2 1/2 Proposals to Save Social Security

Abstract

1. Introduction In the grand cycle seems to govern the security systems of the nations of the world, it may once again be the United States' turn to move. Chile famously has adopted compulsory individual retirement accounts, Australia has moved to a kind of compulsory 401(k) superannuation plan, Switzerland to a system of compulsory occupational pensions, and Sweden to a system of compulsory notional accounts, where individual contributions are recorded by the government and accumulate as individual entitlements do not correspond to private sector investments. Canada, facing roughly the same type of shortfall as the United States, simply raised payroll taxes with a plan for direct investment by the pension authority in the stock market has not yet been broadly controversial. Interesting attempts (e.g., Robson 1996) to advance Chilean-type solutions did not find much political traction. But in the United States, the trustees of the major public pension plan, Old-Age and Survivors Insurance and Disability Insurance (OASDI), have been forecasting for about 15 years (essentially since immediately after the implementation of the last reforms were to save Social Security) the plan as structured could not meet its obligations through a 75-year forecast window. But there has been no legislative correction. There certainly have been a number of proposals: indeed the 1994-1996 Advisory Council on Social Security came up with three. Here we review a newer proposal presented in book form: The Real Deal: The History and Future of Social Security by Sylvester J. Schieber and John B. Shoven. We also review a second book True Security: Rethinking American Social Insurance by Michael J. Graetz and Jerry L. Mashaw. This book is also about saving security, but the problem is thought of as not so much about OASDI financial projections but instead (p. 5) that the long-term political support for insurance could come unglued unless the effectiveness of current insurance, broadly defined, is improved. Finally, a third book, Social Security: The Phony Crisis by Dean Baker and Mark Weisbrot, focuses on discussions of OASDI solvency (although it discusses aspects of health insurance as well) but argues current action to restructure OASDI is not required to save it. Hence we have only counted this in our title as one-half a proposal: no pejorative connotation is intended. We begin in section 2 with a brief annotated outline of each of the three books. We put most of our emphasis on OASDI issues, as do Schieber-Shoven and Baker-Weisbrot; as noted Graetz-Mashaw covers a very wide range of insurance programs. In section 3 we make some more general observations. A central point is the reminder a positive economics approach cannot choose among these or any proposals: to a large extent these proposals are different simply because their authors have different values. Section 4 concludes. 2. Overviews The Real Deal: Schieber and Shoven This is a substantial and worthwhile book. Schieber and Shoven have devoted several chapters to a history of United States Social Security from its inception. They then discuss current problems in depth, provide a discussion of a number of recent reform proposals, and give a significant proposal of their own. According to their history, right from the beginning the central issue facing OASDI was to fund or not to fund, is, whether there would be a fund to cover the public pension promises being made to current workers (and hence a long delay before any significant benefits would be paid) or whether instead there would be a reliance on subsequent generations to cover the promises in the future (and hence transfers could begin relatively quickly). The initial plan signed into law by Roosevelt in 1935 was a funded one. But by the 1939 amendments, this was changed to a largely unfunded plan by a coalition of liberals who wanted to alleviate current poverty among the elderly and conservatives who argued the accumulation of a trust fund would lead to untoward government intervention in the economy through social investment. …