Will the President’s Proposal Solve Social Security’s Crisis?

Policy Reports | Social Security

No. 280
Wednesday, November 16, 2005
by Andrew J. Rettenmaier and Thomas R. Saving

Why Progressive Price Indexing?

Progressive price indexing refers to a change in the benefit formula that progressively applies less wage indexing to benefits as income rises. It would reduce the benefits paid by Social Security to higher lifetime earners while leaving the benefits paid to lower income workers unchanged. The Social Security actuaries have evaluated a reform proposal designed by Robert Pozen, who was a member of the President’s Commission to Strengthen Social Security.4 In that proposal, progressive price indexation was combined with PRAs equal to 2 percent of a worker’s earnings up to $3,000.

Under Pozen’s progressive price indexing formula, workers in the lower 30 percent of the lifetime earnings distribution would receive 100 percent of the benefits scheduled under current law, but workers above this threshold would be subject to progressively less wage indexation. Essentially, the purchasing power of the benefits of workers who earn the taxable maximum would be fixed at the level that exists in 2012 — that is, they could be adjusted upward for inflation, but with no additional benefit from faster-rising wage growth.

Readers should note that Pozen developed his progressive price indexing formula with a personal account funded by 2 percent of wages. President Bush, by contrast, has called for accounts funded by 4 percent of wages, twice the size of Pozen’s. With 4 percent personal retirement accounts — which, because of their size, can fund a greater portion of retirement benefits — it is appropriate to devise a less generous progressive price indexing formula, similar to the one we propose below.

Because of the higher benefit levels funded out of the 4 percent accounts, our progressively price indexed Social Security system can be less expensive than either current law or the Pozen approach coupled with 4 percent accounts — and still provide benefits similar to what the current system promises.

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