December 09, 2004

Can Social Security Be Fixed? Surprisingly, the Answer May Be Yes.

Wall Street Journal editorial board member Susan Lee discusses Social Security Reform in a recent op-ed piece. Her observations were a surprise to me. I’d been under the impression that there was no plan currently under discussion that could rescue the program.

Lee notes that current Social Security payments increase from year to year to keep pace with increases in wages. She contends that if increases kept pace with increases in prices, rather than wages, that alone would fix the system:

All [social security] benefits are based on something called the primary insurance amount. This amount, in turn, is based on a worker’s earnings, indexed to the growth in average real wages, for the highest 35 years of earnings…So every retiring worker gets to take advantage of overall economic prouductivity, pushing up the level of wages during the time in which the work was performed. This adjustment allows the purchasing power of benefits to grow over time…

Under the current arrangement, the purchasing power of benefits grows over time. In other words, historically wages are increasing faster than prices—which in itself is a very interesting and encouraging insight. Possibly the original planners of Social Security did not foresee this. It’s this disparity, Lee observes, that’s crushing the system:

If benefits were indexed to prices however, Social Security would, at this very minute, be in balance over the long-termthe system would be permanently solvent. Not only would future revenues equal future costs, but there would be a surplus!

Indexing for price changes alone would protect retirees, new and not-so-new, from inflation, thereby maintaining purchasing power.

Hal Pawluk of BlogCritics disagrees:

Earlier in her column she quickly glosses over a couple of key facts:

...the proposed switch to price indexing would reduce benefits relative to what the current law promises (and would require a 50% increase in payroll taxes to finance). [Ibid.]

So how wonderful is that? If the payroll taxes are raised without privatization, Social Security is fixed, so why privatize and reduce the benefits?

Hal is saying that he finds a mere 50% increase in payroll taxes to be a perfectly acceptable way of fixing Social Security. If that’s the best argument against what Lee is saying, then the opposition to this appears weak.

Tyler Cowen of Marginal Revolution agrees with Lee, saying “Did you get that right? Just stop boosting benefits.” [Emphasis in original – ed.]

It is encouraging that what Lee is proposing isn’t some pie-in-the-sky plan that will never get a chance to be implemented. It’s part of a plan that has been proposed by the President’s Commission to Strengthen Social Security:

Look no further than Plan Two offered by the President’s Commission to Strengthen Social Security, in 2001. ...Plan Two changes the way benefits are allowed to grow. How? You guessed it, by replacing the computation of benefits via wage indexing to a policy under which initial benefits would grow from one cohort to the next at the rate of price increases.

Cathy Siepp has had a look at The Real Gilligan’s Island, a new reality show.

I tried to watch The Real Gilligan’s Island, the new TBS reality series in which two Skippers, two Gilligans, etc. compete to see who can be rescued first, but gave up on the wretched enterprise after 15 minutes.

I had a similar experience. Regarding the original, which “has never, not once, been off the air since its CBS premiere 40 years ago,” Cathy notes:

The Millionaire displays an unseemly Western uxoriousness toward to his one wife insulting to societies where women are fourth-class citizens, after the children and the camels. Mary Ann, besides her fondness for short-shorts, is offensively spunky to anyone who thinks women belong in burkas.

Then there’s Gilligan, the essence of the nave, childish American as Americans are so often described, ad nauseum, abroad. But bumbling, unsophisticated Gilligan has a way of ruining the plans of every Soviet cosmonaut or banana-republic dictator who drops by the island.

“Representing the average citizen at his most ordinary,” literary critic Paul Cantor wrote in his 2001 book Gilligan Unbound: Pop Culture In the Age of Globalization, “Gilligan presides over a kind of democratic utopia on the island and is repeatedly called upon to act as its savior.” What’s more, he always prevails.

Given what Cathy points out, it seems to me that it’s a surprisingly good representative of America to the world.