May 11, 2005
When I wrote last week’s column to make publication for the early weekend editions, President Bush had not yet made his Saturday radio address. In that address, Bush outlined a program that would substantially reduce the imbalance between promises and funding in the social security system.
That program, which reduces about 70 percent of the funding imbalance in the next 75 years, is called “progressive indexation.”
Today, the benefits a new retiree can receive are adjusted upward each year by the growth of wages (at least until the wage earnings cap is reached). After one retires, the benefits are adjusted each year for the prevailing rate of inflation.
Normally, wages grow faster than inflation (last year was an exception caused by surging oil prices). Thus, those initial benefits grow much faster than the annual inflation adjustment for retirees.
President Bush proposed that those with low qualifying wages will continue to have their initial benefits grow by the growth in wages. Thus, almost 50 percent of wages earned while working will be paid to the low wage recipient in retirement.
However, as wages rise, a blended index of only partially accounting for wage growth and partially dealing with inflation could be used to determine those initial benefits. Before the wage cap is reached, only inflation would determine the growth in initial benefits.
As a result of this change, those wage recipients who earn at least the wage cap would only receive about 18 percent of their wages in social security benefits. (Those high wage earners already receive less in retirement than the low wage recipient in comparison to their contributions. However, this change would dramatically lower the value of social security to the higher wage earners).
Democrats already have criticized this plan for taking away promised benefits from the middle class. They maintain that social security was not intended as only a program to keep retirees out of poverty.
But whatever social security was intended to achieve cannot be accomplished with the current funding. If the middle class must have their government promised benefits preserved, then new funding must be found.
Criticizing the administration proposals without providing any of their own ideas merely shoves the leadership issue from President Bush to the Democrats. Certainly, supporting a program that prevents workers from falling into poverty after retirement has social merit. Arguing about preserving benefits for the middle class is more difficult to defend, especially when current funding simply cannot preserve those benefits over time.
I should point out that 50 percent of wages as benefits is not sufficient to maintain a lifestyle in retirement. Most financial planners would argue for something closer to 85 percent to accomplish that. Thus, social security never should have been considered as the only retirement source, even for the low wage recipient. That is why tax deferred plans, such as individual retirement accounts, 401Ks, and other programs have been expanded in recent years.
Also, I did write a column that outlined a proposal that would eliminate virtually the entire gap between promises and funding without raising the 6.2 percent tax rate paid by employer and employee. Remove the wage cap (but still have a benefits cap that would grow with wages). Then allow individuals to create individual retirement accounts that can be inherited with their 6.2 percent contribution if they so desired.
The employer still would pay its portion even if the individual left the system. The additional employer payments on high wage recipients and the reduced benefit burdens as those with alternatives opt out of the government program would remove the funding discrepancy.
Of course there would be economic consequences from increasing the tax liability of employers with high wage recipients. This would add to the competitive burdens that American companies face against international competition.
We could solve that burden and a great deal of capital distortion by eliminating the corporate income tax. Yes, this would shift the unfunded problem from future retirees to current tax payers. But some of that would be ameliorated by greater economic growth.
Anyway, no one cheered my proposals. But at least I had some. And now the President does too. If the Democrats don’t like these, they need to come up with some of their own. If the problem is small, as some Democrats claim, then the pain of plugging the holes should not be large. Plug away or get out of the debate.