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Monday, April 11, 2005

Alternatives ways to Fix Social Security

Peter A. Diamond and Peter R. Orszag have released a plan to fix social security. It is a basic reduce benefits and increase taxes plan, although if that is they was we decide to go this plan is probably as good as any. I still prefer private accounts. One thing about their report that bothers me is their claim that private accounts would produce a negative cash flow problem for the Social Security program. This is true, from a certain point of view. If you remain with the idea of a pay as you go program where one group of people funds another group of peoples retirement in perpetuity, this is exactly what you have. If though, you have a fundamental view that people fund their own retirements (something I would prefer) their is no negative cash flow problem because the program doesn't get (or need) the cash in the first place. Obviously, it is cheaper at any given point in time to continue the pay as you go system than it is to transition to a system of saving the money before you spend it. That doesn't mean that it isn't smarter to make the change however. It is analogous I think to trying to go from financing your life from credit cards to only buying what you can afford. When you have a heavy credit card already, it is extremely tough to make the payments AND buy what you need to live on without going back for more credit. The easy solution for every given month is to pay your credit cards and then use the credit cards to pay for what you need. Everyone knows this is bad financial planning, but many people do it anyway, and once you start it is very hard to transition back. Nonetheless, I would advise anyone in that situation to do everything they can to tighten their belt, spend a little less, perhaps work a little extra, and begin weaning themselves from that debt lifestyle. The same principle seems to me to apply to 'fixing' social security. If Social Security only pays out what it has collected (plus interest) then it will never have a financial crisis again. (This doesn't of course address Social Security for disabled people, etc. but I view that as a very minor part of Social Security that can best be dealt with as seperate programs with an different revenue source.)


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