The Bush administration has signaled that it will
propose changing the formula that sets initial Social Security benefit
levels, cutting promised benefits by nearly a third in the coming
decades, according to several Republicans close to the White House.
Under the proposal, the first-year benefits for
retirees would be calculated using inflation rates rather than the rise
in wages over a worker’s lifetime. Because wages tend to rise
considerably faster than inflation, the new formula would stunt the
growth of benefits, slowly at first but more quickly by the middle of
the century. The White House hopes that some, if not all, of those
benefit cuts would be made up by gains in newly created personal
investment accounts that would harness returns on stocks and bonds.
But by embracing "price indexing," the president would for the first
time detail the painful costs involved in closing the gap between the
Social Security benefits promised to future retirees and the taxes
available to fund them. In late February or March, the administration
plans to produce its proposed overhaul of the system, including
creation of personal investment accounts and the new benefit
The change would save trillions of dollars in scheduled expenditures
and solve Social Security’s long-term deficit, but at a cost. According
to the Social Security Administration’s chief actuary, a middle-class
worker retiring in 2022 would see guaranteed benefits cut by 9.9
percent. By 2042, average monthly benefits for middle- and high-income
workers would fall by more than a quarter. A retiree in 2075 would
receive 54 percent of the benefit now promised.
This is a step in the right direction, see my previous post. I’ll soon be offering more analysis.