Replacing reality

Posted: May 19, 2005 12:00 AM

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.

 The effect of switching to price indexing would be glacially slow -- future increases would eventually be diminished by no more than 1 percent a year, and imperceptibly at first because earnings for years before the law was changed would still be adjusted by the old method. Other fixes such as raising the retirement age are more problematic, less humane.

 If money grew on trees, keeping wage indexing would mean an average-wage worker retiring in 2075 would receive real benefits twice as generous as today's. More than twice as many old people would each be collecting twice as much money. That is not this generation's "promise" to future beneficiaries. It is this generation's threat to future taxpayers.

 Although ever-increasing real future benefits under current law cannot be paid, as Ferrara has often noted, he nonetheless argues they can and must be paid, and even "guaranteed" by future taxpayers. But that is quite impossible without imposing debilitating taxes on future workers, which is itself impossible because future citizens can vote to free themselves from any onerous obligations we attempt to impose on them.

 If all the promised future benefit increases for millions of aging baby boomers could really be financed with impunity, thus guaranteeing a high and stable replacement rate, then why would young people need or want personal accounts? If Social Security could and should pay rising real benefits to today's young workers, what is the problem Ferrara's own Social Security reform plan sets out to solve?

 Ferrara's plan assumes Congress will cut spending on other programs (including Medicare) and send that spare cash to Social Security, along with an extra portion of corporate profits taxes. If Congress cannot or will not transfer hundreds of billions of dollars of income tax receipts to Social Security each year, as the plan hopes, Ferrara's plan would authorize borrowing to fill the gap. As Social Security's chief actuary Steve Goss explained it, Ferrara's plan would "provide for the Treasury to issue additional bonds to the public in order to generate revenue to transfer to the Trust Funds if, at any time, the combined OASDI Trust Fund ratio is projected to fall below 100 percent. . . . This provision would guarantee solvency for the Trust Funds in any circumstances." 

 Nobody need worry about doubling and guaranteeing real future benefits under Ferrara's plan, since the Treasury could simply borrow whatever is needed to pay the bills and Congress could simply raise income taxes as much as needed to service the extra debt. Personally, I find price indexing a much wiser and safer solution.