WASHINGTON—As President Bush and lawmakers debate what, if anything, to do about Social Security, one option that's attracting increasing attention would slow the growth of future retirement benefits by changing the way they're calculated.
In recent weeks, the president and some lawmakers have declared themselves open to considering at least a partial change in how future Social Security benefits are calculated. The changes involve using the inflation rate as the basis for annual adjustments in Social Security benefits.
Currently, annual changes Social Security benefits are pegged to national wage levels. Switching the peg to the rise in prices, or inflation, wouldn't cut benefits outright because benefits would continue to rise annually at the rate of inflation. But benefits likely would increase more slowly than they would under the current approach, since wages historically have risen faster than inflation.
Critics warn that indexing Social Security benefits to inflation would cut benefits for average workers by one-third to one-half below what they'd get under the current formula.
Proponents of price indexing say the benefits promised under the current system are unsustainable financially. By 2041, Social Security will be able to pay only about 74 percent of promised benefits, the system's trustees report, unless changes are made. That's because there won't be enough active workers to finance the retirement of the baby boom generation (1946-1964), which will begin retiring in 2008.
"We are going to double the ratio of retirees to workers over the next several decades, and it makes no sense to have huge increases in benefits" without workers to pay for them, said Michael J. Boskin, an economist at Stanford University's Hoover Institution, a conservative think tank. He headed President George H.W. Bush's Council of Economic Advisers from 1989 to 1993.
President Bush hasn't offered any plan to make Social Security solvent. But during a news conference last month, he praised a price-indexing proposal offered by Robert Pozen, a registered Democrat and the chairman of MFS Investment Management, a Boston-based mutual fund manager.
"I was surprised," Pozen said Tuesday. He said he'd briefed White House staffers but not the president, "so I didn't even know he knew about those discussions."
Pozen proposes a progressive system. It would keep the more generous wage indexing for low-income Americans, but would link benefits for wealthier Americans to increases in inflation, which would make their benefits rise more slowly. A mix of wage and price indexing would be used to calculate the benefits of middle-income Americans.
Pozen says wealthier Americans already receive retirement subsidies from the government. They save for retirement through investments that defer their taxes into the future in Individual Retirement Accounts (IRAs) and 401(k) plans.
"The lower wage earners need to benefit ... they do not receive the tax subsidies," Pozen said.
In a March 21 analysis of Pozen's plan, the Center on Budget and Policy Priorities, a liberal think tank, questioned its fairness. It said that high-income earners currently get 33 percent higher retirement benefits than average earners.
"Under progressive price indexing, this difference would shrink to only 7 percent for workers retiring in 2075," wrote Jason Furman, the report's author and a former economic adviser to President Clinton. "This raises the question of whether broad political support for Social Security can be sustained if workers pay very different amounts of payroll taxes but most workers receive the same level of benefits."
Two other proposed remedies for Social Security's projected $3.7 trillion funding shortfall over the next 75 years are getting attention because they rely on changes to how future benefits are calculated. One plan by Sen. Chuck Hagel, R-Neb., would keep the current method of calculating benefits, but scale them based on age. Younger retirees would get less initially and more as they age.
Sen. Lindsay Graham, R-S.C., offers a much-discussed plan that includes price indexing for future benefits and raising the cap on how much income would be subject to payroll taxes. Currently, the first $90,000 of income is subject to payroll taxes.
Bill Novelli, the executive director of the AARP, the powerful lobby for older Americans, said he sees growing congressional support for something like Pozen's plan, which tries to make changes to future benefits while still protecting low-income Americans.
But the AARP, he said, would oppose any measure that seeks a complete shift from wage indexation to price indexation.
"It's draconian. It's a bad idea," Novelli said.
(c) 2005, Knight Ridder/Tribune Information Services.
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