Alan Reynolds

When President Bush tackled Social Security reform, he surely expected the usual denial and deceit from AARP and do-nothing Democrats. What he probably did not anticipate was an even more vehement defense of the status quo from conservative attorney Peter Ferrara, a longtime advocate of personal accounts.

 In a January op-ed, Ferrara strenuously opposed basing first-year benefits on individuals' earnings histories after adjusting for inflation (price indexing), rather than the current practice of giving initial benefits an extra boost to keep pace with economy-wide wage growth (wage indexing).

  "Under the current wage indexed system," wrote Ferrara, "the replacement rate, the percentage of preretirement income replaced by Social Security, remains stable over time at about 40 percent for average-income workers and 28 percent for low-income workers."  Actually, that 28 percent figure was a Congressional Budget Office (CBO) estimate for high-income workers. The replacement rate is 58.3 percent for low-income workers.

 The supposedly "stable" replacement rate for average workers rose from 18.7 percent in 1950 to 51.7 percent in 1981, according to the trustees' report, but it has since fallen to 43.2 percent this year and is scheduled to fall further to 40.6 percent by 2008. For those born in 2000, the CBO figures that will drop to 29.8 percent because Social Security can't pay more than that. 

  "Under current law," Ferrara recently wrote, "future benefits of workers paying into Social Security increase yearly at the rate wages rise. Under price indexing, benefits would grow only at the rate prices increase."

 Actually, only first-year benefits are boosted to keep pace with the general trend of wages; after that, first-year price indexing applies. Benefits of new retirees would still grow with wages if they too were indexed to prices rather than wages (as they are for older retirees), because benefits would still be based on each person's earnings history and real earnings would continue to rise. In any case, defending wage indexing is like arguing that it would be nice if bankrupt airlines could pay better benefits.

Alan Reynolds

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