Chris Christie Addresses the Pension Elephant

Chris Christie is taking some heat for having the guts to say Social Security should be means tested and the retirement age increased. He also suggested reforming Medicaid and increasing the age for Medicare eligibility to 67. In asking his New Hampshire audience to embrace entitlement reform, Christie has taken on the elephant in the room.

His comments, while bold politically, rest on solid economic ground: Economists of every stripe agree that U.S. entitlement reform is long overdue. And, the problem truly is elephant size: unfunded liabilities are estimated to be around $23 trillion, or about $73,000 per man, woman, and child in America today.

A politician speaking truth on America's Big 3 entitlement programs - Social Security, Medicare, and Medicaid - is a rarity these days, so Christie's comments have predictably ignited harsh attacks from both parties. Reasons for outrage are pretty straightforward: talking about entitlement reform is an admission that the programs are failing; it forces politicians to talk substance; and it means the all-too-common promise to preserve benefits as they are is false.

The economic point Christie is making is clear: Social Security is viewed by many lawmakers and retirees like a guaranteed defined pension program that is 100% safe and secure. Nothing could be further from the truth.

The fact is, it's a pay-as-you-go system that is susceptible to demographic changes (i.e., we are living longer!), market risks, business cycles, and political risks. In the case of Social Security, we're finding that the emperor has no clothes - "Promises, Promises" as the old Naked Eye song goes. Promises have been made for generations with the knowledge there'd be no way to keep them.

While mere mention of Social Security is often newsworthy, and while incremental reform ideas like George W. Bush's privatization ideas of 2004/2005 were deemed radical, Christie's proposals are quite moderate, cautious, and arguably not enough to assure Social Security's long term solvency.

Means testing of benefits, for example, which would make Social Security payments dependent on whether one has the means to do without that help, is a central feature of welfare programs in both Canada and the U.K. And, our Medicaid program already relies on means testing when it comes to nursing home care: assets and income are both taken into account.

And, in terms of substance, Mr. Christie's call for means testing only affects a tiny group of people - those with income more than $80,000 per year. According to a Dow Jones story, "In 2012, 80% of households composed of those 65 or older had income of $43,260 or less, including Social Security income." Furthermore, raising the retirement age to 69 and early retirement by just two years is not enough to stem our rapidly growing liabilities.

Christie's plan to save Social Security places too much faith on bureaucrats and federal commissions to solve the problem. And we have seen, through the Social Security reforms of 1983 and 1994, that Christie-style reform doesn't protect us from future political interventions or political risk.

Worst of all, though, Christie's proposal doesn't do enough to address a fundamental market failure that has been created by irresponsible Americans and fueled by the false sense of safety that Social Security presents. One in three Americans have nothing saved for retirement, and the average American in the age 55 to 64 bracket has just $12,000 in retirement savings. They expect Social Security to provide for them in old age, but Social Security has become more precarious each year.

Benefit cuts and uncertainty about Social Security in the future aren't going to be enough to encourage savings and equity investing. "Carrots" are needed too, and Christie's proposal is filled with a lot of tough love and not much in the way of a more viable long-term model, such as social security privatization.

Christie's correct and should be commended for asking Americans to look at the open, festering sore that is our Big 3 entitlement programs. But, his remedy doesn't do enough to encourage savings and put us on a path where, thanks to a system of private accounts, Social Security as we know it - a program of false promises made today and then broken tomorrow - is retired and written off as a bad idea.