Progressive Indexation

At his press conference on April 28, 2005, President Bush laid out the contours of his proposal to address Social Security's expected long-term financing needs. The president pitched his plan as "progressive," embracing a proposal to cut Social Security benefits on a sliding scale of income. Unfortunately, the reality is that the president's approach will hit the middle class especially hard. And, not only do the middle-class benefit cuts become more severe over time, his proposal only covers 59 percent of Social Security's projected shortfall. Because the president relies exclusively on benefit cuts to solve the problem, it means the president has $1.6 trillion in additional benefit cuts still to account for. Under President Bush's plan, the middle-class benefit cuts he laid out are just the beginning.

Currently, 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 for 70 percent of wage earners using what he terms "progressive indexation." 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 benefit cuts. 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 as their benefits would rise only in line with prices, falling further and further behind rising living standards. Workers earning more than $20,000, but less than $90,000 would see benefit cuts to varying degrees, which would grow larger with income. These cuts would affect both retirement benefits and the benefits of surviving spouses and children of deceased workers.

The middle-class benefit cuts would be substantial. A worker with medium earnings, $36,600 in 2005, retiring at age 65 in 2045, would see a benefit cut of 16 percent, and a worker with high earnings, $58,560 in 2005, and retiring the same year, would see a benefit cut of 25 percent.

There is no end in sight for these benefit cuts as they would grow larger in the future. Benefits are adjusted for the difference between wage and price growth, translating into annual cuts in the long term. A medium wage worker retiring in 2025 would see a benefit cut of 6 percent. If she retired in 2045, the benefit cut would total 16 percent and for a medium wage worker retiring in 2075, the cut would total 28 percent.

America's middle class can ill afford such massive benefit cuts. Social Security is the most important source of retirement income. Sixty percent of income for households 65 years old and older came from Social Security. For two-thirds of households 65 and older, Social Security constitutes at least half of their retirement income. Cutting these vital benefits on a massive and ongoing basis leaves America's middle class significantly more vulnerable in retirement.

President Bush's benefit cuts are only the beginning. The president has essentially ruled out the possibility of giving more revenue to Social Security. This leaves him only with the possibility of benefit cuts to address Social Security's expected financial shortfall. His proposed benefit cuts, though, cover only 59 percent of the projected shortfall. To cover the remaining 41 percent without additional revenue, the president would have to make deeper cuts into retirement and survivor benefits or extend his benefit cuts to disability benefits.

The president's rhetoric aside, his proposal will balance the books on the backs of the middle class. Combined with his plans to divert trillions of dollars to create private accounts in Social Security, it will result in a fundamental undermining of the most effective social contract in the history of the country. A real discussion of America's retirement security is needed, but it must follow three basic principles:

-The fundamental structure of Social Security must be protected – any additional savings options must be done outside of Social Security,

-Solutions must be truly progressive – the middle class must not be asked to bear the majority of the burden, and

-No solution should increase our already escalating national debt.

Unfortunately, President Bush's proposals do not pass any of these key tests.

John Podesta is the President and Chief Executive Officer of the Center for American Progress.

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