Reihan: My Social Security Plan

Andrew Samwick ably summarizes the current state of the debate among Democrats.

What I'd like to see is a combination of Swedish-style notional accounts and Phil Longman's Early Retirement accounts. Let's absolutely not "carve-out," and let's emphasize growing the labor force by discouraging early retirement and reducing the tax burden on so-called "secondary earners," and perhaps by pursuing some limited, modest pro-natalist measures.

Check out Rick Mattoon on notional accounts.

Contributions to the NDC are recorded in each individual’s personal account and accumulate based on their earnings. However, the contributions are only “notional” in the sense that the money that is being collected today is used to finance current obligations of retirees. The individual’s fund balance grows on paper even though there is no real money in the account. The rate of growth is determined by the employee’s contribution and a defined rate of return that is tied to the national per capita real wage growth. In doing so Swedish officials wanted to stabilize pension funding and insure pension sustainability.

Workers can then choose to retire as early as age 61. When they retire annual benefits are calculated by dividing the account balance by a divisor. The divisor is set to the cohort’s age 65 life expectancy and an imputed rate of return based on the long-term real growth rate of the economy (assumed to be 1.6%). Benefits are then adjusted each year for inflation take into account the imputed rate of return.

The ability to cap total payouts and adjust benefits to reflect economic and demographic changes significantly improves the financial stability of the Swedish pension system.

As Mattoon goes on to point out, the Swedish system is far from perfect. But it strikes the right balance between the status quo and conservatarian utopians.