2004 Nobel Prize in Economics recipient Edward C. Prescott wrote this earlier Wall Street Journal ($) piece advocating a restructuring of the current Social Security system to one based on mandatory individual retirement accounts.
In this op-ed from today’s WSJ, Professor Prescott again makes the case for converting Social Security to a system based on mandatory savings accounts, and makes his case with powerful reasoning based on simple common sense:

Social Security was developed at a time when the number of workers paying into the system greatly outnumbered those who were receiving funds, and thus the promise made by government was easily kept. But times change while policies atrophy, and Social Security has evolved into a system that places an increasingly onerous burden on the young; the ratio of workers to elderly has shifted from 41-to-1 in the 1930s, to 3-to-1 today.

Professor Prescott points out that it is rational for young workers to protest having to pay a disproportionate amount to subsidize such a system by working less to support such a system. Thus, he argues, let’s change the system to address such rational behavior:

Would such changes in tax rates and changes in government promises affect labor supply? Theory says “yes,” the statistical evidence agrees, and common sense concurs. These young workers are rational. They make labor/leisure choices on the margin, and these marginal choices add up.

So what to do? How to move from a pay-as-you-go welfare system to a self-funding retirement system that benefits from individual maximizing incentives? Again, the answer begins with the insight that labor supply is responsive to tax rates. We simply cannot keep cranking up Social Security taxes with impunity. What we need to do is turn the present tax-and-transfer system into a bona fide individual retirement system that is in line with individual incentives.
In short, the answer is to establish a system of mandatory investment accounts for retirement. Why mandatory accounts? Because without mandatory savings accounts we will not solve the time inconsistency problem of people under-saving and becoming a welfare burden.

And Professor Prescott observes that private retirement investment accounts must be made mandatory precisely because people are rational with their money:

The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational — they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age — even if they don’t save a nickel — then what is their incentive to save that nickel? Wouldn’t it be rational to spend that nickel instead?
So, indeed, people are acting rationally when they choose not to save. We have rational people making choices based on the rules. The trick is to get the rules right. A mandatory retirement system, properly designed, would establish effective rules.

And then with the wisdom that generated a Nobel Prize, Professor Prescott bores in on the main problem confronting Social Security reform and advises on how to overcome it:

No sooner did talk get serious about fixing Social Security in recent weeks than the political boo-birds went to work scaring people away from new ideas. It’s rare to open a newspaper editorial page these days and not find some Cassandra screeching about evil policy-makers and cranky politicians who are trying to destroy Social Security. Why a politician from any party would want to intentionally destroy a retirement program meant to benefit the elderly is beyond me. Such political claptrap makes me glad I’m an economist. Granted, politics is a game with its own rules and incentives, and people will rationally play by those rules for political gain, but such political role-playing certainly complicates matters, at best, and makes for bad policy, at worst.
Maybe one way to help avoid ad hominem attacks and political labeling would be to recast the Social Security question from one of reform to one of reconstruction. Let’s stop talking about reforming Social Security — let’s rebuild it. In other words, if we could wipe the slate clean, what kind of government retirement program would we build from scratch today? It’s one thing to snipe at new proposals, but it takes a plan to beat a plan, and I’m willing to bet that the best minds of both political parties, given such a charge, would not come up with a government retirement program as it currently exists.

Read the entire piece. Ed Prescott is a true clear thinker.