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Jeffrey Liebman on Social Security Reform

Although the Bush Administration's campaign to launch Social Security reform has not gained traction in Washington, serious problems continue to threaten the system's solvency. Reform advocates contend that there must be institutional changes to keep the system reliable for future generations. Jeffrey Liebman, professor of public policy at the Kennedy School and a former economic advisor to President Clinton, has joined with two fellow Social Security scholars in proposing a compromise Social Security reform plan - one that could potentially satisfy politicians from both sides of the aisle.

Q: What are the current problems plaguing the system and why is reform necessary?

Liebman: There are two challenges facing U.S. retirement policy. The first is the long-term financial imbalance in the Social Security system. Although the system is currently running surpluses, the aging of the population implies that in about a dozen years expenditures will outstrip revenues. By 2050, scheduled benefits are projected to exceed revenues by 35 percent and the gap will continue to grow thereafter.

The second challenge facing U.S. retirement policy is that too few Americans have savings to supplement their income from Social Security. Social Security is designed to provide a solid foundation for financial well-being in retirement, not to cover a retiree's entire income needs. Private pensions and savings are meant to provide the rest. Unfortunately, for too many older Americans, Social Security is essentially all there is: one-third receives 90 percent or more of their income from Social Security. Thus an important goal for retirement policy should be to encourage all workers to accumulate sufficient individual savings so that the combination of Social Security and private nest egg allows them to maintain their standard of living during retirement. Proposals to introduce personal retirement accounts as part of Social Security can be seen as an attempt to deal with this second challenge.

Q: What are the specific elements of your plan that will address the problems and keep the system solvent?

Liebman: The reform we came up with was based around four compromises. The first compromise was over how large the traditional Social Security system should be. We agreed that the amount of money going into the traditional benefit should be exactly 12.4 percent of payroll, no more and no less than the payroll tax today. We closed Social Security's financing gap with a roughly equal combination of benefit cuts and new revenue.

Second, we agreed to add enough new revenue to maintain currently promised retirement income levels, but we devoted all of the new revenue to personal retirement accounts equal to 3 percent of payroll for every worker.

Third, we agreed that half of the revenue for the accounts would come from new worker contributions of 1.5 percent of payroll and half would come from diverting resources from the Social Security Trust Funds.

Fourth, we agreed to have personal retirement accounts in the plan, but the accounts were heavily regulated. So, in particular, they would be mandatory and when you get to retirement, you would be required to take out all your money in the form of an annuity a payment that lasts as long as you live. This ensures that people cannot squander all of their savings in the first few years of retirement.

Q: Why are personal retirement accounts such an important element to the Social Security system as we move forward?

Liebman: The benefit of having personal retirement accounts in the plan is that if we're going to spread the burden across generations and start putting some extra revenue into the system now, we need to have a way to save that money so that it doesn't get diverted to other purposes, as the current Social Security surplus often does. If you bring in new revenue but put all of the net new revenue into personal retirement accounts, then you have a way to spread the burden across even current workers in terms of making extra contributions today, but to do so in a way that you can really be sure is going to be contributing to people's retirement incomes in the future.

Q: You used a very unique process to formulate this plan. Please describe the process.

Liebman: Earlier this year my coauthors and I were feeling frustrated about the tone of the Social Security reform debate, so I got together with Andrew Samwick, who had been chief economist on the staff of President Bush's council of economic advisors, and Maya McGuineas, who had been the Social Security advisor to Senator McCain's 2000 presidential campaign. We got together to see if we could come up with a plan that we could all three support. Basically it was an experiment to see whether there is any hope for Social Security reform or whether the partisan differences are so great that we should all spend our time working on some other issue.

So we did this experiment to see whether the three of us from very different points on the political spectrum could come together around a single plan. It was a lot harder than we expected, but we did come up with a plan. It was very different from the plan that any one of us would have designed by ourselves, but nonetheless all three of us think it's a substantial improvement over doing nothing. So we went through this process where we negotiated for several months and finally came up with a plan that incorporated all of our very different priorities.

Q: Do you see this proposal and others as potentially restarting the Social Security debate in Washington? What will happen if the reform debate is not reignited and the system continues as is?

Liebman: There are three reasons why it's important to do social security reform now and not wait ten or twenty years until the problem is right on top of us. The first is that if we act now we can share the burden of bringing the system into balance across more generations. The later you go the larger the costs will be on the later generations if you let the earlier generations off the hook for paying any of the cost for bringing the system into balance.

The second reason it's important to act now is that while we have Social Security surpluses in hand, it means that we can phase in some of the painful elements of the plans, benefit cuts and tax increases, and by doing it gradually they become a lot more politically feasible than if you announced a large tax increase or benefit cut that was going to be implemented tomorrow or two years from now.

The third reason why it's really important to act now and not later is that if we can act now and announce some of the future reforms today, it allows people to plan ahead and alter their savings behavior or alter their retirement dates and take into account the new system. It's very unfair to spring big changes on people right at the last minute right when they're about to retire or after they've retired, and the earlier we get Social Security reform done, the more time people will have at hand to plan for those changes.