Orszag calls for Social Security reform

Outgoing OMB director Peter Orszag, himself the author of a book on Social Security reform, is urging policymakers to take on the challenge, according to Dow Jones:

"Despite the fact it is not the most substantial contributor to our long-term fiscal gap, we also need to restore solvency to Social Security," he said at an event on the topic at the National Press Club.

"Not only will putting Social Security on sound footing help to some degree with our overall long-term budget picture, making adjustments sooner rather than later...will provide greater certainty to future Social Security beneficiaries and also allow us to make adjustments that are both gradual and fair."

For those interested, the provisions of Orszag's proposal, co-authored with economist Peter Diamond (currently headed to the Federal Reserve Board), are available here. While the proposal contains a number of benefit reductions, principally for higher earners, most of the leg-work toward solvency is done on the tax end, both in terms of raising the payroll tax rate, the tax ceiling and imposing a surtax on earnings above the ceiling.

The chart below shows system costs relative to GDP for the Diamond-Orszag proposal relative to current law.

While there are cost reductions toward the end of the period – and, importantly, Diamond-Orszag differs from current law in that it can actually afford to pay what it promises – my own view is that we need to restrain Social Security costs given the other pressures on the budget. An extra couple of percent of GDP might not be a huge deal if it were the only costs we were looking at. But Medicare and Medicaid don't look as if they're going to be fixed anytime soon, and it's much harder to substitute individual saving for those kinds of benefits relative to Social Security, where a modest benefit reduction could be compensated for by a modest increase in 401(k) contributions.