CAPITAL EXCHANGE
David Wessel - WSJ
Social Security -- Getting Some Perspective
January 27, 2005; Page A2
In a U.S. Social Security debate in which partisans cite facts selectively to justify their positions, newspaper columnists occasionally turn for perspective to veterans on the sidelines.
One is Edward "Ned" Gramlich, a U.S. Federal Reserve governor who chaired a Social Security advisory commission a decade ago. The former dean of the University of Michigan's School of Public Policy and a liberal Democrat, Mr. Gramlich argues that it's time to fix Social Security. He advocates private accounts -- as long as they're on top of Social Security, not created by diverting payroll taxes as President Bush proposes. Here's how he sees today's debate:
Q: Does Social Security need major repair?
A: I don't think the system is in crisis. But we can make much more desirable changes if they're made early. The problem with waiting until the car is about to go off the road is that our options are constricted. It's hard to make sensible benefit cuts if people have already retired or are close to retirement. It's easier to do if cuts are well-advertised. In the past, we have waited, the benefit system has expanded and we've raised the payroll tax. At some point, we can't do that.
Q: Are we at that point?
A: We could raise the payroll tax a bit without huge economic consequences. But at some point we do want to get off the treadmill where we set a benefit system that we can't quite afford and then raise taxes to pay for it. I am, by the way, all for making the payroll tax slightly less regressive by raising the maximum wage subject to the tax.
Q: Why insist on preserving the existing Social Security framework?
A: If we were to go to a system that was entirely individual accounts, we probably couldn't have large backstop benefits to protect people. Many advocates of individual accounts would have something like a floor benefit level to protect people and private accounts on top of that, but that floor can be pretty low. The system we have now does work well and is really not all that costly. The cost is going to grow a bit as the population ages, but not much. It's tried and true. I don't see why we can't retain it.
Q: Then why did you back individual accounts as an add-on to Social Security?
A: I'd like to protect the basic benefits, but we need more saving. We need it because people don't save enough for retirement. We need it to finance the benefit system we have. And need it for the nation's macroeconomics. One way to get new saving is to raise payroll taxes. I didn't think that was either politically feasible or necessary. Another way is to mandate that people save a bit on top of Social Security. This differs from a tax increase because they would ultimately get the money back, but the main motivation is to increase national saving. Increasing national saving implies reducing consumption. It's not a surprise that this is a hard sell.
[Edward Gramlich]
Q: Why do you oppose diverting payroll taxes to private accounts?
A: With carve-out individual accounts, we erode social protections at a time when we also seem to be witnessing the collapse of the corporate defined-benefit pension system. If we go to a retirement system that is entirely individual accounts, we also lose opportunities for income redistribution.
Q: The age at which workers get full benefits is rising to 67. Why would you lift it?
A: People in my grandfather's generation who got to age 65 paid into Social Security for 40 years and got benefits for about 10. People in my grandson's would collect benefits for more than 20 years. As life expectancy increases, the disparity gets increasingly unfair across generations. An easy way to restore fairness and to make a huge impact on the actuarial deficit of Social Security is to have the retirement age go up in line with overall life expectancy -- in an automatic way so Congress wouldn't have wrenching decisions every few years.
Q: Some say that'd be unfair to those with physically demanding jobs.
A: That's a bad rap. The retirement age would rise very slowly, about a year every decade. The main impact would be felt by workers in their 20s and 30s today. The share of workers who work in physically demanding occupations is falling every year and is going to be very low by the time they retire. I would still permit people to retire early and get reduced benefits. They're probably going to get a benefit cut, whatever happens.
Q: How well does our political system deal with Social Security?
A: We do have to make cuts in benefits or increases in taxes. We can do much more sensible things if we act early. But it's hard to generate the requisite urgency when the system is projected to be paying full benefits for the next 40 years or so. I'm not an advocate of the president's general approach, but I have sympathy for arguments that the president's people are making about the wisdom of acting now.
Write to David Wessel at capital@wsj.com4
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