- The Washington Times - Saturday, May 21, 2005

When President Bush tackled Social Security reform, he surely expected the usual denial and deceit from AARP and do-nothing Democrats. What he probably did not anticipate was an even more vehement defense of the status quo from conservative attorney Peter Ferrara, a longtime advocate of personal accounts.

In a January column, Mr. Ferrara strenuously opposed basing first-year benefits on individuals’ earnings histories after adjusting for inflation (price indexing), rather than the current practice of giving initial benefits an extra boost to keep pace with economywide wage growth (wage indexing).

“Under the current wage indexed system,” Mr. Ferrara said, “the replacement rate, the percentage of preretirement income replaced by Social Security, remains stable over time at about 40 percent for average-income workers and 28 percent for low-income workers.” Actually, that 28 percent was estimated by the Congressional Budget Office for high-income workers. The replacement rate is 58.3 percent for low-income workers.

The supposedly “stable” replacement rate for average workers rose from 18.7 percent in 1950 to 51.7 percent in 1981, according to the trustees’ report. But it has since fallen to 43.2 percent this year and is scheduled to fall further to 40.6 percent by 2008. For those born in 2000, the CBO sees that dropping to 29.8 percent as Social Security can’t pay more.

“Under current law,” Mr. Ferrara recently wrote, “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.”

Actually, only first-year benefits are boosted to keep pace with the general trend of wages. After that, first-year price indexing applies. Benefits of new retirees would still grow with wages if they too were indexed to prices rather than wages (as for older retirees), because benefits would still be based on each person’s earnings history and real earnings would continue rising. In any case, defending wage indexing is like arguing it would be nice if bankrupt airlines could pay better benefits.

The effect of switching to price indexing would be glacially slow — future increases would eventually diminish by no more than 1 percent a year, and imperceptibly at first because earnings for years before the changed law would still be adjusted by the old method. Other fixes such as raising the retirement age are more problematic and less humane.

If money grew on trees, keeping wage indexing would mean an average-wage worker retiring in 2075 would receive real benefits twice as generous as today’s. More than twice as many old people would each collect twice as much money. That is not this generation’s “promise” to future beneficiaries. It is this generation’s threat to future taxpayers.

Though ever-increasing real future benefits under current law cannot be paid, as Mr. Ferrara has often noted, he nonetheless argues they can and must be paid and even “guaranteed” by future taxpayers. But that is quite impossible without debilitating taxation of future workers, which cannot be done because future citizens can vote to free themselves from any onerous obligations we try to impose on them.

If all the promised future benefit increases for millions of aging Baby Boomers could really be financed with impunity, thus guaranteeing a high and stable replacement rate, why would young people need or want personal accounts? If Social Security could and should pay rising real benefits to today’s young workers, what problem does Mr. Ferrara’s own Social Security reform plan set out to solve?

The Ferrara plan assumes Congress will cut spending on other programs (including Medicare) and send that cash to Social Security, along with an extra portion of corporate profits taxes.

If Congress cannot or will not transfer hundreds of billions of dollars of income tax receipts to Social Security each year, as the plan hopes, Mr. Ferrara’s plan would authorize borrowing to fill the gap. Social Security’s chief actuary Steve Goss explained that Mr. Ferrara’s plan would “provide for the Treasury to issue additional bonds to the public in order to generate revenue to transfer to the Trust Funds if, at any time, the combined OASDI Trust Fund ratio is projected to fall below 100 percent…. This provision would guarantee solvency for the Trust Funds in any circumstances.”

Nobody need worry about doubling and guaranteeing real future benefits under Mr. Ferrara’s plan, since the Treasury could simply borrow to pay the bills and Congress simply raise income taxes as much as needed to service the extra debt.

Personally, I find price indexing a much wiser and safer solution.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.

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