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The Agenda

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

Andrew Biggs on Modernizing Social Security



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Right-of-center advocates of Social Security reform have tended to emphasize the importance of addressing the program’s long-run actuarial imbalance. In a new essay in National Affairs, Andrew Biggs argues that conservatives ought to take a broader approach that would aim to make the program more effective in achieving its core goals as well as more fiscally sustainable. I’ve written enthusiastically about Andrew’s Social Security reform agenda in the past, but “A New Vision for for Social Security” puts his ideas in easily digestible form. His basic idea is to gradually transform the Social Security program into a two-part program, consisting of a flat universal benefit and a universal retirement savings account. And though he calls for a modest increase in the retirement age, he also calls for eliminating the Social Security payroll tax and the Retirement Earnings Test for older workers, measures that will encourage labor force participation. Andrew also calls for Social Security cost-of-living-adjustments that would grow at one percentage point higher than inflation to protect the oldest retirees, a step that could help make his reform model more politically attractive. 

One aspect of Andrew’s Social Security reform proposal will prove particularly attractive to conservatives interested in family-friendly tax reform:

Larger families would significantly benefit Social Security’s finances. But raising a child entails hundreds of thousands of dollars in costs, from birth through college. To compensate parents for their efforts and expenses, a family-friendly payroll-tax cut would reduce the 12.4% Social Security payroll tax by two percentage points for each child under age 18. Such a reform might have the side effect of raising fertility rates and thereby reducing Social Security’s deficits over the long term. For example, an explicitly pro-fertility tax credit introduced in Quebec in 1988 is estimated to have raised birth rates by as much as 25%. A similar increase in the United States would raise the fertility rate from its current 2.0 to around 2.5, such that the tax cut would more than pay for itself.

In modeling the effects of such a reform, I have assumed a far smaller increase, with birth rates rising to 2.15 children per woman. To maintain revenues under such a scenario, the basic payroll-tax rate would need to rise by 1.3 percentage points, split evenly between employers and employees. Individuals would pay higher taxes when they did not have children at home, but lower taxes while raising their kids. If birth rates rose to around 2.25, the payroll-tax increase could be eliminated. Families are helpful to Social Security’s financing, so Social Security should be friendly to families. [Emphasis added]

There are risks associated with Andrew’s approach. Many will object to abandoning the current Social Security benefit formula in favor of a flat universal benefit, and to relying more heavily on universal retirement savings accounts. When all elements of the proposal are taken together, however, the proposal is much more attractive than other credible reform plans, most of which rely more heavily on tax increases.

 



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