Very Nice Social Security Reform Plan

John Kasich was on Neil Cavuto advocating his plan for Social Security reform. You can see a summary of a Kasich type plan here. (The best summary I found actually describes a plan by others, but other summaries were too brief.) Kasich's plan is a partial privatization of 2% (slightly less than a third of the employee contribution) for all workers under 55 years, in exchange for slowing the growth of SSI benefits by using only prices to adjust the COLA rather than prices and wages. This plan basically shifts the burden of the lost benfits from lower payments from the pay as you go system to the higher yielding private retirement accounts. Its a very responsible reform fiscally, reducing the burden on the trust fund as compared to other plans.

The benefit of Kasich's plan is its fiscal conservatism (unsurprising), but its major drawback its directly tied to its major strength: its basically designed to preserve the existing system rather than replace it with something better.

For anyone not familiar with Social Security reform, there are two problems, both demographic. One the one hand the baby boomers constitute a bubble of consumers who, like a snake's meal of a mouse, must pass through the system. On the other hand is the gradual decline in the ratio of workers to retirees, due to slowing birth rates and greater longevity. Like Bill Clinton's plan, the Kasich plan addresses the first problem, the boomer bubble, really well, but ignores the second problem, the declining ratio of workers to retirees.

My own analysis of plans rejected the Clinton plan, and I'd be inclined to reject the Kasich plan without some modification to accomodate the declining ratio. My own plan is to combine the Clinton plan (investing the Trust Fund in the market), a removal of the payroll tax cap, and full privatization of the employee contribution, leaving the employer contribution to fund transition costs and maintain the disability and survivorship programs. The first two elements are ultimatly there to assist with transition costs, the second part provides a better benefit and makes the ratio of workers to retirees irrelevant, since workers fund their own retirement directly. It would be harder to modify the Kasich plan, at least in the direction of greater privatization without increasing the transition costs which Kasich seeks to minimize.