Saving Social Security

Saving Social Security: A Balanced Approach

Peter A. Diamond
Peter R. Orszag
Copyright Date: 2005
Edition: 2
Pages: 294
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  • Book Info
    Saving Social Security
    Book Description:

    New in Paperback. While everyone agrees that Social Security is a vital and necessary government program, there have been widely divergent plans for reforming it. Peter A. Diamond and Peter R. Orszag, two of the nation's foremost economists, propose a reform plan that would rescue the program both from its projected financial problems and from those who would destroy the program in order to save it. Since the publication of the first edition of this book in 2004, the Social Security debate has moved to the center of the domestic policy agenda. In this updated edition of Saving Social Security, the authors analyze the Bush Administration's proposal for individual accounts and discuss the so-called "price indexing" proposal to restore long-term solvency through changing how initial benefits would be calculated. Social Security is essisessential reading for policymakers involved in reform, analysts, students, and all those interested in the fate of this safeguard of American lives. "An honest, transparent and comprehensive approach to making the much needed reforms to the Social Security program." -Journal of Pensions, Economics, and Finance

    "Very accessible presentation of facts, analysis of underlying problems, comparison of opinions, and argument for proposed reforms." -Future Survey Exhaustively researched and deeply entrenched in practical issues and mathematical calculations... a highly recommended ray of hope against a looming national crisis." -Wisconsin Bookwatch "Diamond and Orszag bring some welcome realism and decency to the debate." -Robert M. Solow, Institute Professor Emeritus, Massachusetts Institute of Technology, Nobel Laureate in Economics

    eISBN: 978-0-8157-9783-8
    Subjects: Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Saving Social Security: An Update
    (pp. vii-xxiv)

    Since the publication of the first edition of this book in early 2004, the Social Security debate has moved to the top of the domestic policy agenda. In his February 2005 State of the Union address, President Bush proposed replacing part of the existing system with voluntary individual accounts. In the months that followed, much public discussion surrounded the administration’s proposal as well as different approaches to addressing the underlying actuarial deficit in the Social Security program. In March 2005, the Trustees of Social Security released an updated set of actuarial projections. The new projections did not show any dramatic...

  4. Acknowledgments
    (pp. xxv-xxvi)
  5. 1 Introduction
    (pp. 1-13)

    Social Security is one of America’s most successful government programs. It has helped millions of Americans avoid poverty in old age, upon becoming disabled, or after the death of a family wage earner. As President Bush has emphasized, “Social Security is one of the greatest achievements of the American government, and one of the deepest commitments to the American people.”¹ Despite its successes, however, the program faces two principal problems.

    First, Social Security faces a long-term deficit, even though it is currently running short-term cash surpluses. Addressing the long-term deficit would put both the program itself and the nation’s budget...

  6. 2 A Brief Overview of Social Security
    (pp. 14-26)

    Social Security was created in 1935 and issued its first monthly retirement benefit payment, to Ida May Fuller of Ludlow, Vermont, in January 1940.¹ Over time, an increasing share of American workers have qualified for benefits under the program, and the number of beneficiaries has risen from 3.5 million in 1950 to 35.6 million in 1980 and 46 million in 2001. To comprehend the challenges facing Social Security today and to evaluate alternative reform packages, it is important to understand who receives Social Security benefits and how the program works to provide recipients with a base level of assured income,...

  7. 3 Goals for Social Security Reform
    (pp. 27-54)

    Social Security is a huge and complex program, serving an array of purposes and affecting the lives of the vast majority of Americans. It plays a central role in the nation’s retirement system, its social insurance system, and the federal budget. But the program also faces a long-term deficit and is in need of updating—the last significant reform of Social Security was two decades ago. Any such reform must strike an appropriate balance among many competing goals. This chapter examines five such goals: restoring Social Security to a sound financial footing, reducing the future burden from Social Security on...

  8. 4 Social Security’s Long-Term Deficit
    (pp. 55-78)

    Social Security faces a significant long-term deficit, requiring some type of reform to put the system on a sounder financial footing. This chapter discusses alternative ways of accounting for the projected long-term deficit and three of the principal factors that contribute to it.

    Ultimately, delineating the causes of the long-term deficit is somewhat arbitrary, since the accounting can be done in many different ways. For example, box 4-1 focuses on changes in the deficit since 1983. From that perspective the terminal-year effect, discussed in chapter 3, looms large: more than half of the net deterioration in the seventy-five-year actuarial deficit...

