President Bush announced April 28 that he is embracing a proposal to address Social Security's financial shortfall by slowing the growth of future benefits for higher-income and middle-income workers, but not for lower-income workers.
Bush said, "I propose that future generations receive benefits equal to or greater than the benefits today's seniors get." Democrats called the proposal a deep benefit cut. But which side is right? Would benefits be equal, or would they be cut?
Both sides have a claim to accuracy, but neither is giving the full story and thus leaving citizens confused. The fact is that the current Social Security benefit formula would cause benefits for future retirees nearly to double in buying power over the next 75 years, even after adjusting for inflation.
What Bush is proposing is a plan that freezes benefits at their current buying power for upper-income workers, while other workers would continue to see benefits rise faster than inflation.
Compared to the buying power of benefits paid to today's retirees, that would not be a "cut" for anybody. Compared to the rising level of benefits provided by the current formula, that would mean a "cut" for upper-income and middle-income workers. And for the bottom 30 percent of earners, those making $25,000 a year, there would be no "cut" at all.
Sometimes it seems as though Democrats and Republicans are living in parallel universes.Consider these two dueling quotes from April 29, regarding the President's announcement that he is supporting "progressive indexing" of Social Security benefits for future retirees:
President Bush: I propose that future generations receive benefits equal to or greater than the benefits today's seniors get.
Sen. Harry Reid, Democratic Majority Leader: This plan will provide deep benefit cuts for middle-class seniors.
So which is it -- steady benefits or reduced benefits?
Actually, neither side is being completely honest. Bush fails to mention that upper-income and middle-income workers who retire in the future would get lower benefits under his plan than under the current benefit formula. And Democrats fail to mention that the current formula would cause future benefits nearly to double in buying power over the next 75 years, and can't be paid for by current tax rates.
What's the Plan?
The White House said the President's plan is "similar" to this one, proposed by Robert C. Pozen:
•Anyone now retired, or retiring before 2012, would get full benefits promised under current formula.
•Workers averaging $25,000 a year or less (in today's dollars), and retiring after 2012, would continue to get full benefits promised under current formula. This would apply to the lowest 30 percent of earners.
•Workers averaging $113,000 or more (in today's dollars), and retiring after 2012, would see their benefits rise only enough to compensate for the rising cost of living.
•Workers in between would have benefits set by a sliding scale, with benefits rising more than the cost of living, but less than under the current formula.
Source: Robert C. Pozen, " A Social Security Plan for All," paper prepared for "Saving Social Security ," The Brookings Institution, 4 Jan 2005.
According to a White House "fact sheet" issued while the President was speaking at a prime-time news conference, his proposal is "similar" to a "progressive indexing" plan proposed by Robert C. Pozen.
By itself, progressive indexing would clear up about 70 percent of the $4 trillion shortfall in Social Security's finances, according to an analysis by the chief actuary of the Social Security system. It would do so by holding down growth of future benefit levels. This can be done either with or without the individual investment accounts that Bush also proposes.
For a summary of Pozen's plan see the text box at left. For full details, and also for an analysis by the Social Security system's chief actuary, see "supporting documents" at right. Pozen is a lawyer and economist who served as a Democratic member of President Bush’s Commission to Strengthen Social Security. He is a former vice chairman of Fidelity Investments and the lead investment advisor to the Fidelity mutual funds. He currently teaches law and business at Harvard and is the chairman of MFS Investment Management.
Wages vs. Prices
Currently the level of benefits for future retirees is set by a formula harnessed to the rise in wages, a system called "wage indexing." Because wages tend to rise more rapidly than prices, that pushes up benefits even faster than inflation. Democrats have been predicting for months that Bush would endorse "price indexing," which would allow benefits for future retirees to rise only in line with inflation, holding their buying power constant. What Bush in fact endorsed is a compromise, called "progressive indexing," which would push up benefits faster for low-income workers than for middle-income workers and hold them constant in terms of buying power for those at the top.
A "Cut" for Whom? When? How much?
Pozen's progressive indexing plan would mean a "cut" – compared to what's in the current benefit formula – of varying amounts depending on average salary levels and the year in which retirement begins. Here are some examples taken from table B-1 of the chief actuary's analysis:
For workers with average earnings, a "cut" of 6 percent for those retiring in 2025, rising to 28 percent for those retiring in 2075.
For those at the top, making more than $133,000 in today's dollars, a "cut" of 11 percent for those retiring in 2025, rising to 49 percent for those retiring in 2075.
For low-income workers, those making $25,000 a year in today's dollars, no cut whatsoever.
And Compared to What?
It is important to remember that these figures are in relation what the current benefit formula promises, not what current law can actually deliver. The current level of payroll taxes can't support the promised level of benefits beyond 2041, according to latest official projections.
If nothing is done, benefits will automatically be reduced for all persons receiving them. Without a tax increase or some other additional revenue, those built-in reductions would start at 26 percent in 2041, rise to 32 percent by 2078 and keep rising every year after that. And that would apply to everybody receiving benefit checks – rich and poor alike.
So, compared to the levels that current taxes can actually support, low-income workers would actually get substantially more under progressive indexing than they would under the current system, starting in 2041.
High-income workers would still get less, even compared to what current taxes can bear. High-income workers retiring in 2045 would see a "cut" of little over 28 percent under the current system, and a "cut" of 29 percent under progressive indexing.
So when politicians use the word "cut," it's a good idea to get clear on just what they mean. A cut compared to what, and for whom, and when? And what's the cost to avoid?
Stephen C. Goss, "Estimated Financial Effects of a Comprehensive Social Security Reform PRoposal Including Progressive Price Indexing," Social Security Administration, Memorandum to Bob Pozen, 10 February 2005.
Robert C. Pozen, "A Social Security Plan for All," paper prepared for "Saving Social Security," The Brookings Institution, 4 Jan 2005.
Robert C. Pozen, "The route to real pensions reform," The Economist, 6 Jan 2005.
"Fact Sheet: Strengthening Social Security For Those In Need," White House Fact Sheet, 28 April 2005.
Press Conference of the President, White House Transcript, 28 April 2005.
Joseph Curl, "Bush Urges Tiered Benefits," The Washington Times, 29 April 2005.