Former Bush Administration Treasury Secretary Paul O’Neill criticized the Bush Administration for a lack of meaningful policy analysis in his book, The Price of Loyalty. Mr. O’Neill is a bright and independent thinker about matters of financing governmental policy, so it’s prudent to consider his ideas carefully.
In this NY Sunday Times op-ed, Mr. O’Neill proposes a debt-financed transition of the current Social Security system under which those younger than their mid-thirties would save in broad-based, low-cost index funds, on a trajectory that would return to them a $1 million annuity at retirement. Mr. O’Neill calculates that this would would require about $1 trillion in temporary financing. In short, stop the existing system for new entrants, phase out the existing system as older citizens die, and cover the transition costs with debt to be repaid out of the absence of traditional benefits to the younger entrants in future years. This is a similar plan to the one that Arizona State economics professor and Nobel Prize winner Ed Prescott proposed in this earlier post.
The most interesting observation in the op-ed is Mr. O’Neill’s blunt and disdainful analysis of the politics of Social Security reform:

As I write this I can imagine the chorus of pundits saying, “This isn’t politically possible.” Why not? Because it is too complicated for people to understand? Or because the only way to approach change in our society is through small incremental steps, like the president’s tepid notion of a limited, voluntary diversion of Social Security taxes into small private accounts?
Baloney, I say. What stands between a truly worthy aspiration for our society and its realization is political leadership with the courage to dream big.