Personal accounts, not benefit cuts

Posted: Nov 08, 2004 12:00 AM

During the presidential election, President Bush and many Republican congressional and senatorial candidates campaigned on reforming Social Security by creating personal retirement accounts that workers own and control. By virtue of their solid win, Republicans now have a clear mandate to enact this reform.

Personal accounts are supported by large majorities of the American people in every poll, including Democrats, blacks, Hispanics, labor and other traditionally liberal groups. That said, Republicans must be extremely careful how they implement this reform. Opponents of personal accounts will be looking for any early Republican stumble that can be used to discredit the personal account reform.

Cutting future Social Security benefits or raising the retirement age, as some "green-eye shade" Republicans are suggesting to help pay the transition costs, are not part of the GOP's mandate, and neither idea should be on the agenda. The public also overwhelmingly opposes both ideas in every poll.

Republicans would be foolish to allow Democrats to say that the first thing Republicans did as soon as they got firm control over the government is go after Social Security benefits. And advocates of personal accounts would be foolish to get sidetracked into supporting politically disabling Social Security benefit cuts, instead of what they are really for, and, indeed, have already won politically.

Because it is so obvious the public opposes Social Security benefit cuts, those who obsess over the transition costs of moving to personal accounts have come up with stealth benefit cuts to slip past the American public. This idea, which is being aggressively urged on Republicans, is called price indexing - benefit cuts by another name.

Currently, during taxpayers' working years, the initial level of retirement benefits to which they will be entitled rises each year at the same rate as average wages increase. It's called wage indexing. As a result, when workers retire in the future, Social Security benefits will continue to comprise about the same percentage of their pre-retirement incomes as Social Security does for today's retirees.

In more technical jargon, the replacement rate remains the same over time. Currently, Social Security replaces about 42 percent of pre-retirement income for average-income workers and 28 percent for higher-income workers.

Switching from wage indexing to price indexing would change the calculation of the initial-benefit level so that throughout taxpayers' working careers the initial level of their future retirement benefits would rise only at the same rate that prices increase. This would freeze Social Security benefits at today's levels in inflation-adjusted terms but ignore real standard-of-living increases.
It would constitute a massive cut in the Social Security benefits that current law guarantees, so massive that it would be enough by itself to eliminate the long-term Social Security deficit entirely.

For today's young workers, future Social Security benefits promised under current law would be cut by 40 percent from the levels that otherwise would be paid. As time goes on, and benefits continue to grow more slowly than wages, this cut from currently promised benefit levels would become larger and larger, eventually reaching 50 percent, and continuing on higher.

This means that over time the percentage of pre-retirement income replaced by Social Security benefits - the replacement rate - would decline perpetually year after year. Instead of replacing about 42 percent of pre-retirement wages for average workers as today, that percentage would decline slowly over the decades to eventually 30 percent, then 25 percent, then 20 percent, etc.

Advocates of price indexing say it only slows the growth of Social Security benefits, it doesn't cut them. That argument won't fly politically. Moreover, the argument doesn't pass the "smell test" for today's workers who realize full well that Social Security already pays a lousy rate of return on their payroll taxes even if all currently promised benefits are paid in full. Price indexing only makes a lousy deal worse.

Let me remind the austerity-minded hand wringers who argue that price indexing won't really effect workers who elect personal accounts - because they will receive more through personal accounts than they are currently promised - one can already hear personal-account opponents literally screaming that the Republicans want to force workers to give up a sure thing for a risky scheme. Besides, if personal-account advocates are so sure everyone invested in personal accounts will do better in the future, shouldn't they have the courage of their convictions and be willing to guarantee everyone at least what they currently are promised?

If Republicans become committed to cutting future Social Security benefits to help pay the transition costs, they will be forced to accept a tax increase as well, in the name of "fairness." Liberals and Democrats will insist that we cannot possibly address the Social Security deficit solely through benefit cuts, and at least half or more must be addressed through higher taxes.

Proposals like price indexing or delaying the retirement age are politically suicidal and completely unnecessary. If workers are allowed the freedom to choose large personal accounts and the transition costs paid for as proposed in the Ryan-Sununu Bill now pending in Congress, almost all Social Security retirement benefits eventually will shift to the personal accounts voluntarily, and the long-term Social Security deficits will be eliminated entirely.