I’ve praised Jed Graham’s balanced, well-tailored Social Security reform proposal, and I think it’s something Democrats and Republicans could embrace without risking political suicide. But the Social Security reform that is closest to my heart was proposed by Edward C. Prescott in the aforementioned edited volume Toward Fundamental Tax Reform.
Before I we discuss Prescott’s proposal, let’s revisit a post from last summer in which I briefly summarized an Economics 21 commentary on Social Security’s finances:
The CBO projected that, even if the Administration’s proposed accounts had been financed entirely with new debt, the total additional pressure on the budget would have amounted to just $12 billion in 2009 and $29 billion in 2010. And even though all of these personal account investments would have been devoted to funding future Social Security benefits, these figures produced howls of anguish about the allegedly devastating effects on Social Security finances.
These were relatively small carve-out personal accounts, designed to add an optional pre-funded component to the pay-as-you-go Social Security system.
So five years after that debate, where are we now? Well, the recession has had a much more severe impact on Social Security finances than anything alleged by the harshest opponents of President Bush’s plan. The 2008 report by the trustees of the Social Security trust fund projected a 2009 cash surplus of $87 billion. Thereafter, that surplus declined by a full $84 billion, resulting in an actual surplus of a mere $3 billion. The same 2008 report projected a 2010 surplus of over $88 billion. Now we’re facing a likely 2010 deficit – and thus possibly a total decline of more than $100 billion in a single year relative to the 2008 projection.
Remember too that any additional near-term fiscal pressures under President Bush’s proposal would have been in the service of improving annual program operations over the long term. The same, obviously, cannot be said of the worsening near-term finances attributable to the current recession, which offers no upside for future Social Security finances.
That is, the new debt to pay for current retirees was designed to facilitate the creation of a more sustainable system.
By any measure, Social Security is in far worse shape today than predicted in 2005, with or without President Bush’s reform plan. Those who raised the greatest concerns about “transition costs” in 2005 should be apoplectic over Social Security’s severely worsened finances.
Strangely enough, there is nearly total silence from those quarters. Many of the same voices who loudly decried President Bush’s proposal for the enormity of its “transition costs” are now in a state of professed calm over Social Security finances.