Monday, November 15, 2010

Peter Orszag on Commission Social Security Plans

Former Obama budget chief Peter Orszag writes in the New York Times today in qualified support of the Social Security reform proposals from the fiscal commission's two co-chairs, Erskine Bowles and Alan Simpson. The whole piece is worth reading for his description of the plan components, but I thought a couple parts were worth focusing on. First, he says,

the plan would not create private accounts within Social Security — the most controversial issue that came up when reform was last debated in 2005. Why not lock in a reform when private accounts are off the table? (Note to progressives: the Social Security plan put forward by Paul Ryan of Wisconsin, the expected new chairman of the House Budget Committee, does include private accounts.)

In recent years, most liberals have made the fight against personal accounts a central one. If the Simpson-Bowles proposal serves as a starting point for Congressional negotiations, it seems they've won that fight. If it was as important as they argue – I'm not sure it was – then they should pocket this gain and start moving ahead.

Second, Orszag says,

The main flaw in the proposed Social Security plan is that it relies too little on revenue increases and too much on future benefit reductions. A reasonable objective would be a 50-50 balance between changes in benefits and changes in revenues. But the way to bring reform into better proportion is to adjust the components of this proposal, not to fundamentally remodel it.

I can certainly understand an inclination to spit the difference. But I wonder in the context of the larger budget picture whether this makes the most sense. It seems to me that we should cut outlays in places where cuts are most effective, saving tax increases for where they're needed the most. Reducing Social Security retirement benefits will encourage middle and high earners to work more and save more, which is good for the economy and the budget. Increasing taxes will tend to make them work less and save less. So I think a benefit cut-heavy approach to Social Security reform makes sense. Once you get to Medicare, however, it's tougher for people to save on their own to make up for reduced benefits. Plus, the overall Medicare shortfall is larger. If you're going to raise taxes, Medicare seems the better place to do it. So even if you might want the overall budget shortfall split in a 50-50 way, I think there's a good case for tilting Social Security more toward the benefit end.

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