Towards A Good Samaritan World

Monday, February 28, 2005

ALL POWER TO THE CENTRIST DEMOCRATS

Here's another Democrat I like. Jeffery Liebman is obviously a liberal who dislikes Bush, and he's writing the Harvard Magazine. But he is open-minded about private accounts.

Given the uncertainties about what form a PRA-based Social Security reform plan will take and the economic impacts it would have, what should a strong supporter of social insurance do? One option is to reject personal retirement accounts and try to solve Social Security's problems with a combination of tax increases (for example, by repealing the cap on the level of earnings subject to the Social Security tax) and benefit cuts. After all, this has been the traditional approach to Social Security reform.

In my judgment there are two reasons to abandon the traditional approach and, instead, to embrace personal retirement accounts. The political reason is that in the current anti-tax environment, it is unlikely that significant tax increases are going to be enacted as part of Social Security reform. Therefore, the only feasible way to devote the extra resources to Social Security that will allow us to maintain replacement rates in the future is to do so via personal retirement accounts.

The economic reason is that we need to save the tax increases for Medicare and Medicaid. Over the next century, the share of national income that we will want to devote to healthcare will likely rise substantially and, because much of healthcare in the United States is paid for via the public sector, we will need to increase tax rates substantially to cover those costs. Although there is considerable debate about the magnitude of the economic costs of taxation, they are certainly not zero. We should therefore try to solve the Social Security problem with as little economic distortion as possible, relying on forced saving via PRAs and leaving the explicit tax increases to pay for future healthcare costs.


Liebman takes care to emphasize that he believes in the principle of social insurance. He is signalling to liberals that he is still on their side. But Liebman recognizes that private accounts are compatible with the principle of social insurance. In some versions, the creation of personal accounts is, indeed, a reform that any liberal who does not consider dependecy on the government to be a good in itself should love.

This idea seems to have gotten through to Senator Joe Lieberman, who-- according to Josh Marshall's best guess-- is on the verge of making a deal with Senator Lindsey Graham to support a reform with private accounts and a hike in the Social Security tax. Lieberman is the most famous example of that (lately) somewhat rare breed: a centrist Democrat. Hopefully, support for a somewhat redistributive but ownership-oriented Social Security reform will become the distinguish badge of centrist Democrats. If Hillary, for example, wants to establish her centrist credentials, this could be a great way to do it.

Meanwhile, a Reaganite conservative, who wanted to establish private accounts in the 1980s, is now against them, because 1) he thinks that a slide in the dollar can't sustain the added debt (this is a variation of what David Levey and Stuart Brown call "The Overstretch Myth"), 2) he opposes the rise in the payroll tax cap that is likely to fund private accounts, and 3) he has what he thinks is a better option:

Social Security can be fixed without raising taxes or saddling the dollar with a debt burden it cannot sustain. In 1981, Deputy Assistant Treasury Secretary Stephen J. Entin produced a plan that eliminated the Social Security shortfall by changing the initial benefit formula from wage indexing to price indexing.


A move to wage indexing is a great idea, and a downward revision of the trajectory of benefit growth should be part of any Social Security reform bill. But that will make the whole system a worse deal for the young, and it will just be one more tug in the inter-generational tug-of-war that is Social Security. We should try to phase out that tug-of-war with personal accounts. And if the political price for that is a bit of redistribution, it's worth it.

Arnold Kling wrote an article sometime back on "Why the Left Should Favor Social Security Reform (And the Right Should Oppose It)."

The debate over Social Security privatization is starting to remind me of my favorite Winnie-the-Pooh story, In Which Piglet Meets a Heffalump. At one point in the story, Pooh and Piglet are discussing the best bait to use in a trap for a Heffalump (author A. A. Milne's deliberate mispronunciation of elephant). Pooh, who likes honey, starts arguing for honey as bait. Meanwhile Piglet, who likes acorns, starts arguing for acorns. Suddenly, each of them realizes that he is arguing against his own interest: if acorns are chosen for the trap, then Piglet will have to supply them; whereas if honey is chosen for the trap, then Pooh will have to supply it. So the argument ends, with Piglet giving in first.

I think something similar would happen if the Left and the Right were to think through the consequences of Social Security privatization. Krugman and others on the Left would suddenly realize that they are in favor of it, and conservatives might decide that they should be against it.


The developments I've noted here suggest that Kling was right. Liebman and Lieberman may set a trend. As redistributive Social Security reform gains ground, the battle lines will shift. A lot of conservative Republicans will fight back, but it's hard to imagine the House Republican caucus blocking a plan which enjoys broad public support, bipartisan political support, and is backed by the Bush Administration. Social Security reform could be the welfare reform of our decade, a political compromise that satisfies the public and leads to an era of national consensus, when the political classes go on bickering but a satisfied public loses interest. And gets on with the business of prosperity.

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