TCS Daily

Take the Plus

By Arnold Kling - January 27, 2005 12:00 AM

"The president can promote the individual ownership he wants and protect the guaranteed Social Security benefits Democrats insist on with a new universal 401(k) that offers all Americans a private retirement account in addition to Social Security, and uses government funds to match contributions made by moderate and lower-income workers."
-- Gene Sperling

A number of key former members of the Clinton economic team, including Gene Sperling, Laura D'Andrea Tyson, and J. Bradford DeLong, have come out in favor of personal accounts as an addition to, rather than a partial replacement for, Social Security. The term for these personal accounts is "Social Security Plus."


If I were an adviser to President Bush, I would suggest that he embrace these Clinton wonks and say, "Sold!" I think he should take The Plus.


At a bridge tournament, when a card player decides to "take the plus," that means playing a hand in such a way as to ensure a modest positive score and reduce the risk of a loss. The opposite strategy is to "go for the swing," which means taking a gamble that could bring major gains if the cards are in the right place but otherwise may produce a disaster. In some situations, most experts would say "I'd go for the swing," while in other situations most experts would say "I'd take the plus." Many factors go into the calculation. If golf is your game rather than bridge, then "taking the plus" is analogous to "laying up."


An Experiment


At the moment, some opponents of personal accounts argue that they will provide poor returns to individuals. Opponents claim that:


  • management fees will be too high
  • the stock market is too risky
  • individuals make bad investment decisions


I disagree with all of these claims. However, rather than argue back and forth, I think there is merit in testing the performance of personal accounts in the context of Social Security Plus. An experiment with Social Security Plus for a decade or so would produce "facts on the ground" that would help to overcome ideological bias.


If the critics are correct and personal accounts are a loser, then the experience with Social Security Plus will serve to discredit personal accounts, and the program would probably be phased out. We would still have traditional Social Security as a fallback. On the other hand, if proponents are correct and personal accounts are a winner, it seems likely that happy personal account owners under The Plus would press for expanding personal accounts to replace some or all of their Social Security.


I am willing to see The Plus used as an experiment to prove the merits of personal accounts. In exchange for giving up the hope of an immediate move to reform Social Security, taking The Plus would provide supporters of privatization with the opportunity to build a strong consensus for privatization several years from now. For me, that is a fair trade. I believe that the opposition to personal accounts is ideological, and I have confidence that the American people will take experience over ideology any day. Social Security Plus could be a meaningful foot-in-the-door for personal accounts.


Another Commission?


The Plus by itself does not address two important challenges for Social Security: its large unfunded liability; and the generational imbalance, as stressed by economist Laurence Kotlikoff. The process for dealing with these challenges can be separated from the issue of personal accounts.


To address the unfunded liability of Social Security as well as its demographic sensitivity, economists have made several proposals. Many of us support adjusting the retirement age. Given improvements in health, extensions of our lifespan, and general increase in wealth, the age at which we become government dependents is inappropriately young. While there is nothing wrong with retiring young, such a choice should be supported by personal saving, not by the hard work of those just starting to climb the economic ladder.


An alternative to adjusting the retirement age is changing the indexing formula to link benefits to price inflation rather than to wage inflation. This would lead to gradual, but dramatic, reductions in the growth rate of benefits.


Kotlikoff argues that we need to look at the generational impact of whatever combination of benefit reductions and tax increases we adopt in order to bring Social Security's projected benefits and revenues into better alignment. He argues that if tax increases and benefit cuts are both pushed into the future, then today's elderly will benefit unfairly at the expense of today's young workers.


While even most Democratic economists admit that there is a need to rebalance Social Security, all proposals to do so are controversial. In that sense, Social Security continues to be a political "third rail."


In this context, DeLong offers a proposal that is intriguing. He suggests creating a nonpartisan Board, comparable to the Federal Reserve, to oversee Social Security's long-term finances. This Board could set formulas for adjusting the retirement age, for example.


I have doubts about the idea of an independent Board with this authority. As a matter of democracy, I think that there is a case for trying to keep issues in the hands of accountable elected officials, rather than a much-less-accountable branch of government. As a practical matter, I doubt that Congress would cede decision-making authority to an independent Board, particularly since tools that can be used to address Social Security's fiscal status include adjustments to tax rates.


Still, the idea of a permanent oversight Board with bipartisan membership sounds appealing. It takes the idea of an "independent commission," which seems to be tried every decade or two, and gives it more continuity and greater institutional legitimacy. Even though its output might consist of recommendations rather than decisions, a permanent commission charged with maintaining the long-term solvency of Social Security could be difficult for Congress to ignore.


Another Plus


If President Bush wants to go for a swing, he can try to use personal leadership to slow the growth rate of future Social Security benefits in order to bring the system's promises in better alignment with projected revenues. However, I would still respect him in the morning if instead he takes the plus, in this case by handing the problem over to an independent commission. Such a commission, if given a strong mandate and bipartisan support, could help make the tough recommendations in a way that is effective, fair, and less politically risky for skittish Congressmen.


The hard-line stance of the self-marginalizing groups notwithstanding, most responsible Democratic experts acknowledge that Social Security's financial outlook is troubling. Endorsing a permanent Social Security solvency commission could enable President Bush to work with the sensible wing of the Democratic Party and take the plus, rather than use political capital to try to get Congress to swallow painful medicine.


Gain by Giving In


One thing that strikes me about the ongoing Social Security debate is that both sides appear to have opportunities to gain by "giving in" to the other. In a previous essay I explained how President Bush's privatization proposal could help the Left achieve a long-held objective of shifting some of the burden of Social Security from payroll to income taxes. Now, with Social Security Plus and the idea of a permanent solvency commission, some Democratic policy analysts are offering suggestions that would help achieve many of the objectives that the President has for Social Security.


Politicians often act as if it is a bad idea to give in, because doing so shows weakness. Personally, I am willing to be perceived as weak while I get what I want. When the situation calls for it, I say Take the Plus.


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