The Phantom Benefit Cuts
Although President Bush’s proposal for progressive indexing of Social Security preserves the scheduled benefits of all low-wage workers as well as all workers retiring before 2012, the critics have lambasted its “benefit cuts” for middle- and high-wage earners. These critics suggest that reductions in scheduled benefits can easily be avoided by raising payroll taxes.
Judging any reform plan relative to scheduled benefits is misguided. The schedule represents the benefits we have promised but do not have the money to deliver. That is why Social Security has a long-term deficit with a present value of $3.8 trillion. If the litmus test of a reform plan is not cutting scheduled benefits for any significant group of workers, then no viable plan to restore Social Security’s solvency will pass muster.
Instead, any proposal to reform Social Security should be evaluated on three criteria: the benefit reductions relative to payable benefits (that can be financed by the current system); the purchasing power of future benefits relative to current benefits (for workers in similar positions); and the replacement ratios provided by proposed benefits (taking into account all sources of retirement income). Moreover, any plan for benefit reform should be compared with the precise increases in payroll taxes that would be needed to avoid the proposed reductions in scheduled benefits.
Let us take as an example a medium-wage worker who will earn $47,000 in 2012 when progressive indexing will first be implemented ($36,500 in 2005). The critics have already proclaimed that such a worker retiring in 2045 at age 65 would receive 16% less under progressive indexing than scheduled benefits–$16,417 rather than $19,544 per year. Is this reduction from the schedule a “benefit cut”? If Congress does not enact Social Security reform, the system will default in 2041 and benefit levels will automatically be reduced by roughly 27% for all workers by 2045. So judged relative to payable benefits, the $16,417 received by the median-wage worker in 2045 would actually be an increase in benefits. That sum represents $2,150 more in Social Security benefits than the $14,267 that the system can afford to pay in 2045 absent major reforms.
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