It should come as no surprise that proposals to create individual accounts as part of Social Security reform are faltering. As the layers of promises are peeled back, it becomes increasingly clear that investment accounts are neither necessary nor sufficient to fix Social Security. Accounts will not make millionaires out of minimum-wage workers. Higher returns from investing in stocks will not work as some magic elixir that cures the challenges confronting Social Security. Accounts will not result in huge estates to leave to the next generation.
But the idea should not be abandoned.
If Congress is willing to make the real choices necessary to fix the program - choices thus far swept under the carpet - these accounts have an important role to play, serving as the glue to make a balanced reform plan stick.
The three questions that must be answered in designing a Social Security fix are what, when, and where:
• What to do to rebalance Social Security?
The program's funding gap can only be filled by increasing revenues or cutting promised benefits.
There are plenty of options, from increasing payroll taxes, to using general revenues, to increasing the retirement age, to changing how we calculate benefits, to means-testing payments for the well-off. None are painless, however, so politicians generally have an aversion to discussing them.
One might assume that the major dividing line between the two parties would be whether to make changes on the tax or the spending side.
But instead, politicians of both stripes, well aware of the dangers inherent in honestly discussing these hot-button issues, are doing their best to avoid them by sparring over accounts.
• When to do it?
Assume Congress were to agree on a balanced package of, say, an increase in the payroll-tax cap, benefit reductions for wealthy retirees, and an increase in the retirement age. It would still have to decide on the timing of the changes.
One option would be to postpone as long as possible and return Social Security to a pay-as-you-go system, where payroll taxes would cover benefits on an annual basis. No changes would have to be made in the immediate future because the system would run surpluses for another decade or so. Then changes on both the tax and benefit side would be phased in as the fiscal crunch started to hit.