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How Much to Cut?

Sunday, January 9, 2005; Page B06

AS IT INCHES its way toward a Social Security proposal, the Bush administration appears ready to control the rising cost of benefits for retirees. Some sort of cost control is likely to be part of any honest reform to the system, and the Bush proposal has some logic. According to a White House e-mail circulating last week, the administration wants to break the link between Social Security benefits and the general increase in earnings in the country, a proposal that formed part of the leading recommendation from the Social Security commission in Mr. Bush's first term. If the commission's plan were implemented, the average earner who works until the age of 65 would get a tenth less than under the current system if he or she retired in 2022. By 2042, it would be a quarter less; by 2075, just over half of what's promised by the current system.

If these cuts sound harsh, that's partly because the current system makes promises that aren't affordable. The practice of wage indexing that the administration appears keen to scrap is one source of this excessive generosity. The indexing works by taking the 35 highest-paid years of a person's career, then upping the numbers by the rate of national wage growth in the intervening period. Suppose, for example, you earned $40,000 in 1988. Wages have increased by about 80 percent since then, so your 1988 earnings are upped to around $72,000 for the purposes of calculating your pension entitlement. Because of this system, benefits are on an expensive growth path. The average earner who retires this year at 65 gets an annual benefit of about $14,000, whereas an average earner who retires in 2050 is projected to get over $20,000 in today's dollars.

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Some argue that this isn't a problem. Upping past salaries allows pensioners to share in the general rise in prosperity; besides, if Social Security taxes were raised on salaries above the current cutoff of $90,000 a year, the growth in benefits would be affordable. But given that future tax increases are inevitable to pay for soaring medical costs and for the deficits brought on by Mr. Bush and the Republican Congress, it's not responsible to fix Social Security's funding shortfall exclusively by raising taxes. Some cost control makes sense. If workers aren't happy with a pension that, while generous in relation to the living standards of their younger years, feels stingy in relation to their earnings immediately before retirement, they can, if not in the lower brackets, save privately to supplement their Social Security benefit; if healthy, they also can postpone retirement. As physically strenuous occupations account for a shrinking proportion of the jobs available, the option of working into later years makes sense for more and more Americans.

The problem with the Bush idea is that it is excessive. According to the Congressional Budget Office, ending the current system of wage-indexing would more than wipe out the entire shortfall in Social Security funding -- why cut more than you have to? Moreover, the cuts would hurt vulnerable groups unless accompanied by careful protections. Those who become disabled would see their benefits cut unless they are granted an exemption from the reform; being disabled, they may not be able to make good their loss by working longer. The poor, who have little opportunity to save privately and fewer skills to help them remain in the workforce, would receive a cut proportionately as large as richer retirees, whereas they should be given special protections.

The administration is grappling with a big challenge; until it goes public with a proposal, it's impossible to be sure how it may finesse these issues. But, as it refines its thinking, it should consider scaling back what appears to be its current plan. Gentler cost control, designed to protect the vulnerable above all, would represent a better balance.

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