Personal accounts, not benefit cuts

The president and many members of Congress have explicitly run on personal accounts for Social Security in the past three election cycles, and won. Polls show overwhelming support on the issue, across party lines. Republicans now have a clear mandate for such reform.

But they do not have any mandate for taking an ax to future promised Social Security benefits, as some think tank warriors now urge. No one ran and won on cutting future promised Social Security benefits, and polls show overwhelming public opposition to it. Such future benefit cuts are a completely separate concept from personal accounts.

Some in the benefit cut pain caucus call for further major delays in the retirement age, well into the 70s. Another politically catastrophic idea now being urged on Republicans is called price indexing.

Currently, during a taxpayer’s working years, the future benefits to be paid increase yearly at the rate of average wages. As a result, as workers retire in the future, Social Security benefits would continue to amount to about the same percentage relative to their incomes during working years.

In more technical jargon, the replacement rate would remain the same over time. Currently, Social Security replaces about 40 percent of preretirement income for average income workers, and 28 percent for higher-income workers.

Price indexing would change the calculation of future Social Security benefits, so while a taxpayer is working the future benefits to be paid would increase only at the rate of price increases. This would freeze Social Security benefits at today’s levels in real terms. It would be a massive cut in the Social Security benefits that would be paid in the future under current law, so massive it would be enough by itself to eliminate the long-term Social Security deficit entirely.

For today’s youngest workers, future Social Security benefits would be cut by about 40 percent from the levels promised under current law. As time goes on, and benefits continue growing more slowly than wages, this cut from currently promised benefit levels would grow larger and larger, eventually reaching 50 percent, 60 percent and beyond.

This means as well that over time the replacement rate would decline perpetually year after year. Instead of replacing about 40 percent of preretirement wages for average workers as today, that percentage would decline slowly over the decades to eventually 30 percent, then 25 percent, 20 percent, etc.

Advocates of price indexing say it only slows the growth of Social Security benefits, it doesn’t cut them. But that argument won’t fly politically. Price indexing is a huge cut from the currently promised future retirement benefits. Moreover, because the replacement rate is cut so substantially, and continually, it leaves future Social Security benefits even more inadequate as retirement income support.

Indeed, price indexing would sharply, and perpetually, cut the already outrageously low rate of return Social Security offers to today’s workers. All the studies showing the low returns Social Security would pay even under current law are based on the current wage-indexing formula. With price indexing, the great majority of workers would ultimately be pushed down farther and farther into negative real returns.

If Republicans wander into the swamp of cutting future promised Social Security benefits, and anything ever comes out of that, it will surely include a tax increase as a compromise. Liberals and Democrats will insist we cannot possibly address future Social Security deficits solely through benefit cuts, and at least half or more must be addressed by higher taxes.

Worst of all, proposals like price indexing or delaying the retirement age are completely unnecessary. If we allow workers the freedom to choose large personal accounts, virtually all Social Security retirement benefits will eventually shift to the accounts, and the long-term Social Security deficits will be eliminated entirely through this means.

So what sense does it make to pursue politically suicidal cuts in future promised Social Security benefits, like price indexing or further delaying the retirement age? The politically wiser, and ideologically sounder course for conservatives, is to pursue a large personal account option for Social Security instead, without any cuts on top of that in currently promised Social Security benefits.

Indeed, the personal accounts would pay workers much more in benefits than Social Security promises under current law. So with personal accounts, Republicans would be able to rely on the purely positive political themes of higher benefits, personal ownership and control, and freedom of choice.

Republicans would be foolish to allow Democrats to say the first thing Republicans did as soon they got firm control over the government is go after Social Security benefits. And advocates of personal accounts would be foolish to get sidetracked into supporting politically disabling cuts in future promised Social Security benefits, instead of what they are really for, and, indeed, have already won politically.

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