NCPA - National Center for Policy Analysis


March 15, 2005

A useful idea now being tossed into the Social Security reform debate is "progressive indexing," which attempts to marry private investment accounts with an income test for slowing the increase in future benefits, says the Wall Street Journal.

Currently, Social Security benefits are indexed to -- that is, scheduled to increase with --the growth in average wages, which is about 1 percent a year faster than general price inflation. Under a proposal by money-manager Robert Pozen and Sen. Robert Bennett (R-Utah), the indexing formula based on income would change:

  • The benefits of workers with average career wages of $25,000 or less -- 30 percent of retirees -- would remain fully wage-indexed.
  • The benefits of workers above $113,000 would be fully price-indexed, and the benefits of everyone in the middle would be indexed on a "progressive" scale in which the wage index/price index ratio decreases with income.
  • Meanwhile, everyone would also be allowed to invest a portion of their payroll taxes in their own private accounts of the kind Bush has proposed.

The Pozen-Bennett plan also has the virtue of calling the reform obstructionists' bluff.

  • It requires no increase in debt before 2030, while reducing the payroll tax shortfall by something like $2 trillion over 75 years.
  • By cutting that shortfall, the proposal would substantially improve the likelihood that the government will actually pay the benefits it has promised.

Even better would be larger personal accounts than either Pozen or Bennett recommend, says the Journal. This would take payroll taxes out of the hands of politicians and allow them to be invested as soon as possible.

Source: Editorial, "Social Security Progressives," Wall Street Journal, March 15, 2005.

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