Wednesday, February 16, 2005

Answers for Professor Bainbridge

Professor Bainbridge, one of my favorite bloggers due to his excellent wine reviews, has some serious questions about Social Security reform. We don't get too many serious inquiries from the Democratic side, and I doubt the good professor considers himself a Democrat anyway, but it is an excellent opportunity to continue the dialogue. I'm by no means and expert, because that would require me to look stuff up and I really can't be bothered, but I thought I'd give it a try. Haven't winged a written exam since college, but here goes:

Professor asks:

Would we achieve significant actuarial improvements in the health of the Social Security system by (a) changing the method by which the benefit is calculated from being based on wages to one based on prices (see Tyler Cowen's post for details) and (b) increasing the retirement age? Social security was designed for an era in which most folks would live to receive benefits for months rather than years. Why not deal with that problem directly? (Glenn Reynolds has a solution that goes somewhat in the other direction.)

I've actually read the answers to these questions so I can confidently say that yes, we would achieve improvements in the health of SS by limiting reform to the two methods suggested above. I think we would have to move the retirement age substantially to get a huge lift, but this might make sense since when the program was designed life expectancy was not more than a couple years past 65. It is now well into the 70's for both genders, and most likely will continue to rise. The inflation equation I'm less familiar with, but all seem to agree this change would help as well. I believe that we should take both of these actions.

Professor asks:

If we can achieve significant savings and ensure the health of the system with the changes mentioned in # 1, is there a non-ideological reason for introducing private accounts? Even proponents of private accounts concede that the transition costs will require trillions of dollars of government borrowing. Do we conservatives really want revenge on FDR and the New Deal at that price? Personally, speaking as a small government fiscal conservative kind of guy, I'd give up personal accounts if any money thereby saved was spent on deficit reduction or, better yet, an income tax rate cut.

This is not about revenge on FDR and the New Deal, and I'm at a bit of a loss to understand what is ideological. I believe it is important to give people an opportunity to own their retirement, I'm not sure that can be considered an ideological view. The real reason to offer private accounts is two-fold. First if we limit inflation adjustments and increase the retirement age as per my above answer, we are by definition cutting benefits. Allowing for private accounts, that will quite likely grow faster than the same contributions under the current system, will hopefully take up some of the lost benefits that occurred through the retirement age and inflation adjustment changes. The second reason is that giving people a real ownership position in our society is likely to get them more engaged in every facet of this countries governance. This would be good for liberals and conservatives, which I guess, is the ultimate non-ideological reason. As for the borrowing question, we already will have to borrow trillions to cover the Social Security shortfalls, because the government will have to refinance debt, currently held in the SS "trust fund" on the open market. This will be a huge, unprecedented increase in the expansion of the publicly issued debt.

Professor asks:

Why aren't conservatives talking about other entitlement programs, such as Medicare, which reportedly is scheduled to go broke long before Social Security does?

Some of us are. See my post below on Social Security. Medicare is a huge problem that arguably dwarfs the Social Security problem. Just to kick that debate off I'll mention that we should expand Health Savings Accounts.

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