Posted on 05/01/2005 5:59:24 AM PDT by snowsislander
PHILADELPHIA - (KRT) - On Thursday night, President Bush announced that he'd like to balance Social Security's books by having retirement benefits grow more slowly for the better-off than for people with lower incomes.
He was endorsing, at least in principle, an idea called "progressive indexing," the brainchild of a Boston-based investment executive named Robert C. Pozen.
And progressive indexing, if enacted, would have a dramatic impact on the vast majority of working Americans.
In the decades to come, only the poorest 30 percent of retirees would receive the Social Security benefits they're promised under current law.
Everyone else would get less, a lot less as time goes on, with higher-wage workers seeing the greatest impact in their checks.
For example, an individual who retires in 2055 with an average career income equivalent to $58,000 today would be hit with a 31 percent reduction in promised benefits. That calculation does not include the impact of allowing workers to put some of their Social Security money into private accounts, as Bush has proposed.
People retiring in the early years after the change would see small reductions; those retiring later would see more. Everyone's benefits, though, still would be higher in real terms than they are today.
"Until you deal with the basic benefit issue, you can't get a handle on solvency," Pozen, 58, chairman of MFS Investment Management and a registered Democrat, told the Senate Finance Committee last week.
Keep in mind that if nothing is done to improve the finances of Social Security, the system will have to cut benefits across the board by an average of 26 percent in 2041. Or so its trustees project.
Democratic reaction to progressive indexing has been mostly negative, with House Minority Leader Nancy Pelosi saying that Bush, by embracing it, has proposed "the single biggest cut in Social Security benefits for the middle class in history."
So what does progressive indexing mean?
Under current law, the size of a worker's initial retirement check is based in part on how much average wages rose during his or her career. That's known as wage indexing.
In 2001, Bush's Commission to Strengthen Social Security, on which Pozen served, talked about moving from wage indexing to price indexing. That shift would reduce benefits drastically, since prices historically have risen more slowly than wages.
Sometime after the commission disbanded, Pozen came up with the notion of combining the two methods as a way to improve the system's finances without driving lower-income retirees into poverty.
In his plan, he'd retain the more generous wage indexing for people with average career earnings less than $25,000 (the bottom 30 percent as of 2012, his tentative start date). He'd impose price indexing on people who earn more than $113,000 (the top 7 percent) and blend the indexes for everyone in between.
He offers three reasons for adopting this approach even though Social Security already is said to be progressive, in the sense that low-wage workers get bigger retirement checks relative to their contributions than high-wage earners.
One is that people at the low end depend on their checks and need every nickel. The second is that low-wage retirees tend to die sooner than high-wage ones, giving them fewer years to collect benefits.
Third and perhaps most important, he says, is that the federal government already provides huge retirement subsidies for middle- and upper-income Americans through IRAs, 401(k)s and the like. While such tax-advantaged options are open to all Americans, they are used mostly by people who can afford to save.
"For moderate- and upper-income workers, the current system is too generous," Pozen said in an interview, "given the retirement-savings vehicles available and the overall federal budget situation."
Liberal analysts object to his plan on several grounds.
For one thing, they say, it relies entirely on adjusting benefits to address Social Security's projected $4 trillion, 75-year funding gap. There are no provisions for increasing revenues, through such measures as raising the cap on the wages to which payroll taxes apply.
"Any benefit cuts of this magnitude are unworkable," said economist Jason Furman of the Center on Budget and Policy Priorities. "There will have to be some benefit cuts, and they should be progressive. But there are better ways."
And progressive indexing, its opponents say, could undermine popular support for Social Security in the long term by making it look like a bad deal for people with above-average salaries - and by weakening the link between contributions made and benefits received.
Pozen, who made his reputation in money management during a 15-year career at Fidelity Investments, says that his plan should be viewed as only "a fair and workable foundation" for legislative action.
He says that it can be massaged in various ways and combined with other proposals, such as a later retirement age, a higher wage cap and private accounts; Bush said again last week that they must be part of any final package.
Pozen favors the accounts, though he thinks they should be limited to 2 percent of salary, not Bush's 4 percent. But he also thinks that enhancing the system's solvency, which the accounts don't, must be job one.
And while Pozen is pleased that his idea has now landed at the center of the Social Security debate, he worries that nothing will get done in Congress unless "the president become more flexible on personal accounts."
Progressive indexing, incidentally, would not wipe out the $4 trillion shortfall. It would deal with only about 70 percent of the 75-year gap.
But Pozen says he's come to believe that people who propose to do away with the entire shortfall "don't really want anything to happen"; they know that such plans are too painful for Congress to enact.
Economists acknowledge that changing Social Security will be painful for lots of Americans. How to distribute the pain is the question. Progressive indexing is one answer.
