June 02, 2005, 9:13 a.m.
Progressive Indexing Is No Benefit Cut
You’d expect this attack from the left — but also from the right?

By Cesar Conda

President Bush’s call for the “progressive indexing” of Social Security benefits has been attacked as a “benefit cut” that will land on the middle class. Liberal Democrats who support the status quo make this argument. But surprisingly, so do a handful of free-market conservative policy analysts who believe that personal retirement accounts alone will fix Social Security.

This debate centers on how initial Social Security benefits are calculated. Currently, benefits are calculated using increases in wages. But in the early 1970s, benefits were calculated using both price and wage increases. However, that decade’s great inflation caused future benefits to soar out of control. In fact, the 1975 Social Security Trustees report found that the program faced insolvency by 1979. To address the program’s shortfall, Congress passed in 1977 legislation that ended the automatic price adjustment for benefits, among other reforms.

Back to the present situation: Social Security benefits are now growing faster than inflation. Today’s 20-year-old worker is promised benefits that are 40 percent higher than those of seniors retiring today. This is at a time when the program’s finances are rapidly deteriorating. According to the 2005 trustees report, Social Security will begin running deficits in 2017. Since last year’s report, the program’s total unfunded liability has increased from $10.4 trillion to $11.1 trillion in present-value terms.

To help return the system to solvency, President Bush has proposed that the future benefits of wealthy retirees be calculated using an automatic adjustment in prices instead of wages. For low-income workers, benefits would continue to be calculated using wages, which grow faster than inflation.

According to the Social Security Administration’s actuaries, progressive indexing would solve 70 percent of Social Security’s funding problem. The addition of voluntary personal retirement accounts — which replace part of the government benefit with private investments that people own and control — would further improve Social Security’s long-term finances.

It is ironic that conservative critics of progressive indexing have joined liberals in attacking it as a benefit cut. But as the Washington Post recently editorialized, progressive indexing produces “cuts in promised benefits, not cuts compared to today’s benefit.” Furthermore, progressive indexing offers higher benefits than the current system can afford to pay. As Congressional Budget Office director Doug Holtz-Eakin recently put it:

Under progressive indexing, benefits for high earners would be lower than under current law. But unlike under current law, those benefit reductions would allow the trust funds to remain solvent. As a result, workers in later cohorts would be spared the across-the-board benefit cuts that would occur when the trust funds were exhausted. For lower earners in those cohorts, benefits would be higher than under current law.

Another argument holds that progressive indexing worsens the already low rates of financial return from Social Security. However, the critics arrive at this conclusion by conveniently excluding the higher returns that flow from personal retirement accounts. By this standard, the “personal account only” plan — which calls for large accounts to eventually fund all of the promised retirement benefits — would also produce lower, and at some point negative, returns from traditional Social Security.

Finally, some Republicans in Congress have argued that progressive indexing moves Social Security “more toward a welfare system.” The fact is that Social Security already includes a progressive benefit structure, one that replaces a larger share of income for lower-earning workers than higher earners. Price-indexing the benefits of higher earners makes the program slightly more progressive. More important, unlike a welfare program, workers earn their Social Security benefits by contributing payroll taxes to the program. Progressive indexing preserves this link between contributions and benefits.

The American public remains deeply skeptical about Social Security’s promise to pay future benefits, and is demanding solutions from our nation’s political leaders. President Bush deserves credit for starting the debate over possible solutions. We do know that personal retirement accounts alone will not permanently fix the program. To preserve Social Security for future generations, sensible restraints on the growth of benefits — through progressive indexing or increasing the retirement age — must be considered as part of the solution. Failure to do so would be irresponsible in the extreme.

— Cesar Conda is a senior fellow at Freedom Works and a principal of Navigators LLC in Washington D.C.

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