Jason Furman writes:
HOW WOULD THE PRESIDENT’S NEW SOCIAL SECURITY PROPOSALS AFFECT MIDDLE-CLASS WORKERS AND SOCIAL SECURITY SOLVENCY?: In last night’s press conference, President Bush endorsed a proposal that would result in substantial cuts in benefits for middle-income families and deeper cuts for higher-income families. While the proposal was described as reducing benefits for the most affluent Americans, it would result in large benefit reductions for middle-class workers, as well.
All workers with incomes above $20,000 today would be subject to benefit reductions, and the benefit cuts would escalate sharply in size as income climbed above $20,000. A worker making $35,000 today would be subject to benefit reductions more than half as large as the benefit cuts imposed on people at the highest income levels. A worker making $60,000 today would be subject to benefit reductions more than 85 percent as large as someone making several million dollars a year.
The benefit reductions for average earners would be the largest in Social Security’s history. The 1983 Social Security reform, for example, lowered benefits for average workers by 17 percent, with the reduction phased in over 46 years. The President’s plan would lower benefits for average workers by 28 percent over a period of 70 years, and by considerably more than that for middle-class workers with incomes somewhat above the average, such as those who make $60,000 today.
Social Security survivor benefits would be cut by the same magnitude. How disability benefits would be affected is unclear, although the President implied they would not be reduced.
The President’s proposed change in the Social Security benefit structure is essentially a plan known as “progressive price indexing” that has been designed by investment executive Robert Pozen. Analysis by the Social Security Administration’s actuaries shows that Mr. Pozen’s plan would reduce benefits for average earners retiring in 2075 by 28 percent, relative to the current benefit structure, and that this reduction would apply equally to retirees, survivors, and people with disabilities. The actuaries also have reported that the benefit reductions under the Pozen plan would close about 70 percent of the 75-year Social Security shortfall.
The White House last night issued a fact sheet stating that its proposals, too, would close 70 percent of Social Security’s financing problems. To do that, the President’s plan either must cut disability and survivor benefits substantially — after all, one-sixth of the savings in the Pozen plan come just from reductions in disability benefits — or cut retirement benefits for middle-class workers even more deeply than the figures cited above (which are the actuaries’ estimates of the benefit reductions under the Pozen plan). If the President’s plan shields disability benefits from cuts, as the President indicated last night — and does not cut retiree and survivor benefits more sharply than the Pozen plan — then it will close 57 percent of Social Security’s 75-year shortfall, not 70 percent. (The 57 percent figure also reflects the small cost of the poverty-level minimum benefit the President proposed last night.)...