Future Shock: Some serious flaws found in latest proposals to fund Social Security

Does Social Security need an extreme makeover? President Bush clearly seems to think so. He now has two proposals on the table—partial privatization and so-called “progressive price indexing”—that would radically transform the program.

Social Security has always paid defined benefits based on prior earnings, with the goal of allowing people to maintain a reasonable standard of living in retirement. Bush’s proposals would break that key link, slashing future benefits for millions of middle-class workers.

His private accounts plan, which would allow workers to divert about a third of their payroll contributions to private investments, would determine basic retirement income partly by stock market ups and downs rather than government guarantees.

And the indexing plan that Bush embraced at his April 28 press conference would preserve the present defined-benefit approach only for low-wage workers—those currently earning less than about $20,000. For everyone else, 70 percent of workers, the system would be flipped upside down—so that the more you earn and pay in, the more your benefits are cut.

Under Bush’s price-indexing plan—developed by investment executive Robert Pozen—the lowest-earning workers would continue to have their future benefits protected by linking benefit levels to overall increases in wages, which is how benefits are calculated now for all workers. Higher earners, however, would have their future benefit levels linked to price increases. Because prices tend to rise more slowly than wages, over time their benefits would drop sharply compared to what’s promised under present law.

And because the gap between price indexing and wage indexing continues to widen over time, young people would see big cuts. According to calculations by the Center on Budget and Policy Priorities (CBPP)—a nonpartisan Washington think tank widely respected for the accuracy of its analyses—here’s how workers now 25 would fare on retirement in 2045:

• Only the lowest-paid 30 percent of all workers — those earning below about $20,000 today — would see no change in their benefits.
• Average-wage workers (those earning about $36,600 now) would see benefits cut by 16 percent.
• Higher-earning workers making about $59,000 now would face a 25 percent cut.

Coupling these cuts with a partial switch to private accounts would mean even more dramatic reductions in defined benefits for those who choose the private account option. Benefits would be cut dollar for dollar to compensate for the funds diverted from Social Security to the account, then cut again because of price indexing.

Looking ahead to 2055, the CBPP found that the combined cuts would be devastating. Medium earners would see their projected benefits slashed by 66 percent. Higher earners would face an 87 percent cut.

“I can’t believe this is the right way to go,” says Colleen Fisher, a 33-year-old marketing consultant in Washington. “Social Security was enormously important for my grandparents, and I’m paying into it now with the hope that it’ll give me some real help someday. But when I look at Bush’s plan and think what it would mean to my son, Teddy, it’s a terrible gamble. And we shouldn’t be gambling with Social Security.”

The White House says it’s unfair to compare Bush’s benefit cuts with the benefits promised under present law, arguing that Congress has made promises it can’t keep. Bush touts his plan as a responsible way to restore Social Security to long-term solvency, claiming it would close about 70 percent of the anticipated shortfall, though some of these savings come from cutting disability and survivors benefits. (Protecting the disabled means the Bush-Pozen plan would close only 59 percent of the gap.)

But opponents point out that cutting benefits—let alone cutting them so much—isn’t the only way to close a revenue gap. Other options are available if policymakers are willing to consider raising revenue as well as trimming costs [see “What’s the Big Idea?”]. Among the options:

• Gradually lifting the cap on taxable income (now set at $90,000) to about $150,000. Actuaries estimate that just this one modest change — which would affect only about 6 percent of taxpayers and could be phased in over decades — could increase net revenue enough to close more than 40 percent of the projected shortfall (but it would be widely opposed, especially by small businesses and higher-earning self-employed people).
• Keeping some of the estate tax (rather than eliminating it entirely in 2010, as Bush proposes) and earmarking the proceeds for Social Security. A tax limited to estates over $7 million (for a couple) would affect less than 1 percent of all estates but would trim the shortfall by nearly 30 percent.

And since that anticipated shortfall is based on a 75-year forecast—which every expert agrees is bound to change—there’s a strong case to be made that such modifications would be sufficient for now.

So far, Bush has balked at raising revenue. Meanwhile, Democrats have resisted pressure to offer solvency plans of their own—in part because they don’t want to be drawn into a debate about benefit cuts.

But former Social Security commissioner Robert Ball, who has defended the program for decades, insists that cuts are unwarranted. “Benefits are already being cut because of Congress’ decision in 1983 to gradually increase the retirement age,” he says. “And benefits are being cut every year by the rapidly rising increases in Medicare Part B premiums, which are deducted from Social Security checks. We don’t need—and can’t justify—more cuts.”

Ball believes that long-term solvency can be maintained with modest revenue increases alone, and that Bush’s price-indexing plan, if enacted, would inevitably lead to a fatal erosion of public confidence in the program.

“It really changes the entire philosophy of Social Security,” he says. “Instead of partially replacing a worker’s earnings, it gradually becomes a welfare program paying the same flat benefit to everyone—while protecting only the poorest 30 percent. I can’t imagine people continuing to support it, once they realize that the more they contribute, the less they’ll get.”

Rep. Sander Levin of Michigan, senior Democrat on the House Subcommittee on Social Security, concurs. “Social Security is not a poverty program,” he says. “It is a retirement system that people have worked hard for and paid into and earned. No one should be misled by offers of ‘progressive’ or ‘sliding-scale’ benefit cuts—because they mean only one thing: major across-the-board reductions in future retirement benefits.”

Can Bush’s plan gain political traction? Polls show support for his private-accounts proposal dropping—even among younger workers, expected to be the most receptive. Price indexing runs a similar risk. The more people learn about it, the more they may balk at supporting such a total makeover of a program that actually may need only relatively minor adjustments to survive—even thrive—for another 70 years.

Thomas N. Bethell is a writer-editor based in Washington.