May 3, 2005

FROM THE PONZI SCHEME TO THE POZEN?

A Win-Win Proposition: A way out of the impasse on Social Security reform. (ROBERT C. POZEN, May 3, 2005, Opinion Journal)

Although President Bush's proposal for progressive indexing of Social Security preserves the scheduled benefits of all low-wage workers as well as all workers retiring before 2012, the critics have lambasted its "benefit cuts" for middle- and high-wage earners. These critics suggest that reductions in scheduled benefits can easily be avoided by raising payroll taxes.

Judging any reform plan relative to scheduled benefits is misguided. The schedule represents the benefits we have promised but do not have the money to deliver. That is why Social Security has a long-term deficit with a present value of $3.8 trillion. If the litmus test of a reform plan is not cutting scheduled benefits for any significant group of workers, then no viable plan to restore Social Security's solvency will pass muster.

Instead, any proposal to reform Social Security should be evaluated on three criteria: the benefit reductions relative to payable benefits (that can be financed by the current system); the purchasing power of future benefits relative to current benefits (for workers in similar positions); and the replacement ratios provided by proposed benefits (taking into account all sources of retirement income). Moreover, any plan for benefit reform should be compared with the precise increases in payroll taxes that would be needed to avoid the proposed reductions in scheduled benefits.


The proposal that follows is modest enough, but represents a complete defeat for Democrats who hold the current system inviolable.

Posted by Orrin Judd at May 3, 2005 3:42 PM
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