Saturday, October 30, 2004

How to Reform Social Security, Part I

I have devoted a few posts to taking the Democratic leadership in both the Congress and the Presidential campaign to task for failing to play a constructive role in the debate on Social Security reform. In less strident language, I have also noted my disappointment that President Bush has not put more emphasis on this issue by, for example, submitting one of the plans devised by his Commission as a starting point for bipartisan legislative debate. So what do I think is the right way to reform Social Security?

Here are my objectives, in declining order of importance:

1. Restore Solvency. The pressing problem today is that the benefits promised under current law are projected to exceed the revenues collected. The present value of that excess is $10.4 trillion. We need to fill that hole.

2. Relieve Poverty. The purpose of Social Security is to provide insurance against poverty in old age. Social Security collectively refers to the Federal Old-Age, Survivors, and Disability Insurance programs. Any reform of the system should pay careful attention to these risks of elderly poverty.

3. Keep the Program Small. I do not believe that government programs should be any larger than they have to be in order to achieve their objectives. I consider myself to be a proponent of limited (though purposeful) government. If we can meet the objectives of having the program financially sound and keeping the elderly out of poverty with a small program or with a large program, then I choose the small one.

These three objectives don't make any mention of personal accounts. That's because they don't necessarily require the program to get any bigger, measured by the size of the taxes that are necessary to support it. (Solvency could be restored through progressive benefit cuts entirely.) However, most people who have proposed a specific reform have added new revenues. Once new revenues are being added to the system, then it becomes important to figure out where they should go--the Trust Fund or personal accounts.

Confronted with that choice, I opt for personal accounts. For me, an immediate and permanent contribution of 3.5 percent of taxable payroll into personal accounts for all workers, in addition to the 12.4 percent payroll tax that they and their employers already pay, is preferable to the current system. The contributions are 3.5 percent because that is the amount that the Social Security actuaries say is required to restore solvency even if invested entirely in Treasury bonds. But such a reform, though preferred to the current scenario, is also far from ideal. I'll outline a better system in the next post.


John Samples said...

I recognize that this post tries to set out what should be done and thus need not consider politics.

However, any proposal that focuses on what is sometimes said to be the actual purpose of Social Security - precluding poverty among the elderly - faces the problem that the defenders of the system insist on the "universality" of the program. For them, the illusion that Social Security is a savings and investment vehicle is not a mistake but rather a central and valuable aspect of the program.

Imagine that over the past seventy years, that instead of Social Security, the US had simply redistributed directly to the elderly to the point that their poverty level was equal to current and past levels, while the excess taxation went to private consumption and investment. Proponents of the program would, I think, still reject that "redistributionist" Social Security even though the effect on elderly poverty was the same as the current system.

It is this view, I think, that informs Sen. Kerry's absolutist defense of the current system and his faith that its problems can be solved by simply raising taxes.

LRose said...

The blog is quite interesting and I will return often, but alas there is a color problem. I have older eyes, and older eyes have trouble reading white print against a navy background. Brad DeLong's color scheme is much more friendly to these eyes. We do age, but that neeed not be held against us :)

LRose said...

Thank you so much. Now I can devote myself to worrying about Social Security, and we have not begun with Medicare.