One thing that was really telling about the Treasury brief focusing on the LMS plan is the fact that it's about the only personal account plan that COULD be used, since it's about the only one without significant borrowing (Kolbe-Boyd is another). In other words, by far the biggest purpose for personal accounts is to spread burdens between generations, but if we're borrowing all the money to finance them then we can't be at all sure they're doing what they're supposed to be. Policy-wise, this tells me we've focused on only half the story. The account is like a wheelbarrow for shifting resources between generations. You still need to fill it with resources, though, and LMS is one of the few that actually does.

What does the following phrase mean? a gradual increase in the payroll tax cap to 90 percent of earnings Are the earnings in question each individual's earnings, or is it a fixed cap at the 90 percentile mark of some population of earners?

It is the latter. Increasing the Maximum Taxable Earnings to the point where 90% of total payroll is subject to the payroll tax. It has slipped below that level over the past couple of decades. That would have put the MTE at $171,600 in 2006 when the plan was scored by the Office of the Chief Actuary at SSA.

Social Security surpluses do not increase our capacity to pay future benefits because they cannot be saved anywhere. We are the biggest economy with the smallest retirement problem and other countries are saving here. There is no economy that we can save in and withdraw from later. Our country can only put money in our own economy, and that is not saving. Every penny to pay future benefits must be withdrawn from our own economy. The only thing our government can do is increase investment or reduce government consumption. The best way for government to invest money is to not tax money from private investors. The policy to have the biggest benefit to future generations is pro-growth policy that leads to the biggest future economy to withdraw from. To maximize growth we need a budget balanced between taxes, debt, and spending, such that changing the balance in any way will reduce growth.

"by far the biggest purpose for personal accounts is to spread burdens between generations"

Is that true? An increasing burden of SS is going to land on future generations one way or another by arithmetic. The main purpose of private accounts as I view them is to preserve the basic nature of SS as it is today, regardless.

Two things made SS exceedingly popular in the past: everybody received more from it in than they put into it, while the tax cost to the politicians was very low (at least until '83). What wasn't going to be popular about that?

But in the future both these conditions go into reverse.

Future generations must get less back from SS than they put in (discounted by the bond rate) in an amount that matches the extra that prior generations received over what they put it. And would past generations have loved SS so much if it had paid them $11 trillion less than they contributed to it, rather than $11 trillion more??

Also, to pay even these benefits, income taxes are going to have to be increased by 2 points of GDP to cover the operation of the trust fund by the 2030s. For perspective, this is 10 times the size of the tax increase of the 1983 SS Ammendments that traumatized Congress, and 3x the size of the 1993 Clinton tax increase that passed a Democratic Congress by one vote and preceeded the Democrats losing the House for the first time in 40 years. And it will be simultaneous with tax increases at least twice as large needed for Medicare etc.

It is inconceivable to me that SS's design as we know it will survive this period. How many people are going to vote for a tax increase this large, simultaneous with other even larger tax increases, to support a program that will make them poorer on a lifetime basis? Even many retirees will do better off by voting "no" on a big tax increase on their taxable retirement income (pensions, IRAs, etc).

The political incentives seem instead to point powerfully to another reform "compromise" repeating that of 1983 but on a larger scale: Most current and soon-to-retirees keep their benefits ... the young get benefits reduced by various means ... the rich get means-tested further (this time "out" for many -- how many liberals are going to support big tax increases on workers to secure benefits for Bill Gates?) ... and increased taxes are dropped on the young.

The effect of all which will be to destroy SS as we know it for the then-young, who will receive a return from it so clearly negative, while being means-tested out of if it if they are a success in life, as to make SS politically unsupportable. SS becomes a rich-pay-for poor welfare program.

OTOH, if SS private accounts to hold the surplus in real economic investments had been adopted back in '83 or when proposed after the '94 Advisory Commission, then there'd be no extra 2% of GDP tax cost to fund the trust fund in the 2030s, and the private investments would still be giving all particiapants a positive return on net.

The conditions that made SS politically popular would still be met instead of being reversed, and SS could continue happily on its way.

Of course it would have been best to fund such private accounts with reduced general budget spending -- but even if borrowing had been needed, increasing borrowing in the 1990s and 2000s, when cheap, to reduce borrowing and spending in the 2030s and 2040s, when it figures to be very dear, would have been a good deal.

Alas it seems to late to go this route to save the structure of SS now. And I'm afraid that any reform plan that counts on incurring the 2-pt of GDP income tax cost of the 2030s, by counting the value of the Trust fund bonds towards of the "actuarial balance" of SS, will fail to avoid hitting the political minefield ahead.