WE KNOW THE WAY:

Change the focus to long-term growth (Glenn Hubbard, August 5, 2010, Politico)

While Social Security is not the biggest contributor to long-term budget costs — that distinction is held by health care — it is a big deal.

The good news is that we know ways to reduce the Social Security debt while retaining its important role as a floor for retirement income. One step is to increase the retirement age to match recent improvements in longevity.

Benefit growth for middle- and upper-income households can also be trimmed. One fix is progressive indexing, in which lower-income workers’ benefits are indexed to growth in wages (as under current law), while benefits for higher-income workers are indexed only to growth in prices. This focuses Social Security more sharply as a safety net and would generate a large improvement in America’s long-run fiscal picture.

A bold move toward fiscal consolidation would improve long-term growth by easing the pressure of mounting government debt on interest rates and reducing the need for higher taxes. More important, the adjustment would grant breathing room for near-term fiscal action to improve growth.

Two good candidates for so doing are (1) a temporary payroll tax holiday for firms and for lower-income workers to reduce hiring costs and boost household spending and (2) a cut in America’s high corporate tax rate.

Further fiscal consolidation could also improve long-term growth prospects, while focusing entitlement spending on a “social safety net” role. Reducing Medicare subsidies for nonpoor individuals could be a large step. Shifting the federal contribution to Medicaid to a block grant, in which payments to states grow with inflation and low-income population, could be another key step.

These changes — important for fiscal consolidation and keeping tax rates low to encourage growth — are key.