Diamond and Orszag Still Offer the "Wrong Fix" for Social Security

September 18, 2002

In a new article in the American Prospect, economists Peter Diamond of MIT and Peter Orszag of the Brookings Institution again argue that personal account proposals such as the ones from the President's Commission to Strengthen Social Security would reduce benefits to retirees and increase costs to the system: "By diverting revenue into individual accounts, all three commission plans take money from Social Security that it cannot afford to provide. This diversion creates a financial hole that makes a difficult but manageable problem into a politically unmanageable one. Two of the three plans cut benefits far too much."

Diamond and Orszag are correct that under one of the Commission's Plans, future retirees would receive lower benefit than those promised under the current program. (In two of the three Commission plans, all retirees would receive higher benefits than those currently promised.) But these so-called "cuts" are against a baseline that is financially unsustainable unless we increase payroll tax rates by almost 50 percent or transfer trillions of dollars of general tax revenue to the program. The Commission's most prominent plan would require less than half as much general revenue as the current program.

Moreover, charges that the Commission's personal account plans cost more than the current program are false, unless we assume that the current program receives no extra revenue. In this case, of course, the personal account plans would pay benefits substantially higher than the current program, making charges of benefit cuts nonsensical.

For more details, see a memo by Cato Social Security analyst Andrew Biggs on the "Diamond/Orszag Study on Reform Plans from the President's Commission."

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