A Summary of Saving Social Security: A Balanced Approach

Peter A. Diamond and Peter R. Orszag
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard

May 4, 2004

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. As President Bush has emphasized, “Social Security is one of the greatest achievements of the American government, and one of the deepest commitments to the American people.” Despite its successes, however, the program faces two principal problems.

First, Social Security faces a long-term deficit, even though it is currently running short-term cash surpluses. Addressing the long-term deficit would put both the program itself and the nation’s budget on a sounder footing.

Second, there is broad agreement that benefits should be increased for some particularly needy groups—such as those who have worked at low pay over long careers and widows and widowers with low benefits. The history of Social Security is one of steady adaptation to evolving issues, and it is time to adapt the program once again.

Restoring long-term balance to Social Security is necessary, but it is not necessary to destroy the program in order to save it. Social Security’s projected financial difficulties are real and addressing those difficulties sooner rather than later would make sensible reforms easier and more likely. The prospects are not so dire, however, as to require undercutting the basic structure of the system. In other words, our purpose is to save Social Security both from its financial problems and from some of its “reformers.”

In this paper we review the financial position of Social Security, present a plan for saving it, and discuss why Social Security revenue should not be diverted into individual accounts. Our approach recognizes and preserves the value of Social Security in providing a basic level of benefits for workers and their families that cannot be decimated by stock market crashes or inflation, and that lasts for the life of the beneficiary. And it eliminates the long-term deficit in Social Security without resorting to accounting gimmicks, thereby putting the program and the federal budget on a sounder financial footing. Our plan combines revenue increases and benefit reductions—the same approach taken in the last major Social Security reform, that of the early 1980s, when Alan Greenspan chaired a bipartisan commission on Social Security. That commission facilitated a reform including adjustments to both benefits and taxes. Such a balanced approach was the basis for reaching a consensus between President Ronald Reagan and congressional Republicans on one hand and congressional Democrats led by House Speaker Thomas P. O’Neill on the other. Our hope is to move discussion toward a basis for such a compromise.