Settling Social Security Benefits At A Discount

“Settling Social Security At A Discount” 

Endorsement

This plan is by far the best idea in the public market.   We like it because it actually fixes structural flaws within Social Security, rather than just seeking to rebalance the failure of the system.   It increases the quality of the benefits provided, and lowers the cost of delivery.  Whether this plan would fix Social Security is really not important - this plan makes Social Security work better.

How Does It Work

This plan enables people who fear the stability of the system to trade a portion of their future benefits for more stability.  The plan suggests that someone could trade a $1.00 of benefits from the existing system for $0.83 cents from assets that they own and control. 

Strengths

From the prospective of workers who have no choice but contribute, this plan is light-years ahead of every other plan in the public debate because it treats future benefits as debt rather than a promise.   The difference is pretty large.  A debt has to be paid where as a promise should be paid. 

"The unavoidable and well-known result is that Social Security's debt (its 'promises', if you prefer) can't be paid in full."  ~ Alex Pollack 

The plan leverages choice.   Choice enables people to have better benefits at a lower cost to the system.  If I exchange X for Y, I am better off even if I don't like X.  I dislike it less than Y. 

The plan hurts no one. 

Weaknesses

If the plan has a weakness, it is that it may be too popular.  The author's research says that there is $0.83 of benefits in the system for every $1.00.  Whether $0.83 is right or not, isn't terribly important.  Congress would have to have calculate some exit value.  If Congress over-prices this exit value, the government would be in worse straights rather than better. 

This plan contains an optional solicitation.  The response to any solicitation will depend upon the unique circumstances of every worker.  One problem that all of option-plans face is adverse selection which is an economic principle that says solicitations will be accepted by the wrong type of person.  This plan - and those like it - are most likely to attract people who are contributors to the system rather than those who pull resources out of the system.   If too many contributors leave and too many consumers stay, the system will be worse off.

 Both of these drawbacks come down to one thing : do you trust Congress's ability to set the exit point.

Distortions

This plan does not technically fix Social Security.  It addresses the outcome of 70 years financial mismanagement.  This plan treats the symptoms but not the disease.  The cause of the problems in Social Security is clear; over time Congress has systemically overpaid benefits relative to cost.   This plan lessens the exposure to the symptoms of the disease, but doesn't cure it.   

Open Questions

This plan - like those which would privatize the system - creates parallel retirement systems.  Whenever I see this structure, I have to ask what happens when Social Security collapses. 

This plan allows people who are worried about the system to take corrective measures.  The voters will worry less.  As people lessen their exposure to it, they will have less incentive to fix it.   

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