Saving Social Security: The Diamond-Orszag Plan

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

April 1, 2005


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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