Dartmouth prof's proposal is cornerstone of Bush approach to Social Security

Posted 01/19/01

"Economics is the dismal science," says Andrew Samwick, smiling. "It asks the question, 'Who will pay?' " According to the economics professor, that question was ignored in the debate that swirled around Social Security during the most recent presidential campaign. In 1998 Samwick and Harvard economist Martin Feldstein proposed reforming Social Security by creating private retirement accounts within the system. Samwick entered the national debate when, during his presidential campaign, George W. Bush made that idea the cornerstone of his approach to changing the public pension program.

Samwick assesses the problem: "The current level of payroll taxes going to Social Security is 12.4 percent. Ten and one half percent of this money funds current benefit recipients, creating a surplus that disappears in 2015. After 2015, the system will be operating in a deficit, with the gulf widening each year until 2075, when there will be a 6-percent difference between revenues and expenditures. That is the real dilemma confronting Social Security."

To close the gap, he proposes investing an amount equal to 2 percent of the current payroll tax, "much like a 401K plan is now," he says. This would maintain the current level of retirement income mandated by law and avoid raising taxes, increasing the retirement age or reducing benefits. "And we would avoid sandbagging a future generation with a 6-percent increase in their taxes," he says.

Samwick believes that putting more government money into the system simply creates greater debt in order to pay for a program destined to fail because of its structure. This addition of government money was the lock-box idea proposed by Democratic candidate Al Gore. Samwick says that plan ignores the growing gap between revenues and expenditures and does not address the problems with the system.

Samwick says Social Security reform is inevitable because of the anticipated 50-percent rise in expenditures as the population ages. That financial burden must be relieved by changing the system or it will be met by deep reductions in benefits to seniors or sharply higher taxes on workers, raising them to levels workers may simply be unwilling to bear. "We have a window of opportunity but the longer we wait, the less palatable our financial options become," says Samwick. When reform does come, he says, "it will be an amalgamation of several plans, and a chance for service to the country."

His reform proposal is only one aspect of his research, which was honored by the college with this year's Karen E. Wetterhahn Memorial Award for Distinguished Creative or Scholarly Achievement. He also studies executive compensation, pensions and tax shelters. "The more scholarly work I do, the better the advice I can give to my students and the better the example I can provide for them," Samwick says. As for his involvement with Washington politics, he says his experience in policy advising shows students how economics can be applied to real-world difficulties.

And the challenges for economists will continue. "The aging of the population presents some unique and previously underappreciated problems of resource allocation, in both Social Security and Medicare," he says. "I think that finding solutions for problems in the economics of aging is our big economic challenge of the coming decades."