[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

that point, additional sources of revenue will be needed if the current law’s promises
of benefits are to be honored.
While all agree that some changes to Social Security will be needed, what form
those changes should take and how large they have to be are intensely debated.
Calling the situation a crisis, President Bush has sought major changes to the very
nature of the program. He has proposed that younger workers be allowed to divert
some of the Social Security taxes they pay into individual retirement accounts,
which then could be invested as each individual chooses. At retirement, benefits
would be paid both from the traditional Social Security program and from the
balance in the individual account. Proponents of retirement accounts argue that
they will enable individuals to earn, on average, higher rates of return on their
contributions than they do under the current Social Security program.
Opponents of retirement accounts make three points. First, they argue that the
advocates have made unrealistic assumptions about the average returns on worker’s
contributions. Second, they stress that a system of individual accounts involves more
risk for each individual; for example, the stock market might decline significantly
just as a worker was about to retire, wiping out a large part of her account if it were
invested heavily in stocks. Third, opponents point out that if younger workers divert
some of their Social Security taxes into separate accounts, the funds available to
provide benefits to the current retirees will go down. To come up with the money
to keep paying for these promised benefits, therefore, the government will need to do
one of three things: raise other taxes; borrow more now, thereby worsening the
already huge budget deficit; or cut back on other government programs.
Most critics of the president’s proposals recognize that if nothing is done, Social
Security in time will face financial problems. However, they argue that these can
be fixed with relatively minor adjustments in the program. One suggestion is to
index the level of a retiree’s initial benefit payment to the level of prices rather than
to the general level of wages (as is currently done). Since wages on average rise
faster than prices, tying payments to the latter would reduce the growth in future
payments. At the same time, the indexing would ensure that the purchasing power
of the benefits did not decline.
President Bush has been urging Americans to consider a major
reform of the Social Security system.
CURRENT AND RECENT CONTROVERSIES IN THE ECONOMICS OF THE PUBLIC SECTOR ∂ 397