Fred Thompson has now officially become the first candidate to come out with a full Social Security reform plan.

Before we dive into it, here's a short recap of the possible reform options. To put Social Security on a path to solvency, we only have a few options:

1. Raise taxes, which is a short term fix.
2. Cut benefits, also a short term fix.
3. Transform the system from a pay-as-you-go system to a pre-funded system. Costs more in the short term, but achieves sustainable solvency.

That's it. It's mix and match, but you only have three options to choose from.

So here's his plan, as summarized by the NYT Politics Blog:

• Index benefits to prices, not wages (Cut Benefits)
• Create optional add-on personal retirement accounts. (Transform the system)

So it looks like Fred chose options (1) and (3). That's no surprise since he's running in the Republican primaries. It's also pretty straightforward, and it would fix most of the shortfall, while giving retirees the same purchasing power as they would have today.

The PRA proposal is what gets interesting:

On the personal accounts, 2 percent of workers’ paychecks would automatically be entered. The government would give the employee $2.50 for every $1 contributed into the account, up to $1,000 per month or $12,000 per year. After that point, 50 cents would be matched to every $1. This money would be paid for by the current Social Security fund, Mr. Thompson said.

It's not immediately obvious where this money will come from, but the suggestion is that we'll use the current "surplus" (until 2017) and also part of general revenues...and of course the current "Social Security fund" (which is confusing, because there isn't any actual money in it).

This is a good deal for those soon-to-retire. It's also a great deal for young people who would have the benefit of a lifetime of growth with initial government matching. It also nudges the current system towards a sustainable path while giving future retirees the same deal as today's retirees have.

Who loses with this plan? Those retiring in the medium term (15-25 years away) get a smaller benefit than they were promised, and they won't have a long term of compounding ahead of them in their personal account.

In the end, of course, any reform will have winners and losers, and it appears as if he has chosen to spread the pain as widely and thinly as possible. Kudos to Senator Thompson for having the guts to lay out his plan when everyone else has their heads in the sand.

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