Pozen, Graham, and the Quest for a Workable Social Security Reform

by Reihan Salam

Robert Pozen makes a solid case for a Social Security reform that emphasizes the interests of lifetime low-earners. I was particularly pleased by the fact that Pozen drew attention to the $100 billion in annual tax expenditures for employer-sponsored retirement programs, a subject we’ve addressed in this space. As Silja Haeusermann’s research suggests, the combination of a means-test and a minimum benefit might be best way to shrink Social Security expenditures overall:

In the 1990s, Paul Pierson made a huge impact in the field when he explained how difficult it would be for governments to consolidate or retrench existing social policy programs, because these policies (pensions being the best example) create their own support coalition that reaches far beyond the left-wing electorate. On this basis, he predicted policy stability. More recent research, spearheaded by Swiss political scientist Giuliano Bonoli , proved him wrong by demonstrating that reforms could be achieved, under the condition that governments combine cutbacks with elements that benefit the most precarious social groups, mostly low-skilled, young and female voters. In a book that will be out with CUP this month, I have shown that this kind of “package deals” has become a necessary condition for successful pension reforms over the last 20 years, not only in Switzerland, but also in Germany, France and other European countries. [Emphasis added.]

But I still prefer Jed Graham’s Old-Age Risk-Sharing proposal to the Pozen Plan, which he’s described in detail at Investor’s Business Daily:


Under Old-Age Risk-Sharing, a career-average earner ($42,000 in 2009) retiring after 2032 would face an upfront benefit cut of 20%, which would gradually unwind over 20 years to keep the safety net intact. However, thanks to enhanced incentives for delayed retirement, that worker could fully overcome this upfront cut and attain an extra measure of income security in very old age by working two years past the official retirement age.

A lower earner would face a 10% upfront cut that could be overcome with one extra year of work, while a high earner would need to work three extra years to overcome a 30% upfront benefit cut.

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.

Graham’s approach achieves tremendous cost savings, yet it actually does a better job of protecting the growing number of Americans who live to a very old age than the status quo. Indeed, this could represent a substantive policy success and a political liability, as front-loaded cuts might prove more visible. That said, Old-Age Risk-Sharing doesn’t depend on an increase in the retirement age. Rather, it reduces the incentives for early retirement. It thus gives workers who for whatever reason choose to retire at 63 or even 62 more options.

Favoring an increase in the retirement age has been embraced as a mark of seriousness, and I have no compunction about the idea. But it does seem as though Old-Age Risk-Sharing might prove a better approach, not least because raising the official retirement age might just lead more older workers to draw on disability benefits, thus mitigating the fiscal upside.

Perhaps the best thing about Graham’s proposal relative to Pozen’s is that it doesn’t depend on an increase in the Social Security payroll tax. As Graham explains in A Well-Tailored Safety Net, his reform asks more affluent workers to work a bit longer to receive their full benefit. Given that more affluent workers tend to work less physically demanding jobs, this idea has an intuitive appeal. I hope that Rep. Ryan and the House Budget Committee gives Graham’s approach due consideration.