NCPA - National Center for Policy Analysis


October 8, 2007

A recent proposal by Rep. Rahm Emanuel, chairman of the House Democratic Caucus, may point the way to a bipartisan compromise on Social Security, says Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard University and a member of the Wall Street Journal's board of contributors.

The essence of Emmanuel's proposal is to create universal personal retirement accounts funded by equal 1 percent-of-earnings contributions from employers and employees.  Although enrollment would be automatic, participation would be voluntary since each individual could choose to opt out in any year.

The Emanuel plan has much in common with earlier proposals by President Bush:

  • Both approaches call for the funds in personal retirement accounts to be privately managed in a mixture of debt and equity funds.
  • Experience with automatic enrollment plans in private firms shows that almost all employees remain enrolled.
  • A subsidy for low-income individuals, comparable to the tax benefit for savers in IRAs and 401(k) plans, would guarantee their participation.
  • The accounts would provide annuity benefits when the individuals reach retirement age and could be bequeathed if the individual dies before retirement.

The Rahm Emanuel proposal, coming from the chairman of the House Democratic Caucus, looks like an important signal that a compromise may now be possible between Republicans and Democrats along the general lines originally proposed by President Bush.  There would of course be many details to be negotiated.  But the basic idea of combining traditional tax-financed Social Security with investment-based personal retirement accounts looks like it can be on the table, says Feldstein.

Source: Martin Feldstein, "Social Security Compromise," Wall Street Journal, October 8, 2007.

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