I read, but didn't get a chance to watch, the State of the Union address last evening. I had a few reactions to what the President said about Social Security:
1) I liked the sequencing of the statements. The discussion of restoring solvency came first, followed by the discussion of personal accounts. I hope that reflects the way the folks in the White House are thinking about the issue.
2) The President specifically said that, to restore solvency, a range of options are on the table, including raising the retirement age, which is my preferred option.
3) He also excluded the possibility of raising the payroll tax to restore solvency. That will make it more difficult--I hope it does not necessary exclude an out-of-pocket contribution to support the personal accounts, but I believe it does. I have a feeling that this will be one of the places where a compromise can be reached--higher revenues coming into the system, but in an amount smaller than the revenues flowing to the personal accounts. Just a guess.
4) I did not like the statement, "By the year 2042, the entire system would be exhausted and bankrupt." We've been down this road before. A reasonable definition of bankrupt includes the system not being able to pay all of its obligations. However, this does not mean that the system will be exhausted in 2042. What is projected is that the trust fund will be exhausted in 2042. The system will still have an income rate (payroll tax plus income tax on benefits) of 13.28 percent of taxable payroll, which is 4.51 percentage points short of the projected 17.79 percent cost rate. (The figures come from this table.) In the SOTU address, every word must be carefully chosen. The folks inside the White House working on this language absolutely have to get it exactly right.
5) Then the President moves to the following paragraph about personal accounts:
Here's why the personal accounts are a better deal. Your money will grow, over time, at a greater rate than anything the current system can deliver -- and your account will provide money for retirement over and above the check you will receive from Social Security. In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children and -- or grandchildren. And best of all, the money in the account is yours, and the government can never take it away.
A couple of issues here:
- There is a vagueness about the "greater than anything the current system can deliver" phrase that is troubling. It doesn't mention the risk associated with obtaining those returns. It also suggests that rates of return are the way to make the case for reform. Not so. It's the fact that, if you are prefunding, you need to do it outside the current system so that saving actually goes up. I would support personal accounts even if the rates of return where no better than Treasury bond returns, if we are bringing new money into the system.
- The issue of bequests is completely unnecessary. Social Security exists to provide insurance against outliving one's means. Nothing prevents people from leaving bequests currently if they so desire. I am not aware of any failures in the life insurance market that need government attention.
- It is a stretch to say that the government "cannot take these accounts away." I agree that it would (probably) be more difficult for the government to impose a surtax on the accounts than it would be to cut benefits coming from the pay-as-you-go system, but "cannot" is too strong. I also believe that, once the objective of making sure that elderly are not poverty is met, there is no compelling reason to have the benefits paid out of the traditional system rather than a system of personal accounts.
6) Some other items that were discussed. The President was clear that everyone 55 and over is in the traditional system with benefits as specified by current law. Good. He was also clear about a gradual phase-in. Good. He explicitly mentions the Federal Thrift Savings Program as a guide for the sort of investment options available. Very good. He then said that, eventually, everyone would get to put 4 percentage points of their payroll tax payments (of 12.4 percentage points total) into the personal accounts. Not 4 percent up to a limit, like the Commission said, but 4 percent. I'm not sure whether that was intentional.
7) An item not discussed--exactly how progressive the reductions in future benefits from the current system would be. I expect this to be another area for compromise--make the traditional system that continues even more progressive, to make sure that the lowest-income people, who are less able to bear financial risk, are depending less on the personal accounts than other workers.
I haven't checked what others have been writing around the blogosphere and the MSM, so maybe more later.