Social Security Saga Continues

To some, President Bush’s endorsement of ‘progressive indexing’ has fixed the problems of Social Security while protecting the most vulnerable workers. But to others, the endorsement spells danger for the future of the Social Security system.

Under the current Social Security system, the annualized career earnings of all workers are increased by the amount of wages the whole U.S. economy have raised over their careers. By contrast, under progressive indexing the average career earnings of all workers with over $113,000 per year would be increased by the amount that prices have generally raised over their careers. In other words, proponents of progressive price indexing present it as a way to protect low income workers from Social Security benefit cuts and to moderate the effects on middle-income workers, while reducing benefits most for high-income workers.

However, careful examination implies that the combination of progressive price indexing and the private accounts that President Bush has proposed would create serious risks to all workers, because such a package could put Social Security on a path likely to weaken support greatly for Social Security over time.

Since wages regularly rise over one percent per year faster than prices in the U.S., the adoption of progressive indexing would dramatically improve the solvency of Social Security and drastically reduce the government borrowings required to sustain the system. At the same time, the Social Security benefits of all workers with average career earnings below $113,000 per year would grow in both real and nominal terms, and the Social Security benefits for workers with higher average career earnings would still keep pace with the consumer price index.

It is however, difficult to measure how much an individual will lose as a result of this change. Progressive price indexing, by itself, is neither left-wing nor right-wing. Lagging the working poor from benefit cuts and tapping income-tax revenues to fund Social Security is "liberal." For Social Security to become a flat-benefit guardian against poverty, rather than a substantial base line layer of retirement income for everyone is possibly "conservative." But when you combine Pozen's progressive indexing with Bush's separate proposal for private accounts, it becomes something different: a way of phasing out Social Security altogether. Viewed in this way, Bush's embrace of a program to make the distribution of income more equal can be explained as a Trojan horse to eliminate Social Security in the long run. When it comes to the administration’s ideas for Social Security, we are back where we started. No one knows what will really come next in the social security saga.