Benefit Cuts

According to this morning’s Washington Post, the Bush administration may change social security benefit indexing from wages to prices. Over time, this will result in lower future benefits. It’s tough medicine. Like serving spinach along with the rare prime rib. But the bigger reality is simply that these benefits would never come to pass unless payroll taxes were raised massively in the years ahead. Substituting personal saving accounts for social security benefits will permit beneficiaries to recoup benefits over the long run. In effect, the idea here is to substitute market returns for what are really non-existent social security returns.

Naturally, this idea will be highly controversial. But I think some benefit reduction is essential to getting Allan Greenspan on board and a majority of Congressional votes for passage of a reconstructed social security system. Many of my supply-side friends will disagree. But I think the politics of transition deficits require benefit concessions. If I had a choice, I would prefer to raise the retirement age over time, as a benefit reduction measure. I don’t have all the facts on this, but I think a retirement extension with a population that lives longer would be easier to sell politically than a swap from wage indexing to price indexing.