to the problem, and that equity investment must add significantly to the risk, while increasing administrative costs?

The reference plan is, at least, a fairly rational one, and one, which takes into account the impact SS benefits have on the lives of the elderly. If alternative plans were prepared with as much sense and good will.

Brian Wilder 10.28.04 - 7:06 pm

Robert Prather said...

Does the Diamond / Orszag plan include notional accounts as a means of stabilizing the unfunded liability, such as in Sweden?