In the comments on my last post, a commenter asked two very direct questions. Here they are, with my answers:
(1) Do you think that the Bush administration is at all likely to back the kind of proposal that you favor?
I would assign almost a zero probability that the Bush administration (or any elected official) will propose any increases in the normal and early retirement ages, let alone increases of the magnitude that would be sufficient to restore solvency. That is a very hard rhetorical battle to win. I think it is worth trying--as life expectancies increase, we would be well served to have a public debate that the age of dependency (a phrase borrowed from Arnold Kling's blog) should also increase. In the unlikely event that a Senator or Representative did start to win this battle, the Administration might through its support behind him or her. But that is just my speculation.
We should expect something that looks a lot like Commission Model 2--restore solvency through a gradual reduction in future benefits upon retirement for those currently below a certain age, modifications of the benefit formula to better protect survivors and career low-earners, and a voluntary option to divert some amount (e.g., 4% of earnings up to an indexed threshold like $1000) of payroll taxes into personal accounts.
(2) Assuming arguendo that the current reports of the likely Bush proposal - i.e., merely diverting a portion of current social security taxes to private accounts, without other reforms - do you favor such a reform (as opposed to doing nothing for now)? As suggested by the above comment, wouldn't such a proposal just make the short and medium term (2018) problem worse, without making the long term problem (2042) much (if at all) better?
If it is literally diverting some portion of the payroll taxes to personal accounts with no change in the benefit formula (beyond prorating it for the portion of taxes diverted), then I do not favor that, because solvency is not restored simply by that diversion of funds.
Assuming it is Commission Model 2 (as described above) and assuming that it is all debt-financed, then it does meet my main requirement of restoring solvency. We know the $10.4 trillion hole is plugged because, over the 75-year projection period, the annual deficit is reduced to zero and the transition debt is repaid. (This is what Chapter 6 of the Economic Report of the President showed for this reform assuming 100% voluntary participation.) It clearly makes the long-term financial problem smaller. If this is what is proposed, then I do favor it over the status quo.
In fairness to the Commission, its report did not specify that the transition should be debt-financed. They left this as an open question for policy makers to answer. I think they recognized what debt-finance would do to the short- and medium-term unified budget deficits. None of us are sure what would happen to interest rates if an implicit debt (unfunded obligations of an entitlement program) of $10.4 trillion were eliminated but explict debt (Treasury bonds held by the public) were increased by a few trillion before being repaid. And, as we went through before, the Administration hasn't proposed doing exactly that. For example, I have heard suggestions like allowing people to establish personal accounts only if they will contribute some of their money out-of-pocket (e.g., if you contribute an extra 2% of your payroll up to $500, then you can divert 4% up to $1000). I expect a lot of suggestions for how to bring in more revenue to come up in the legislative debate about any reform that the Administration proposes.