- The Washington Times - Thursday, May 26, 2005

The president’s staff told him the key to Social Security reform is to support so-called progressive price indexing, which would cut future promised Social Security benefits for everyone earning more than $25,000 yearly. In return, the staff assured him, enough Democrats would support personal accounts to ensure passage of the reform package.

So the president last month bravely supported the largest cut in future promised Social Security benefits in history in a nationally televised press conference.

He got his reply from the Democrats two weeks ago at a hearing before the House Ways and Means Committee. Every Democrat on the committee bitterly attacked the progressive price indexing as a huge benefit cut for the middle class.

And rightly so. With the cuts in promised benefits under progressive price indexing, the already miserable, low return promised by Social Security today would be reduced each and every year into perpetuity for everyone making more than $25,000 per year. All these workers eventually would be pushed down into negative real returns from Social Security, becoming more and more negative each year.

Moreover, the progressive price indexing benefit changes would reduce the replacement rate, or percent of preretirement income replaced by Social Security, each and every year into the future as well, again for everyone making more than $25,000 per year. The replacement rate for average income workers would fall from 40 percent today eventually to 30 percent, then to 20 percent, then to 10 percent, etc.

Because of this effect, the Cato Institute’s Jagadesh Gokhale was asked at a recent conference “Isn’t it true that price indexing would eventually reduce Social Security benefits to insignificance?” Being very intelligent, fully knowledgeable and intellectually honest, Mr. Gokhale answered in one word: “Yes.”

Republicans beware. If you support price indexing in any form, when Democrat challengers say the above things about your proposal during election season, you will not be able to say they are wrong. You will have to explain to voters why eviscerating their future promised Social Security benefits this way is a great idea.

Instead of support for progressive price indexing leading to passage of personal accounts, it has long been obvious the result would be tax increases and no personal accounts.

Sure enough, soon after the president endorsed progressive price indexing, Rep. Robert Wexler, Florida Democrat, responded with a proposal to add a new 6 percent payroll tax, split between employer and employee, on incomes of more than $90,000 each year.

Some reformers thought this was a big breakthrough because at least one Democrat has been induced to put a proposal on the table. But Republicans should not treasure a debate over Republican future benefit cut for annual incomes above $25,000 and a Democratic proposed payroll tax increase on yearly incomes of more than $90,000, in the face of the widespread public belief it is unfair that higher incomes are not already subject to the Social Security tax.

Moreover, if the Democrats are proposing to solve the problem with tax increases and the Republicans propose instead cuts in future promised benefits, obviously we are on a road toward a package in the middle including some large, and completely unnecessary, tax increase. In addition, since Democrats also adamantly oppose any real personal account that takes over any part of the current Social Security system, Republicans will eventually have to give up on the accounts to get Democrats to agree to the package.

Bob Pozen, the economist who developed the progressive price indexing proposal for the president, has recently made this even more obvious. He started off proposing progressive price indexing in an article in the Wall Street Journal. A few weeks later, he proposed a tax increase as well to balance the future benefit cuts in his plan. Then last week he argued that personal accounts should be dropped from the package altogether to get a deal with the Democrats.

Personal account reformers who got sidetracked into supporting price indexing have led us down this dead end to tax increases and no personal accounts. We were supposed to be advancing personal accounts by talking about the much better benefits they provide, as well as all the other positive benefits of personal accounts for workers.

But instead, due to the focus on price indexing, we have been dragged down into talking about the need for cutting future promised Social Security benefits. Personal account reform was supposed to be a symphony about advancing the personal prosperity of working people, not a dirge about the need for retirement penury.

The only way out of this trap now is to go back to supporting pure personal accounts, without tax increases or benefit cuts. Republicans can then go to the public with a clearly better deal for workers than the current system offers.

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

LOAD COMMENTS ()

 

Click to Read More

Click to Hide