| |
|
|
Special Report
One Social Security reform plan that still has legs
Robert C. Pozen's plan, touted by the president, remains the leading candidate for closing the system's funding gap. He thinks it marks the last, best chance to get something done.
By Rick VanderKnyff
Like a zombie from one of those '60s horror films, Social Security reform refuses to die -- despite public indifference and political stalemate. There are reports that bills will emerge next week in both the House and Senate -- and one idea that may make an appearance in both is something called "progressive indexing."
Sounds esoteric, but because it's the only specific plan the president has endorsed so far for fixing the system's solvency issues, it has moved out of the world of policy wonks and onto front pages. Simply put, it would slow down benefit growth for middle- and high-income workers without changing the growth rate of benefit payments for those at the lowest income levels.
The architect of progressive indexing, Robert C. Pozen, believes that if lawmakers aren't able to craft a solution in this go-round, reform efforts will be as good as dead for now.
Pozen -- a Democrat who supported John Kerry in the last election is a lawyer who made his fortune in the mutual fund business (he is chairman of MFS Investment Management in Boston). He served on Bush's 2001 commission on Social Security and has testified in both houses of Congress numerous times.
The president on Tuesday told Sen. Bob Bennett, R-Utah, to go ahead with Social Security legislation that won't include the private investment accounts -- but will include a variation on Pozen's indexing plan, according to CNBC's Steve Liesman.
Pozen, interviewed recently by phone at his firm's Boston headquarters, would rather not predict his plan's ultimate chances of success: "It's a very elaborate political game that's being played, and I don't want to pretend to be an expert."
While he may not be an expert on politics, he is happily playing the expert on Social Security, appearing frequently on televised discussions, writing op-ed pieces for The Wall Street Journal and The Economist -- and becoming a regular on Capitol Hill.
Solvency first, private accounts later
While he is a proponent of "personal accounts" -- the president's pet plan to allow workers to divert a portion of their payroll deductions into stock and bond investments -- Pozen is spending most of his energy these days hawking his plan for addressing the Social Security system's projected funding shortfall.
"I am mainly interested in getting to solvency," said Pozen. "Personal accounts are a good sweetener," but his progressive-indexing model can function with or without the accounts, he said.
Related news and commentary
The aging of the baby boom generation will put strains on the pay-as-you-go system, in which payroll taxes paid by current workers fund the benefits of today's retirees, with the balance going into a trust fund to be set aside for future benefits. According to projections from the Social Security Administration, the system will have to start tapping into that trust fund in 2017; in 2041, the fund will be exhausted and revenue from payroll deductions will no longer be sufficient to cover promised benefits.
Personal accounts in themselves do nothing to address the solvency issue, as Bush himself has acknowledged. Any fixes designed to trim the projected shortfall will have to include tax hikes, cuts to currently scheduled benefits or both.
The President's Commission on Social Security, on which Pozen served, proposed in 2001 to address the projected funding shortfall by changing the way initial benefits are calculated, tying the formula used to calculate that benefit to the consumer price index instead of the faster-rising wage index used now (in recent decades, the growth of wages has outpaced the growth of prices by about 1.1% per year).
In short, such a change would mean benefits significantly lower than those now scheduled. When the plan was resurrected in fall, it was quickly attacked by critics, many of whom said the across-the-board cuts would be particularly devastating to the poor.
Enter 'progressive indexing'
Pozen's progressive indexing model is a blended approach to calculating initial benefits, preserving the currently wage-indexed formula for low-income workers while switching to price indexing for high-wage earners. Those falling in the middle would see their initial benefits increased by a proportional blend of wage and price indexing. The changes would affect only those workers born after 1950.
Pozen's plan breaks down like this, by income levels:- Workers making $25,000 or less: Their benefits would remain as scheduled under current law.
- Workers making between $25,000 and $113,000: Over 75 years, the Congressional Research Service reported, middle-income wage earners would see initial benefits cut by 39.3% from currently scheduled levels.
- Workers making more than $113,000: Over 75 years, their initial benefits would be 51.5% less than currently scheduled.
These changes alone, Pozen said, would trim a long-term deficit estimated at $3.8 trillion by 70% to $1.1 trillion. Other adjustments could make up the remainder, he believes.
Pozen said his first aim was to preserve the benefit levels of low-wage workers without resorting to large tax increases. "I was trying to get back to the roots of the program," he said. "It was really to set a floor, to make sure that low-income workers have some kind of retirement income.
"That has to be the priority, to protect the Social Security benefits of low-wage workers, those people who don't have IRAs, 401(k)s."
Critics have said that middle-income workers lose too much under the plan, but Pozen disputes that. "We should recognize that these people have other sources of retirement income, and that these sources" -- such as 401(k) plans -- "are essentially subsidized by the government through tax deductions" to the tune of $55 billion in 2004, Pozen said.
Benefit 'cuts'?
Pozen bristles when critics say his indexing changes amount to benefit cuts. He makes a distinction between "scheduled benefits" and "payable benefits," pointing out that while a certain benefit level is spelled out under current law, there will not be enough money to pay those promised benefits to future retirees.
"'Benefit cuts' is a very nasty term. People who use the term 'benefit cut' are making it impossible to reach reform," Pozen said. Tax increases large enough to erase the projected shortfall are not politically viable, he said. Proposals to raise the level of income subject to payroll taxes from the current $90,000 won't make a big enough dent, either, he said, and would put an unfair burden on those affected.
For the record, Pozen has offered a plan that combines his progressive indexing scheme with a 2.9% surtax on all wages over $90,000. One option, he has written, would be to devote half of that surtax to Social Security solvency, with the remaining half allocated to a personal account.
There are those who say the best course right now is to do nothing -- that Social Security Administration projections have proven overly pessimistic over time, and the economy may very well grow fast enough to obviate the need for cuts. "For many workers, cuts would be deeper than if no action were taken and Social Security became insolvent," according to the Center on Budget and Policy Priorities.
"To avert the danger of future cuts in benefits, Mr. Bush wants us to commit now to, um, future cuts in benefits," columnist Paul Krugman wrote this week in the New York Times. "This accomplishes nothing, except, possibly, to ensure that benefit cuts take place even if they aren't necessary."
Pozen doesn't buy it. Doing nothing, he said, is a "pretty bad option," given that the chance to implement a gradual fix to the solvency issue only diminishes over time. "It's fair to say that we do not have a crisis now," he said, "but we do have a predictable crisis."
What's next for reform?
Which brings us circling back to where we started -- efforts in Congress to implement the kind of reform plan the president has been stumping hard for ever since his re-election.
Bush has said he's willing to listen to any and all ideas -- as long as they include personal accounts. Tuesday's news on the Bennett bill is the first sign that he might be willing to budge -- but his staff quickly said he remains firmly in support of private accounts.
Congressional Republicans have generally embraced the call with reluctance at best, mindful of the dangers inherent in tampering with any entitlement program, especially Social Security. Democrats, meanwhile, have said they will not consider any plan that includes personal accounts.
The White House has been calling on Democrats, with escalating rhetoric, to come up with a plan of their own. Democrats, watching the president's falling poll numbers with glee and sensing a distinct lack of enthusiasm for reform among the public, have decided to sit on their hands.
Pozen has been critical of Bush for putting too much focus on carve-out accounts, but now gives him some credit for paying more heed to the solvency issues.
"The president has already started to refocus, but he's not ready to let go of personal accounts yet," Pozen said, before Tuesday's report that Bush may be softening. "He's very reluctant to bargain against himself. He doesn't think the Democrats have come to the table with anything."
|
|
|
|
