Why I Like and Admire Andrew Biggs

by Reihan Salam

Andrew Biggs, a scholar at AEI, is a straight-shooter. Check out this excellent piece on the transition costs involved in creating carve-out, as opposed to add-on, Social Security personal accounts:

I’ve supported personal accounts in the past and I have no problem with them today, but I also argued in National Review (and a follow-up blog post) that conservatives need to make some cost-benefit calculations regarding what policies to propose. Competing with personal accounts is the desire to hold the line against tax increases for Social Security. I don’t think it’s likely that Social Security reform with personal accounts and without tax increases is likely to pass. Even President Bush all but said he would increase the “cap” on Social Security taxes as a way to get his personal accounts plan passed. My judgment is that it’s both easier and more important from a policy perspective to hold the line on Social Security tax increases than to introduce personal accounts to the program. It would be nice to have both, but I suspect conservatives are going to have to make a choice. [Emphasis added.]

While I agree with Biggs on this particular question, I am very drawn to Phil Longman’s concept of “early retirement accounts,” which he described in a short essay in 2005:

The idea is to allow all US workers to divert a portion of their payroll taxes into personal “early retirement accounts”, which would give individuals more control over their financial destiny and the timing of their retirement. In exchange, the age at which Social Security benefits kick in would be pushed back several years, but without any cuts in monthly benefits thereafter.

At a stroke, this proposal overcomes the most serious objections to privatisation plans. Although such a system would require some initial borrowing, it more than pays for itself over time. Say, for example, that individuals were allowed to divert one-sixth of their payroll taxes into early retirement accounts. Suppose further that the minimum age for receiving a Social Security pension rose from the current 62 to 68, and that the threshold for full benefits increased from 65 to 72. The Social Security Administration’s Office of Policy estimates that the savings from this extension in the retirement age would not only cover the full cost of the early retirement accounts, but would also make the system solvent in the long term.

I’d be very curious to know what Biggs makes of the ERA approach. One added benefit, as Longman explains, is that ERAs would encourage workers to remain in the workforce for a longer period of time:

Research shows that people with 401(k) and other defined contribution plans tend to delay retirement. The longer citizens remain in the workforce, the more they will contribute to their own and the nation’s economic well-being, and the likelier they are to remain healthy.

Delaying the onset of age-related diseases could also reduce the Medicare burden over time. It’s worth noting, of course, that ERAs have a downside:

While it leaves those aspiring to early retirement exposed to some financial risk, it allows them to bear that risk while they are still relatively young. If your early retirement account does not perform well enough for you to be able to retire at 62, then you will just have to work a few years longer before you receive full Social Security benefits. If you are physically unable to work, you would still be eligible for disability insurance.

But this strikes me as an acceptable cost in light of the benefits. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.