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Monday, October 08, 2007

Martin Feldstein: Social Security Compromise

Do we really have to have this debate all over again? There has been a noticeable push to revive the Social Security issue in recent weeks, but I doubt it will have any political traction:

Social Security Compromise, by Martin Feldstein, Commentary, WSJ: A recent proposal by Rep. Rahm Emanuel, chairman of the House Democratic Caucus, may point the way to a bipartisan compromise on Social Security. The essence of Mr. Emmanuel's proposal ... is to create universal personal retirement accounts funded by equal 1%-of-earnings contributions from employers and employees. Although enrollment would be automatic, participation would be voluntary since each individual could choose to opt out in any year. ... A subsidy for low-income individuals, comparable to the tax benefit for savers in IRAs and 401(k) plans, would guarantee their participation. ...

As a candidate in 2000, George Bush called for personal retirement accounts to supplement the traditional tax-financed Social Security benefits. ... Unfortunately, Democratic critics argued that individual accounts would be "gambling" with the retirement savings of working men and women. Moreover, congressional Democrats refused to begin a dialogue with the administration, even when the White House insisted that every aspect of its plan was negotiable.

The partisan character of the attack was ironic since President Bill Clinton had ... spoken favorably about the potential role of individual accounts. The Clinton White House and Treasury developed a detailed plan based on such accounts. ...

The Rahm Emanuel proposal, coming from the chairman of the House Democratic Caucus, looks like an important signal that a compromise may now be possible between Republicans and Democrats along the general lines originally proposed by President Bush. There would of course be many details to be negotiated. But the basic idea of combining traditional tax-financed Social Security with investment-based personal retirement accounts looks like it can be on the table.

As both President Bush and Mr. Emanuel emphasized, personal retirement accounts would increase individuals' confidence in their retirement incomes and would raise our national savings rate, contributing to faster economic growth and less dependence on capital inflows from abroad. The creation of personal retirement accounts can also be a first step toward correcting the fiscal problem of Social Security.

As everyone now recognizes, the current 12.4% Social Security employer-employee payroll tax will not be enough to finance the benefits specified in current law as the population ages. Continuing to finance those benefits with a pure tax-financed system would require raising the payroll tax rate to more than 18%, or finding other ways to raise tax revenue.

The historic returns on stocks and bonds, however, imply that a 2% contribution to personal retirement accounts would eventually generate enough retirement income to maintain the monthly benefits specified in current law, without any increase in taxes. Such is the power of investments in stocks and bonds that 2% of payroll contributions to personal retirement accounts would eventually do the work of a 6% tax-rate increase.

Reforming the tax-financed Social Security benefits to avoid a future fiscal shortfall is a bridge that need not be crossed now. The important point is to start the personal retirement accounts as soon as possible. The rapid aging of the population and the imminent start of the baby-boom generation's retirement make it important to avoid delay. The White House and congressional Republicans should reach out to Mr. Emanuel to see if the compromise needed to save Social Security and increase savings can now be achieved.

As Dean Baker is always ready to point out, the solvency argument is not very compelling:

The Congressional Budget Office's projections show that the program can pay all benefits, with no changes whatsoever, through the year 2046... The projected shortfall over the whole 75-year planning period is 0.4 percent of GDP, approximately 30 percent of the current cost of the war in Iraq...

But even if you do believe there are problems on the horizon, when you remember that support for reform from many on the right is not because they want to save the current Social Security system, but rather because they see this is a first step toward eliminating it, the reluctance of Democrats to enter into negotiations is understandable. Democrats distrust Republicans on this issue for good reason.

    Posted by on Monday, October 8, 2007 at 12:24 AM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (52)

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