Edward Prescott on Social Security
Edward Prescott, 2004 Nobel Prize co-winner, is putting forward a plan to help reform Social Security, or more accurately to augment the current program. One of the notable parts of the article is that Prescott comes out in support of the “No Crisis” view of Social Security insolvency.
“I don’t think there’s a crisis,” he told me in a recent interview. “But the sooner we do this (reconstruction), the sooner we can improve benefits.”
Basically, Prescott favors augmenting Social Security with forced savings plan that would put the savings into something like the Federal Thrift Savings Plan. The plan would institute graduated payroll taxes with the money going into these private accounts. The rates would look something like,
- Prior to age 25 the tax is set to zero to allow workers to use the money for aquiring human capital, a mortgage or even car payments.
- At age 25 the tax rate would be 3%.
- At age 30 the rate would increase to 6.1%.
- At 35 the rate would move up to 12.4%
The benefits is that since the workers taxes really aren’t taxes, but forced savings the negative impact of higher taxes is minimized or even eliminated. In fact, labor force participation might increase and savings should increase as well, according to Prescott.
My only issue, is that a forced savings plan might be offset savings by people who are currently saving via 401ks. However, those workers who do not have access to such retirement accounts would now be saving. So on the whole I’d say that savings would probably increase.
Also, the increased savings would mean higher investment and capital, which could very well translate into higher wages. Also, more productive capital will mean a more productive economy, which is also good for the current Social Security system.
Hopefully Prescott’s proposal will be written up and put on the web for people to read.