Building a better plan

President Bush adds a twist to the debate about keeping Social Security solvent. Should it support virtually everyone -- or only those most in need?

Washington Bureau ChiefMay 29, 2005 

For seven decades the Social Security system has been governed by a simple principle: In retirement you reap what you have sown. Since Social Security's birth in 1935, old-age benefits have been tied closely to the payroll taxes Americans pay during their working years. In general, the more you earn, the larger your benefit check.

That tenet, which historians say has made Social Security a powerful force in the lives of nearly all Americans, is now in question as politicians debate how to steer clear of the system's looming financial trouble.

Under a proposal advanced by President Bush, the ties between lifetime earnings and Social Security benefits would be loosened, and the system would transform into something more akin to welfare, with current benefit levels maintained for the poor but diminished by varying degrees for everyone else.

"I believe a reform system should protect those who depend on Social Security the most," Bush said last month in announcing a benefit-reducing plan that he said would solve more than half of the system's projected shortfall.

The president's pronouncement was a bold stroke. He not only talked openly about restraining benefits -- something few politicians had dared -- but also simultaneously seized ground normally held by his political opposition, suggesting that the system be tilted in favor of the poor.

It's uncertain, however, whether Bush's plan will have a political future. Democrats have not felt obliged to respond robustly, in part because they doubt the president will be able to win over a public that has been skeptical of his attempts to fashion new Social Security legislation.

But left-leaning leaders and interest groups have signaled the opposition's real response: They warn that Bush's plan, called "progressive indexing," could be the death of Social Security.

"The foundation of support that Social Security provides would be seriously eroded," former Social Security chief Kenneth Apfel told Congress recently. Throw in Bush's other big reform proposal -- the option of private retirement accounts -- and Apfel said the "long-term sustainability of the Social Security retirement system would be in peril."

The question of whom Social Security will serve decades down the road -- the few or the many -- is one of several fundamental issues being put to the nation in the unfolding grand debate over retirement security.

Bush also framed the first big issue, spending most of this year arguing that individuals must share more of the responsibility for retirement. His solution would be to allow Americans to take control of a portion of their Social Security contributions through investment in the stock market and other savings options.

Other large issues loom. Is it time, for example, to raise the age at which full retirement benefits are granted? The normal retirement age is already in the process of moving up from 65 to 67, but even that advance isn't keeping pace with increasing life expectancy.

Republican Rep. Bill Thomas of California, chairman of the House Ways and Means Committee, promises to consider the age issue when he drafts Social Security legislation next month. For now, though, Bush is claiming center stage with his embrace of a benefits-slowing formula that favors the poor over the affluent.

Whom is it for?

The question it raises comes to this: Should Social Security continue to be a retirement system that supports virtually everyone, or do the financial implications of the baby boom's looming retirement mean that it should narrow its mission to supporting those who need help the most?

Proponents say the progressive indexing plan, first proposed by mutual fund executive Robert Pozen, would have multiple benefits. It would help ensure that the poor have retirement incomes that lift them above the poverty line. It would solve most of Social Security's solvency issue (nearly 60 percent by some measures). And it could pressure Americans to increase one of the world's lowest savings rates.

Opponents counter that the benefit reductions (as measured against the current system) would still fall particularly hard on the middle class and over time would re-create some of the financial problems among the elderly that led to Social Security's creation in the first place.

Fundamentally, though, the core of this debate is a layer or two deeper. Indexing opponents fear the real aim is to weaken Social Security over time by turning it into an anti-poverty program that no longer retains broad-based public support.

And that, in turn, leads to the ultimate concern of some Democrats: that they'll lose arguably their most important issue, retirement security, allowing Bush to achieve a historic political realignment that ushers in a long period of Republican ascendancy.

Who has the edge?

Early soundings from public opinion polls suggest that the president has his work cut out for him. But in a memo to fellow Democrats, strategists Stan Greenberg and James Carville warned that by not proposing a Social Security reform plan of their own, Democrats may be losing their longtime edge on retirement issues.

