Social Security Reform
By Arnold Kling
The New York Times has two relevant op-eds. John Kasich writes,
benefits are growing faster than inflation. First-time Social Security benefits are now tied to wage growth, and wages are rising faster than prices. The result: over the next 75 years, benefits are expected to increase nearly eighteenfold, while prices will go up less than half that rate. In order to keep pace, our children and their children will have to work longer hours and pay more taxes. Between now and 2080, benefits will most likely exceed payroll taxes by $120 trillion.
How do we get out of this mess? To preserve the system for the long term, we must change the way first-time benefits are calculated. Growth in initial benefits should be linked to the consumer price index – not to wage growth.
See also the chapter in Learning Economics called “A Social Security Policy Primer.”
Jose Pinera describes the Chilean experience with private accounts. Of particular interest is how they dealt with the transition issue.
There was no “economic” transition cost, because there is no harm to the gross domestic product from this reform (on the contrary, there is a huge benefit). A completely different issue is how to confront the “cash flow” transition cost to the government of recognizing, and ultimately eliminating, the unfinanced Social Security liability. The implicit debt of the Chilean system in 1980 was about 80 percent of the G.D.P.
We used five “sources” to generate that cash flow: a) one-time long-term government bonds at market rates of interest so the cost was shared with future generations; b) a temporary residual payroll tax; c) privatization of state-owned companies, which increased efficiency, prevented corruption and spread ownership; d) a budget surplus deliberately created before the reform (for many years afterward, we were able to use the need to “finance the transition” as a powerful argument to contain increases in government spending); e) increased tax revenues that resulted from the higher economic growth fueled by the personal retirement account system.
For Discussion. Could similar approaches be used for managing the transition in the United States?