  9. 5 A Three-Part Plan to Shore Up Social Security
    (pp. 79-98)

    This chapter presents our three-part proposal to restore actuarial balance to Social Security. Like the successful Social Security reforms of the past, our plan involves a combination of changes in the determination of both benefits and revenue. Each element of our plan is intended to address one of the three sources of the program’s long-term deficit discussed in chapter 4: increasing life expectancy, increased earnings inequality, and the legacy debt arising from the program’s history. Together these three components of our plan would not only restore actuarial balance but also provide revenue for several improvements in Social Security’s social insurance...

  10. 6 Strengthening Social Security’s Effectiveness as Social Insurance
    (pp. 99-115)

    The previous chapter described our plan for restoring long-term balance to Social Security. This chapter describes the provisions of our plan that would buttress Social Security’s protections for the most vulnerable beneficiaries while still maintaining long-term financial balance in the program. Our goal is to ensure that Social Security continues to provide an adequate base of inflation-protected income in time of need and to cushion family incomes against the possibility of disability, death of a family wage earner, or having one’s career not turn out as well as expected. That is one of the reasons that our plan combines benefit...

  11. 7 Implications for Benefits and Revenue
    (pp. 116-132)

    Our Social Security reform plan would restore long-term balance to the program, update it for developments since the last major reform in 1983, and strengthen some of its most important social insurance features. This chapter traces out some of the implications of our proposed reforms for Social Security benefits and revenue.

    In evaluating reform plans, it is important to be clear about the baseline against which the proposed benefits and revenue are compared. In presenting our proposals in previous chapters, we compared all our proposed benefit changes against the scheduled benefit baseline, which reflects what would be paid in the...

  12. 8 Individual Accounts
    (pp. 133-163)

    Unlike many other proposals for Social Security reform, our plan does not call for the creation of individual accounts within Social Security. Individual accounts, which include tax-favored private sector accounts such as 401(k)s and Keoghs, already provide an extremely useful supplement to Social Security, and they can be improved and expanded. But they are simply inappropriate for a social insurance system intended to provide for the basic tier of income during retirement, disability, and other times of need.

    Furthermore, individual accounts would help address the actuarial deficit in Social Security only if they are linked to reductions in traditional benefits...

  13. 9 Questions and Answers about Our Balanced Reform Plan
    (pp. 164-192)

    Everyone has heard the saying that Social Security is the “third rail” of American politics: touch it and you die. These reports of death by political electrocution may be exaggerated, but no one would dispute that Social Security reform is highly controversial. And as we indicated in chapter 1, views on reform run the gamut. Some analysts do not favor any reform of Social Security at this point; others would destroy the program in order to save it.

    Social Security reform is so controversial in part simply because so much is at stake: Social Security plays a crucial role in...

  14. 10 Conclusions
    (pp. 193-198)

    For more than sixty years, Social Security has provided retirees with a basic, assured level of income protected against inflation, financial market fluctuations, and the risk of outliving one’s assets. It protects against other risks as well, such as disability or the death of a family wage earner. And through its progressive structure, Social Security protects against the possibility of one’s career not turning out as well as planned.

    But Social Security also faces a long-term deficit that needs to be addressed. If we address it sooner rather than later, we will enjoy greater flexibility in the adjustments we can...

  15. Appendix A Social Security and National Saving
    (pp. 199-204)
  16. Appendix B Trends in Retirement Age
    (pp. 205-207)
  17. Appendix C How the Legacy Debt Arose: A Simplified Example
    (pp. 208-209)
  18. Appendix D Characteristics of Tax-Favored Defined-Contribution Plans
    (pp. 210-213)
  19. Appendix E Should the Trust Fund Invest in the Stock Market?
    (pp. 214-216)
  20. Appendix F Comparisons with Models 2 and 3 of the President’s Commission
    (pp. 217-228)
  21. Appendix G Memorandum from the Office of the Chief Actuary
    (pp. 229-245)
  22. Appendix H Long-Term Analysis of the Diamond-Orszag Social Security Plan
    (pp. 246-250)
  23. Notes
    (pp. 251-288)
  24. Index
    (pp. 289-294)
  25. Back Matter
    (pp. 295-295)