The Social Security Squeeze Can Be Solved

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Improvement Proposals

That's fine as far as it goes. But instead of just keeping the S.S. Social Security afloat, why not take the opportunity to make it better? The U.S. population is aging and it's well-known that Americans haven't been saving enough for their old age. One way to bolster retirement savings is to add to the Social Security system a program of voluntary additional contributions. The money could be invested in a limited menu of low-cost, broad-based options reminiscent of the federal government's Thrift Savings Plan, which offers participants five basic investment options plus a life-cycle fund. The details of such an option have been sketched out by a number of scholars, including the late Robert Eisner; Dean Baker, co-director of the Center for Economic & Policy Research in Washington; and others.

Even more intriguing is the idea of a mandatory savings program advocated by Robert Fogel, Nobel laureate at the University of Chicago. Fogel believes that people should be able to retire earlier in the world's richest country, free to pursue their passions and dreams, to find "spiritual fulfillment" and community engagement. He worries that the mantra of "we can't afford it" is pushing us in the wrong direction. The policy of raising the retirement age is essentially "privatizing" the system: People are more and more responsible for saving until the official retirement age kicks in. "The principal form of privatizing is the delay in the age at which full social security income will be made available to retirees," writes Fogel in The Fourth Great Awakening and the Future of Egalitarianism.

Instead, Fogel proposes the outline of a new mandatory pension system that would sharply increase freedom of choice later in life. For instance, under reasonable growth assumptions he calculates that a household that was required to put aside 14.7 percent of its annual income into retirement savings would accumulate enough at age 55 to fund a pension paying 60 percent of peak earnings. Want to cover their health-care needs in retirement as well? It would take another 9.4 percent in savings. Low-income people would get help through a progressive tax of 2 percent or 3 percent on the better-off half of households. The money would belong to the individual and be completely portable.

The details are less important than the fundamental insight: The real economic resources are there to finance early retirement and freedom of choice in the last third of life; it's the financing method that needs to be made better. We can afford it.

Of course, that kind of bold idea isn't on the table. But it shows the range of solutions in the marketplace that will make the woes of Social Security far easier to address than those of its entitlement cousins. If we can't get "spiritual fulfillment," financial independence and peace of mind for our elderly population will do nicely.

Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on Businessweek.com.

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