Social Security

President's Plan Shields Benefits of Low Earners

By Jonathan Weisman
Washington Post Staff Writer
Friday, April 29, 2005

President Bush last night embraced a complex proposal to restore much of Social Security's fiscal balance by cutting deeply into the Social Security benefits of high-income workers and eroding benefits promised to the middle class.

By forcing higher-income beneficiaries to bear the brunt of the cuts, the plan would shield low-income retirees completely -- allowing Bush to endorse an enhanced benefit that would ensure the working poor will not retire into poverty. Any benefit cuts or enhancements would come on top of the president's personal accounts proposal, in which every dollar contributed to a private account would be deducted from a worker's traditional Social Security benefit, plus an interest rate 3 percent above inflation.

Already battling public opinion, the president has now publicly endorsed a proposal under attack from all sides -- by conservatives who say it will make Social Security an even less attractive deal than it is now, and by liberals who say it is unfair to the middle class and would undermine political support for Social Security.

The proposal, known as progressive indexing, was formulated by Robert Pozen, a Massachusetts investment executive and a Democratic member of Bush's 2001 Social Security Commission. It would not completely close the gap between Social Security benefits promised and taxes expected to be paid into the system, but it would solve almost three-quarters of the problem. The White House last night pegged the figure at 70 percent.

Currently, to set initial benefit levels, the Social Security Administration averages the highest earning years of a worker's career, then adjusts them upward to reflect the growth of wages between those years and the time of retirement. Under Pozen's progressive indexing, that system would remain in effect for the bottom 30 percent of earners, who are currently making less than about $20,000 a year.

For workers earning the maximum income subject to Social Security taxes, currently $90,000, benefits would be set according to the growth of inflation over their careers. Since prices tend to grow more slowly than wages, benefits for these workers would be reduced substantially over time, from the level currently promised and even the reduced level payable once the Social Security system has depleted its entire trust fund.

Workers earning between $20,000 and $90,000 would have their benefits set by a sliding scale that combines inflation increases and wage growth.

According to analyses by Social Security's chief actuary, the nonpartisan Congressional Research Service and the liberal Center on Budget and Policy Priorities, the impact would be substantial. By 2055, workers earning $90,000 would see their annual Social Security benefit drop from the currently scheduled $35,751 to $22,666, a 37 percent reduction, according to the Center on Budget and Policy Priorities. By 2075, the negative impact would grow to 49 percent.

Even if nothing were done to fix Social Security's finances, such workers in 2075 would see their benefits cut by $5,156, or 19 percent, from the level even a "bankrupt" Social Security system could pay.

For the working class, the picture is more complex. Under progressive indexing, a worker now earning $35,000 and retiring in 2055 would see annual benefits fall by 21 percent, or $4,552. But that benefit would be $1,685 higher than Social Security could actually pay, absent any changes.

If that same retiree were earning $58,000 in 2005, his benefits would be cut by $9,082, or 31 percent, from currently scheduled levels. If nothing were done to Social Security, the worker would still get $813 more a year under a "bankrupt" system than under progressive indexing.

Democratic economists say such numbers prove that policymakers will have to combine benefit cuts with some form of tax increase to spread the pain and close Social Security's projected funding gap.

"Even if you whack high-income people, you still need deep cuts on middle-income people," said Jason Furman of the Center on Budget and Policy Priorities.

In an interview, Pozen said yesterday he would be willing to discuss some tax increases to mitigate the impact of benefit cuts, but he said it was unfair to compare benefits under his plan with benefits currently promised but unaffordable. Bush last night reiterated his opposition to increasing the payroll tax rate.

Some conservatives are no less blunt in their opposition to Pozen's approach. Under progressive indexing, the rate of return from what middle- and upper-income workers pay into the system and what they get back will get worse every year, said Peter Ferrara, a conservative Social Security analyst. Benefits would be an ever smaller percentage of workers' pre-retirement income.

Such conservatives maintain that large, private investment accounts could replace Social Security with no cuts in promised benefits. But Pozen said their proposals are simply avoiding the difficult choices that he -- and the president -- are willing to make.

"You have to suffer some pain," Pozen said. "The question is, what's a reasonable amount of pain and who should suffer it?"

© 2005 The Washington Post Company