January 10, 2007
A modified version of progressive indexing (PIN) could reduce the present value of the 75-year deficit of Social Security by 70 percent, from close to $4 trillion to approximately $1.2 trillion, says Robert C. Pozen, chairman of MFS Investment Management.
Under the PIN system:
- The current schedule of Social Security benefits for the lowest 30 percent of wage earners, as well as for already retired-workers and those who will retire before 2012 are preserved.
- The growth of initial Social Security benefits for the top wage earners is slowed to the annual increase in consumer prices (price indexing), as opposed to the annual increase in wages (wage indexing).
- For all those workers in between, PIN provides for lower benefits than the current schedule, but benefits that grow faster than increases in consumer prices through a blend of price and wage indexing.
However, since the PIN plan would not include a personal retirement account, it would present a political challenge to conservatives, says Pozen. One response could be an expansion of other types of incentives for retirement savings, says Pozen:
- Most workers earning more than $120,000 per year do not meet the eligibility requirements for the Roth Individual Retirement Account (IRA); if all income limits were taken off the Roth IRA, higher wage workers would be eligible for its tax advantages.
- This would promote retirement savings by these higher earners, whose Social Security benefits would be growing at the slowest rate under PIN.
- Expanding the savers credit would encourage lower earners to also save more for their retirement.
If tax increases are needed, a 2 percent surcharge -- 1 percent from the employer to restore the solvency of Social Security and 1 percent from the employee to be contributed to a Roth IRA (or half of the 1 percent over $1 million per year) -- would be best, says Pozen. This alternative would link the surcharge to additional retirement benefits and permit a further improvement in PIN's benefit schedule for median workers.
Source: Robert C. Pozen, "PIN Money," Wall Street Journal, January 9, 2007.
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