July 30, 2005


A Feasible Fix for Social Security (Nicole Gelinas, Summer 2005, City Journal)

Conservative reformers greeted President Bush’s late-April proposal for “progressive indexing” of Social Security benefits with dismay—and prominent conservative leaders haven’t said much about it since. They’re wasting an opportunity. Yes, Bush’s proposal was meant as a giveaway to liberals—a politically calculated trade to win their support for reining in Social Security’s unsustainable growth. And it’s a fair deal, provided that conservatives get what they’ve always wanted from reform: personal accounts within Social Security, to entice millions of middle-income Americans to join the investor class. [...]

Though the president’s proposal is still vague, its basic elements are clear enough. Let’s start with the bad part before looking at what makes the overall scheme so attractive, and then consider how its underlying principles can best be realized.

Bush would pare back Social Security’s future payouts to middle and top earners, giving a huge relative boost to retirees whose lifetime earnings were low. Right now, the Social Security Administration determines a new retiree’s initial benefit according to a formula based on how quickly U.S. wages increased during that worker’s career. The president would like to preserve that formula for the bottom 30 percent or so of earners. But for higher earners, the initial benefit would be based on how quickly prices, rather than wages, increased during a worker’s career—in other words, at the rate of inflation. Since wages usually rise more quickly than prices, future benefits for lower-income people would grow much faster over time than would benefits for middle- and higher-income people.

This doesn’t sound like enlightened reform, and understandably it has annoyed some conservatives. Columnist George Will objected on ABC’s This Week in late April: “So what [Bush is] doing is making Social Security less and less relevant to a majority of the American people. You’re stigmatizing it . . . by . . . means-testing Social Security so it becomes a poverty program.” Republican senator George Allen of Virginia worried that the plan would “reduce the retirement security for . . . middle-income working people.” Cato Institute senior fellow Alan Reynolds warned, “Any Social Security ‘reform’ that [is] increasingly generous to those who paid the least in taxes would be increasingly perceived as grossly unfair and therefore politically untenable.”

But they’re forgetting the good news in Bush’s proposal: personal accounts, which will make Social Security more relevant to middle and upper earners, not less, since it will give them the ability to save for a middle-class retirement within Social Security, not despite it. Reform without personal accounts, or with tiny personal accounts for top earners, isn’t real reform.

With the establishment of personal accounts, progressive indexing won’t mean a benefit cut for middle and upper earners. In its entirety, Bush’s proposal would simply shift massive future liabilities from the government to the free market.

Here’s how it would work. Social Security benefits currently rise faster than inflation, because, as noted, growth in future benefits keeps pace with average wage increases, and wages historically rise faster than prices. The Social Security Administration’s actuary estimates that wages will keep rising slightly over 1 percent faster than prices each year for the next 50 years or so.

Wages rise faster than prices because productivity growth and technological advances, not just inflation, push them higher over time. American workers produce more each year with less capital and less time, so their wages rise while prices stay down. Retirees now see the results of that wage growth in their Social Security checks—but the burden is entirely borne by younger taxpayers who must fund that growth in future benefits, and that burden is becoming unsustainable.

Personal accounts within Social Security would let current workers continue to benefit from those same economic advances. After all, the same worker productivity that allows wages to rise also shows up in robust corporate profits, which in turn fuel strong stock- and bond-market returns. Future retirees would reap those returns through their personal accounts, where some of their tax dollars would go to building up nest eggs for retirement.

Just compare the returns on Social Security of three hypothetical young earners under the way things are supposed to work now—though remember, the current system is unsustainable—and then under City Journal’s fleshed-out version of Bush’s still-sketchy proposal.

Was George Will damning or praising the plan?

Posted by Orrin Judd at July 30, 2005 8:34 AM
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