Tuesday, May 10, 2005

The Two Peters Plan

Micky Kaus writes in Slate on Bush's Social Security reform plan and reviews the Democratic alternative. How my friends at the Kane County Dem webpage can call themselves liberals and support an almost inevitable repeat of 1983's reforms and this time leading to an 18% regressive tax on labor is beyond me. Let's get a little Radical and try a National system of personal investment accounts. Let every worker own a piece of the world economy.
Democrats would fiddle with the benefit schedules too! The most frequently cited Democratic alternative plan is the one proposed by Peter Diamond and Peter Orszag--call it the Two Peters Plan. They estimate the total 75 year Social Security shortfall at 1.9 percent of taxable payroll, and would meet it by a combination of tax increases and benefit cuts. Specifically, as best I can make out, they make three changes in the benefit schedules:

1) They cut benefits for the top tier of wage earners, reducing by a third the amount of wages over about $44,,000 that get replaced by Social Security at retirement. This change alone saves almost 10 percent of Social Security's shortfall (.18 percent of payroll).

2) In addition, they cut overall benefits gradually to compensate for greater longevity--accounting for half of another .55 percent of payroll--or .27 percent. It's not clear how these cuts would be allocated.

3) In addition, they would impose a "legacy charge" of .97 percent of payroll, more than half of which is financed by benefit cuts, or another .50 percent of payroll.

You get the impression that Two Peters chop up these benefit cuts into little parts because they'd rather you didn't add them all up. When you do you get a benefit cut totaling .95 percent of payroll, or about 50 percent of the total shortfall. In the liberal-endorsed Two Peters' plan', as in the Bush-endorsed Pozen plan, "reductions are smaller for lower earners, and larger for higher ones."

Sure, the Two Peters plan is a gentler than the Pozen plan, which uses benefit cuts to make up 70 percent of the shortfall. But is that what all the fuss is about--70 percent versus 50 percent? It would appear to be a question of degree, and not all that much degree neither.

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