WASHINGTON—President Bush's new proposal to fix Social Security's projected funding shortfall would keep the current benefit structure intact for Americans who earn less than $25,000 a year, but it would cut the rate of growth of everyone else's benefits.
For the wealthiest Americans, that would mean a steep benefit cut compared with the current system. Bush's plan assumes that the wealthy already get tax breaks for their retirement savings in the form of tax-deferred Individual Retirement Accounts (IRAs) and employer 401(k) pension plans, which the poor rarely have.
The president favors a plan modeled on one by Robert Pozen, the chairman of Boston-based MFS Investment Management, a mutual fund manager and a member of Bush's 2001 commission on fixing Social Security.
Pozen's "progressive indexing" plan would slow the growth of future benefits by changing the way they're calculated. Social Security actuaries believe Pozen's plan would cover about 70 percent of the system's projected $3.7 trillion funding shortfall over the next 75 years.
Currently when a worker retires, the Social Security Administration calculates his retirement benefit based on his lifetime earnings, adjusted by a formula tied to the annual change in average national wages.
Pozen would keep this method of calculating benefits intact for workers whose earnings average $25,000 or less a year—roughly the bottom 30 percent of U.S. workers. For workers with higher earnings, he would calculate retirement benefits on a sliding scale, adjusting them for changes over time in both average national wages and prices. Benefits for the wealthiest workers, whose average career earnings exceed $113,000, would be calculated solely on an index keyed to changes in prices over time.
Historically, wages have grown faster than prices; during the 20th century, U.S. wages grew 1.1 percent per year faster than prices. By tying benefit increases to prices, their future benefits would grow more slowly than if they were tied to wages, as they are now.
Under Pozen's plan, someone earning about $36,000 in today's wages and retiring in 2055 would receive an initial year of retirement benefits, in the earning power of today's dollars, of $17,400. Under the current system, that same worker is promised $21,770.
Because Pozen's plan would deliver $4,370 less, Democrats call that a benefit cut. But Pozen, a Democrat himself, sees it as a benefit increase of $3,000—over the $14,400 that a worker retiring in 2005 would get.
"I think what people aren't realizing is that these benefits are growing, even for higher earners, in both real and nominal terms," Pozen told Knight Ridder in a recent interview. His plan would trim the rate of benefit growth, but not cut benefits below current levels.
Pozen believes that his plan is fair because it would protect the lowest third of the working population from any change in the current formula for benefit growth, and then progressively slow the rate of benefit growth as income rises.
During his news conference Thursday night, President Bush also offered a new wrinkle to his proposal to create private investment accounts funded by Social Security taxes. If workers fear investing in stocks, he said, they should be allowed to invest solely in Treasury bonds.
Such a move "would be utterly idiotic," said Jason Furman, a former Clinton administration economist and now an analyst with the Center for Budget and Policy Priorities, a liberal research center.
What retirees would get from their bond accounts would likely be less than what they would have gotten from sticking with traditional Social Security benefits, Furman said.
Trent Duffy, a White House spokesman, didn't dispute that. But he told Knight Ridder that bond accounts could still be attractive because they would be transferable to heirs should a worker die before reaching retirement age. Payroll taxes paid into traditional Social Security aren't transferable to heirs.
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(c) 2005, Knight Ridder/Tribune Information Services.
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