WILLisms.com: Reform Thursday: Week Seven, Bonus Graphic: Ryan-Sununu's Solvency.

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Reform Thursday: Week Seven, Bonus Graphic: Ryan-Sununu's Solvency.

Yesterday, we answered whether or not personal accounts achieve Social Security solvency (they do).

Now, how about a graphical representation of the argument:

Click for larger version.

Basically, under the Ryan-Sununu legislation, scored by Social Security's Chief Actuary, personal accounts would put Social Security into solvency and then some.

The only hitch is getting from here to there. While some estimate the transition costs at 1 or 2 trillion dollars, according to the actuarial analysis, it will cost 656 billion dollars (in today's dollars) spread out over several years to do so. However, for every year we wait to reform the system, the debt raises by an additional 600 billion dollars.

Let's assume the transition leaves a hole of 656 billion dollars.

We could cover those costs with (but not limited to) lower benefits, higher taxes, a broader tax base, a higher retirement age, or short-term borrowing.

The above graphic shows just how insignificant the short-term financing of the transition costs (which are not new costs, just an acknowledgement of existing obligations) would be compared to the potential problems we will certainly face if we do nothing.

One way to help solve Social Security's looming crisis and get over that hump is by slowing the growth of benefit increases. To do this, annual benefit adjustments would become based on inflation rather than wage growth (because wages almost always outpace inflation). Once we are beyond the transition, personal accounts keep the system self-perpetuating and solvent.

In the end, personal accounts (but obviously not personal accounts alone) do put Social Security into solvency. Every legitimate reform proposal on the table includes personal accounts along with some temporary way of transitioning the system until those personal accounts can assure permanent sustainability.

Personal accounts just make good sense; they are both smart policy and wise poltics.

Posted by Will Franklin · 17 March 2005 11:21 AM

Comments

"Personal accounts just make good sense" - I would add a third plus to the list: they have a good chance of reversing the "it's not my money so why should I care that one aspirin is $44" trend that the current law has caused. This belief, by now firmly accepted by your typical American, is fundamentally flawed.

Indeed, rather young and healthy folks buy low-deductible (thus expensive!) insurance plans and then still complain that they have to pay copay and/or that it doesn't cover unnecessary tests. The HSA is exactly what they need - with the extra bonus that they now have incentive to be more healthy to spend less *from their own pocket* on deductible expenses.

Cheers,
Fil

Posted by: Filip G at May 26, 2005 08:21 PM

Just like the studies that show that consumers are more likely to spend more $$ when using a credit card versus cash, I believe that when folks are 'encouraged' to shell out their own $$ then will not only care more about the cost (ie. shop around doc's based *also* on their fees) but also realize that it is in their best interest (capitalism) to get a healthy lifestyle, etc. They win, and, in many ways, we as a society win.

Cheers,
Fil

Posted by: Filip G at May 26, 2005 08:25 PM