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Tue 3 May, 2005 08:35 pm
Bush's latest proposal in his attempt to destroy Social Security. How do you like it?
What comes next in Social Security saga?
As Bush presses on, 'progressive indexing' may be his most drastic plan yet.
By Peter Grier | Staff writer of The Christian Science Monitor
WASHINGTON – By providing some details about how he would solve Social Security's long-term financing problem, President Bush has accomplished at least one task: He's ensured that the political battle over the big retirement program is fully joined at last. His proposal for "progressive indexing," which would cut promised benefits for all but low-income workers, has loosed an outpouring of number-crunching and commentary in Washington. To supporters, Bush has bravely gone first and shown how to fix Social Security's problems while protecting the most vulnerable US workers. To critics, Bush's proposal is not as progressive as it seems - and might, in the end, undermine support for the entire system.
Now it's up to Congress to begin the arduous task of actually drafting legislation. And amid the welter of editorials, issue alerts, and policy reports, one thing seems clear, say some analysts - there is no easy way out. Big changes in benefits, or taxes, or the retirement age, would be necessary to bring eventual balance to this largest of government programs.
"Anyone who tells you that there is a painless way to fix Social Security isn't telling the whole truth," writes Ed Lorenzen, executive director of the think tank Centrists.Org, in a study of Bush's numbers.
Bush has long pushed for private accounts within Social Security, of course, so to some extent his ideas about the system have been a feature of debate for years. But even the White House acknowledges that private accounts wouldn't address Social Security's long-term financial problems. They would be, in essence, an accessory - one that the White House insists would make the system more attractive, but an accessory nonetheless.
In endorsing progressive indexing in his press conference last week, however, the president has proposed something that would have a substantial impact on the vast majority of US workers, whether they wanted it to or not. More so than with private accounts, Bush may have now launched a national debate on the core costs and promises of the system.
It's a debate he will try to foster this week, from his Tuesday discussion of the issue at a Nissan manufacturing plane in Ohio to a Wednesday speech at the Latino Small Business Economic Conference in Washington.
Progressive indexing is an idea attributed to Robert C. Pozen, a Boston-based investment executive who served on the Social Security commission Bush established in his first term.
Under this plan, the poorest 30 percent of retirees - those with incomes below around $20,000 - would see their promised benefits unchanged. Their initial retirement checks would continue to be based in part on how much US wages rose during their working career.
The other 70 percent of retirees, however, would face reductions, which would become steeper over time. That is because their initial retirement checks would be figured using the rise in prices. Over decades, prices do not generally climb as fast as wages.
It is difficult to peg exactly how much any individual would lose as a result of this change. Those now in the work force would have fewer years under any new system, and thus would face smaller cuts.
But eventually the cuts would be substantial. A worker who retires in 2075, having earned an income equal to today's average, would face a 28 percent reduction compared to benefits they would have earned through the current system, according to an analysis from the Center on Budget and Policy Priorities. Those earning only slightly more - the equivalent of around $60,000 in today's dollars - would face steeper cuts.
Benefit reductions for average workers would be the steepest in the history of Social Security, says Center on Budget and Policy Priorities economist Jason Furman. Given that Bush's progressive-indexing plan does not include raising the cap on income subject to Social Security taxes, currently $90,000, it in fact calls upon the middle class to shoulder most of the reform burden, Furman says.
Despite its name, "it is not progressive," he says. Combined with private accounts, the progressive-indexing changes could ensure that many middle- and upper-income Americans receive little if any benefit from an actual Social Security check. And that could undermine support for the system in the long run, says Furman, as it comes to be seen as just another anti-poverty program.
Proponents of progressive indexing, however, say that to measure its reductions of benefits against those promised by current law is to mislead. That is because Congress has scheduled future benefits far in excess of what the tax structure can pay for.
"The money simply will not be there," write Heritage Foundation analysts David C. John and Stuart Butler in their analysis of Bush's plan.
People at the bottom end of the wage scale need every dollar of their benefit, say proponents, while those who earn more have a much wider array of retirement and savings options to choose from. Government subsidies for those choices, such as the tax-shelter advantages of 401(k)s, should be counted as part of the overall federal retirement system.
The choice is not between benefit reductions and nothing, but between benefit reductions and tax hikes, according to the president's defenders.
"Congress would have to raise and invest $5.7 trillion today to pay all of Social Security's promised benefits between 2017 and 2080," according to Mr. John and Mr. Butler.
No plan is an island: Galveston's experiment
Quote:
In Texas, mixed feelings, and assets, after 25 years of Social Security reform.
