Andrew Samwick Summarizes a Non-Partisan Approach to Social Security Reform

While some liberals (Duncan Black’s post from Wednesday responding to this)are advising us Democrats to stay out of the briar patch, I appreciate the efforts of Andrew Samwick and others. Dr. Samwick writes:

The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency.

Greg Anrig’s critique notes that the proposal:

would divert a share of payroll taxes into private accounts while severely cutting guaranteed benefits across all income levels. Geez, thanks for reopening that can of worms, guys!

Dr. Samwick fires back by noting the (relatively modest) long-term Social Security shortfall. His firing back also includes this:

The first is that it is reasonable to allow people to make choices to pursue higher returns with some additional risk if they are being required to put new money into the system.

I have only a couple of comments (both left over at Samwick’s place a while back). The first goes to the extra expected return cum additional risk argument. I have been arguing – along with Robert Barro and Gary Becker – that rational individuals who have private retirement savings already select an optimal mix of expected return and portfolio risk. On the other extreme, the Cato free lunch crowd is telling folks that moving a dollar from one account to another can magically greatly increase returns with no increase in risk. I’m glad to see that Dr. Samwick is more honest than the Cato crowd on this particular issue.

The second comment draws from “no transfers from general revenues to achieve sustainable solvency”. Is the converse part of their plan. My main concern with the Bush Administration (beyond their brazen dishonesty enabled by the Cato crowd) is that their real agenda is to transfer funds from the Social Security Trust Fund to reduce the massive long-run General Fund insolvency issue – what I’ve dubbed a backdoor employment tax increase. I hope Dr. Samwick joins me in also saying that this type of transfer should be off the table.

For more detailed comments on their plan – see Mark Thoma.