"Bottom line, Republicans may be winning the battle of seriousness, even as they lose the specifics of the Social Security battle," their memo said.

The question of whether Social Security should be a program for all or only for the neediest was present when the system was devised by Congress in the 1930s, according to Social Security historian Ed Berkowitz of George Washington University.

"The Senate voted to allow people to opt out," he said. "That could have left only the poorest people in the system. But ultimately that didn't prevail. Participation was made very broad."

Although the system has undergone many revisions and expansions since then, the founding principle remains the same. Virtually all wage-earners are eligible -- those working for minimum wage as well as billionaires -- and their retirement benefits are calculated in rough relation to the amount of payroll taxes they contribute over their 35 highest-earning years.

The plan pushed by Bush would change that by altering the formula on which beneficiaries' first benefit checks are based. Currently, these initial benefits are increased yearly on the basis of wage gains in the overall economy, and the adjustments apply to everyone.

Progressive indexing would supplant that with a sliding scale of annual increases. Wage-based gains would continue for the poorest 30 percent of the population. But for those in the highest income brackets, the annual adjustment would be based on prices, which typically climb at a slow rate. Everyone else would be somewhere in between those two standards.

Americans 55 and older would be unaffected. For those younger than 55, the revisions at first would be almost undetectable. Over the years, though, the difference would begin to tell.

According to calculations by the Center on Budget and Policy Priorities, a left-leaning think tank, a wage-earner making $90,000 (in today's dollars) and retiring in 2055 would see benefits reduced 36.6 percent against the current formula. For someone earning $36,600, the benefits loss would exceed 20 percent. By 2075, according to the center, reductions would reach nearly 50 percent for the high earner and 28 percent for the lower earner.

Only the lowest 30 percent of wage-earners (those now making less than $20,000) would continue to see initial benefits tied to overall gains in living standards. The rest would find Social Security a comparatively smaller piece of their retirement. Decades down the road, most beneficiaries would get roughly the same amount of monthly benefits, no matter how much they contributed in payroll taxes.

"The rationale for progressive indexing is simple," Pozen said. "Low-wage workers are almost entirely dependent on Social Security benefits for retirement income; they have minimal participation in 401(k) plans and IRAs. On the other hand, almost all high-wage workers as well as most middle-wage workers do participate in private retirement plans."

Democrats such as Sen. Charles Schumer of New York have indicated they would be willing to talk about the indexing plan, but only if the president gives up on his other initiative offering wage- earners the option of investing a portion of their payroll taxes in private accounts.

Can we rein it in?

If both concepts were enacted, critics say, some Americans eventually would receive only a few dollars monthly in government checks, a recipe for ever-weakening political support of the Social Security system.

But would a weakened Social Security system necessarily be bad?

Publicly, there is not much discussion about such a question. Both parties say they want Social Security to remain strong. And neither party wants to be seen as acting out of crass political motive.

Partisan politics aside, though, some say there's an argument to be made for reining in Social Security's clout. If the political system now finds it difficult to put a brake on the ever-increasing resources going to the elderly, this theory goes, imagine how impossible it will become a quarter- century from now, when the number of people 65 and older will nearly double to 70 million people.

"If we do not have the political will to solve the Social Security problem now, there is no hope of doing so when the baby boomers start collecting benefits -- not just for Social Security but for Medicare and Medicaid as well," said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.

The counter-argument is that some quite powerful civic glue might be lost if Social Security is changed into a largely anti-poverty program.

In an analysis of Bush's Social Security plan, the Center on Budget and Policy Priorities put it this way:

"Social Security has been the crown jewel of U.S. social programs for decades, in no small part because it is a compact not only across the generations but also among all working Americans -- the healthy and the middle class as well as those who work for low wages and those who suffer from disabilities.

"Unraveling this compact would make ours a very different, and less humane, society."

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