Outside the Beltway

Is Bush Cutting Social Security?

James Joyner · Friday, April 29, 2005 · 8 comments

Michelle Malkin notes that the major news outlets, notably the NYT, WaPo, and AP, are taking President Bush’s statement last night that,

I propose a Social Security system in the future where benefits for low-income workers will grow faster than benefits for people who are better off. This reform would solve most of the funding challenges facing Social Security.

as evidence that Bush would be “cutting” Social Security benefits for the well off. She points to WSJ and USA Today analysis that puts a different spin on it:

Under his proposal to adjust benefit levels, low-income workers would continue, as they do under current law, to have their initial retirement benefits linked to the growth of wages in the economy. But the wealthiest seniors would have their initial benefits tied to price inflation, which generally rises more slowly than wages.

The upshot, according to Malkin:

Yes, Bush’s indexing plan is “cutting benefits” in the sense that upper-income beneficiaries would get less money than under the status quo. But no retiree is going to see his or her standard of living decline relative to where it stands now.

Quite right. Of course, if Bill Clinton had made this proposal, conservatives would almost surely be crying “Socialism!”*

I haven’t seen the numbers so will hold off final judgment. In principle, I think I could live with such a graduated scheme as politically necessary to achieve the desired fix. Presumably, too, much of the difference would be offset by the greater ability of those in the upper brackets to invest in private accounts.

Liberals/media pundits are right, though, that this would have the effect of moving Social Security from being perceived purely as a “retirement” program into the realm of “welfare.” Of course, for all practical purposes, that’s always been the case. Workers who draw benefits from the system for more than a very few years always get much, much more out of it than they put in, even with interest factored in. Since the benefits are paid out of current accounts rather than a mythical “trust fund,” that amounts to a welfare system. But the strength of the program has been the useful fiction that it’s actually an “entitlement” and that people are “just getting what they put in.”

Update: Via commenter praktike below, what appears to be a legitimate look at the numbers by the Center on Budget and Policy Priorities, a somewhat left-leaning think tank/advocacy group focusing “on fiscal policy and public programs that affect low- and moderate-income families and individuals.”

AN ANALYSIS OF USING “PROGRESSIVE PRICE INDEXING” TO SET SOCIAL SECURITY BENEFITS

* 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 today̢۪s 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.[1] 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 Security̢۪s 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.

None of this strikes me as particularly problematic, given the alternatives. Remember, “relative to the benefits that the worker would receive under the current benefit structure” is not among the options. There simply isn’t going to be the money to transfer that kind of money from the smaller number of workers to the larger number of retirees we can expect in the near future.

-Jim Henley, in the comments below, correctly notes that the “welfare” angle is less of a problem than it might otherwise appear.

-Solving 70-72% of the problem with one part of a multi-part plan is excellent. The other 28-30% will come from the rest.

-Encouraging high earners to shift more money into private investments is almost certainly a good thing as it relieves much of the burden on the Social Security system while also increasing capital in the private sector.

*Update (1702): Of course, as Ace notes, “kneejerk partisanship causes deranged liberals to take a position contrary to Bush — even when that position is one they supported 24 hours before Bush took it .” Indeed, that was my tacit point above. Partisans often defend positions that they would roundly criticize coming from the other side of the aisle. Perhaps it’s just the nature of rooting interests and maybe it’s a case of “only Nixon can go to China.”