by Lawrence M. O'Rourke
December 31, 2004
The plan, which has won the backing of several congressional Republicans, would cut the amount of the first Social Security check that beneficiaries would receive by changing the formula for establishing the amount from a wage averaging system to a consumer price index system.
The reduction in the first-ever check would grow over the years. However, the annual increases in Social Security checks, already calculated on a consumer price index, would not be affected.
Unlike the core Republican plan that would divert as much as two-thirds of payroll taxes earmarked for retirement from Social Security to private investments in stocks and bonds, the alternate plan by itself could continue to direct Social Security taxes into the federal government trust fund.
But benefits would be cut steadily over the next seven decades until Social Security provided 20 percent or even less of a wage earner's pre-retirement salary, according to a Social Security Administration analysis.
Peter Orzag, Social Security analyst at the Brookings Institution, estimated that the shift in calculating the benefit level that is now under consideration would cut Social Security payments by $4 trillion over 75 years, more than the shortfall projected by the system's trustees.
Berna Brannon, Social Security analyst at the Cato Institute, said the change would cut projected checks by only a "few dollars" a month for those who retire in 2010, a possible first year of operation.
The cut would be cumulative, so that those who will retire after 2010 would anticipate smaller checks than the current system projects. But the result of the smaller checks would be that Social Security would continue to be solvent, guaranteeing annual, if smaller, benefits.
"A shift from wage indexing to price indexing Social Security benefits condemn today's workers to a level of comfort in retirement that will be below their parents and will decline with each succeeding generation," said Barbara Kennelly, a critic of the plan who is a former Democratic House member and now heads the National Committee to Preserve Social Security and Medicare.
The plan could substitute for the president's plan to create private individual accounts using diverted Social Security taxes for retirement savings.
Brannon said many advocates are pushing for both the shift in the benefit formula and private accounts. The former, she said, would lift the threat of bankruptcy from Social Security. Private accounts, she said, would promise greater return on investment dollars for younger workers.
The notion of linking the two plans in one Social Security overhaul package has political significance as Congress tackles perhaps the most sensitive issue on its 2005 agenda.
GOP aides said that a combination approach of gradual cuts in benefits and the creation of private accounts would allow advocates to argue that they were preserving traditional Social Security while offering young people an investment opportunity that could yield a higher payment in retirement years.
The idea of lowering the initial benefit through a change in the formula was first advanced in 2001 by a commission created by President Bush. The commission's plan was shelved.
But earlier this month, N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, spurred a revival of the plan when he said the proposal to change the Social Security benefit formula is consistent with the White House strategy to change Social Security.
The change now gaining renewed attention would come in the amount of the annual initial benefit that future Social Security beneficiaries would get through the traditional plan.
This would be achieved by scrapping, starting in 2009, the current approach used by the Social Security system to figure out annual benefit increases.
The current system is known as wage indexing. It begins with looking at a worker's average monthly earnings for each of the worker's 35 highest working years before age 60.
The earnings levels for these 35 years are averaged and divided by 12 _ producing a figure that Social Security uses to set a first-time benefit for normal retirement age, now 65 years and four months for those born in 1939.
The normal retirement age is set for 65 years and six months for those born in 1940. It will rise over the years to age 67 for those born in 1960 and later. Some proposals to fix Social Security call for pushing the regular retirement date back, perhaps to age 70.
Under the proposal now being promoted by Republican supporters, the current system that establishes initial benefits paid to normal retirees would be replaced in 2009 by a new formula based upon the consumer price index.
Analysts contend that wages generally rise faster than prices. Between 1988 and 2003, average wages rose 76 percent while the consumer price index rose 54 percent, according to the U.S. Bureau of Labor Statistics.
By using the proposed new consumer price index formula rather than the current formula, Social Security would trim the initial benefit _ and thus effectively all future benefits. The impact would be felt most by those who retire further in the future than those who retire sooner.
The Social Security Administration has estimated, for example, that an average wage earner who retires in 2042 would receive 26 percent less in benefits than the amount the person would receive under the current system. That person would get about 27 percent of pre-retirement income.
Further along, a person who retires in 2075 would get 20 percent of pre-retirement income, according to Social Security actuaries.
The actuaries adjusted the figures to reflect that retirement ages are scheduled to rise from today's 65 years and four months to 67 for those born in 1960 and later.
The annual increase in initial benefit would be smaller than beneficiaries would now anticipate, a matter of modest significance at first, but building over the years.
Over time, retirees would likely see larger checks from Social Security each year, but smaller than would be the case under the current system. The reduction would come about through shrinkage in the amounts added annually to monthly benefit checks for the following year.
Beneficiaries would retain the government's assurance of regular payments rather than risk declines as the private accounts ebbed and flowed in value and payoffs.