President’s proposal for deep cuts in middle-income Social Security benefits

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Snapshot for May 4, 2005.

President's proposal for deep cuts in middle-income Social Security benefits
Soon after the president began his campaign to privatize Social Security last November, the White House endorsed a plan to freeze benefits at their the current level and prevent future benefits from sharing in the  economy's future prosperity.  Specifically, the president's 2001 commission on Social Security had proposed replacing the current formula of wage indexing, which keeps benefits rising with productivity and real wage growth, with price indexing.  This proposal has been criticized for causing drastic cuts in benefits across the income scale. 

In last week's press conference, President Bush endorsed mutual fund executive Robert Pozen's proposal to bring about substantial cuts in promised benefits through partial price indexing.  Under this new plan, workers with career earnings averaging $25,000 or less per year would continue to have their future benefits calculated based on increases in wages, but middle- and high-income workers would see large cuts in their guaranteed benefits.  Under this proposal, people with career annual earnings above $113,000 would, starting in 2012, have their future benefits calculated based purely on increases in prices; middle-income workers would see their benefits subjected to a combination of wage and price indexation that would result in a reduction from currently promised levels.

When most workers in their late twenties today retire around the year 2045, they will fare far worse under this partial price indexing scheme.1   While low-earning workers' benefits remain unchanged, 70% of the workforce would see a benefit cut.  A worker with average earnings ($36,500 in 2005) would face a benefit cut of 16%, as the share of pre-retirement income replaced by Social Security falls from 36% to 30%. Higher-wage workers would face even deeper cuts.  A person somewhat higher up the wage scale (earning $58,400 in 2005) would face a benefit cut of 25%, with the replacement rate falling from 30% of prior earnings to just 23%. 

Over time, partial price indexing erodes the current relationship between lifetime earnings and Social Security benefits, so that by 2075 (retirement time for those born this year) all workers would receive about the same benefit.  The chart above shows how the benefit cuts get deeper over time.  A worker with average earnings ($36,500 in 2005) would face a benefit cut of 28% in 2075, as the share of pre-retirement income replaced by Social Security falls from 36% to 26%. A higher-earning worker (earning $58,400 in 2005) would face a benefit cut of 42%, with the replacement rate falling from 30% of prior earnings to only 18%.  As a result of these cuts, Social Security would no longer serve as a public pension plan and would rapidly become simply an anti-poverty program. This erosion will weaken the widespread support for the program over time, with most workers receiving less and less for the taxes that they contribute.  The intention seems to be to fundamentally change Social Security from a dependable, guaranteed retirement benefit to a bare-bones safety net program. 

1. The source for these numbers is Jason Furman, Center on Budget and Policy Priorities, An analysis of using "progressive price indexing" to set Social Security benefits, April 29, 2005. 

This Snapshot was written by Amy Chasanov and Lee Price.