NCPA - National Center for Policy Analysis


January 11, 2005

While the president has not endorsed a specific Social Security reform plan yet, news reports suggest the administration will point Congress toward one of the frameworks developed in 2001 by the Commission to Strengthen Social Security (CSSS), commonly called Commission Model 2, says Matt Moore, a senior policy analyst with the National Center for Policy Analysis.

Model 2 basically makes two changes to Social Security in order to reduce the government's obligations, eliminate the program's daunting $11 trillion debt and return the program to solvency:

  • It changes the indexing of initial benefit payments from wages to prices (or inflation).
  • It lets workers to own a Personal Retirement Account (PRA), so those affected by the first provision can earn most of the money back.

Currently, initial benefits are set by a complex formula that calculates a worker's earnings in his 35 highest-paid years and adjusts them upward to reflect the standard of living when the worker retires. Under current law, that adjustment is based on the growth in wages. Model 2 would change the formula so the adjustment would be based on the rise of consumer prices, explains Moore.

Because wages rise faster than inflation (by about 1.1 to 1.2 percent yearly), the new formula would slow the growth of future initial benefit payments, gradually reducing initial benefits by a third over the next seven decades.

This provision affects calculation of benefits in the first year of retirement. Once initial benefit payments are determined, retirees will still receive cost-of-living increases each year, just as under current law. Today's current and near-retirees would not be affected, says Moore.

Source: Matt Moore, "Reform Calculations," Washington Times, January 9, 2005.

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