New Republic Online: "The New New Deal"

[Bush_Eats_Beef]

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BENEFITS WITHOUT BANKRUPTCY.
The New New Deal
by Niall Ferguson & Laurence J. Kotlikoff
Post date 08.09.05 | Issue date 08.15.05

President Bush's Social Security proposal looks to be dead in the water--and a good thing, too. The plan was half-baked and fiscally irresponsible. The American public took one look and realized it provided neither personal nor national financial security. Even many Republican congressmen didn't buy it. So much for the president's post-election political capital.

Social Security has been reformed before. In the 1980s, the payroll tax was raised slightly and a gradual increase in the retirement age was introduced (it is scheduled to rise to 67 by 2027). One option might be simply to do more of the same. But that's not what the president proposed. He wanted to give workers the chance to divert some of their Social Security contributions into individual retirement accounts, while indexing the value of the future Social Security checks for middle-class and higher earners to inflation instead of wages.

There were four problems with this. First, diverting money into individual accounts would have turned the Republican line on Social Security into a self-fulfilling prophecy, pushing the system into deficit much sooner than would happen otherwise. Second, individual accounts would have done away with one of the biggest advantages of a state pension system, namely economies of scale and reduced risk. (It's a sobering thought that Jeremy Siegel of the Wharton School--as the author of Stocks for the Long Run, the equity sell-side's favorite academic--is now predicting a stock market slump as baby boomers sell off their portfolios to finance year-round vacations and plastic surgery.) Third, as a consequence, the president's scheme would have made an already bad position even worse for younger Americans, making them reliant on a risky, costly, and inadequate private-account alternative. Finally, and most importantly, it would have done nothing to address the much deeper fiscal imbalance between all the projected revenues of our government and all its existing commitments--not just Social Security, but a whole raft of other nondiscretionary expenditures, of which the Medicare system is by far the biggest.

So what's the alternative? The program we outline below aims at both efficiency and fairness. Unlike other solutions on offer, it is holistic; that is, it embraces Social Security reform, health care reform, and tax reform. And it is based on four fundamental principles we think most Democrats--indeed, most Americans--would subscribe to...