As Social Security Turns 70, Top Economists Propose Reform Plan

On August 14, to commemorate the 70th anniversary of the Social Security Act, two of the nation’s foremost economists present their plan to rescue the program from its projected financial peril in Saving Social Security: A Balanced Approach, Revised Edition (Brookings Institution Press). In this revised and updated book, Peter A. Diamond, Institute Professor at the Massachusetts Institute of Technology, and Peter R. Orszag, Joseph A. Pechman Senior Fellow in Economic Studies at Brookings, offer a strategy to restore the long-term solvency of this government program without sacrificing its social purpose of providing security to Americans during times of need.

In addition to presenting the authors’ reform plan, Saving Social Security analyzes the Bush administration’s proposal for individual accounts and discusses the so-called “price indexing” proposal to restore long-term solvency by changing how benefits would be calculated. The book argues that both proposals are flawed: the individual account option because it creates a substantial cash-flow problem that worsens solvency and because Social Security benefits are inherently better designed than individual accounts to provide core retirement income; the price indexing option because the change would reduce benefits excessively and thereby undermine the program’s social insurance attributes.

Diamond and Orszag’s plan combines benefit and revenue adjustments, following the precedent set by Alan Greenspan during the last major Social Security reform in the early 1980s. The plan

• restores long-term balance and sustainable solvency
• avoids imposing additional burdens on the rest of the budget
• protects disability and young survivor benefits
• strengthens the program’s protections for low earners and widows
• does not divert Social Security revenue into individual accounts
• preserves Social Security’s core social insurance role, providing a base level of income in times of need that is protected against financial market fluctuations and unexpected inflation

While most people agree that Social Security is a vital government program, there have been widely divergent plans for reforming it. In Saving Social Security, Diamond and Orszag put forward a set of moderate reforms that would eliminate the long-term deficit and ensure the program’s financial health.

Peter A. Diamond is an Institute Professor at the Massachusetts Institute of Technology. His recent books include Social Security Reform (Oxford University Press, 2002) and Taxation, Incomplete Markets, and Social Security (MIT Press, 2003). He is a former president of both the American Economic Association and the National Academy of Social Insurance.

Peter R. Orszag is the Joseph A. Pechman Senior Fellow in Economic Studies at the Brookings Institution. He is also a research professor at Georgetown University and director of the Retirement Security Project. He served as special assistant to the president for economic policy during the Clinton administration.