Friday, November 16, 2007
FRED THOMPSON may have come late to the presidential race, but the former Tennessee senator has produced the most courageous proposal of the campaign. Mr. Thompson's Social Security plan is not as progressive or as balanced as we would prefer. Yet in a campaign in which candidates have preferred to dodge difficult choices on Social Security, Mr. Thompson's proposal has attractive elements and deserves applause for making some tough choices.
Mr. Thompson would cut benefits for future retirees from the unsustainable amount currently promised; he would combine that move with voluntary private accounts sweetened with a generous match from the federal government. Mr. Thompson points out, correctly, that by 2041, Social Security will be able to pay only about three-fourths of promised benefits, but he assumes -- as do his fellow Republicans -- that the burden of solving the problem should fall exclusively on the benefit side. This thinking is as faulty as that of Democrats who assert that all promised benefits are sacrosanct.
Mr. Thompson proposes to change the way initial Social Security benefits are calculated by linking them to the increase in the cost of living, rather than the growth in wages, over the course of a worker's career. Because wages tend to grow faster than prices, under current law each generation is promised more generous benefits than its predecessor. There is logic to changing the system so that workers across different generations receive the same benefit in dollar terms. But such a change means that benefits over time would replace an increasingly smaller share of workers' pre-retirement income; it would be better to do that in a more progressive fashion that preserves a decent standard of living for workers at the bottom.
That is where the sweetener comes in. Rather than private accounts financed by diverting payroll taxes from the existing program, Mr. Thompson would offer add-on private accounts. Unless workers opted out, 2 percent of the wages they earn that are subject to Social Security tax (up to $97,500 this year) would be deposited into private accounts.
The lure of the accounts is that the government would match, on a 2 1/2 to 1 basis, contributions from the first $1,000 of wages each month; for contributions from wages above that amount, the government would match 50 cents for every dollar contributed. For those who chose to participate in the accounts, however, their guaranteed benefits would be further reduced -- about 30 percent over the course of a career -- or they would have to work an additional five years beyond the current retirement age (now 67) to receive full benefits. Over time, Mr. Thompson argues, this is a good bargain: Workers would probably accumulate significant nest eggs, more than offsetting the reduction in benefits.
Encouraging savings through private accounts, especially with a match that gives proportionately more to lower-income workers, is a good idea. But what happens to the low-income worker who doesn't choose, or can't afford, to put aside extra money for retirement and ends up with a cut in promised benefits? What about low-income workers whose accounts don't reap the expected returns? Why match the savings of well-off workers?
Mr. Thompson says his plan would eliminate the Social Security shortfall -- an estimated $4.7 trillion over the next 75 years. But he neglects to make clear that fully half of that solution would come from transferring general revenue funds to the Social Security system. The theory is that increasing the national savings rate through private accounts would boost the economy and that the Social Security system is entitled to a piece of that. Perhaps, but that is an enormous amount of money to drain from the general treasury, and the short-term cost of the accounts could pile up huge deficits. This an imperfect start to an important discussion.
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