A Republican “fiscal cliff” proposal to change the way that cost-of-living adjustments are handled in federal programs has sparked renewed interest in a broader overhaul of the way Social Security benefits are calculated.
Republicans are proposing changes to a funding formula the government uses to adjust benefits annually in a host of programs, including Social Security. That might open the door for a broader discussion about further changes in how Social Security benefits for future retirees are calculated.
House Speaker John Boehner, R-Ohio, proposes changing federal cost-of-living adjustments by using a different measurement of inflation. Most adjustments are calculated by changes in inflation as measured by the consumer price index.
Boehner wants adjustments linked to what’s called a chained consumer price index, in which inflation rises more slowly because the calculation assumes that consumers will buy less of a product whose price is rising. This presumes that Social Security and other federal programs have overstated inflation, overpaying recipients with inflated cost-of-living adjustments. Boehner projects savings of $200 billion over 10 years if all government cost-of-living adjustments were done this way.
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The proposal, which would affect current retirees, has detractors in both parties. But it’s also helped renew public debate over a bigger change that would link future Social Security benefits to changes in prices over time. The current system calculates benefits based on changes to the average national wage.
This idea is called progressive indexing, and President Barack Obama has expressed interest in it in the past. The Wall Street Journal’s editorial board recently endorsed the concept. Former World Bank President Robert Zoellick, who’s mentioned as a potential U.S. treasury secretary, embraced the idea in a Dec. 10 opinion piece about ways to tackle the nation’s fiscal challenges.
“A deal in Washington should save Social Security by progressively indexing the base payments to future retirees and gradually increasing the eligibility age,” he wrote.
It’s all music to the ears of Robert Pozen, a former Wall Street mutual fund executive who proposed the idea, now called the Pozen Plan, when he was a member of a presidential blue-ribbon commission in 2001.
“It’s getting some miles now,” said Pozen, who argues that his plan offers funding stability for a bedrock government program while still ensuring an intact safety net. “The first question is, if we are going to reform Social Security, we have to have somebody get less benefits. The obvious group that needs the benefits most is the lower third. . . . We have to have a more generous schedule for low earners than high earners.”
Right now, when a worker retires, the Social Security Administration calculates the retirement benefit based on his or her lifetime earnings. Those earnings then are adjusted by a formula that’s indexed, or linked, to the annual change in average national wages.
Under the Pozen plan, progressive indexing leaves the current benefit structure in place for Americans who earn less than $25,000 a year – the bottom 30 percent of workers. Future Social Security benefits promised to the other 70 percent of workers would be less generous.
Most would see their benefits calculated on a sliding scale that reflects changes over time in average national wages and prices. For those with average career earnings above $113,000 a year, their benefits would be calculated completely by the changes in prices over time, which rise more slowly than wages.
Across all income categories, the Pozen Plan would still see benefits growing from where they are today. But some, especially for wealthier workers, would grow more slowly.
“You’re basically taking away the larger share of Social Security benefits, establishing minimum benefits that are guaranteed,” said Leonard Burman, a national recognized tax expert and professor at Syracuse University, who warned that Social Security might begin to look more like a traditional welfare program. “There’s a concern that you would undermine support for the whole system. People think they’ve earned their benefits.”
The AARP, the lobby for seniors, strongly opposed the idea of progressive indexing when it was last seriously discussed in 2005, and it still does.
“We support retaining wage indexing in Social Security,” said Cristina Martin Firvida, the director of financial security for AARP.
Its more immediate concern, however, is Boehner’s proposal to change the cost-of-living calculation.
“If the concern is that we are inaccurately reporting inflation, as experienced by retirees and the disabled . . . then we’ve been looking at the wrong market basket for 40 years,” Martin Firvida said.
That’s because the current system sets adjustments based on rising costs in a basket of goods purchased by active workers, whose payroll taxes pay for current retirees.
“Workers tend to be younger, healthier, and therefore have fewer health care expenses,” she said. “We all know that health care outstrips (consumer) inflation year after year.”
Federal Reserve Chairman Ben Bernanke weighed in on this debate Wednesday, noting in a news conference that economists view the chained approach to calculating inflation as a more accurate indicator.
“However, whether that is better or appropriate for Social Security indexing or not, I think that is ultimately a political decision,” Bernanke said. “I suppose a rejoinder would be that neither then CPI or the chained CPI may necessarily be a particularly good measure of the cost of living for Social Security recipients, so those are the kinds of questions that Congress is going to have to deal with.”