President Bush Calls for Making Tough Choices In a Progressive Manner to Restore Social Security Solvency
April 29, 2005

Ed Lorenzen

 

President Bush deserves credit for calling attention to the financial challenges facing Social Security.  Last night he took the next step by beginning the discussion of the changes in the system that will be necessary to put the Social Security on a sound financial footing.

President Bush endorsed a Social Security reform proposal which would make benefit changes to close the financing gap facing Social Security in a progressive manner. These changes would have a greater impact on higher wage workers who are not as dependent on Social Security benefits for retirement income.
 

The approach outlined by the President last night is consistent with the plan put forward by Robert Pozen, a member of the President’s Commission on Social Security reform.  The Pozen proposal, known as progressive price indexing, would continue wage indexing for workers at the bottom of the income scale while using price indexing to calculate benefits for high income workers.  The benefit formula would use a blend of wage and price indexing for workers in between.  The Social Security reform legislation introduced by Representatives Jim Kolbe (R-AZ) and Allen Boyd (D-FL) also restrains the growth of spending through progressive changes in the benefit formula.

 

The President also stated that no worker who works hard and pays into Social Security for his or her entire life should retire into poverty. This is consistent with a proposal put forward by Urban Institute Scholar and Centrists.Org board member Gene Steuerle to create a new minimum benefit which would rise in real terms as earnings in the population rise. The plans put forward by the President’s Commission on Social Security reform contained a minimum benefit proposal which would guarantee that an individual who worked for 30 years would receive a Social Security benefit equal to 120% of poverty.  This would increase the benefits for many workers whose wages were low during their pre-retirement years above what current law promises. 

 

By proposing restraints on the growth of benefits for wealthier retirees that will close much of the funding gap and expressing his willingness to work with Congress on additional changes, President Bush acknowledged that there is no free lunch in Social Security reform. Anyone who tells you that there is a painless way to fix Social Security isn’t telling the whole truth.  Plans that appear on the surface to save Social Security without including the tough choices actually are hiding tremendous costs.  Maintaining the status quo will force, future Congresses to cut other important government programs, raise additional taxes or issue massive amounts of new debt to meet the obligations to future retirees.

 

According to an analysis prepared by the Social Security Administration’s Office of the Actuary, the Pozen proposal would eliminate 70% of the financing gap facing Social Security.  In his remarks President Bush acknowledged that additional changes would be necessary to restore solvency and offered to work with Congress to close the remaining shortfall.  In his State of the Union Address President Bush spoke approvingly of proposals that would increase the retirement age or index benefits to longevity and increase the actuarial adjustment for early retirement.  He has also stated that he is open to an increase in the amount of wages subject to payroll taxes. Other potential changes include using the more accurate measure of inflation developed by the Bureaus of Labor Statistics to calculate Cost of Living Adjustments and limiting spousal benefits for high-earner couples.

 

Tough choices will be necessary to eliminate the deficit facing Social Security whether or not individual accounts are included in a reform plan.  Including individual accounts in a reform plan does not require deeper benefit reductions than would otherwise be required, but neither does it make such reductions unnecessary.  However, individual accounts can help make the task easier for policymakers and limit the impact on future beneficiaries.

 

Any reforms of the Social Security system must preserve the vital social insurance function of the system and allocate a larger share of the available revenues to beneficiaries with the lowest lifetime incomes and the greatest need.  Policymakers should be careful to protect low income workers who will depend primarily on Social Security for retirement income from the impact of changes in benefits necessary to restore solvency

 

At the same time, social insurance does not prescribe that all people who retire receive higher and higher benefits in real terms. The costs of meeting the benefit promises under current law will grow much faster than revenues as the dependency ratio increases, making some restraint in benefit growth inevitable. A responsible reform plan should target the tough choices necessary to restrain the growth of benefit costs at workers best able to adjust to a change in promised Social Security benefits.

 

While the concern about diminished political support for the system from reducing benefits for upper income retirees should not be dismissed lightly, that risk is relatively minor compared to the impact that making benefit changes across-the-board would have on low and moderate income workers. As long as people of all incomes and generations believe the programs are fair and will efficiently reduce poverty among the elderly their political support should continue.

 

If the growth of benefits is to be restrained, as will be necessary unless workers are asked to shoulder an ever growing payroll tax burden, it is preferable to structure those changes to protect those who are most dependent on Social Security benefits and asking higher income workers to accept a greater proportion of the reduction in promised benefits.  Putting Social Security on a sound financial footing will require policymakers to make tough decisions about allocating limited resources.

 

Reaching agreement on a solution will require sacrifices by both parties.   All options for reform should be on the table. All parties must resist the temptation to immediately shoot down ideas they don’t like.  Similarly, policymakers, the press and public should avoid singling out individual reform items for criticism without considering them in the context of a comprehensive plan.  

Many of those who argue that progressive price indexing would undermine political support for the program support proposals which rely on substantial increases in taxes paid into the Social Security system by upper income workers.  Both approaches would reduce the rate of return earned by these workers.  Some of the proposals which rely on tax surcharges to restore solvency do not give workers additional benefits for the increased contributions.  If reducing the benefits that upper income workers will receive in the future will create political risks for the Social Security system, then increasing the taxes that these workers pay today will create even greater risks, particularly if workers do not receive any increase in benefits for their increased contributions.

 

While there are legitimate differences of opinion on the best way to reform Social Security, we all should be able to agree that inaction is not an option.  We hope that Congress will respond constructively to the President’s suggestion and his offer to work toward a bipartisan consensus on a long-term solution to the challenges facing Social Security.

Links:

Centrists.Org Progressive Approaches to Benefit Changes In Social Security Reform (Revised April 29, 2005)

CentristPolicyNetwork.Org  The Kolbe-Boyd Social Security Reform Bill  (February 2, 2005)
Centrists.Org  Reality Check on Social Security Reform: Personal Accounts Do Not Provide a Painless Solution (March 11, 2005)
Memorandum from Stephen C. Goss, Chief Actuary at SSA, to Bob Pozen.  “Estimated Financial Effects of a Comprehensive Social Security Reform Proposal Including Progressive Price Indexing”  (February 10, 2005)