Social Security benefits would be cut by progressive indexing

By DON McINTOSH, Associate Editor

In early May, debate flared over a new feature in President Bush’s campaign to change Social Security. Bush proposed a formula for Social Security benefit cuts, which he termed “progressive indexing.”

The president’s idea of diverting Social Security revenue into private accounts actually worsens the system’s future solvency, critics successfully pointed out. Accordingly, cuts in benefits would be one way to help restore solvency.

Administration officials said the cuts weren’t cuts, just slower growth in initial benefits.

Under progressive indexing, Social Security’s starting benefit would grow progressively more slowly over time — a “cut” from what is currently promised.

Social Security presently uses “wage indexing” — calculations about the average wage — to determine a recipient’s starting benefit, which is then adjusted each year for inflation. Bush has proposed a shift to calculations based on increases in prices instead. Because prices grow more slowly than wages over time, a shift to “price indexing” means a lower benefit than the one workers now expect to receive.

Price indexing attracted fierce criticism when it was first publicized in February, so in May Bush began talking instead about progressive indexing, a combination proposal in which benefit increases for the poorest would still be wage indexed while increases for the very richest would be purely price indexed.

Thus, theoretically, the poorest workers wouldn’t be affected by the cut. The richest, who rely least on Social Security anyway, would get the biggest cuts.

By far the greatest impact would likely be on workers in between – most workers.

In effect, progressive indexing would produce a smaller benefit for anyone earning more than the equivalent of $16,470 in 2005. Cuts accelerate over time and with income.

Take “medium earners” for example. Median earners are those whose lifetime earnings average today’s median wage: $36,500 a year. Under the current formula, median earners who retire in 2025 would get a starting benefit of $16,009 a year (in inflation-adjusted dollars); those who retire in 2045 would get $19,837 a year; and those who retire in 2055 would get $22,097. With progressive indexing, benefits for median earners retiring in 2025 would be $1,025 a year less; $3,253 a year less for those retiring in 2045; or $4,552 a year less for those retiring in 2055.

“High earners,” those averaging $58,560 in today’s dollars, would see even larger cuts. High earners retiring in 2025 would see benefits cut $2,038; those retiring in 2045 would see benefits cut $6,444; those retiring in 2055 would see a cut of $9,082.

The concept of “progressive indexing” was developed by Robert Pozen, chairman of Boston, Massachusetts-based MFS Investment Management. Pozen, a former vice chairman of Fidelity Investments, was a member of the 2001 presidential commission that Bush set up to develop proposals to privatize Social Security.

Because Pozen is a registered Democrat, Bush has repeatedly referred to progressive indexing as an idea developed by a Democrat, despite the fact that no congressional Democrats have endorsed it.

When Pozen testified about his idea May 12 at a hearing of the House Ways and Means Committee, Representative Charles Rangel took aim at Bush’s strategy. Bush has so far credited individual “Democrats” with every proposal to increase Social Security taxes or decrease benefits.

“You’re so proud of being a Democrat,” Rangel said to Pozen. “The White House goes out of its way to identify you by your party label. Why might that be?”

Pozen said he didn’t know. “Take my word for it,” Rangel said, “we would not be hearing your name if you weren’t a Democrat.”

In fact, Rangel declared, “Progressive indexing,” is designed to undermine political support for Social Security.

If benefits are gradually cut for higher income workers, eventually Social Security could come to be seen as a benefit for poor people rather than a benefit for every worker.

“My mother worked all of her life as a member of the International Ladies Garment Union,” Rangel said. “And she was so proud of her Social Security check because she felt she had earned it. She never considered it welfare.”

President Bush has presented progressive indexing as a necessary component of his plan for private accounts in Social Security, but critics say the two proposals are unrelated and should be judged separately.

In at least one sense, however, the two are linked. Up to now, Social Security has been basically a “pay as you go” system, with taxes from today’s workers paying for benefits for today’s retired and disabled workers and their survivors and dependents. Under Bush’s proposal for a system of private accounts, Social Security revenues would be used to buy stocks and other investments. Because Social Security would still owe benefits to those current beneficiaries, that diverted money has to be made up for somehow. Progressive indexing is Bush’s answer as to how to pay for the private accounts: cut benefits.

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