Now it seems to be President Bush's answer, not just Robert Pozen's.
I think private accounts are the way to go, and if we could just let everyone under, say, age 45 or 50 go to a completely private account, I think we might be able to save this FDR monstrosity.
But I have to admit that I just don't like saving it by making Socialist Security even more marxian by an even more straightward adoption of "[f]rom each, according to his ability; to each, according to his need".
Rather than "means testing" we could use lifetime reported earnings as the basis for computing the benefit. Right now they use the highest 5 years.
Even though many are calling this suggested plan cuts, am I correct in thinking that in reality it only lessens the increase? Everyone's SS benefits would still increase, for some the increase would be lessened. Not really a cut, right?
All indexing does is allow the government to continue to steal the money. Maybe that's why this idea will pass with unanimous vote from those in Washington.
Call me crazy but I thought of a good place to start making the Social Security System better that NOONE has suggested; Congress IMMEDIATELY stops spending the Social security Surplus!
I must be nuts!
I think that would be a fine idea. I'd like to see the budget pared to the point that we weren't borrowing any money, whether the parlous Ponzi scheme part, or borrowing from China and Japan. I'd like to cut back enough on the budget so that we were running in the black -- and then cut taxes so that we were even.
I support the president on a number of issues and willing to forbear on others, but on this means testing and on the drug "benefit", I am strongly opposed to both. The drug "benefit" is a done deal, more's the pity, but I cannot see fixing Socialist Security in this manner.
"Huge retirement subsidies" by not taxing money that people try to save for their own retirement? Bull! they are distorting the language. What I understand the sentence to mean is: 'we coould do away with individual retirement accounts such as IRA's and 401(k)'s so that we could tax the growth in those funds sooner rather than later'.
I agree with the sentiment that the entire federal budget is out of whack. STOP SPENDING MORE THAN IS COLLECTED IN TAXES. (expenditures should be less than revenue)
It means they're not going to use lube this time.
With salt added.
http://www.freerepublic.com/focus/bloggers/1394528/posts?page=13
FROM MY POST:
I have two comments :
1) The democrats are opposed to Bush cutting the rate of growth of SS benefits for 'the rich'. Yet in 1993 the Democrats alone voted for and passed an increase of the federal income tax on SS benefits . So they won't cut our benefits (sounds good) because they want us addicted to them, but at the same time will take those same benefits away from us and put them in general revenue in the form of tax increases. Even when they try to sound like they are fighting for us it turns out to be a big con. Understand what they are doing here!! These people are evil!
2) "It's actually earning over 7% per year now", What ????!!! Don't the feds just spend the money as it comes in? Don't these socialists have a clue what the meaning of 'earn' is?
I cannot put into words what I think of these socialist libs!
Saw Lib Nancy Pelosi (CA-SF)on ABC 'This week'. She attacked Bush for proposed cuts in middle class SS benefits. George asked her repeatedly for her plan, she said over and over dems plan is to pay back the trust fund like Clinton did(didn't Clinton just spend the SS surplus???). What is Nancy talking about??? Dems(her and BC) raised taxes on SS benefits in 1993, in effect cutting the benefits, but putting the money in the general fund. What are democrats (including Pelosi on this program) saying they are for? Raising taxes only!! So they will protect our SS benefits but will take them away at the same time in general revenue taxes to pay back the SS trust fund. BTW: No one is asked them about this contradiction, they get off scot-free.
Eleanor Cliff is howling about Bush cutting middle class SS benefit cuts right now(McLaughlin Group). No one is calling her on this.
"...the entire federal budget is out of whack. STOP SPENDING MORE THAN IS COLLECTED IN TAXES."
FICA taxes produce a surplus for now over and above the current cost of SS benefits. That surplus should be directed to private accounts owned by the taxpayer individually. That moves up the date of SS "insolvency" to the here and now but the term "insolvent" has little meaning in this context because the whole program is welfare funded by taxes. Strictly speaking in the bankruptcy sense, the program, which does not exist separately from the government, is not insolvent as long as it can pay its current obligations. All this blather about SS "insolvency" centers on the fiction that somehow SS is a separate independent entity. That is the same "off-balance-sheet" accounting used by Enron.
We need to simply acknowledge that SS is a welfare entitlement paid by a special segment of income tax known as FICA, which by the way is a regressive tax compared to the graduated ordinary income tax. Nevertheless, the whole sham is, and has always been, a line of BS to pry tax dollars out of those of us who work. Once we get that into perspective, I think it's only a matter of time until we scrap this cruel joke of a program. If we are going to supplement people's incomes once they are retired, fine, but let's do it with our eyes wide open.
"I'm from the government, and I'm here to help you." Be afraid. Be very afraid. RUN AWAY!
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