Mr. Bush's Proposal
Monday, May 30, 2005; Page A20
IS PRESIDENT BUSH advocating cruel cuts in Social Security? Consider these calculations by the Urban Institute's C. Eugene Steuerle: Government-provided retirement benefits for the average couple retiring in 1960 amounted to $195,000. Today, that amount has grown to $710,000 ($439,000 in Social Security and $271,000 in Medicare, which didn't exist in 1960). For a couple retiring 25 years from now, lifetime benefits are scheduled to exceed $1 million. Mr. Steuerle's numbers are adjusted for inflation, so this is real growth.
Is this sensible, given other pressing demands? Is it sustainable, given the impending retirement of the baby boomers? The answer to both questions is no, which is why Mr. Bush's proposal to adjust the way that increases in Social Security benefits are calculated -- a method known as progressive indexing -- merits serious consideration.
The size of retirees' Social Security checks is based primarily on their average earnings over the course of their careers -- adjusted upward to prevent the value of Social Security checks from being eroded. The controversial part -- and the heart of the debate over progressive indexing -- is whether that upward adjustment should be based on the rise in prices during the worker's career or on the rise in wages.
The current system ties benefits to average wage growth during the worker's career. This approach was neither carved in stone nor part of the original Social Security system. Instead, until the 1970s, Congress dealt with the issue by periodically increasing benefit amounts for existing and future retirees. In 1977, lawmakers made those changes automatic, indexing initial benefits to wage growth and recalculating benefits after retirement to reflect increases in the cost of living.
Tying initial benefits to wage growth lets retirees share in the improved standards of living to which they contributed. But because wages generally increase faster than the cost of living, wage-indexing is also enormously costly: It accounts for close to half of the projected increase in costs through 2075. Simply switching from wage- to price-indexing would more than take care of Social Security's solvency problem. But Mr. Bush is proposing something less drastic; this is where the progressive part comes in.
Retirees would be divided into three categories beginning in 2012. The lowest tier (average career earnings of $20,000 or less in today's dollars) would continue to have benefits calculated based on wage indexing; their scheduled benefits would remain the same. The highest tier ($90,000 and above, again in today's dollars) would have benefits calculated through price indexing; their promised benefits would be cut substantially from what they would have been under a wage-indexed system. The middle tier would have its benefits calculated under a sliding-scale combination of the two approaches.
Such a formula wouldn't entirely eliminate the Social Security deficit, but -- under a plan produced by investment executive Robert
Pozen and endorsed by Mr. Bush -- it would address about 60 percent of the problem.
The major critique of the Pozen plan is that promised benefits for the middle tier would be cut too sharply. It's fair to debate whether Mr. Pozen scales back scheduled benefits too far down the income chain, though it's important to remember that these are cuts in promised increases, not cuts compared to today's benefit. Mr. Pozen is the first to say his plan could be recalibrated to be more generous to the middle class.
But there's not enough money in the system to pay scheduled benefits, and tax increases can't be expected to cover all of the shortfall, given other looming demands on the treasury. Deciding what benefits the country can afford to give its citizens -- and how much of that amount should go to seniors, as opposed to children and working families -- is an essential part of the Social Security discussion. It's why progressive indexing ought to be considered as part of the solution.
This is one in a series of editorials examining Social Security and its future. Others can be found athttp://www.washingtonpost. com/opinion. |
