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July 05, 2005

The Ideal Social Security System

Josh Marshall asks a question:

TPMCafe || Politics, Ideas & Lots Of Caffeine: By Josh Marshall: Imagine there were no Social Security and there never had been. And figure we were starting from scratch. Why would we pick a program more or less like the one we have to today with Social Security? What parts of today's economy would be reacting to? Assuming we would pick a system more or less like this one, why? And how would we argue for it?

If this isn't the system we'd pick I think we should have the courage to play out that conversation too. But assuming we would want to create Social Security again, let's refine the arguments for why we would do so. Once we can do that, I think a lot of our broader 'narrative' will fall into place.

I think we would design a system in which:

  1. Substantial prefunding--that is, a large trust fund balance protected by keeping the program "off budget" in the sense of making it illegal to spend any government monies to calculate, publish, or disseminate budget or debt totals that count Social Security taxes as revenues or offsetting receipts, or that do not include Social Security assets as liabilities of the government.
  2. A substantial mandatory "defined benefit" component, very much like that of our current Social Security system.
  3. Automatic adjustments to tax rates, benefit formulas, and retirement ages to keep the system in automatic long-run balance.
  4. A substantial optional (but encouraged and default) add-on system in which a proportion of your payroll earnings into a low-fee diversified unchurnable private account invested in index funds--unless you check the "I do not wish to participate" box on your IRS form 1040.

The system we would design would have substantial prefunding because our current national savings rate is very low and our economic growth rate is not high enough to make pay-as-you-go clearly the best option. The system we would design would have a Social Security-like "defined benefit" component because people really value a retirement income component not heavily subject to market vicissitudes, and the government is the only organization that can offer such a "defined benefit" plan. The system would have automatic adjustments to prevent episodes when it falls out of actuarial balance to provide an excuse for clown shows like the one the Bush administration is still putting on. The system would have add-on private accounts because it is a scandal and a disgrace that the poorer half of Americans have essentially no investments in the stock market.

It is a shame that we have been unable to use this year's debate to move us closer to an ideal system. But--given the manifold incompetencies and mendacities of the Bush administration--it was never more than a one-in-twenty shot anyway.

Posted by DeLong at July 5, 2005 05:32 PM