Bush to Cut Social Security payments

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Mon, 3 Jan 2005 23:27:28 -0500

Bush to Cut Social Security payments by One Third !

 

 

 

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Bush to Cut Social Security payments by One Third !

 

 

 

 

http://www.washingtonpost.com/wp-dyn/articles/A45726-2005Jan3.html?nav%3Drss_pol\

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washingtonpost.com

Social Security Formula Weighed

Bush Plan Likely to Cut Initial Benefits

 

By Jonathan Weisman and Mike Allen

Washington Post Staff Writers

Tuesday, January 4, 2005; Page A01

 

The Bush administration has signaled that it will propose changing the

formula that sets initial Social Security benefit levels, cutting

promised benefits by nearly a third in the coming decades, according

to several Republicans close to the White House.

 

Under the proposal, the first-year benefits for retirees would be

calculated using inflation rates rather than the rise in wages over a

worker's lifetime. Because wages tend to rise considerably faster than

inflation, the new formula would stunt the growth of benefits, slowly

at first but more quickly by the middle of the century. The White

House hopes that some, if not all, of those benefit cuts would be made

up by gains in newly created personal investment accounts that would

harness returns on stocks and bonds.

 

But by embracing " price indexing, " the president would for the first

time detail the painful costs involved in closing the gap between the

Social Security benefits promised to future retirees and the taxes

available to fund them. In late February or March, the administration

plans to produce its proposed overhaul of the system, including

creation of personal investment accounts and the new benefit calculation.

 

" This is going to be very much like sticking your hand in a wasp

nest, " said David C. John, a Social Security analyst at the

conservative Heritage Foundation and an ally of the president. " And

the reaction will be similar. "

 

In informal briefings on Capitol Hill, White House aides have told

lawmakers and aides that Bush will propose the change in the benefits

formula, an approach recommended by his 2001 Commission to Strengthen

Social Security , according to congressional aides and lobbyists.

 

Currently, initial benefits are set by a complex formula that

calculates workers' average annual earnings in their 35 highest-paid

years and adjusts those earnings up from those years to reflect

standards of living near that worker's retirement age. That adjustment

is based on wage growth over that time span. Under the commission

plan, the adjustment would be based instead on the rise of consumer

prices.

 

The change would save trillions of dollars in scheduled expenditures

and solve Social Security's long-term deficit, but at a cost.

According to the Social Security Administration's chief actuary, a

middle-class worker retiring in 2022 would see guaranteed benefits cut

by 9.9 percent. By 2042, average monthly benefits for middle- and

high-income workers would fall by more than a quarter. A retiree in

2075 would receive 54 percent of the benefit now promised.

 

While no decision has been made, allies and opponents expressed little

doubt about where the president is heading.

 

" No decision has been made, but the administration is clearly leaning

in that direction, " said Michael Tanner, director of the libertarian

Cato Institute's Project on Social Security Choice. " I don't think

anything else is seriously on the table. "

 

A former senior administration official who recently discussed Social

Security strategy with Bush aides said the change in the indexing

formula " is assumed to be a part of any final solution. "

 

" You've got the bitter medicine of changing the indexing, but to go

along with that you've got the sweetener of the accounts, " the former

official said.

 

" There will be price indexing, " said John Rother, policy director of

AARP, the powerful seniors lobby.

 

The White House has been slowly building the case for the change. Last

year's Economic Report of the President, written by the Council of

Economic Advisers and signed by Bush, uses the Social Security

commission's primary proposal to advocate overhauling the retirement

system. Last month, the council's chairman, N. Gregory Mankiw,

fingered the current system of " wage indexing " as a primary culprit

for Social Security's problems.

 

" A person with average wages retiring at age 65 this year gets an

annual benefit of about $14,000, but a similar person retiring in 2050

is scheduled to get over $20,000 in today's dollars, " Mankiw said in a

speech at the American Enterprise Institute. " In other words, even

after adjusting for inflation, a typical person's benefits are

scheduled to rise by over 40 percent. "

 

Opponents of the proposal have also been mobilizing. Under an

inflation-linked formula, benefits would keep up with prices, but wage

levels determine standards of living, Rother said. Social Security

benefits currently equal 42 percent of the earnings of an average

worker retiring at 65. Under the new formula, that benefit would fall

to 20 percent of pre-retirement earnings. Future retirees would, in

effect, be consigned to today's standard of living.

 

" It's like saying elderly people today should live at a 1940 standard

of living, " said Robert Greenstein, executive director of the liberal

Center for Budget and Policy Priorities. " Part of our social contract

has been to allow seniors to participate in rising standards of living

rather than consigning them to some second-class status in retirement. "

 

But proponents say the shift to price indexing has to be viewed with

the addition of private accounts.

 

" If this was a case of just price indexing and doing nothing else,

frankly, some of the [opponents'] charges are pretty valid, " John

said. " But if you give the personal accounts as well, you're giving

people the opportunity to make up the difference. Not everyone will do

that, but a substantial number will. "

 

White House spokesman Trent Duffy said benefits under a revamped

system should be compared with benefit levels that are possible under

the current system, not benefit levels that are promised but cannot be

financed. " A solution has to be compared to current law, and current

law will guarantee huge tax increases or huge benefit cuts, or both, "

he said.

 

Administration officials point out that future retirees face two

prospects: the amount of benefits the retirees were promised and the

amount that can actually be paid.

 

If workers are allowed to divert four percentage points of their 12.4

percent payroll tax into personal investment accounts, future retirees

would probably be able to raise their total benefits above the amount

payable from taxes collected at that future time, according to the

chief Social Security actuary. But those increased benefits still

would not match the benefits currently being promised because future

tax levels cannot keep pace with the rapid increase in the number of

retirees.

 

A retiree in 2032 would see a promised monthly benefit of $1,343 drop

to $1,231, an 8.3 percent cut from both the payable and promised

levels. But by 2052, returns on personal accounts would push total

benefits for a middle-income worker to 129.4 percent of the payable

benefit, even though the total benefit would still be about 6 percent

less than promised because of the rising number of retirees.

 

© 2005 The Washington Post Company