Chuck Hagel today proposed cuts to Social Security benefits as a means to solve the impending shortfall. Specifically Hagels plan would raise the retirement age to 68 and lower the amount available for early claims. Hagel's plan also includes Private Accounts, which brought an objection from Democrats:

some leading Democrats said they could not support Hagel's plan because he would pay for private accounts by borrowing and increasing the nation's deficit. Sen. Edward M. Kennedy, D-Massachusetts, told ABC's "This Week" that would be "a great threat to seniors" because it would raise interest rates.

Perhaps I am mistaken, but I always thought Seniors desired higher interest rates because they were on fixed incomes (and were not the borrowers of the economy). But, lets not get into a debate on whether interest rates would really rise at all if we borrwed an additional $5 trillion. I would argue no.

Nevertheless, Hagel's idea is a good start. Raising the age is fair because people generally live longer than they used to. Further, raising the age should not be considered a benefit cut. Instead it should be considered an adjustment from productivity gains (i.e. living longer).

In the end Social Security Reform will pass and it will include some of everything, i.e. benefit cuts, tax increases, and private accounts. I believe that it will be politically difficult for Democrats to oppose a reform plan with all three elements. The tax increase could be a slight raise to the Social Security Cap (a tax on the rich!) But the increase should be gradual (i.e. only a 1-3% tax on the next $50,000 of income). Finally, private accounts should be optional and include an additional saving component. For example, if a person contributes 1-2% of their own money to a private account (pre tax), then the government would match it by privatizing 1-2% of their own Social Security Contribution. This would create additional private savings, slightly lower front ended borrowing, and reach the 4% ownership component demanded by President Bush.

The Administration is already hinting at a compromise solution:

Treasury Secretary John Snow, appearing on ABC, maintained the personal accounts still must be part of the solution.

"They don't in and of themselves bring those lines together," he said. "But we'll never get a fair and equitable solution to the Social Security problem unless personal accounts are an integral part of the solution."

Next Year, Bush should reform Medicare.