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Benefits for tomorrow's seniors cut under any Social Security overhaul

WASHINGTON—Whether or not President Bush succeeds in partially privatizing Social Security, any deal to overhaul the nation's retirement system would make future guaranteed benefits less generous than they are now.

Even Democrats, who are assailing President Bush's plan to remake Social Security, concede that any effort to improve the program's long-term finances would reduce the growth of benefits, delay them or both.

"If Democrats were in charge, benefits would have to be altered," said Rep. Charles Rangel of New York, the top Democrat on the powerful House Ways and Means Committee. "You cannot fix the system without pain, no matter how much money you borrow."

How much pain and where it would be applied remain open questions. Proposals include indexing benefits to price inflation rather than national wage growth, increasing the retirement age, changing the formulas for calculating benefits or simply reducing benefits for new retirees across the board.

At the same time, however, some debate whether big changes are even required to fix the system.

And until the White House releases a specific plan, Democrats are reluctant to spell out what they might support for fear of alienating older voters and weakening their negotiating stance with the president.

Elderly advocacy groups such as the influential AARP are ruling out measures such as a higher retirement age, smaller cost-of-living adjustments or benefit adjustments based on income.

Still, even the AARP is trying to get a sense from its members of what benefit cuts might be acceptable. Organization officials point to the Social Security adjustments in 1983, when President Reagan and the Democratic-controlled House of Representatives negotiated a bipartisan deal that gradually increased the retirement age, delayed cost-of-living adjustments and accelerated scheduled increases in payroll taxes.

"If you just say to people, `Would you favor this one thing by itself?' very few people are going to favor a benefit cut," said John Rother, the AARP's policy director. "But if you present it as part of a package that's balanced, that seems fair, that protects low-income, then I think people will say, `Well, I'm not enthusiastic but I can see why this might be necessary.'"

So far, Bush has focused exclusively on his plan to allow workers to divert a portion of their payroll taxes into private retirement accounts. But that alone won't shore up Social Security's long-term fiscal dilemma.

The Social Security trustees have predicted that as the baby boom generation retires, payments to elderly beneficiaries will begin to overtake payroll tax revenue starting in 2018. Social Security surpluses will continue to provide promised benefits at least until 2042, the trustees concluded. After that, with no changes in the system, benefits would have to be cut by about 25 percent to meet projected payroll-tax revenue.

The private accounts would let retirees invest a portion of their payroll tax in the stock market or government bonds. Social Security would need additional changes to overcome its long-term crunch, but Bush has yet to describe an all-encompassing plan.

Last Thursday, Vice President Dick Cheney reiterated the president's broad goals for an overhaul: that it contains private investment accounts, doesn't increase payroll tax rates and doesn't affect current retirees.

A December 2001 report by a presidential commission on the matter offers hints as to what a complete overhaul might include. It suggested that the federal government could slow the growth of Social Security benefits, resulting in smaller benefits for future retirees.

Under that plan, the formula for calculating a retiree's initial benefit no longer would be linked to the rise in national wages. Instead, it would be tied to price inflation. Historically, wages have risen faster than prices, so benefits indexed to prices over time would be smaller. Under current law, a future retiree with average earnings born in 1970 would receive a $17,700 annual benefit, in 2004 dollars. Under a price-indexed formula, he or she would receive $13,600 a year, in 2004 dollars.

Robert C. Pozen, a member of the 2001 presidential commission and an influential figure in financial circles, is suggesting a hybrid model that would use a blend of wage indexing and price indexing to protect lower-wage workers from experiencing too sharp a reduction in benefits.

Changing the index isn't the only way to slow the growth of benefits.

Other proposals that policy makers and members of Congress have mentioned include adjusting the initial benefit level to account for increasing life spans.

Another would increase the number of work years used to calculate benefits. Under current law, Social Security payments are based on an individual's highest 35 years of earnings. Some propose increasing that number to anywhere from 38 years to all working years. As more years are included in the formula, average earnings over that period decrease, reducing the benefit.

Another proposal would make cost-of-living adjustments differently, pegging them to a stricter consumer-price index that the Labor Department devised. The Congressional Budget Office estimates that such a change could reduce annual cost-of-living adjustments by 0.3 percentage points.

Congress also could increase the retirement age again, as it agreed to do in 1983. Or it could accelerate the date at which the retirement age increases to 67. Under current law, the 67-year-old threshold kicks in in 2022. Legislation introduced in the House last year, but never acted on, would have moved up the effective date to 2011.

But the AARP objects to reducing cost-of-living adjustments or increasing the retirement age.

Most Democrats are staying mum, saying it's up to Bush to make the first move.

"I haven't yet seen a serious proposal from the Democratic side that addresses the financing of this system," said Jeffrey R. Brown, a finance professor at the University of Illinois whom the president recently appointed to his Social Security advisory board. Brown described the Democratic strategy as sitting on the sidelines "lobbing grenades."

"The ball is in the president's court," said Gene Sperling, former national economic adviser to President Clinton. "It's early January, Democrats are discussing both substantive options and strategy. There is still an open discussion going on."

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(c) 2005, Knight Ridder/Tribune Information Services.

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