Price indexing and Social Security: A time bomb

People Before Profits

Private accounts have been the center of controversy in the Social Security debate, but the hidden time bomb is Bush’s proposal to change the way retirees’ starting benefits are determined. “Price indexing” is really a cumulative benefit reduction plan which would spell the death of Social Security.

The formula used under the current system takes into account the wage level in the country overall as well as the individual’s earning record. The Bush plan would use a formula that includes the increase in the consumer price index (CPI) in the preceding 12 months (so-called “price indexing”). Average wages in the U.S. rise about 1.1 percent per year faster than the CPI, according to projections by the Social Security trustees.

The Bush plan adjustments would be cumulative. For example, assume a starting benefit of $1,000 a month figured on the current wage-based formula. The Bush plan would lower that starting year benefit by 1.1 percent to give $989 the first year the plan went into effect. With the same ratio the next year, a new retiree would receive a starting benefit of $989 times 100/101.1 to give $978. Reductions for future beneficiaries are cumulative. A worker retiring 20 years later would start at $801. [These calculations are based on the trustees’ projected increase in real wages per year.]

The Bush commission cleverly avoided obvious cutting of benefits to avoid public outcry, but their plan does cut benefits in a way that will progressively eat away the program.

The non-partisan Congressional Research Service gave a real life example. With the present program a person retiring in 2005 could receive a 42 percent “replacement” income. If the Bush price indexing had been in effect since 1940, he would receive only 17 percent replacement income. In the Bush plan, the benefits for retirees and disabled will “wither away” with time. A person born in 2072 would expect no guaranteed benefits upon retirement — Social Security would be dead.

The great economic safety net that has kept millions of retirees, disabled, survivors and children from extreme poverty and despair for more than 60 years would be gone.

The price-indexing plan has been barely discussed by the corporate media, or progressive media for that matter. If Bush had come right out with a direct benefit reduction, there would have been an enormous outcry. Instead, benefits are cleverly reduced by an indirect and complex mechanism that is difficult to explain to the public and has been kept as secret as possible.

However, it has plenty of support within the administration. In December, N. Gregory Mankiw, chairman of the president’s Council of Economic Advisers, criticized the current system of wage indexing. White House Director of Strategic Initiatives, Peter Wehner, endorsed shifting to price indexing in a memo in January. The Social Security Bill introduced by Sen. Lindsey Graham (R-S.C.) last year includes this indexing proposal. On Feb. 16, Alan Greenspan, chairman of the Federal Reserve, testified before the Senate Banking Committee that he endorsed making a major switch in how benefits are calculated when they reach retirement age.

At the same time, on Feb. 16, Bush graciously agreed that he might consider raising the “cap” on income taxed under the Social Security program. Although he has adamantly opposed increasing the payroll tax rate, there have even been rumors that the latter might be considered. Thus, there is a sense that his handlers are now preparing us for the next stage in the manipulation of the public. We are to view Uncle George as open-minded and willing to compromise.

Herein lies the danger. If the clever administration strategists sense an overwhelming opposition to private accounts, they may magnanimously drop that idea and even throw in a cap increase, but propose that at least we should modify the starting benefit formula to reflect inflation. This latter provision is the real, and probably original, mechanism devised, not just to weaken, but to destroy Social Security. Their hope is that its relative complexity will confuse legislators, let alone the public, and pass unnoticed — perhaps even as a rider on a midnight bill.

When we fight to leave Social Security alone, we must include no change in the formula for indexing benefits. Our struggles today will determine the well-being of our country for generations to come.