CHN: The President’s Proposed Benefit Cuts: Not Progressive, Not Voluntary, Not Necessary

President Bush, in his press conference last week, proposed cutting Social Security for some beneficiaries in order to improve the program’s solvency. Unfortunately, as a recent paper from the Center on Budget and Policy Priorities explains, the President’s proposed cuts 1) are not progressively targeted but rather squeeze the middle class, 2) are not voluntary but apply even to those who opt out of private accounts, and 3) are not necessary to shore up Social Security.

Not Progressive

The President has endorsed investment executive Robert Pozen’s idea of “progressive price indexing.” Under the current rules, the initial benefit a worker receives from Social Security rises with the average wage, so that Social Security can continue to replace a sizable percentage of wages as years go by and wages climb. This ensures that today’s retirees live at today’s living standards rather than the living standards of, say, forty years ago. “Progressive price indexing” calls for indexing the initial benefit of wealthier workers to prices, which rise more slowly than wages, and thus constitutes a cut in scheduled benefits. In theory, the poorest workers would continue to enjoy an initial benefit level indexed to the average wage, while middle-income workers would be subject to some blend of the two standards.

The President’s benefit cuts would apply to anyone earning over $20,000.
President Bush promised to shield lower-income people from the benefit cuts he says are necessary to put Social Security on better financial footing. In reality, cuts would apply to people making as little as $20,000 and the cuts faced by a middle-income worker would not be that different from the cuts faced by a millionaire.

The President’s benefit cuts would hit the middle-class harder than the wealthy.
If you compare the percentage of total retirement income a middle-income person loses under the Bush proposal to the total retirement income a wealthy person loses, it becomes clear that the cuts hit middle class the hardest. The projected cut in benefits for a middle wage earner (someone who earns $36,500 today) in 2080 is equal to 26.9 percent of her retirement income, while the implied cut for a maximum wage earner would be equal to just 11.9 percent of her retirement income.

The President’s benefit cuts apply to survivor benefits and might also apply to disability benefits.
The President was not clear about how how disability insurance beneficiaries would fare under his proposal. The Pozen plan cited by Bush uses cuts in benefits for survivors and disability beneficiaries for part of its savings. The President has suggested he would protect disability benefits, but if he does so, his plan will produce far less in savings than he promises. His savings goals will either require more benefit cuts, including applying them to people with disabilities or making deeper cuts to others, or increasing revenues. So far the President has resisted raising revenues.

Not Voluntary

The President’s benefit cuts apply regardless of whether or not you opted to have a private account.

The cuts in scheduled benefits that are termed “progressive price indexing” apply to beneficiaries regardless of whether or not they opt to have a private account. In addition, people who choose to have a private account are subject to a second cut in their guaranteed benefits in order to pay for it. The President attempted to underplay the nature of the cuts that would apply to everyone, saying “Americans who choose not to save in a personal account will still be able to count on a Social Security check equal or higher than the benefits of today’s seniors.” This is a misleading statement because under the current rules, the benefits of future retirees are already scheduled to be much higher than benefits of today’s seniors due to wage indexing as explained above. Even if your initial benefit was subject entirely to price indexing (which would be a drastic cut compared to scheduled benefits under current law) you would have a greater benefit in nominal dollars (not adjusted for inflation) than today’s seniors.

Not Necessary

The President’s Social Security benefit cuts are worse for many people than they would be if Congress took no action at all.

Social Security benefits are scheduled to rise to keep up with our living standards. However, the Social Security trustees have projected a shortfall that will result in the program being able to pay only 74 percent of scheduled benefits in 2041. Because of the scheduled increases (known as wage indexing, as explained above) even these reduced benefits will be greater than what people receive today. The Congressional Budget Office, using assumptions more consistent with economic history, has projected this shortfall to occur in 2052. We cannot be at all certain of economic projections so far into the future. But no matter what size the funding gap is, there is no reason we should rely solely on benefit cuts to close it. President Bush wants to rely on benefit cuts alone to close the projected shortfall, instead of using a mix of revenue measures and benefits changes, as did the 1983 Social Security reforms led by Alan Greenspan. As a result, the President’s plan requires many workers to have even lower benefits than they would receive under the current rules if we made no changes whatsoever.

The Bottom Line

The Coalition on Human Needs supports policies that prevent poverty in old age and poverty caused by the disability or death of a breadwinner. Cutting Social Security for anyone who makes over $20,000 and diverting funds into risky private accounts is not such a policy. The President is proposing drastic changes that would endanger retirement security for people of relatively modest means. These changes, if enacted, would not be voluntary, progressive, or necessary.

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