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PHILADELPHIA - (KRT) - On Thursday night, President Bush announced that he'd like to balance Social Security's books by having retirement benefits grow more slowly for the better-off than for people with lower incomes.
He was endorsing, at least in principle, an idea called "progressive indexing ( Listen to NPR's interview with Robert C. Pazen )," the brainchild of a Boston-based investment executive named Robert C. Pozen.
And progressive indexing, if enacted, would have a dramatic impact on the vast majority of working Americans.
In the decades to come, only the poorest 30 percent of retirees would receive the Social Security benefits they're promised under current law.
Everyone else would get less, a lot less as time goes on, with higher-wage workers seeing the greatest impact in their checks.
For example, an individual who retires in 2055 with an average career income equivalent to $58,000 today would be hit with a 31 percent reduction in promised benefits. That calculation does not include the impact of allowing workers to put some of their Social Security money into private accounts, as Bush has proposed.
People retiring in the early years after the change would see small reductions; those retiring later would see more. Everyone's benefits, though, still would be higher in real terms than they are today.
"Until you deal with the basic benefit issue, you can't get a handle on solvency," Pozen, 58, chairman of MFS Investment Management and a registered Democrat, told the Senate Finance Committee last week.
Keep in mind that if nothing is done to improve the finances of Social Security, the system will have to cut benefits across the board by an average of 26 percent in 2041. Or so its trustees project.
Democratic reaction to progressive indexing has been mostly negative, with House Minority Leader Nancy Pelosi saying that Bush, by embracing it, has proposed "the single biggest cut in Social Security benefits for the middle class in history."
So what does progressive indexing mean?
Under current law, the size of a worker's initial retirement check is based in part on how much average wages rose during his or her career. That's known as wage indexing.
In 2001, Bush's Commission to Strengthen Social Security, on which Pozen served, talked about moving from wage indexing to price indexing. That shift would reduce benefits drastically, since prices historically have risen more slowly than wages.
Sometime after the commission disbanded, Pozen came up with the notion of combining the two methods as a way to improve the system's finances without driving lower-income retirees into poverty.
In his plan, he'd retain the more generous wage indexing for people with average career earnings less than $25,000 (the bottom 30 percent as of 2012, his tentative start date). He'd impose price indexing on people who earn more than $113,000 (the top 7 percent) and blend the indexes for everyone in between.
He offers three reasons for adopting this approach even though Social Security already is said to be progressive, in the sense that low-wage workers get bigger retirement checks relative to their contributions than high-wage earners.
One is that people at the low end depend on their checks and need every nickel. The second is that low-wage retirees tend to die sooner than high-wage ones, giving them fewer years to collect benefits.
Third and perhaps most important, he says, is that the federal government already provides huge retirement subsidies for middle- and upper-income Americans through IRAs, 401(k)s and the like. While such tax-advantaged options are open to all Americans, they are used mostly by people who can afford to save.
"For moderate- and upper-income workers, the current system is too generous," Pozen said in an interview, "given the retirement-savings vehicles available and the overall federal budget situation."
Liberal analysts object to his plan on several grounds.
For one thing, they say, it relies entirely on adjusting benefits to address Social Security's projected $4 trillion, 75-year funding gap. There are no provisions for increasing revenues, through such measures as raising the cap on the wages to which payroll taxes apply.
"Any benefit cuts of this magnitude are unworkable," said economist Jason Furman of the Center on Budget and Policy Priorities. "There will have to be some benefit cuts, and they should be progressive. But there are better ways."
And progressive indexing, its opponents say, could undermine popular support for Social Security in the long term by making it look like a bad deal for people with above-average salaries - and by weakening the link between contributions made and benefits received.
Pozen, who made his reputation in money management during a 15-year career at Fidelity Investments, says that his plan should be viewed as only "a fair and workable foundation" for legislative action.
He says that it can be massaged in various ways and combined with other proposals, such as a later retirement age, a higher wage cap and private accounts; Bush said again last week that they must be part of any final package.
Pozen favors the accounts, though he thinks they should be limited to 2 percent of salary, not Bush's 4 percent. But he also thinks that enhancing the system's solvency, which the accounts don't, must be job one.
And while Pozen is pleased that his idea has now landed at the center of the Social Security debate, he worries that nothing will get done in Congress unless "the president become more flexible on personal accounts."
Progressive indexing, incidentally, would not wipe out the $4 trillion shortfall. It would deal with only about 70 percent of the 75-year gap.
But Pozen says he's come to believe that people who propose to do away with the entire shortfall "don't really want anything to happen"; they know that such plans are too painful for Congress to enact.
Economists acknowledge that changing Social Security will be painful for lots of Americans. How to distribute the pain is the question. Progressive indexing is one answer.
Now it seems to be President Bush's answer, not just Robert Pozen's.
© 2005, The Philadelphia Inquirer.
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