The Economists' Voice

Saving Social Security: The Diamond-Orszag Plan

Introduction

Social Security is one of America's most successful government programs. It has helped millions of Americans avoid poverty in old age, upon becoming disabled, or after the death of a family wage earner. To be sure, the program faces a long-term deficit and is in need of updating. But Social Security's long-term financial health can be restored through modest adjustments. Major surgery is neither warranted nor desirable, in our view.

Over the next 75 years, the actuarial deficit in Social Security amounts to 0.7 percent of Gross Domestic Product (GDP); projected out forever, the deficit is 1.2 percent of GDP. (Most of the time you will see Social Security benefits measured as percentages of "taxable payroll"—the base of Social Security taxes. "Taxable payroll" is roughly 40 percent of GDP, so deficit numbers as a percentage of taxable payroll are roughly 2 1/2 times deficits as percentages of GDP.) The important thing is that this projected deficit is small enough that it can be eliminated through a progressive reform that combines modest benefit reductions and revenue increases. In this article we will explain briefly how that can be done; more detail can be found in our book, Saving Social Security (Brookings 2004).

Since Painful Choices Must Be Made, a Key Question Is, Which Ones?

The Social Security deficit can be eliminated only through different combinations of politically painful choices: tax increases and benefit reductions. Unfortunately, too many analysts and politicians have ignored this reality, responding to the painful alternatives by embracing "free lunch" approaches.

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