Washington – The Social Security proposal President Bush seemed to embrace Thursday night to make the system solvent would have the effect of significantly limiting the rise in retirement benefits for most workers, analyses show.
Under the existing law, monthly payments for all workers rise as average national wages rise. Bush apparently wants to tie the benefits of most workers to inflation in prices rather than increases in wages.
He pledged that benefits in the future for most retirees would be comparable to what they are today. He seemed to be saying they would be the same in terms of what the money would buy.
But Bush promised to make the benefits of low-wage workers better than they are now – evidently an attempt to attract Democrats to the table.
Democrats, though, were focused on Bush’s insistence that individual investment accounts, the most controversial aspect of his proposal, had to be part of any Social Security legislation.
A fact sheet issued by the White House said the approach on Social Security benefits was based on a plan called “progressive indexing” developed by Robert C. Pozen, an investment-company executive from Boston. It would allow the initial retirement benefits of the poorest workers to be calculated as they are now, on the basis of how national wages rose during their working years.
But the retirement benefits of other workers would be calculated on the basis of price inflation, rather than rising wages.
Over time, wages tend to rise considerably faster than prices, so the benefits for young people today of modest means would be much lower than under the current law.
Progressive indexing under Pozen’s plan would solve about 70 percent of the Social Security solvency problem over the next 75 years.
The Pozen plan has clear political risks. Calculations by the actuary of the Social Security Administration show, for instance, that those who are now 17 years old and earn average wages all their working lives would receive Social Security benefits 20 percent lower than what they could expect under current law when they retire at 67 in 2055. The average annual wage this year is about $36,000.
People who earn somewhat more than that in their working years – the equivalent of $59,000 this year – would see a 30 percent reduction. And people who earn the equivalent of $90,000 and more would have a reduction of almost 40 percent when they retire in 2055. On the other hand, workers with the lowest wages – those who earn about $25,000 or less – would not face a benefit cut.
Only people with the lowest wages would be distinctly better off under the president’s plan than they would be if Social Security reserves were allowed to run out, as is projected to happen in about 2040 or 2050.
Bush argues that people will still be much better off because the increased returns from the private retirement accounts he would create would more than offset the guaranteed benefit cuts.