Social Security Reform Unveiled

Yesterday morning, aides to former President Bill Clinton, President George W. Bush, and Senator John McCain, R-Ariz., jointly unveiled a compromise plan to reform Social Security.

The three authors of the proposal include Professor of Public Policy at the Kennedy School of Government (KSG) Jeffrey B. Liebman, who served as a special assistant to former President Clinton for economic policy from 1998 to 1999. The other two authors are KSG alumna Maya C. MacGuineas, who advised McCain on Social Security during his 2000 presidential campaign, and Professor of Economics at Dartmouth College Andrew A. Samwick ’89, who served as chief economist on the staff of President Bush’s Council of Economic Advisors from 2003 to 2004.

The plan was reviewed by the Office of the Chief Actuary at the Social Security Administration (SSA), which concluded that the plan would “easily satisfy the criteria for attained sustainable solvency,” according to a memorandum written by the SSA.

Eckstein Professor of Applied Economics and Dean for the Social Sciences David M. Cutler ’87 praised the proposal.

“It’s a fantastic thing that they’ve done,” said Cutler. “They’ve gotten three people from different perspectives—one who developed the Clinton social security plan, one who developed the McCain one, and one who developed the Bush one. That’s an enormously valuable thing.”

Under current projections from the SSA, benefit payouts will begin exceeding Social Security tax revenues in 2017. Trust funds would then cover the difference until 2041, when they would be completely exhausted.

The proposal fills in the funding gap with a mix of benefit reductions and revenue increases.

The proposed benefit reductions include progressive benefit cuts—meaning that high income earners would face larger cuts—and a gradual increase in the retirement age to 68.

The revenue increases include a rise in the payroll tax cap to 90 percent of earnings, and an additional mandatory contribution of 1.5 percent of payroll into new Personal Retirement Accounts (PRA’s), which would be matched by a 1.5 percent contribution from the Trust Fund.

Once given a PRA, individuals can choose to have their money managed by any number of government-approved funds.

The PRA’s would be accessible on an annuity basis, beginning at age 62. The existing 12.4 percent payroll tax would remain untouched.

According to the authors, the benefit reductions and revenue increases would contribute, in roughly equal amounts, toward eliminating the funding gap. This would help make it a compromise between Democrats, who traditionally prefer revenue increases, and Republicans, who traditionally prefer benefit cuts.

“We look at our plan as starting in the center, and spreading outward to build as large a coalition as we can,” said Samwick.

But the authors also acknowledged that real political difficulties remain. Making the PRA contributions mandatory, requiring annuitized withdrawals, and increasing the retirement age are all proposals likely to draw fire from various groups, the authors said. But despite their controversial nature, they are all much-needed reforms, stressed the authors.

“We believe it is time for the President to call Congressional leaders together for a social security summit,” Liebman said. “We believe our plan serves as a useful model for one that might emerge.”