Social Security Reform

The reform of our Social Security system is one of the more tractable problems we face. It is actually very simple. It does not require increasing the age for receiving full benefits. It does not require individual retirement accounts, Herman Cain’s solution. All it requires is to put the system on a sound financial footing as you would do with any true insurance system. For example, suppose you have an individual making $40,000 per year during his or her work life. Suppose further that he or she started working at age 22 and retires at age 67 after 45 years of work. If the appropriate interest rate is 2%, then he or she could retire with almost $32,000 per year on average (for 13 years . . . some living shorter and some longer).

All these numbers are in real terms . . . this means that there is no inflation assumed. In order to handle inflation and the investment for the fund, I suggest a couple of things: first, let’s create a new government bond for the social security fund and no other purpose that pays 2% plus the rate of inflation; second, let’s make it a criminal offense to raid the social security fund.

There may be transitional problems with moving to a true insurance system, but I think that the taxpayers will be willing to handle a transitional problem if they know there is a light at the end of the tunnel.

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