Other Social Security Reforms Also Raise Eyebrows

While the cyclone of information and rhetoric making up the Social Security (search) debate runs its course, some reform proposals circulating include a controversial measure that has received much less attention than private savings accounts but could prove critical to the battle.

A number of plans, including the one recommended by the President's Commission to Strengthen Social Security (search), have suggested shifting the way benefits are formulated from the current wage-indexing scheme to a price-indexing one, in addition to establishing private accounts.

Wage-indexing was instituted in 1977, and allows the money each worker puts into the system to grow over time in relation to average wage increases. Because wages increase faster than prices, a shift to basing the growth of benefits on prices would result in smaller benefits when compared directly.

Proponents say such a shift would help sustain the Social Security trust fund. Opponents argue that American workers — particularly workers retiring after 2030 — would see a 30 percent to 40 percent decrease in the amount of their annual retirement payments if price-indexing is used.

"It's a very large reduction in the future promised benefits," said Peter Ferrara (search), a proponent of personal savings accounts who insists that even the suggestion of a price-indexing shift would kill the debate for Republicans backing personal accounts.

According to the Center for Retirement Research, a non-partisan group based at Boston College, wage-indexing allows workers retiring in 2025, for example, to recover 37 percent of their pre-retirement income through annual Social Security benefits — about $16,205 a year.

In a price-indexing system, those same retirees would receive 23 percent of their pre-retirement income, about $12,558 a year.

"My argument is this: When this is really debated, it will be politically indefensible and something Republicans have to stay away from," said Ferrara, comparing it to a "draconian benefit cut."

But not all Republicans have been scared off. Sen. Lindsey Graham, R-S.C., is planning to include some variation on a shift to price-indexing when he reveals an updated draft of a Social Security plan that promotes personal accounts.

His spokesman, Kevin Bishop, said that price-indexing will slow growth and save money, while the personal accounts will supplement any drop-off in expected returns, particularly for younger workers who don’t expect to see much of their promised Social Security benefits anyway.

"Trust me, there is a lot of heated rhetoric over this," said Bishop, who admitted that price-indexed benefits would not "be as generous as what you would have gotten" under the current system but said if done fairly, and with private accounts, workers will come out on top and Social Security will be able to keep the promises it makes to future retirees.

"We'll just have to keep educating," Bishop said.

David John, Social Security expert with the Heritage Foundation, admitted that price-indexing would indeed "slow down the growth in benefits" but added that young people, such as his 18-year-old daughter, do not believe they will get the benefit level currently promised to them by the government.

"The good news, I guess, would be that the government would not be making more promises they cannot afford to keep," he added.

Pete Sepp, spokesman for the National Taxpayers' Union, said price-indexing would still produce benefits that keep up with the rate of inflation, and it would allow Social Security reform planners to avoid raising taxes and forcing workers to put more into the system than they do now or to borrow trillions to pay for it.

"It’s up to organizations like ours to convince people that, look, this is a palatable alternative to raising taxes or letting their money go down the drain," Sepp said.

Ferrara believes that putting close to $7 trillion into Social Security over the next 75 years and allowing workers to put an average of 6.4 percent of their payroll taxes into voluntary private investment accounts would allow retirees to get what they are promised without shifting to price-indexing or raising taxes.

"I think when you have a good idea, personal accounts can be popular — why mess with price-indexing?" he asked. "People are going to say, what did you do with our Social Security?"

President Bush has said he is open to shifting to price-indexing, mainly because he believes personal accounts alone are not going resolve the encroaching insolvency problem of the trust fund. He and others, including opponents of personal accounts, acknowledge that by 2042 the trust fund will stop paying for itself and it will only be able to pay retirees 75 percent of what they were promised.

Graham and others, including Treasury Secretary John Snow, who was traveling last week to sell Bush's vision of private accounts, are considering a number of ways to shift to price-indexing.

One way is a mix of wage- and price-indexing, with lower income earnings keeping to the former and wealthier earnings to the latter, so that the formula does not place an extra burden on low-wage earners who depend more on Social Security.

Any move to price-indexing would not affect current or near-future retirees; it would affect younger workers the most, said experts familiar with the price-indexing measure.

Alan Charney, political director for USAction, one of several groups fighting personal accounts, said price-indexing is a cut, plain and simple, and his group plans to oppose it just as fervently.

"The average consumer assumes that prices go up faster than wages, when in fact it's the other way around," he said.

Charney said his group believes the Social Security trust fund's solvency problem can be resolved better by requiring a tiny increase in the money that workers put into the system each year.

Social Security expert John said that the shift to price-indexing may sound too dramatic and if proponents don’t respond accordingly, it could be spun by the opposition to seem as though the government is trying to cheat retirees out of their benefits.

"What we really need is a quiet and rational national discussion about Social Security and special retirement accounts in general," he said. "What we are having now is a quiet discussion where everyone is shouting at the top of their lungs and it makes it hard to explain what different people are talking about."