Will the President’s Proposal Solve Social Security’s Crisis?

Studies | Social Security

No. 280
Wednesday, November 16, 2005
by Andrew J. Rettenmaier and Thomas R. Saving


Conclusion

We have evaluated two variants of a reform proposal that combines progressive price indexing with personal accounts — both of which are components of the general framework outlined by the president. The president’s proposal provides for partial prepayment of Social Security benefits and protection of retirees who had low lifetime earnings. The proposal is a compromise between those who favor the current financing arrangement and those who favor personal accounts. Importantly, a reform along the lines of that proposed by the president can make Social Security solvent in the long run while at the same time preserving the real benefits promised but not payable by the current system.

Fundamental reform with prepayment can revitalize Social Security while reducing government debt. Over the short term, reform is not free. Over the long term, reform reduces taxes and restores Social Security to a sound fiscal position and benefits recipients and workers alike. To the degree that reform increases savings, future national income will be higher. Any reform that includes an increase in the taxable maximum must at the minimum provide that the additional revenues be implicitly deposited in personal retirement accounts.

Importantly, even if Social Security is reformed, Medicare’s problem looms larger. Doing nothing about these entitlement programs only transfers the problems to the next generation. The challenge to the naysayers is to provide an alternative path to reform.


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