Many, many posts ago I promised to unveil my plan for fixing Social Security. I have duly kept up with the continuing debate about Social Security "privatization," which is hardly what the President's plan envisions. (There's a selected bibliography at the bottom of this post.) Having weighed it all, I am reinforced in my belief that the only way out of the Social Security "mess" is to phase out Social Security.
Why? As a bleeding-heart libertarian who wants the best for others as well as for himself, and who understands that economics is a positive-sum game, I say this: The best way to incentivize people to work hard, to acquire new and higher-paying skills, and to stay sober is to allow them take responsibility for their old age. Put them on notice (reasonable notice, of course) that they are responsible for themselves; unless they can count on family, friends, or private charity to see themselves through old age, they should consume less, save more, and invest wisely.
What's the worst that can happen? Some form of public assistance would be demanded for the truly needy (and for their fellow travelers, the lazy and the imprudent), and by those who simply bleed envy or pity at the thought of "excessive" income inequality. But the accompanying tax burden would be much smaller than the burden that now hangs over future taxpayers if we try to redeem anything resembling the "promises" implicit in the present Social Security scheme. Moreover, the demise of Social Security would give added impetus to the coming economic boom (see here and here), as the higher rate of personal saving necessitated by the phase-out of Social Security would finance additional investments in productivity-enhancing growth. Lower taxes and a more robust economy would also foster a resurgence of private charity, in aid of the truly needy (if not the lazy and imprudent).
Here's my plan:
1. Abolish Social Security payroll taxes as of a date certain (Abolition Day).
2. Pay normal benefits (those implicitly promised under the present system) to persons who are then collecting Social Security and to all other qualifying persons who have then reached the age of 62.
3. Persons who are 55 to 61 years old would receive normal benefits, pro-rated according to their contributions as of Abolition Day.
4. The retirement age for full benefits would be raised for all persons who are younger than 55 as of Abolition Day. The full retirement age is now scheduled to rise to 67 in 2027; it should rise to 73 by, say, 2020. Moreover, partial benefits would no longer be available to persons between the age of 62 and full-retirement age.
4. Persons who are 45 to 54 years old also would receive pro-rata benefits based on their contributions as of Abolition Day. But their initial benefits would be reduced on a sliding scale, so that the benefits of those persons who are 45 as of Abolition Day would be linked entirely to the CPI rather than the wage index.
5. Persons who are younger than 45 would receive a lump-sum repayment of their contributions (plus accrued interest) at full retirement age, in lieu of future benefits. That payment would automatically go to a surviving spouse or next-of-kin if the recipient dies intestate. Otherwise, the recipient could bequeath, transfer, or sell his interest in the payment at any time before it comes due.
6. The residual obligations outlined in points 2-5 would be funded by a payroll tax, which would diminish as those obligations are paid off.
Repeat, with appropriate variations, for Medicare and Medicaid.
The Official State of Social Security
2004 OASDI Trustees Report: Contents
2004 OASDI Trustees Report: Conclusion
The looming deficit problem: Table VI.F8.--Operations of the Combined OASI and DI Trust Funds, in Constant 2004 Dollars, Calendar Years 2004-80
The underlying causes: Shrinking worker-retiree ratio, increasing longevity, and wage indexing
Some Alternative Solutions to the Problem
General Accounting Office
Laurence J. Kotlikoff
Analytical Perspectives of Other Bloggers
Arnold Kling: Fighting Murphy (also known as "A Social Security Policy Primer")
Alex Tabarrok: The Microeconomics of Social Security Privatization
Tyler Cowen: Should We Privatize Social Security?
Arnold Kling: The Cost of Privatization
Will Wilkinson: How Much Does SS Screw You?
Alex Tabarrok: Prescott on Social Security Reform
Tyler Cowen: Social Security and Our Future
Tyler Cowen: Freezing Social Security Benefits
For much more, browse this list of articles by Arnold Kling, many of which are about Social Security.
My Posts on Social Security and Related Issues
Social Security Is Unconstitutional
Why It Makes Sense to Privatize Social Security
P.S. on Privatizing Social Security
Fear of the Free Market -- Part III
Let's Just Say He's a Bit Evasive
A Good Reason to Favor the "Ownership Society"
That Mythical, Magical Social Security Trust Fund
The Real Social Security Issue
Social Security -- Myth and Reality
Nonsense and Sense about Social Security
More about Social Security
Social Security Privatization and the Stock Market
Oh, That Mythical Trust Fund!
Understanding Economic Growth
The Problem with Voluntary Personal Accounts