…the president’s rhetoric is unconvincing. Yes, he’s made the case that Social Security is headed for insolvency — tax receipts from workers and employers won’t cover benefits for retirees starting in 2018. But he has not managed to connect insolvency with his idea of personal accounts.
No wonder. These are two completely separate issues. Personal accounts won’t prevent Social Security’s impending bankruptcy. Personal accounts are great for other reasons: they will encourage savings, provide a more comfortable retirement, give people a nest egg they can own and increase personal responsibility. But the accounts won’t solve the insolvency problem.
Bush should stop talking about these two issues — insolvency and personal accounts — as though they are connected. He needs to concentrate on one or the other to start.
You probably think I’ll say "personal accounts." I might have, but a few months ago I took the administration’s position in a debate in Reason magazine with innovative economist Tyler Cowen of George Mason University. Sometimes, you learn something from such an encounter. I now see that Tyler was right [TC: thanks!], and what follows is adapted from his argument.
I believe the president should focus on putting Social Security on a sound footing. The best way to do that is to adjust benefits by increasing the retirement age, cutting back payments further for those who choose to retire early and indexing the growth in benefits to the consumer price index (that is, inflation) rather than to wages. Raising payroll taxes — or increasing the ceiling below which those taxes are collected — should be off the table. Such a hike would have a disastrous effect on the economy.
Should we give up on personal accounts?
Not at all. Those accounts will grow organically as Social Security withers.
The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme. The system would become more of a safety net. Retirees would, very naturally, fill in the gap by saving more.
The vehicle for those savings would be personal stock and bond accounts — which already exist!