- The Washington Times - Sunday, May 1, 2005

Karl Rove and his White House minions have been privately telling conservatives that enough Senate Democrats will support Social Security personal accounts if the plan includes what is called progressive price indexing. The president has now proclaimed his support for that proposal, which would substantially cut currently promised future Social Security benefits for middle-class and upper-income workers.

Yet, while these back-door discussions have continued for months, not one Senate Democrat has come out for the president’s personal accounts along with the so-called progressive price indexing.

I think Karl Rove is lost in the fever swamps on this, and that supporting progressive price indexing will lead to a tax increase and no real personal accounts, or no reform at all. I also fear if Congressional Republicans follow this poorly thought out plan they will lose the Republican congressional majorities.

We will see who is right. But for clues, look at this year’s public statements by Sen. Lindsey Graham, South Carolina Republican.

Mr. Graham began the year saying he favored price indexing too, along with personal accounts. Four weeks later, he came out for a tax increase, proposing a sharp increase in maximum taxable income for Social Security, now $90,000 yearly.

Why? Mr. Graham’s statements reflect what he hears from Senate Democrats. He went to them and said: OK, I am for price indexing, now support my plan. But they said: Oh no, you can’t try to address Social Security’s deficits by cutting future benefits alone, the plan must include a balance of tax increases along with the benefit cuts.

But four weeks later, Mr. Graham came out and said the personal accounts were a sideshow and we should set them aside and focus on eliminating Social Security’s deficits. Why?

Mr. Graham went to the Democrats and said: OK I am now for price indexing and tax increases so support my plan. And they said: Oh no, we are not going to support any real personal accounts, where the accounts substitute in any way for the current Social Security system. They will support only the add-on accounts Al Gore proposed in 2000, which have no relationship to Social Security.

Senate Finance Committee Chairman Chuck Grassley, Iowa Republican, had the same experience. He is now prepared to try to advance just such a Social Security sell-out plan through his committee. But now the Democrats are publicly backing away from even the progressive price indexing. And rightly so, for that proposal is political suicide.

Under current law, future benefits of workers paying into Social Security increase yearly at the rate wages rise. Under price indexing, benefits would grow only at the rate prices increase.

But Social Security taxes grow with wages through the payroll tax. With taxes growing with wages but benefits growing only with prices, the rate of return paid by Social Security will decline each and every year, forever. Eventually all workers subject to price indexing will be pushed into increasingly negative returns each year.

Similarly, worker incomes naturally grow with wages. But if benefits only grow with prices, the replacement rate, or percentage of preretirement income replaced by Social Security, will decline each and every year forever as well.

Social Security now replaces about 40 percent of preretirement income for average income workers. Under price indexing, that would decline eventually to 30, then 20, then 10 percent, and on and on, leaving Social Security more and more inadequate as a retirement foundation.

Under progressive price indexing, all these effects fully occur for everyone earning more than $113,000 per year. And they are phased in more slowly for the middle class earning between $25,000 and $113,000.

Republicans who support this will find they are challenged next year by Democrat opponents arguing forcefully they have sold out the middle class. Republicans lost the Senate in 1986 after they passed a bill just tinkering with the COLAs in 1985. Progressive price indexing is a 1,000 times harsher than what they did then.

The wise and winning course would be to forget this whole swamp of benefit cuts and tax increases and just focus on reform involving the personal accounts, period. We know Republicans can win on that ground, because they have won every election fought on that ground for the last three election cycles. With a populist personal account plan that greatly benefits workers, the president could generate a grass-roots tidal wave to force enough Democrat support to pass the plan.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation and director of the Social Security project at the Free Enterprise Fund.

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