Thursday, January 13, 2005

The Brits offer their advice on Social Security

The Economist (UK) thinks it has “The route to real pensions reform” and the solution is personal accounts along with “progressive indexing” which is a graduated combination of the current wage indexing and the proposed price indexing:

This combination of progressive indexing and balanced accounts would cut the long-term deficit of Social Security by half, from a present value of $3.8 trillion to $1.9 trillion over the next 75 years. Of course, the transition from the current system to this combination would require some federal borrowing before the system's economics are reversed. But under reasonable estimates of participation in investment accounts, all borrowing would be completed by the end of the 75-year period. At that time, the Social Security system would be in financial balance and would be self-sustaining.
The Economist also suggests that time is running short for action:

The time for this type of reform is running out. After the baby-boomers start to retire in 2011, their benefit formulas will in effect be locked in—politically it is virtually impossible to change these formulas for those in or near retirement. Thus, to fix the long-term finances of Social Security, Congress has a one-time opportunity to link personal retirement accounts with benefit reform through the introduction of progressive indexing. That opportunity should not be missed.
A pragmatic review from a disinterested party.

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