Tuesday, December 21, 2010

Jed Graham on Domenici-Rivlin and Bowles-Simpson

Over at Investors Business Daily's blog, Jed Graham – the author of the recent book "A Well-Tailored Safety Net" – offers a number of critiques of the Social Security reforms proposed by the two recent debt commissions. Understandably, Graham feels his own approach, termed "Old Age Risk Sharing", would do better. In a number of ways he's right.

Graham argues that the Domenici-Rivlin plan relies too heavily on new revenues, which – given the general scarcity of cash and the abundance of programs looking to get their hands on it – seems right to me.

Graham argues that Social Security doesn't offer a significant bequest opportunity to those who die young (although, to be fair, it also offers survivors benefits that can be very valuable).

Graham also argues that the Bowles-Simpson plan goes too far in reducing annual COLA payments, which has the result of reducing benefits most for the oldest retirees. I basically agree here: substantively, if your goal is to maintain the purchasing power of benefits I think what you'd need is essentially a chain-weighted version of the CPI-E, which tracks purchases by the elderly. This would produce annual COLAs around 0.1 percentage point lower than current COLAs calculated using the CPI-W, versus the Bowles-Simpson proposal which would cut COLAs by around 0.3 percentage points per year.

Moreover, I also think a case can be made for COLAs that are higher than inflation. The reason is that most of retirees' non-Social Security retirement income isn't inflation-adjusted, so a rising Social Security payment would help keep total purchasing power of retirement income constant over time. My pet idea here is to increase benefits along with wage growth rather than prices (nominal wage growth should of course be measured using a proper CPI; the current CPI-W almost certainly overstates the true rate of inflation). To keep lifetime benefits constant you would need to lower initial benefits, which would have the added advantage of encouraging people to retire later. Moreover, having COLAs pegged to wages would help insulate Social Security's finances against changing economic conditions over the long term, reducing uncertainty for policymakers and helping ensure that long-term reforms "stick." As part of broader reforms to maintain solvency you would reduce benefits for high earners, so the end result might not be too different from Graham's idea.

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