29 April 2005 at 1:54:10 PM
Does it matter to you if you get the same benefit as others do after paying more of your income into social security, that is that your retirement benefit would be largely unrelated to your income? That's what Bush is proposing. Also, he said the larger social security benefits would go to those who are better off-that is marked at someone who makes less than $20,000; you make more? your benefits are cut. Think Progress also points out that the cutoff for the "better off" is different than the cutoff Bush used when promoting tax cuts-that cutoff was $100,000 per year-quite a difference-low income redefined from $100,000 per year to $20,000 per year when it comes to retirement funds.
Center on Budget and Policy Priorities
Analyzing "progressive price indexing"
- Progressive price indexing would impose substantial benefit reductions on average workers. Progressive price indexing would reduce annual benefits for an average wage-earner who is 25 today and retires in 2045 by 16 percent or $3,523 (in inflation-adjusted 2005 dollars), relative to the benefits that the worker would receive under the current benefit structure. For an average-earner who retires in 2075, the benefit reduction would be 28 percent or $7,629 in today’s dollars. These are much larger benefit reductions than those included in alternative plans that achieve sustainable Social Security solvency through a mix of revenue increases and benefit reductions (as the 1983 Social Security legislation did).
Progressive price indexing would use benefit reductions to close about 70 percent of the 75-year shortfall. The Social Security Trustees projected in March 2004 that the Social Security system has a deficit of 1.89 percent of taxable payroll over the next 75 years. According to an analysis of the Pozen proposal recently conducted by the Social Security actuaries, progressive price indexing would reduce the deficit by 1.36 percent of taxable payroll and thus close 72 percent of the shortfall. (The remaining deficit would have to be closed by additional benefit reductions, tax increases or general revenue transfers.)
- Progressive price indexing would transform Social Security over time from a retirement program to more of a welfare system that provides a modest retirement benefit largely unrelated to income. Because progressive price indexing produces very large reductions in benefits over time for high earners, substantial benefit reductions for average earners, and no reductions for low earners, it eventually eliminates most differences in benefit levels. Ultimately, most beneficiaries would get the same monthly benefit, despite having paid in very different amounts in payroll taxes.
Under current law, “high earners” (those whose earnings are 60 percent above the earnings of the average earner) receive Social Security benefits that are 33 percent higher than the benefits that average earners get. Under progressive price indexing, this difference would shrink to only 7 percent for workers retiring in 2075, and the difference would be eliminated entirely by 2100. 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.
- Combining progressive price indexing with private accounts carved out of Social Security would make the system unattractive to high-earners. Making Social Security’s benefit formula this progressive could risk undermining some of the broad-based political support that Social Security enjoys. If progressive price indexing is combined with “carve-out” private accounts, and Social Security benefits are reduced further for those who elect the accounts, the problem could become severe. Low earners would rely primarily on traditional Social Security benefits, while higher earners would receive only a tiny Social Security benefit or no Social Security benefit at all and would rely mainly on their private accounts.
- Progressive price indexing is poorly designed to respond to contingencies; the benefit reductions it engenders would grow deeper if the economy performed well, even though the Social Security shortfall would have narrowed on its own, and would grow smaller if the economy performed poorly and the Social Security deficit widened. The stronger that economic growth and real wage growth were, the bigger the benefit reductions would become under progressive price indexing. This would be a perverse effect; stronger growth would lessen Social Security’s financing problems and lower the amount of benefit cuts needed. Conversely, if economic growth slowed, the benefit reductions that progressive price indexing delivered would decrease in size even as the Social Security shortfall widened.
Progressive price indexing would represent a profound shift in Social Security. Ultimately, it would lead to most workers receiving the same Social Security benefit level, regardless of how much they had paid in payroll taxes.
If private accounts are added to the equation and are paid for by additional benefit reductions, the results become even more extreme. If progressive price indexing were combined with the President’s private accounts proposal, workers with average incomes of $90,000 or more would eventually receive no Social Security benefits at all. It is unlikely that a Social Security system structured in this manner would remain politically sustainable over time.
Progressive price indexing also would require substantially larger benefit reductions for middle-class workers than several alternative approaches to restoring solvency. This would be the case because with progressive price indexing, the onus of restoring sustainable solvency is placed primarily on benefit cuts, rather than on a more balanced mix of benefit reductions and progressive revenue-raising measures.
Even if one supports making benefit cuts the primary means of restoring solvency, progressive price indexing is not well designed to achieve that goal, since it would produce excessively large benefit reductions if the economy and real wage growth perform better than expected and insufficient savings if the economy performs more poorly than expected
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