By Kris Axtman | Staff writer of The Christian Science Monitor
GALVESTON, TEXAS – Today's debate over Social Security sounds a lot like the debate in Galveston County a quarter-century ago. Residents here knew it was in trouble, but nobody knew when the bubble would burst. So with the help of a few studies and a lot of predictions, the county took a gamble and opted out of the federal retirement system - creating an alternate system for their employees using individual accounts. Neighboring Brazoria and Matagorda counties would follow suit before Congress closed that option to others.
So when President Bush visited the island last week to talk about his plan to keep Social Security solvent with the help of individual accounts, the nation tuned in to find out how things were working here. And it turns out the reception here has been as mixed as the national reception of Mr. Bush's proposal.
Those at Bush's speech lauded the Galveston alternative, saying people here have received more retirement benefits than if they'd stayed with Social Security. But others say they have been disappointed with the plan.
Bush's proposal differs from the Texas Gulf Coast plans in that it would allow workers to divert only a third of their retirement taxes into personal accounts, but the underlying principle is the same: to shift the burden away from the government and onto the individual.
That flies in the face of what Society Security was created to do, says Eric Kingson, a professor of social work and public administration at New York's Syracuse University. "Social Security is built on the premise that we have some responsibility for each other," he says. "If you weren't worried about those basic protections you could use a private system, and the Galveston plan is a good example of how that system would work."
He studied the county's plan and testified on it before the House Committee on Ways and Means in 1999. "What it does is create huge winners and huge losers," he says.
Another study came to a similar conclusion. A federal General Accounting Office report in 1999 found that lower-wage workers would receive more under Social Security than under the Texas county plans, while higher-wage workers and those without children tended to do better under the alternate plans.
"That's just not true," says Brazoria County Judge John Willy. "In almost every case, county workers make double what they would make with Social Security."
He contends that when the government did that study, researchers used an average 4-1/2 percent rate of return on investments instead of what county workers have actually received since the programs began: a 6-1/2 percent average rate of return.
"A county judge or a county tax collector is going to make more because they are putting more in during their lifetime, but someone making a lower salary is getting the same high rate of return on their money," says Judge Willy.
That's part of the problem with individual accounts, say those who favor the current system. Under Social Security now, workers in the bottom-wage brackets actually do better, proportionately, than workers in the top wage brackets.
And if fewer people are paying into the system, those who are currently paying into it have to pay more, says Henry Aaron, a senior fellow at the Brookings Institution in Washington who testified on the Galveston plan before the Senate in 1999.
"The principal problem with the president's plan as presented so far is it significantly deepens the long-term deficit in Social Security," he says. "The other point is, it's exposing workers to a lot of risk while Social Security benefits are nailed down. You know what you are going to receive."
Under the Texas county plans, which cover some 5,000 workers, employees contribute 6.1 percent of their salaries to their private retirement accounts, with the county kicking in an additional 7.8 percent of payrolls. That's a slightly higher rate than the overall contribution of 12.4 percent under Social Security.
A private firm manages the accounts and invests in annuities and bonds, which are less risky than the stock market.
"I think a lot of the criticism of President Bush's plan is because it allows investment in the stock market," says Ray Holbrook, a retired Galveston County judge and one of the original proponents of the alternate plan. "I would strongly advise him that his plan should stick with bonds and annuities and not let the demon of Wall Street kill the program."
But even with bonds and annuities, private accounts can still carry risk, says former Assistant Galveston County District Attorney George Cooley, who opposed switching to the plan in 1981.
For instance, the first insurance company sponsoring their plan went bankrupt after a year, leaving county workers in limbo until a new firm was found. "So that's a lesson to be learned," says Mr. Cooley. "Any time you enter the private sector, there is going to be risk."
After working for the county for 30 years, he retired with $200,000 in his private retirement account, and opted to receive $40,000 a year for the next five years. Like many who have already retired under the Texas county plans, Cooley is also collecting Social Security from the years he worked prior to the switch.
"I have seen figures that show people are getting triple what they would have gotten under Social Security. I really doubt that, because I know two ladies who were there just as long as I was, and they are getting between $400 and $500 a month - and that's nothing to brag about," he says.
Throughout the United States, there are some 5 million government workers who rely on retirement plans other than Social Security.
Ray Cornett worked as the tax assessor for Brazoria County for 28 years and wound up receiving $20,000 a year for seven years from his personal retirement account. He says he and his wife would be "in bad shape" if he didn't also get state retirement benefits and Social Security on top of that. "There's nothing wrong with the [alternate] plan," he says. "It just doesn't keep you alive."
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