Jed Graham on Old-Age Risk-Sharing

by Reihan Salam

Jed Graham of Investor’s Business Daily has just published A Well-Tailored Safety Net, a sober, carefully-argued case for reforming Social Security. Rather than embrace the Pozen plan, Graham favors an approach that encourages delayed retirement without unduly burdening those who work onerous, physically demanding jobs. In Graham’s view, delaying the retirement age would be extremely unfair, not least because the biggest gains in life expectancy have gone to higher earners who are less in need of Social Security as a safety net.

He proceeds to outline an alternative:

The surest way of tilting Social Security’s incentives toward delayed retirement (in a way that saves money) is by scaling back the incentives, i.e. benefits, for retiring early. The front-loaded benefit cuts prescribed in Old-Age Risk-Sharing would go further in this regard than the lifelong benefit cuts in the traditional menu of Social Security policy options. And because the cuts are front-loaded, the savings would accrue much faster.

Combining Old-Age Risk-Sharing with an increase in the official retirement age to 68 would save as much as hiking the retirement age to 70 on the same time table (50% of the 75-year cash-flow gap or 70% of the official shortfall that treats the trust fund as money in the bank). But Old-Age Risk-Sharing would yield a much more effective safety net: A worker claiming Social Security at 65 would enjoy a benefit that is 14% greater in very old age than if the retirement age were simply raised to 70.

This strikes me as an attractive, politically salable model that merits attention from policymakers.