Bush's "Price Indexing" Proposal To Cut Social Security Benefits

[Itsthetruth]

Economic Policy Institute
Economic Snapshot for February 9, 2005

Proposed Social Security price indexing would slash benefits

The Bush Administration has spoken favorably about substituting price indexing for wage indexing, a change that was a centerpiece of Plan 2 of the President's Social Security commission. Under this change, benefits would no longer reflect improvements in the country's standard of living, but would just be indexed to prices. It is hard to overstate the effect of that substitution on hypothetical future benefits.

Recent research by the non-partisan Congressional Research Service (CRS) sheds light on this issue. The CRS estimated what the effect on current Social Security retirees' benefits would have been if initial benefits had been calculated based on increases in prices—using the consumer price index—instead of increases in average national wages.

Figure 1 shows that, with a price indexation formula, retiree benefits would have been cut substantially. Under the current wage indexation, the Social Security benefit for a person with average earnings over one's lifetime and retiring in 2005 would be $15,336 per year, replacing 42% of the average worker's income. If, however, price indexing had been used instead of wage indexing, that same 2005 retiree would receive only $6,180 per year, replacing just 17% of income. In other words, as the figure shows, a change from wage indexation to price indexation would have meant a 60% cut in Social Security benefits for today's retirees.

CRS also determined how this change would affect the elderly (people aged 65 and older) living in poverty in 2003.2 As shown in Figure 2, in 2003, 3.6 million elderly, or 10.2% of the noninstitutionalized elderly, lived in poverty. If Social Security benefits had been calculated using price indexation, an additional 7 million elderly would currently be living in poverty, bringing the total to 10.5 million, or 30.4% of the elderly.3

A shift from wage indexing to price indexing may sound innocent, but would impose dramatic benefit cuts on retirees and, as a result, substantially increase poverty among the elderly.

[Itsthetruth]

1. Benefits Cuts For All But The Lowest Wage Earners

Last February 10th I wrote:

"This Battle Is Just As Important.

And we ought to hold the politicians feet to the fire on this. If the "private accounts" scheme goes up in flames don't be fooled into thinking the battle to defend social security is over. Hardly. This could be Bush's backup plan "B".

It's interesting that few if any members of the Senate are commenting on this. Have you read any statements by any Senators exposing and opposing Plan "B"? Perhaps some think they can declare a "victory" if they defeat private accounts while preparing to surrender on this other grand scheme for massive benefit cuts."

It's clear according to a White House "fact sheet" circulated after Bush's news conference and statements from Republican leaders that Bush has in mind some form of price indexing combined with wage indexing depending on a person's income. This means benefit cuts for all but the lowest wage earners.

[mpendragon]

2. yes, price indexing cuts benefits but . . .

It means that adjusted for inflation I'll get the same benefits my parents do. People will get fewer benefits in the future than they would have but not more than they do now. If done correctly this sounds like a reasonable compromise to the dumb-ass private account idea.

Price indexing also makes sense in terms of this being a supplemental retirement/disability/family tragedy system. I know that these vultures won't implement it in a reasonable way (not including local housing costs, local transportation costs, and local food/grocery prices). I think the 1940's graph illustrates the price index vs. cost of living problem.

[Itsthetruth]

3. With Price Indexing You Will Get Less, Not More

The Buffalo News
February 5, 2005

"I'm willing to work with anybody, Republican or Democrat or independent, who wants to come in and discuss ways to solve the problem," he told thousands of supporters. "Everything is on the table except raising payroll taxes."

In Florida later in the day, Bush specifically said slowing the rate of growth of future benefits would help solve Social Security's long-term problems.

http://www.buffalonews.com/editorial/20050205/1028607.a...

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The White House
News Release

THE PRESIDENT: Because the -- all which is on the table begins to address the big cost drivers. For example, how benefits are calculate, for example, is on the table; whether or not benefits rise based upon wage increases or price increases. There's a series of parts of the formula that are being considered.

Does that make any sense to you? It's kind of muddled. Look, there's a series of things that cause the -- like, for example, benefits are calculated based upon the increase of wages, as opposed to the increase of prices. Some have suggested that we calculate -- the benefits will rise based upon inflation, as opposed to wage increases. There is a reform that would help solve the red if that were put into effect. In other words, how fast benefits grow, how fast the promised benefits grow, if those -- if that growth is affected, it will help on the red.


http://www.whitehouse.gov/news/releases/2005/02/2005020...

[mpendragon]

4. I know we'd get less but we need some small reasonable fix

There isn't a way to get more without raising taxes or shifting spending priorities. Raising taxes doesn't get you elected. Giving money to social programs doesn't make anyone wealthy so lobbyists don't lobby for them and money will be spent elsewhere (military projects, corporate welfare, contracts for services like Halliburton claims to provide).

That leaves us with a few options:
1. Investing the money better for a larger return (private accounts aren't better)
2. Cutting benefits (make it need based or price indexed instead of wage indexed)
3. Raising the retirement age


I think the most humane thing would be a combination of better investing through a little diversification (with good investment year surpluses going into the trust fund to cover bad years and no private accounts) and price indexing to tie benefits to the cost of living (not a multiple of the cost of food like the poverty line but true cost of living).