Comparing Apples to Apples: How President Bush’s Middle-Class Benefit Cuts Compare to Social Security

 

 

 

Comparing Apples to Apples: How President Bush’s Middle-Class Benefit Cuts Compare to Social Security

On April 28, President Bush laid out his ideas for benefit cuts to Social Security. Under Bush’s plan, everybody except the lowest 30 percent of wage earners would face benefit cuts that grow over time. Contrary to the president’s claim, under a fair comparison, middle-class families would face larger cuts under the president’s plan than if nothing was done to address the Social Security shortfall.

Background

Under the current system, Social Security benefits for new retirees rise in line with living standards. This makes intuitive sense since workers’ taxes are also tied to rising wages and living standards.

President Bush has proposed to cut benefits from their scheduled levels for 70 percent of wage earners using a "blended indexation method" based on the model calculations by Robert Pozen, a former member of President Bush’s Commission to Strengthen Social Security. Under the president’s proposal, benefits would be decoupled from living standards for all but the 30 percent of wage earners with the lowest wages. Anybody with wages currently above $20,000 would see lower benefits than they would receive under the current Social Security system, or so-called scheduled benefits. The highest income earners – those with wages and salaries constantly at the cap above which earnings are no longer subject to Social Security taxation, currently $90,000 per year – would see the largest cuts. Their benefits would rise only in line with prices and thus fall further and further behind scheduled benefits. Workers earning more than $20,000 but less than $90,000 would see benefit cuts to varying degrees, which would grow larger with income.

An Unfair Comparison

In defending these benefit cuts, Mr. Pozen and the White House have argued that the resulting benefit levels would be higher than those that Social Security would be able to pay in the future without any changes. This refers to the benefits that Social Security’s expected future taxes could cover. Social Security is expected to be able to pay full benefits through 2041. After that its contributions would cover a little over 70 percent of scheduled benefits. In their comparison of the president’s cuts, Mr. Pozen and the White House refer to these "payable benefits" after 2041.

Unfortunately, this is an apples-to-oranges comparison. Under President Bush’s proposal, benefit cuts would start for people turning 62 in 2012 and these cuts would cover 57 percent of the projected shortfall. Thus, comparing "payable benefits" to President Bush’s benefits is a comparison between benefit cuts that would address 100 percent of the expected Social Security shortfall and one that addresses only 57 percent and leaves $1.7 trillion in the present value of the shortfall to be covered.

With such a comparison, it is obviously easy to make the president’s benefit cuts look good. After all, this comparison implicitly grants the president an additional $1.7 trillion in present value that is not included in the "payable benefits" measure for the current Social Security system.

An Apples-to-Apples Comparison

To truly make the two scenarios comparable, Social Security would have to receive an additional $1.7 trillion in present value. This could be accomplished by assuming that after 2041, Social Security would have to cut benefits only enough to cover 57 percent of the expected shortfall – just like the president does in his proposal.

How Does the President’s Claim Stand Up to an Apples-to-Apples Comparison?

What does this mean for middle-class benefits? We know that from 2012 to 2041, those workers earning more than $20,000 today would see benefit cuts under the president’s proposal, while Social Security can still pay all the benefits that are currently scheduled to be paid. For a period of almost 30 years, middle-class families should see higher benefits under an unchanged Social Security system than under the president’s proposal.

What happens thereafter? Many middle-class workers would have greater benefits under Social Security than under the president’s proposal, even if there are no changes to the system and if Social Security benefits were cut after 2041 to cover 57 of the expected shortfall. With the exception of lifetime low-wage workers, all hypothetical workers would fare better under an unchanged Social Security system than under the president’s proposal. For instance, a worker with medium wage earnings, earning $36,600 in 2005, retiring at age 65 in 2045, would receive an annual benefit equal to $17,268 from an unchanged Social Security system, where benefits are reduced to cover 57 of the expected shortfall after 2041, compared to $16,767 in annual benefits under the president’s plan (table 1).

Table 1: Retirement Benefits at 65 Under the President’s Plan and with 57 Percent Reduction in Scheduled Benefits after 2041

 

Scheduled Benefits

Payable Benefits with 57 Percent Cut after 2041

President Bush’s Proposed Benefits

 

2005 dollars

Replacement rate

2005 dollars

Replacement rate

2005 dollars

Replacement rate

Scaled Low Earner (45 percent of the average wage, or $16,470 in 2005)

2025

$9,816

49.0%

$9,816

49.0%

$9,816

49.0%

2045

12,172

49.0

10,480

42.1

12,172

49.0

2075

16,795

49.0

13,989

40.8

16,795

49.0

Scaled Medium Earner (average wage, or $36,600 in 2005)

2025

$15,652

36.3%

$15,652

36.3%

$15,140

33.7%

2045

20,056

36.3

17,268

31.3

$16,767

30.1

2075

27,667

36.3

23,044

30.2

$19,976

25.8

Scaled High Earner (160 percent of the average wage, or $58,560 in 2005)

2025

$20,759

30.1

$20,759

30.1

$19,387

27.0

2045

26,590

30.1

22,894

25.9

20,075

22.7

2075

36,683

30.1

30,544

25.1

21,350

17.6

Steady Maximum Earner (taxable maximum, $90,000 in 2005)

2025

$25,511

24.0

$25,511

24.0%

$23,227

21.1%

2045

32,498

24.0

27,981

20.6

23,074

16.9

2075

44,761

24.0

37,282

20.0

22,694

12.3

Source: Author’s calculations based on Social Security Administration, Office of the Chief Actuary, "Estimated Financial Effects of a Comprehensive Social Security Reform Proposal Including Progressive Price Indexing – INFORMATION," February 10, 2005, and Social Security Trustees, 2005 Annual Report.

In fact, there is no year during which a medium wage worker – and, by extension, any worker earning more than $36,600 in 2005 – would fare better under the president’s plan than under an unchanged Social Security plan (figure 1).

Source: Author’s calculations based on Social Security Administration, Office of the Chief Actuary, "Estimated Financial Effects of a Comprehensive Social Security Reform Proposal Including Progressive Price Indexing – INFORMATION," February 10, 2005, and Social Security Trustees, 2005 Annual Report

In a true apples-to-apples comparison, the claim of Mr. Pozen and the White House that President Bush’s plan would mean fewer middle-class cuts than an unchanged Social Security system would no longer hold true.

Christian E. Weller is a senior economist at the Center for American Progress.