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July 27, 2005

Unfunded Entitlements and Default Savings Plans


I had thought one thing I would never see would be Martin Feldstein endorsing a large, unfunded entitlement expansion:

WSJ.com - Saving Social Security: By MARTIN FELDSTEIN: July 15, 2005; Page A10: A recent proposal by House and Senate Republicans marks the start of the legislative process to implement President Bush's approach to Social Security reform. The fundamental principle is to supplement traditional pay-as-you-go Social Security with investment-based personal retirement accounts. Although the new congressional plan is not a complete solution to long-run problems, it's an excellent starting point. By using the Social Security surpluses that are projected between now and 2017, it lays the foundation for personal retirement accounts without diverting the payroll tax needed to fund current benefits...

It also reduces government net revenues without reducing future government commitments to pay money. The message discipline required of practicing Republican economists is very harsh indeed.

The rest of the op-ed is quite good:

Adding voluntary savings through salary deductions to these personal retirement accounts would substantially strengthen this reform.... The key to the success of such a voluntary add-on plan is to combine automatic enrollment with the ability of each individual to opt out... participation rates of 80% or more even when there are no employer matching contributions... the "default option" -- whether you are automatically in unless you decline, or automatically out unless you enroll -- has a powerful effect on what individuals choose to do....

The personal retirement accounts would not replace traditional Social Security but would supplement the more limited pay-as-you-go benefits that would result as the aging of the population leaves fewer workers per retiree.... The automatic enrollment feature would also increase national saving, a high priority in its own right. A higher national saving rate would finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits. A higher national saving rate would also reduce dependence on capital from abroad and would therefore shrink our trade deficit....

The aging of the population means that the existing pay-as-you-go Social Security program cannot by itself provide adequate retirement incomes without a very large increase in the payroll tax rate.... Supplementing the traditional pay-as-you-go benefits with investment-based personal retirement accounts financed by a combination of the projected surpluses and voluntary automatic savings would eliminate the need for any rise in Social Security taxes while providing a secure source of income for future retirees.

But funding them by uncapping FICA would be much, much better.

Posted by DeLong at July 27, 2005 10:16 AM