Saving Social Security: A Balanced Approach, Peter A. Diamond and Peter R. Orzag, The Brookings Institution (2004).

Messrs. Diamond and Orzag describe the status quo for Social Security and offer their recommendations.  Congress should cover the projected deficit by gradually trimming benefits and raising payroll taxes, they say, as it did when Social Security was restructured in the early 1980s.  If their proposals were adopted:

•     Retirement benefits for future retirees would be lower than under current law, although said retirees should still receive higher benefits than current retirees.  The benefit reductions would be proportionally greater for high-income workers than for low-income workers.

•     Payroll tax rates for Social Security would be increased from the current employer-employee rate of 12.4% to a rate of 14.18% (or higher if life expectancies grow faster than projected) by 2055.  The payroll tax ceiling would be raised and earnings above this ceiling would be subjected to a “legacy tax” (about 3%), thereby shifting more of the cost of Social Security to high-income workers. Congress could mitigate these payroll tax increases, if it wished, by reinstating the estate tax and dedicating the proceeds to Social Security.

Under our plan, say the authors, Social Security could be supported indefinitely without tapping general revenues.  Therefore, why should Congress undermine the system by permitting younger workers to invest a portion of their payroll taxes in personal retirement accounts (PRAs)? Millions of workers are already participating in the stock market through 401-k accounts, IRAs, etc. Social Security provides a basic level of retirement income for everyone that can’t be dissipated or outlived, and we should keep things that way.

The authors assume that Congress can safely raise taxes for Social Security without addressing projected deficits for Medicare and Medicaid, which they acknowledge to be “much larger” than the projected deficit for Social Security.  Given that the present value of our government’s unfunded future liabilities totals about $50 trillion, this seems like a cavalier assumption.

Also, PRAs offer benefits over Social Security.  If a worker’s PRA earns average market returns, it should grow at say 6% per year in nominal dollars.  Over 30 or 40 years, that should make a welcome contribution to the worker’s retirement nest egg.   

If you don’t like the Diamond-Orzag plan, don’t worry. According to columnist David Wessel, it has “few advocates in Congress.”  Wall Street Journal, 12/30/04.  “Saving Social Security” provides a useful preview, however, of some of the arguments that we can expect against PRAs.
 top   close