Framing the Social Security Debate: Values, Politics, and Economics.

• Author: Elder, Erick M.
• Position: Review

Edited by R. Douglas Arnold, Michael J. Graetz, and Alicia H. Munnell. Washington, DC: Brookings Institution Press, 1998. Pp. xi, 450. $19.95 (paperback).

Social Security reform is one of the most prominent and complex issues that economists, policy makers, and the public currently face (although the degree of urgency for reform is lessening as our economic strength continues). Framing the Social Security Debate is very timely and should be of interest to nearly everyone. This book is a collection of papers and commentaries presented at the 10th annual conference of the National Academy of Social Insurance held in January 1998. As stated in the Preface, "the purpose of the conference was not to come up with policy prescriptions for Social Security but rather to clarify the nature of the debate" (p. vii). When finished, the reader will have a great appreciation for the complexity of the reform issue; this is the major contribution of this book.

A review of each of the 11 papers and of each of the 14 discussants would result in a review of an entirely unacceptable length. Thus, I shall generally confine myself to a brief overview of the papers.

The first chapter lays out the basic framework of reform, with Michael Boskin explaining the looming problem of the future imbalance of Social Security's Old Age, Survivors, and Disability Insurance and Medicare's Hospital Insurance. Peter Diamond then explains that the economics of any reform proposal hinge on three economically separable issues: defined benefit (DB) versus a defined contribution (DC) system, the level of funding, and the degree of diversification of the public pension funds. A funded system would stimulate savings and capital formation. A diversified portfolio should offer higher expected returns. A DC plan would allow individuals to more closely match their allocations to their particular preferences but would shift risk and uncertainty to the individual. Diamond concludes that in his opinion, a well-run DB program with prefunding and diversified funds is superior to a DC plan because of the higher costs (maintenance fees and transactions costs) and added risk of a DC plan.

Hugh Heclo moves the discussion of reform away from economics to one of values and politics. Heclo views the discussion of reform as a "moral conversation about the nature of the good society" (p. 73) in which the choice is between shared security and individual freedom. Heclo argues that this issue is important...