Early retirement accounts as a fix for Social Security?

National Review's Reihan Salam has some nice things to say about my recent Enterprise Blog post on Social Security personal accounts, which shows that raw comparisons of the benefits paid by accounts to those paid by Social Security can be misleading. Given that, deciding whether to fight for personal accounts as part of Social Security reform—versus, say, focusing on holding the line on taxes while encouraging more outside retirement saving—is a choice conservatives need to wrestle with. I appreciate Reihan's comments (and return the favor—loved your book!).

Reihan then raises the suggestion of "early retirement accounts," an option I hadn't considered in a while. This idea, proposed a few years back by Phil Longman of the New America Foundation, is similar to ordinary personal account plans, but with a twist. In most account plans, the account would pay for part of your total Social Security benefit throughout your retirement. For instance, you might retire at 67 and each year thereafter half your total benefit would come from your account while the other half would come from the traditional program. The twist with early retirement accounts is that the account would pay your full benefit for the first few years of retirement—say, from 67 through 72—and then you'd receive your full benefit from the current program.

The advantage of this approach is that it would tend to encourage later retirement, since people with defined contribution accounts generally work longer than those with traditional defined benefit pensions. It would also ensure a safety net of government-provided benefits later in life, addressing a concern raised by opponents of personal accounts.

The problem with the idea, I think, is that the numbers don't really add up. According to Longman, "The Social Security Administration's Office of Policy estimates that the savings from this extension in the retirement age would not only cover the full cost of the early retirement accounts, but would also make the system solvent in the long term." I was at the SSA at the time and remember the plan (one person inside the agency was a strong supporter of it) but I don't think those estimates are right. And the fact that they're not right shows how difficult it is to solve the Social Security problem.

Using the Policy Simulation Group's Social Security models, I simulated a shift in the normal retirement age to 72 and the early retirement age to 68, taking full effect around 40 years from now. The idea is that individuals who held early retirement accounts their full lives would be subject to the full retirement age increase, while for older folks it would be phased in. Without including the accounts, the plan fixes around three-quarters of Social Security's long-term deficit. If you include the accounts, then most likely the plan would increase the deficit relative to current law.

Now, you can always tweak the parameters to make things fit, so the fact that the numbers don't add up isn't a big deal by itself. But it's the fact that you'd have to really tweak the parameters—say, shift the retirement age to 80 or so—that shows the scale of the Social Security shortfall. It might be smaller than Medicare, but it's bigger than pretty much any other problem the government needs to fix. I don't think early retirement accounts would be politically salable post-tweaking.

An alternate solution would be to build more savings outside of Social Security, say, by automatically enrolling all Americans in 401(k) plans. If everyone saved enough to cover their needs for a few extra years of early retirement, we could shift the retirement age back without making enormous cuts in monthly benefits. My recent AEI paper on increasing the early retirement age of 62 hits on some similar points.

All that said, both Reihan and Phil Longman deserve credit for thinking outside the box on Social Security reform. That's probably the only way we're going to get the program fixed.