Andrew Samwick, in a post at his blog Vox Baby, has what is billed as a Nonpartisan Social Security Reform Plan. Here's the plan, followed by some questions that came to mind while reading through it:
Vox Baby: Nonpartisan Social Security Reform Plan: Along with Jeff Liebman of Harvard University and Maya MacGuineas of the New America Foundation, I am pleased to announce the "Nonpartisan Social Security Reform Plan." Jeff was a Special Assistant to President Clinton's National Economic Council, where he worked on Social Security, and Maya was a Social Security adviser to Senator McCain's 2000 presidential campaign. Combined with my experience on the staff of the CEA in the Bush administration, we cover the political spectrum of recent years.
We've all spent plenty of time worrying about the looming fiscal crisis associated with the demographic shift toward an aging population, of which Social Security is the tip of the iceberg. Push finally came to shove, and we bound ourselves together via months of conference calls, and this is the plan that emerged. It's not what any one of us would have come up with on our own, but those sorts of plans never become legislation anyway.
What is unique about the plan is that it is designed around the broad areas of likely compromise across the political landscape on how to restore solvency to the system. What makes the plan important is that the Office of the Chief Actuary has evaluated it and certified that it would "easily satisfy the criteria for attaining sustainable solvency."
The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency. Specifically:
1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.
2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.
3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.
4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.
5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.
6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.
I invite your comments and questions on the plan, and I will be blogging more about the plan in the days and weeks to come. It was a fascinating experiment--we were trying to walk the very thin line between compromising our principles, which serves no one, and the principle of compromise, which is essential to moving public policy forward. It is a plan that respects political differences but not entrenched political interests. We believe that we have staked out the center of the political spectrum--the challenge now is to capture enough of the people just left and right of center to build the necessary coalition to see it through.
I've undoubtedly missed some things, but here are a few questions and reactions to the proposal:
1. I would like to see a more thorough discussion of the degree of the problem we face. It seems as though this has been talked to death, and in many ways it has. But for the most part we have seen just one or two sets of estimates on solvency. There is a good deal of uncertainty surrounding these numbers, the models used, estimates of trends, and so on, and there is reason to believe that the productivity numbers in particular are overly pessimistic. But lots of smart people say there is a problem to worry about, so let's move on to the proposed solutions.
2. With respect to raising the retirement age, is it true that people are more capable, healthier, more able to do physical labor than in the past? Are they healthier at age 68 than they used to be, or do they just live longer because the last years have been extended through medical advances? What will be done for all those who do physical labor their whole lives and come to age 62 or 65 and simply cannot go on? Is it equitable to treat them the same as someone who does far less demanding labor? In any case, what of those who cannot work at their current employment until age 68 and cannot find employment elsewhere that pays the bills? I’m not sure we fully understand the implications of extending the retirement age on the distribution of benefits, etc.
3. Will tilting the benefits further cause an erosion of political support for the program in the future? This is a big worry. Will it increasingly be seen, because of the differential benefits by income class, as an income transfer program rather than a social insurance program and a program to help overcome market failures in retirement insurance markets? If the higher income groups benefit less, will they next ask why they don’t pay less? Raising the cap to 90% tilts the process even further. Is it possible to protect against an erosion of support in the future because of these changes?
4. Why not hold the risk from participating in financial markets centrally?
What is gained by distributing the risk to individuals through personal
accounts, especially those on the margin? Is it a philosophical objection to
using the trust fund to purchase private sector assets? What are the costs of
reducing individual risk by investing the funds centrally rather than
individually, particularly since individual choice will be so limited to prevent
excessive risk taking?
5. Finally, even if I believe there is a problem, and even if this proposal is written to overcome the biggest concerns, I do not have a lot of faith in the existing congress and I’m hesitant to open the reform door even a crack. I think of it like a car with funny noises that may have “long-run structural” problems. There are some people I would trust completely to get under the hood, diagnose the problem, and fix it. They would do what was needed, and nothing more. There are other people, however, who would love to get under the hood, who may even listen for funny noises to try and convince you to let them tinker (and if they are also dishonest, maybe even squirt a little oil here and there secretly to help make the case). But I wouldn’t let them anywhere near the car. Most of the time, they would do more harm than good, rip out the whole engine when a smaller repair is all that is needed, or add unnecessary repairs to the bill. It’s risky, but in such cases I’d rather try and make it, funny noises and all, down the road to the next repair shop where I have a little more faith in the outcome. For me, that is the biggest problem with signing on to anything at the present time.
Andrew, Jeff, and Maya would appreciate hearing your comments on this proposal. Me too.