Now that President Bush is proposing to reform Social Security, opponents are arguing that there is no crisis. They might wish to read Laurence Kotlikoff.

continuing to ignore the problem will simply let more generations, particularly older ones off the hook, and dump an even bigger problem in our kids’ laps…

Delay has a significant cost. Waiting 5 years, for example, to raise federal income taxes means having to raise them by 74 percent rather than 69 percent. The reason delay matters is that the $45 trillion of red ink, like our credit card bills and any other liability we fail to pay, accumulates at the rate of interest.

Kotlikoff sees a likelihood that the United States and Europe will be unable to extricate ourselves from the debts of our welfare states, and we will find ourselves printing money to pay the bills, creating hyperinflation.

Arithmetically, most of the problem of unfunded future liabilities is in Medicare. However, I would argue that most of the potential for cutting government spending is in Social Security. This ought to be done gradually, in a planned way. My favorite approach, of course, is starting to raise the age of government dependency (retirement age) for workers now under 50. One advantage of this approach would be that it could be applied to Medicare as well as Social Security.

Instead, the approach that is being trial ballooned elsewhere these days is substituting price indexing for wage indexing of Social Security benefits. That has the advantage of cutting the growth of benefits sooner. However, it would not give workers any means of offsetting the benefit cut by working longer.

Thanks to Stephen Karlson for the pointer.

UPDATE: on the topic of changing the index for calculating benefits, the AARP has a useful analysis. Thanks to reader Bill Sterling for the pointer.

For Discussion. Which will be harder to reduce–projected spending in Medicare or projected spending in Social Security?