Subject: [disability-civil-rights] Social
Security Formula Weighed
The Bush administration is planning to link Social
Security to the price index rather than wage growth, according to today's
Washington Post. The administration leak may or may not be a trial balloon.
Under the new formula, "Social Security benefits currently (equaling) 42 percent
of the earnings of an average worker retiring at 65...would fall to 20 percent
of pre-retirement earnings", according to one estimate. "It's like saying
elderly people today should live at a 1940 standard of living".
This approach is bound to affect disability and survivor's benefits.
Any ideas on how? Marta
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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.