01 May 2005

And more on Social Security

DeLong offers us a fairly detailed discussion of what will and won't work in Social Security reform, provided by Peter Orszag of the Brookings Institution in testimony to the Senate Committe on Finance. It's full of crunchy bits.
Under the Administration's proposal for accounts within Social Security, workers receive payroll revenue today, but pay the payroll revenue back, plus interest at a 3 percent real rate, at retirement through a reduction in traditional Social Security benefits. In effect, the individual accounts represent a "Social Security line of credit." Workers drawing upon that line of credit have payroll revenue deposited into their individual account today, but then owe the funds back, plus interest, once they retire. The system is thus similar to a loan from the government to workers. At best, assuming that all the loans carry the government's borrowing rate and are fully repaid, the accounts do nothing to improve solvency within Social Security over the long term --- as even the White House has acknowledged.
it is hard to see why, unless they were subsidized, the loans should be particularly attractive, especially to higher earners. Indeed, a Goldman Sachs analysis recently concluded that, "In essence, the 3% real rate offset represents a loan from the federal government to the accountholder to fund the personal saving account. This is not an attractive proposition."
We as a society must decide whether this $700 billion is better used to provide larger after-tax inheritances to wealthy children or to reduce any benefit reductions necessary to restore solvency to Social Security
Mmmmm. Tasty policy debate.

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