Reihan: My Social Security Plan

Andrew Samwick ably summarizes the current state of the debate among Democrats.

What I'd like to see is a combination of Swedish-style notional accounts and Phil Longman's Early Retirement accounts. Let's absolutely not "carve-out," and let's emphasize growing the labor force by discouraging early retirement and reducing the tax burden on so-called "secondary earners," and perhaps by pursuing some limited, modest pro-natalist measures.

Check out Rick Mattoon on notional accounts.

Contributions to the NDC are recorded in each individual’s personal account and accumulate based on their earnings. However, the contributions are only “notional” in the sense that the money that is being collected today is used to finance current obligations of retirees. The individual’s fund balance grows on paper even though there is no real money in the account. The rate of growth is determined by the employee’s contribution and a defined rate of return that is tied to the national per capita real wage growth. In doing so Swedish officials wanted to stabilize pension funding and insure pension sustainability.

Workers can then choose to retire as early as age 61. When they retire annual benefits are calculated by dividing the account balance by a divisor. The divisor is set to the cohort’s age 65 life expectancy and an imputed rate of return based on the long-term real growth rate of the economy (assumed to be 1.6%). Benefits are then adjusted each year for inflation take into account the imputed rate of return.

The ability to cap total payouts and adjust benefits to reflect economic and demographic changes significantly improves the financial stability of the Swedish pension system.

As Mattoon goes on to point out, the Swedish system is far from perfect. But it strikes the right balance between the status quo and conservatarian utopians.

Comments

The best Social Security plan is to wait and see if it actually needs to have solvency restored. Since, under the 'optimistic' scenario, there's never going to be a shortfall, and, since actual SS revenue growth actually beat the optimistic scenario 9 times, it seems likely to me that this is just a politically-manufactured problem.

Also, Samwick's complaint that only private accounts can prevent Congress from spending SS money on other things is specious. After all, if there's one fact our Republican leadership has made clear, tax revenue doesn't even have to exist in order for it to be spent.

Posted by Bo | October 2, 2007 11:04 AM

Bo, but you don't understand!!!!!!!!! Social Security is doomed!!!!!!!!!!!!! In only a few decades, if things take a long-term turn for the worse!!!!!!!!!!!!

Iraq, of course, can continue to bleed like a severed artery, with both lives and money, but we can tolerate that for years and years and years....

Posted by Barry | October 2, 2007 11:15 AM

Have you read about the Swedish reforms? Early Retirement Accounts? If the better-than-optimistic scenario is good, these are better -- we can revenues towards providing high-quality public services. The idea that Social Security as is is the best of all possible worlds seems strange to me.

Notice that I say, "no carve-outs." I think you're arguing with the wrong person.

Posted by Reihan | October 2, 2007 11:24 AM

Social Security needs some tweeks along the way, but the real problem is Medicare. That will kill us in 5-10 years with no reasonable answer (short of significant health care rationing ... which no politician will touch with a 10 foot pole). As to Social Security, we can either (or both) (a) increase the premiums or (b) reduce the benefits. Without a structural change in the way Social Security funds are "invested" (i.e., in the bucket with the hole in the bottom), (a) will do nothing but add to the pot of treasury bonds, the redemption of which can only be accomplished via increasing the national debt or increasing taxes. Besides, all it does is give Bush more current money to pursue his war and further lower taxes for the wealthy. Option (b) could work via increasing the retirement age, lowering the CPI increase in the payout period or the Wage indexing in the initial payout calculation, or the payout formula itself, or by including more (or all) income in the "wage base". There will be lots of fighting among the groups that get differing hits from these changes, but some will likely occur in the next 5 years.

As for Medicare, soon enough we'll all finally realize rationing is the "only" solution. Then the fighting can begin on why only the rich can afford to privately buy a higher level of care than the rationed amount afforded to everyone.

Posted by Just me | October 2, 2007 12:54 PM

The idea that Social Security as is is the best of all possible worlds seems strange to me.

A somewhat less Voltairean way of putting that would probably be 'If it ain't broke, don't fix it.' Also, we have many parts of our government, say Medicare, our ongoing federal deficit and an unnamed bit of military adventurism, that are quite a bit more broken. It makes sense, given that political attention is a finite resource, to concentrate it on the actual problems instead of utopian twiddling.

Posted by Bo | October 2, 2007 1:11 PM

For Bo (and others), you might want to check out this paper and presentation by Chuck Blahous (the main WH social security staffer) from a recent AEI event on whether the social security trustees have been pessimistic in the past. (http://www.aei.org/events/eventID.1561,filter.all/event_detail.asp) A strong paper, and comments from SSA chief actuary and CBO chief social security economist back him up, so it probably makes sense to start thinking about how to fix the problem rather than hope it fixes itself.

As a side note on the uncertainty of future projections, they're a reason to act sooner rather than later. Remember, while there's a chance the problem will be smaller than the Trustees project, there's an about equal chance it will be bigger. Economic theory says that we should act now to avert the bigger risk even if there's a chance the outcome won't be as bad. (Same logic as acting now to fix global warming.)

Posted by Anon | October 2, 2007 6:43 PM

The thing is, anon, the problem that we're facing is not massive environmental change. The problem with SS is that possibly in 35 years, SS outlays just might be 25-30% underfunded by SS taxes. To put that in perspective, all federal discretionary spending has been underfunded with respect to tax receipts by 23% during the Bush presidency to date, and that is projected to increase if his tax cuts are made permanent. Clearly, we haven't been in economic armageddon for the last 6 years, and the SS 'crisis' won't do that either. Further, assuming they're entirely correct, it's a problem that can be solved by waiting 35 years and then raising payroll taxes to still less than what those Swedes pay.

Posted by Bo | October 2, 2007 8:11 PM

True enough on current deficits, which is why people argue that we need to return to fiscal responsibility and balance the budget. However, while you can go a certain stretch of time with deficits without huge harm, you can't go permanently like that. In all likelihood, Social Security faces cash deficits beginning in about 10 years, meaning an impact on the budget, and system deficits beginning around 2040, meaning significant tax increases or benefit cuts.

You may think they're not significant, but consider how much people howled when Bush proposed solving about half the 75-year deficit with progressive benefit cuts aimed at high earners. They went nuts. It's strange that there's a lot of folks who say the deficit isn't a big deal, but if so they wouldn't be scared to at least put forward a contingency plan.

Posted by Anon | October 2, 2007 10:32 PM

However, while you can go a certain stretch of time with deficits without huge harm, you can't go permanently like that.

That's a common myth. In fact, our government has run a deficit for 68 of the last 75 years, racking up nearly $10 trillion dollars in debt in the process, and we're likely to continue that trend for the next 75 years too. Contrary to popular belief, it's not the end of the world if SS starts contributing to that debt instead of papering it over.

meaning significant tax increases or benefit cuts.

Yes, we'll either cut benefits, raise taxes or go deeper into debt. Oh no, It's a potential problem with only three incredibly obvious solutions! How will we ever survive such a choice?

Posted by Bo | October 2, 2007 11:21 PM