Despite growing concern over the inability to fund Social Security’s pension obligations and its burden on the federal budget, nothing has been done to reform the program. When President George W. Bush sought reform last year, his proposal for personal retirement accounts (PRAs) was quickly shot down. Since then, politicians have made few efforts to construct a bipartisan compromise. But others have been working on just such a compromise. At a recent AEI conference, three former policymakers introduced their plan for bipartisan Social Security reform. Presenting were Harvard’s Jeffrey Liebman, former special assistant to President Bill Clinton; the New America Foundation’s Maya MacGuineas, previously Senator John McCain’s Social Security advisor; and Andrew Samwick of Dartmouth College, the former chief economist at President Bush’s Council of Economic Advisers.

Some see a compromise as the only feasible solution for Social Security. To many, the Liebman-MacGuineas-Samwick plan (LMS plan) is a serious and conscientious effort to achieve meaningful reform. The three policymakers set out knowing it would be difficult to create a plan with which they could each be satisfied, but they also knew that if they could do so, they might be able to stimulate similar efforts in Congress. Liebman noted that the biggest differences between Democratic and Republican proposals “involve the mix between benefit cuts and tax increases and the extent to which we work within the current Social Security system.”

The plan has four main components to balance competing demands: benefit cuts, new revenue, mandatory personal retirement accounts, and other slight modifications to the current Social Security pension system. Benefit cuts come as a 40 percent reduction, as well as an increase in retirement age. The plan creates mandatory personal retirement accounts which will equal 3 percent of payroll. They will be funded partly through new taxes and partly from the Social Security trust fund. Doing so strikes a compromise between carve-outs and add-ons, and avoids borrowing to finance the mandatory PRAs. The plan does not reduce benefits for the disabled or young survivors.

Liebman insisted that the plan adds new sources of revenue and avoids the “slippery slope to privatization,” which he, as a Democrat, opposes. On the other hand, according to Samwick, “the 3 percent PRA contributions would build significant wealth relative to administrative cost, but would not overshadow traditional benefits.” To pay for current benefits, MacGuineas said that the government would have to come up with an additional $6.4 trillion, but with the cut in benefits proposed by the LMS plan, that figure would drop to $1.5 trillion.

Discussion participants included Charles P. Blahous of the National Economic Council, New York University’s Jason Furman, Kent Smetters of AEI and the Wharton School, and David Certner of AARP. Each offered a critique of the LMS plan, which reflected the difficulty of achieving a compromise on such a divisive issue.

Blahous argued that political support for the plan would be undercut because it would sever the link between contributions and benefits, and that it is “left of center” because it relies more heavily on raising revenue than on containing costs. Furman added that there is actually no clear distinction between a mandatory add-on account and a tax increase. He also argued that the plan needs to ensure that the system remains solvent in the face of impending “demographic shocks” (namely, the retirement of the post–World War II baby boom generation). Smetters doubted that solvency would be possible. He also suggested that neither Democrats nor Republicans would be supportive of this proposal, arguing that Democrats would see it as privatization “and the conservative base will see it as a tax increase.” Certner, while finding much to praise in the plan, argued passionately against the carve-out, claiming that PRAs would impose too much risk on individual pensioners.