- The Washington Times - Friday, April 29, 2005

During a televised press conference on the eve of the 100-day anniversary of the beginning of his second term, President Bush pushed a lot of political capital into the already-sizable Social Security-reform pot. His big wager occurred near the end of his 60-day marathon campaign during which he managed to convince three-quarters of the public, according to a recent Fox News/Opinion Dynamics poll, that Social Security faces extremely difficult long-term financial problems. Mr. Bush used Thursday’s prime-time news conference to unveil a proposal that would address approximately 70 percent of Social Security’s $4 trillion unfunded liability over the next 75 years.

To attain that major achievement, the president embraced the proposal of “progressive price indexing,” which has been put forth by Robert Pozen, who served in 2001 as a Democratic member on the President’s Commission to Strengthen Social Security. Under current law, the “wage-indexation” formula for determining first-year Social Security benefits is based on trend changes in wages, which historically have risen faster than prices. Thus, based on current law and projected rising inflation-adjusted wages, the Congressional Budget Office has estimated that the scheduled initial annual benefit for the median-wage earner born in 1990 will be $23,300 (expressed in 2004 dollars). That is 56 percent higher than the scheduled initial benefit ($14,900) of the median-wage earner born in 1940 and retiring this year. The president’s solvency plan would replace the wage-indexation formula with progressive price indexing.

Progressive price indexing would effectively guarantee that the Social Security benefits of the lowest 30 percent of wage-earners would continue to increase in accordance with the rising trend of inflation-adjusted wages. For the vast majority of the remaining 70 percent of workers in the middle- and upper-income categories, according to a sliding scale that incorporates both price changes and rising wages, initial inflation-adjusted Social Security benefits would continue to increase, but not as fast as real wages.

In effect, Social Security’s long-term finances would become far more solvent by not increasing initial benefits for these middle- and upper-income workers as fast as those benefits are currently scheduled to rise under wage indexation. Meanwhile, the president’s reform plan continues to emphasize the opportunity for all workers born before 1950 to divert to personal retirement accounts (PRAs) up to 4 percentage points of the 12.4 percent Social Security payroll tax, which is evenly divided between employees and employers. Invested in higher-yielding stocks, corporate bonds and risk-free Treasury bonds, the PRAs would generate greater returns than young workers could expect to receive under currently scheduled Social Security benefits.

Given Social Security’s huge and ever-rising unfunded liabilities, the president has exerted solid leadership as the Senate Finance Committee begins writing reform legislation. Mr. Bush has offered a sensible proposal that addresses about 70 percent of the 75-year solvency problem, and he continues to invite Democrats to the table, where he welcomes discussion and negotiation of all options, except raising the payroll-tax rate. Solving nearly three-fourths of Social Security’s long-term financing problems, while still allowing real initial benefit levels to continue to rise for the overwhelming majority of workers, represents a major, positive step forward.

Democrats who reflexively reject the progressive price-indexing option reveal themselves to be more interested in demagoguing Social Security than in rescuing it.

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