November 27, 2006


A Fix for Social Security?: How Personal Accounts Could Please Both Sides (Sebastian Mallaby, November 27, 2006, Washington Post)

Democrats may be allergic to personal Social Security accounts, but they are enthusiastic about other ideas for personal retirement accounts that just don't have "Social Security" in the title. For example, Gene Sperling, a former Clinton adviser, has called for a "Universal 401(k)" that would extend the benefits of 401(k) saving to workers whose companies don't offer such accounts. In Sperling's vision, everyone would get the chance to contribute to an account and receive a government contribution as a match, with the most generous match going to low-income workers. To pay for this program, the government could prune the existing $150 billion patchwork of tax breaks for saving. This patchwork is extraordinarily, scandalously regressive: 90 percent of the tax breaks go to the richest 40 percent of taxpayers.

Sperling is motivated by a desire to help low-income people. As he writes in his book, "The Pro-Growth Progressive," 85 percent of workers in the bottom fifth of the labor force have no access to a company 401(k), nor do 75 percent of Hispanic workers or 60 percent of black workers. Globalization, which has boosted the volatility of family incomes, makes it especially important to help workers build assets that can cushion them against job loss, illness or the financial fallout from divorce. Although the Universal 401(k) would be primarily aimed at retirement security, there could be limited earlier withdrawals at times of misfortune.

So while Republicans have been pushing personal retirement accounts as part of an entitlement fix, Democrats have been pushing personal retirement accounts because they worry about worker insecurity. By enlarging the debate so that it's about savings in the era of globalization rather than just Social Security, negotiators can conjure up the common ground that was missing during the 2005 train wreck. Personal accounts need not be merely the alternative to the traditional Social Security benefit. They can simultaneously be the alternative to the nation's outrageously regressive system of tax breaks for saving and a way to help ordinary people build nest eggs. When personal accounts become both of these things, perhaps Republicans and Democrats alike will back them.

If it's just a matter of semantics, why not simply let people fund their Democratic.Sperling Accounts out of their SS taxes?

Posted by Orrin Judd at November 27, 2006 1:12 PM

Because any tinkering with SS disturbs the ghost of FDR. And the Democrats won't allow that, at any cost (even to the ruin of the system).

Clinton missed his chance at SS reform because he was distracted and unwilling to go against the grain. Bush missed his chance because he couldn't bash heads on the Hill.

I suspect Nancy Pelosi and Harry Reid would give the Sperling idea the same raspberry they gave George Bush. After all, the harshest opponents of SS reform are the black Democratic demagogues (like Mel Watt).

But, in 2008, what will the Dems say when the issue comes up? And if the GOP offers the black and Hispanic communities such an account?

Posted by: jim hamlen at November 28, 2006 11:37 AM

Social Security will be reformed because the younger generations do not believe Social Security will exist for them. No one under 30 expects to receive any money from Social Security. Eventually even the Democrats will understand this.

Any workable Social Security reform will need to do several things:

1) Preserve the benefits of older Americans. They planned for their retirements using their expected SS benefits. You can't touch those.

2) Give a date in the future where all Americans born after that date have self-financing accounts. The funds will need to be deposited in 1 account considered safe - say government bonds or an S&P 500 index fund. Perhaps an option between these 2 could be picked by the parents initially and by the person once they reach the age of maturity.

3) Allow Americans between these extremes to choose between a self financing account or keep their Social Security benefits as is. Use the Social Security surplus to make up any loss to Social Security liabilities. If that is not enough, then a special tax will be instituted (preferably a progressive or luxury type) to make up the difference and will end once all Social Security liabilities are paid.

4) Create a new defined benefit program - means tested - to fulfill the original purpose of Social Security (basically making sure people aren't forced to eat dog food to survive after their working days end). This should satisfy most of the progressives and will probably never be used - under the new retirement system it should rarely be needed.

5) Retain the existing IRA and 401(k) system for those who want to roll the bones.

Social Security reform is actually not very hard - you just have to listen to legitimate concerns and keep people happy. Old people want to retain their existing benefits. Young people want a new plan. Don't put both in the same plan and we'll be fine.

The real difficulty will be Medicare and Medicaid. Those will probably only be reformed when we create some kind of a national health care system because businesses don't want to provide health benefits anymore.

Posted by: Chris Durnell at November 28, 2006 12:23 PM

Immigration and birth rates mean we don't need to reform. We'll only reform for policy reasons. That means Democrats can stall it until they're under 40 seats in the Senate.

Posted by: oj at November 28, 2006 12:54 PM


Your assumptions only work in a "Logan's Run" world where the old just vanish. Sure, we'll absorb a lot of immigrants in the coming years. But 100 million? Or more? That's too visceral for most Americans, no?

Of course, if Mexico implodes (as seems possible), it could happen quickly.

Chris is right that SS reform is relatively easy. But getting something to a vote will be impossible, unless the 20-50 year-olds rise up and vote out dozens of incumbent Democrats on that point alone.

Medicare is going to be difficult because the economy can't handle 25 year-olds paying all the premium care for 90 year-olds. Unfortunately, the only way (now) to corral Medicare is through rationing. Going to a single-care system will bring us the National Health Service or whatever it's called in Cuba.

Posted by: jim hamlen at November 28, 2006 4:25 PM

No. Demographic projections already put us at 500 million people at mid-century. Immigration critics suggest 100 million new immigrants just as a result of amnesty. 100 million overall seems a cautious compromise.

Posted by: oj at November 28, 2006 4:51 PM