Three Cheers for Senator Chuck Hagel (R-NB)!

Senator Chuck Hagel (R-NB) announced today his own proposal for Social Security reform. It would make the following changes:

1) No tax increases (not really a change so much as an essential starting point).
2) Allows workers age 45 or younger invest 4 of their 12.4 percent FICA in the same five indexes used in the Federal Thrift Savings Plan.
3) Raise the age for full retirement from 67 to 68.
4) Lowers the amount of partial benefits that workers who opt to retire at age 62 from 70% to 63%.
5) Changes the current formula for benefits (average income over their last 35 years of work and the wage index) by adding in life expectancy to calculate benefits

My thoughts:

I think that Senator Hagel deserves enormous credit for his approach on this issue. First, he picked the most conservative numbers (the next 75 years rather than the infinite horizon projection) to define the problem which has been a source of criticism from the Ostrich Caucus who have claimed (and not without some justification) that some pro-reformers have been exaggerating the problem. Using the more conservative numbers and contrasting them with the maximum “transition cost” still makes the case that PSA’s are cheaper than just the status quo.

Second, Senator Hagel has provided a greater level of detail on his proposal (including naming which five indexes workers would be able to invest their PSA’s in under his plan and their average rate of return). This is going to be key for countering arguments about “workers picking their own stocks” (which we all know was a strawman argument) or “hidden fees” eating up worker’s returns on their PSA’s.

Finally, and I think this is probably the most important – he brought up the fact that Medicare and Medicaid are bigger problems than Social Security and need to be reformed as well if not more so. Senator Hagel was one of the few Republicans who voted against the $849 Billion Medicare Prescription Drug boondoggle which has made the problem worse. IMO Republicans need to light a fire under the administration to deal with Medicare and Medicaid and pro-reform Senators like Hagel deserve credit for putting this front and center.

As far as the merits of the plan, I think it’s a good starting point. My own preference would be to raise the retirement age from 67 to 70 rather than 68. The AARP is going fight just as hard if we try to raise it to 68 so I say go all out and shoot for 70. I also support some sort of asset or means-testing for Social Security as it was supposed to be a “safety net” rather than a universal entitlement program that taxed poorer working class people in order to pay benefits to wealthier retirees. Moreover I think we should do the same for Medicare as well as Social Security. Also while I agree with changing the benefits formula, I think it might be simpler to go from wage-indexing to price indexing and change the retirement age as needed. However perhaps his proposal will accomplish the same but be easier to do politically.