Social Security Reform

Council of Economic Advisers (.pdf) ^ | January 18, 2005 | Dr. N. Gregory Mankiw

[Brilliant]

Agreed. They need at least to put all of the contributions for workers 30 and younger into private accounts. The 30 year olds become eligible for social security in 2042, the year the trustees say they will need to cut benefits by 30%. Of course, that means that they'll have to come up with money from some other source to pay benefits to those older than 30, but better to get working on that now rather than wait until the problem is a crisis. The privatization plan will force Uncle Sam to deal with the problem now.

[Brilliant]

A crisis is a problem that can't be solved. This is a problem that can be solved. It'll soon become a crisis, if we don't act, though.

Basically, the Dem position is "It's not a crisis. We shouldn't do anything until it is a crisis."

[Brilliant]

One thing we have going for us is that the medicare bankruptcy is going to be a dry run on the social security crisis, and will open some more eyes to the problem. The problem is that it's several years off, and at $600 billion a year, that adds up.

If you think about it, medicare illustrates the problem with waiting. In 1995, Gingrich pushed thru Congress a bill which would have fixed the medicare problem. If Clinton had signed it, medicare would not be on the verge of bankruptcy, and we'd not be talking about the problem now. But Clinton demogogued it, and vetoed it. Now, medicare is on the verge of bankruptcy, and there is no way to fix it short of a tax increase or a benefit cut, neither of which has the support of the people. So that means we have to wait until medicare actually goes bust before doing anything about it, and then there will be a significant tax increase, which will probably result in a political crisis.

Now, we are in the same situation with respect to social security as Clinton and Gingrich were with respect to medicare in 1995. If we act now, then the problem is solved. If we wait, as we did with respect to medicare, then the problem simply becomes unsolvable.

Everyone assumes that the "solution" will be to increase taxes. But what they forget is that there will be a whole lot of voters who will think they are going to get screwed, and they aren't going to support the idea of paying higher taxes unless they can be certain that their nest egg is safe. They increased taxes in 1986 with the promise that it would be a permanent fix. But it was not because the very next year, the voters took revenge for the tax increase, thru out the GOP, and the Democrats proceeded to raid the trust fund. People aren't going to believe the Democrats when they say it will be different this time, particularly since the overall tax burden the average guy is paying is already much higher than it was in 1986.

If there are no taxes, there will be no choice but to cut benefits.