Mr. Bush endorsed a proposal that would take a huge bite out of the Social Security retirement benefits for the middle class, claiming that would close some 70 percent of the system's financing gap. That figure is almost certainly overstated. Under the proposed reductions, young workers who now earn about $36,000 would face a 16 percent cut; those earning about $58,000 would face a cut of 25 percent, and those earning $90,000, 29 percent. People not yet in the work force would face even larger reductions.The proposal to which this refers, of course, is to change the way increases in social security benefits are determined. Under present rules, the benefits to which one will be entitled in the future are increased each year at the rate at which wages increase. Bush is proposing is that, for higher income people, the rate of increase should be pegged to the rate of inflation instead. (The rate of inflation is generally lower than the rate at which raises rise). Thus, what Bush is suggesting is not really a cut in benefits. It is a cut in the rate at which benefits increase. And this cut in the rate of increase would apply only to higher income people. The benefits for lower income people would continue to be indexed to the wage increase rate. One can describe this as a "reduction in benefits" only if one takes it as a given that today's 21 year old has an absolute right to see his benefits grow at the wage rate rather than the inflation rate for the next 40 years. But that's a pretty silly way to look at things. First, no one is entitled to anything. What A 21 year old (or really any person) gets from social security the electorate is prepared to pay him at the time he retires. Not a penny more, or less. My guess is that that is likely to change over time by a percentage far greater than the percentage difference between the wage and inflation rates. Second, even if we want to say that the promises made today should be inviolable, the only promise actually made to anyone is to pay currently scheduled benefits until the trust fund runs out (currently projected to be somewhere around 2047 if nothing changes). At that point, the promise is to pay the retiree only that percentage of his scheduled benefits that can be paid out of then-current receipts. Present estimates are that, after the trust fund is exhausted, Social Security will be able to pay only 72% of scheduled benefits. In short, under present law, a person who is 21 today is only "entitled" to 72% of currently scheduled benefits. It is, at present, against the law to pay him any more than that. So, if the effect of indexing the benefits for higher income people to inflation rather than wages is to defer the date at which the trust fund is exhausted, then the effect is to give everyone an increase in the benefits to which they would otherwise be entitled.
For a more honest -- if far less readable -- explanation of the impacts of Bush's proposals, see this from the WSJ.
But the New York Times' yellow editorialism is not really the point. I agree that, for people who are less than 10, maybe even 20, years from retirement, it is probably unfair to change the rules now. Rightly or wrongly, many of these people may have counted on social security to provide them with the bulk of their retirement income and it is now too late in their lives to make up the difference if the rules were to change. But the real question is what we want to tell the "20-somethings" about what social security will do for them. After all, it is the people who are 40 years from retirement who are the ones facing big benefit cuts if nothing changes.
My sense, from both a fairness and a policy perspective, is that we should tell them -- especially the upper income portion of them -- that they should not think of social security as a program that will replace some specified percentage of their pre-retirement income (which is the rationale for indexing benefits to wage growth). Rather, we should say, by the time you reach retirement, the purpose of social security is going to be simply to keep you out of poverty. That is, over the next 30-40 years, we are going to convert social security from something like a pension program to something like a welfare program. As a result, your benefits from social security will be indexed to the inflation rate, since the purpose will be to maintain a certain level of purchasing power, independent of what you actually earned. In return, we are going to let you -- actually make you -- invest a portion of what you pay in FICA taxes in private accounts that you will own.
I advocate, in short, something similar (in concept at least) to the Cato plan discussed in this post
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