In opening his discussion, Diamond put many of the typical concerns regarding social security to rest. Blown out of proportion, fears of the social security system going broke are misplaced, according to Diamond.
Since a payroll tax funds the social security program there will always be a constant flow of capital into the system. "The claim you will get nothing will only happen if somehow the payroll tax revenues are taken away," said Diamond.
Professor of Economics Daniel Barbezat later concurred. "Even without any important changes, the system could fund the program with an estimated 26 percent fall in benefits. While no one wants that, it is a long way away from benefits falling to zero," he said. According to Diamond, therein lies the problem.
Diamond said that though the social security system is currently producing a surplus as a result of changes implemented in 1983, projected costs for scheduled and payable benefits are on the rise.
He explained with graphs that with the retirement of the baby boomer generation and increased life expectancies, benefit expenditures increase as payroll tax revenues decrease. According to Diamond, the current surplus will be depleted by 2041, and expenditures will be forced to match the amount of revenue. As a result, individuals will see a benefit reduction of up to 26 percent in 2041 and 32 percent in 2079.
These projected cuts are troubling to many of its beneficiaries, particularly to those with low life earnings and consequently low retirement savings, such as disabled workers, widows and people from low income backgrounds.
Though the social security system was never meant to be a sole source of income for retirees, up to 22 percent of the elderly rely on social security benefits for 100 percent of their income. Additionally, 34 percent of retirees rely on benefits for 90 percent or more of their income. "From the beginning, social security has been referred to as a floor on retirement income or a foundation for retirement income; it's not a level of income you're expected to try to live on," said Diamond.
According to Diamond, President George W. Bush proposed a means of reforming social security by the way of individual accounts in this year's State of Union address. Bush proposed that instead of allocating a portion of one's payroll to pay for the benefits of today's retirees, an individual would be able to set aside that money and invest it in one's own retirement account.
At retirement, the individual would then pay back a portion of the initial investment to the social security system and the remainder would serve as a retirement fund.
However, Diamond said that this proposal would be detrimental to the system. The proposal would cause the current surplus in the Social Security Trust Fund to exhaust itself a decade sooner than currently expected since benefits would be paid solely out of the fund.
Afterwards, in order to continue benefit payments, the government would need to borrow or take money from the U.S. Treasury as well. The result would be an increased federal deficit. For Diamond, the implementation of individual accounts is "a plan that appears very generous, but leaves social security in a deep hole."
For Diamond, the solution lies not in individual accounts, but in a balance between increases in payroll taxes and benefit cuts. In a proposal he co-wrote with Peter Orszag of the Brookings Institute, he presented the idea of setting up a commission in order to negotiate the changes: "If we had a commission appointed by both Democrats and Republican, that would balance the pain on the tax side and the benefit side," he said.
Statistical evidence indicates that the American public is in favor of such a plan. In a poll conducted at Princeton University, 30 percent of Americans preferred raising payroll taxes in order to make up for the social security deficit, five percent supported benefit cuts and 34 percent preferred both.
Diamond ended his lecture by stressing the importance of the social security question. "This is an important issue that will definitely be back on the agenda," he said.
After the lecture, Barbezat agreed with Diamond that the social security program holds wide public approval. "There is no doubt-all polls show the same thing-the American public very broadly supports social security. It is perhaps the most popular governmental program," he said.
Andre Perez '07 agreed with many of Diamond's points during the lecture. "I thought his plan for social security made good common sense, backed up by sound economic theory," he said.
Mike Chen '08 said that he wished Diamond had spent more time speaking about his solution ideas for the social security program. "The talk was interesting in that it pointed out many of the flaws in Bush's plan, but failed to really elaborate on his own plan, which I was more interested in. Spending more time on his plan would have added much more depth to the lecture," he said.
Diamond graduated from Yale University in 1960 with a B.A. in mathematics and earned a Ph.D. degree in economics from MIT in 1963. He was an assistant professor and acting associate professor at Berkeley until he accepted the position of associate professor at MIT in 1966. In 1997, MIT made Diamond an institute professor economics, the highest honor possible for a faculty member.
Additionally, Diamond is president of the American Economics Association and of the Econometrics Society. He is also a member of the National Academy of Sciences and a Fellow of the American Academy of Arts and Sciences. To date, he has published well over 100 articles and written, co-written or edited nine books.