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May 15, 2005

Larry Lindsey Wants to Boost National Savings

Ex-Bush NEC head Larry Lindsey thinks that the administration's Social Security plans move in the wrong direction:

Hearing Archives: Committee on Ways & Means :: U.S. House of Representatives: Statement of The Honorable Lawrence B. Lindsey, President and Chief Executive Officer, The Lindsey Group, Fairfax, Virginia

Testimony Before the House Committee on Ways and Means

May 12, 2005

Mr. Chairman, members of the Committee, I am honored to have been asked to testify today on the issue of Social Security reform. It is surprising that the issue of promoting national saving is not at the center of the current debate over Social Security reform, and that will be the focus of my comments today....

The first part of any credible Social Security reform plan is to permanently eliminate the actuarial deficit in the system.... There are a number of ways of closing this gap, but with different implications for national saving. For example, it would take a 28 percent increase in payroll taxes to make sure that the government collected all the money it needed to meet benefit promises over time....

The second way of bringing the system into balance is to change the formula for determining benefits now.... The system could be brought into balance by limiting future benefits to the level of benefits enjoyed by those retiring from the system now, while fully indexing those benefits to inflation. This could even be coupled with a generous minimum Social Security benefit....

In order to maintain the level of consumption in retirement that the government previously promised, but could not deliver, individuals would have to gradually increase their personal saving during their working lives. This may not be easy for some folks. So, a second part of any Social Security reform that promotes national saving should include a personal account plan that helps people save and learn the benefits of saving by watching their own accounts grow.... The best way is to allow workers to choose a plan where they would contribute more to their retirement in return for gaining ownership and a higher return on their existing payroll taxes... the government could match private contributions.... Consider... a plan that asked employees to contribute 1 1/2 percent of their wages to their own personal account, with no change in their current taxes. For only a slightly higher short run budget effect than the President’s proposal, Social Security could offer a four-for-one match on employee contributions made on the first $10,000 of earnings and a one-for-one match on contributions made on earnings above that amount. A worker making $10,000 would thus contribute $150 a year to his account and be matched $600 from existing payroll tax revenue – producing a $750 account. A worker making $50,000 would contribute $750 a year and be matched $1,200, producing a $1,950 personal account. The resulting accounts would build up much more quickly, generate more earnings, and provide far more funds for retirement. The employee’s contribution would not affect their Social Security defined benefit in any way. But as in the President’s plan, the Social Security system would be made whole for any diversion of existing payroll tax revenue.

Best of all, national saving would be enhanced unambiguously. The funds being contributed by workers would largely be net contributions to national saving. They would also involve the real attributes of ownership of capital since the worker would unequivocally have some “skin in the game.” A high initial match rate would also create the right kind of incentives to change long term attitudes toward national saving....

This proposal is not a “carve out.” Nothing is carved out or removed from the Social Security system. The dollars allocated to personal accounts impose no additional strain on the Social Security system. This proposal is not an “add on.” There is no new entitlement.... The combination of gradual reductions in the promised rate of real increase in future benefits and a personal account system that promotes national saving – that is neither a carve out, nor an add-on – is the best approach.

Larry's is a fine idea. The only complaint I can have it is his characterization of it: it is too an "add-on"...

Posted by DeLong at May 15, 2005 06:40 PM