Social Security Reform

The Economist hopes for a grand bargain on Social Security reform:

Ingredients of a grand bargain? | Free exchange | Economist.com: So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma's take here and Vox Baby here). The Bush team's plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn't work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.

Nancy Pelosi and her friends may be loath to touch social security but they are worried that poorer Americans don't have enough of a retirement nest egg outside the government pension system. As part of their schtick on dealing with "middle class anxiety", Democratic wonks have all kinds of ideas for getting ordinary Americans to save more. Some stem from the insights of behavioural economics (such as automatically enrolling workers in 401(k) plans unless they explicitly choose to opt out). Others involve restructuring tax subsidies towards the less affluent by, for instance, replacing today's system of tax-deductions with a limited government match. A paper for the Brookings Institution's Hamilton Project by Bill Gale, Jonathan Gruber and Peter Orszag lays out the details.

If Mr Bush wants to sort out social security and the Democrats want to revamp the government's role in the rest of retirement security, there is clearly room for a compromise. One option: combine the Gale/Gruber/Orszag ideas for restructuring retirement tax subsidies with the Liebman/MacGuineas/Samwick social security reform plan. You can find all the details over at Vox Baby but it is probably the best bipartisan plan around and, importantly, includes a mandatory individual contribution to a personal retirement account. By restructuring tax subsidies for retirement saving so that poorer Americans got a hefty top up to their mandatory contributions from Uncle Sam and you might convince enough Democrats that a system which includes personal accounts makes sense.

Back in 1998, 1999, and 2000 there was a deal to be struck: bring the existing Social Security system back into balance with a combination of (small) tax increases and (moderate) future benefit cuts, and supercharge it with add-on private but regulated and insured personal accounts. But neither Gingrich, Hastert, Armey, Delay, or Lott were interested in such a deal--it would give another substantive public-policy victory to Bill Clinton, you see. After 2000 Bush was interested in--well, it was never clear what Bush was interested in, for different advisors said very different things, and Bush never proposed a plan.

But the deal that was there to be struck in 1998, 1999, and 2000 is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility.