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May 7, 2005

Greg Mankiw on Social Security Reform

Here is an excerpt of a Russ Roberts interview of N. Gregory Mankiw (pronounced Man-Que), the former head of President Bush’s Council of Economic Advisors.

Roberts: What are your thoughts on the President's individual retirement account idea and on the longer term health of Social Security? Mankiw: Well I think there's no question that something at some point will have to be done to change the Social Security system. Anybody that looks at the numbers comes away thinking that the current system is just not sustainable in its current form. Social Security is part of a larger fiscal sustainability problem that involves the aging of the population and also the other entitlement programs of Medicare and Medicaid. So something has to be done. I think the President has put forward a very credible plan and I hope it passes. [Editor's Note: This discussion of the President's proposal took place just before President Bush proposed means-testing of social security benefits. Mankiw's remarks refer to the part of the President's proposal to allow private accounts within social security.] The President wants to move from the current defined benefit structure to a more defined contribution structure which is a good thing because it gives people more of an ownership right over their own retirement income and it increases— Roberts: What do you mean by that? Mankiw: Right now, the way the Social Security system works is you pay taxes when you're working and you get some benefits when you're retired. In between the government takes care of your money for you. What it actually does is spend your money and hopes to tax somebody else in the future. What a defined contribution system would mean is that the government would take your money from your paycheck and put it in your account and you would have control over that account. You would decide whether you would want to invest that account conservatively, let's say lots in bonds or more aggressively—more in equities, and that would be your account. A lot of private firms have moved in the direction of defined contribution plans, which gives individuals more choice and control over their own assets. The plan I have here at Harvard is a defined contribution plan. What the President has proposed is to gradually transition Social Security from a defined benefit plan to a defined contribution plan, which I think would be a good thing. Then you have to look at the promised benefits. Even if we were to stay with the current defined benefit structure, the current promises cannot be met given the current tax revenues. So even if we aren't going to take the bolder vision of moving toward a defined contribution plan, we're still going to have to sit down and see how we can bring promised benefits in line with the tax revenues. Roberts: There have been a spate of articles in the press that Social Security reform is dead and no one likes the President's idea of private retirement accounts. I noticed that the President has continued to talk about it. What are your thoughts on the political likelihood of passage? Mankiw: I think very few people actually know the answer to that question, and I think a lot of the speculation in the media about political chances is based on very little true knowledge. To pass a reform proposal, you need at least 60 votes in the Senate so you need a few moderate Senate Democrats to join the Republicans. To know the likelihood of reform, then, you need to know what those few moderate Democrats in the Senate are thinking. My guess is that they are holding their cards pretty close to their chest and talking to very few people. I certainly don't know what those moderate Senate Democrats are thinking. My guess is that they are talking behind closed doors to their advisors and to some members of the Republican leadership. But the people in the press are just guessing what they're thinking. So I think it is very, very hard at this point to handicap the probabilities of something coming out. Roberts: Do you think that the President's going to fight hard for fundamental reform? Mankiw: The President is very resolute. If he decides that something's the right thing to do, he fights for it. He does it if he thinks it's the right thing to do. For example, you saw this in the Iraq war. He didn't go into Iraq because it was the politically popular thing to do—he did it because he thought it was the right thing to do. It's the same with Social Security—he thinks that we need Social Security reform and he's put out a credible plan and he wants to get it done.

Read it all.

Posted by Andrew Roth at May 7, 2005 10:41 AM | Print

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