President Presses for Social Security Benefit Changes

JEFFREY BROWN:

The idea the president is referring to is called progressive indexing. Its author is Robert Pozen, who joins us now. Mr. Pozen is chairman of MFS Investment Management in Boston and served as a member of President Bush's Commission to Strengthen Social Security. Also with us is Gene Sperling, former national economic adviser to President Clinton; he's now a senior fellow at the Center for American Progress.

Welcome to both of you.

Mr. Pozen, starting with you, in general terms, why is this a good idea?

ROBERT POZEN:

The Social Security system now has a huge deficit, so we have to figure out how to constrain benefit growth and do some other things. This is a fair and reasonable way to do it because we're protecting the benefits of low-waged workers who are almost entirely dependent on Social Security for their retirement income and we slow the growth of benefits of higher-wage and middle-wage workers who have IRAs and 401(k)s that are tax subsidized and they help them supplement Social Security in terms of retirement income.

JEFFREY BROWN:

Mr. Sperling, your sense of it?

GENE SPERLING:

I think there's a couple things that are seriously wrong with this proposal. The good thing is that we are protecting people who make $20,000 and under. But what was very deceptive about the president's portrayal last night as you might have got the impression that only well-off people, people who perhaps make over $200,000 were going to get significant reductions. What this plan does, however, is it hits the middle class very hard. I don't think many people listening last night would have gotten the impression that somebody who makes $58,000 in today's terms would have seen their benefits cut by as much as 40 percent in the — by 2075.

So I think that we have to understand that when you have a plan that does not ask anything extra from people over $90,000 and puts all the burden on this "progressive price indexing," it hits very, very hard at people who make $50,000, $40,000, $60,000 and I don't think many of those people think of themselves as well off.

JEFFREY BROWN:

Mr. Pozen, why don't you explain to us how this would work a bit. What does it mean, for example, when the president says that benefits for low-income workers would grow faster than benefits for those who are better off? What does that mean?

ROBERT POZEN:

When you compute your initial Social Security benefits, you come up with a figure for your average career earnings and then you increase it now under the current system by the amount wages have risen over your career. And we're going to continue to do that for low-wage workers. So they're going to continue to grow at that rate. But for high-wage workers, we're going to increase their benefits; we're going to increase their benefits by the amount prices have gone up over their careers, so that will protect the purchasing power of those benefits.

JEFFREY BROWN:

Why —

ROBERT POZEN:

I think —

JEFFREY BROWN:

Excuse me. Why —

ROBERT POZEN:

I think that's what the president means when he says that the — that the value of these benefits will be at least similar for future generations as they are for current generations.

JEFFREY BROWN:

So it's a question of maintaining purchasing power for those in middle and upper income?

ROBERT POZEN:

The upper income will maintain purchasing power, the middle income will maintain somewhere between wage power and purchasing power. Wages increase a little over 1 percent more faster than prices, so wage indexing is more favorable than price indexing.

Now, of course since the system is in deficit, there will have to be some reduction of benefits relative to scheduled benefits. Scheduled benefits is this theoretical number about what people might be getting if we had enough money to finance the system. And if we take a medium-wage worker and we go out to a year like 2055, they would be getting 20 percent less than the schedule.

But we can't afford the schedule and more meaningful tests are, first, what would they get if the system went insolvent, if there were no Social Security reform? And the answer is they'd get 30 percent less than the schedule in 2055. So really progressive indexing would be a better deal.

And the second is: Are they going to get more in purchasing power under progressive indexing? And between 2005 and 2055, they would get about a 20 percent increase in purchasing power.

So I think progressive indexing, while not perfect, deals with the problem that we can't afford schedule benefits and tries to do it in a reasonable way. Gene Sperling points out that he would like more payroll taxes in the system and if there were more payroll taxes, then we could have a little less on the benefits side and that's something that Congress will have to look into.

JEFFREY BROWN:

These calculations can be difficult to understand, but try to sum up for us what your disagreement is with the idea of changing the benefit calculation.

GENE SPERLING:

Well, first, I think it is very important to answer the question that you asked which is: What does it mean to just give Social Security benefits indexed to inflation, which sounds not bad, right? It protects your purchasing power. But let's think about what that would mean if we had done that 65 years ago. If all we did in 1940 was say "we're going to give you your benefit then indexed to inflation, not to how much our country growing our wages" what would that have meant? That would mean that the typical Social Security beneficiary who gets $15,000 a year now would get $6,000, because if you're just indexing to inflation, you're not getting any of the benefits from our standard of living. So you would get a 1940 retirement package not one that deals with what you would need for a dignified retirement in 2005. And I think this is the critical factor.

The other easy way for people to think about it is in Social Security what you really want in retirement security is to have an income that replaces enough of your wage income so that you do not see a devastating fall in your standard of living. Nobody wants to see the retirement years mean that they're going downhill. What Social Security guarantees now for a typical worker is around 40 percent of that benefit, of their wages, then they hope they add on with pension and more savings. If you only index for inflation, we'll start seeing that Social Security only replaces 20 percent perhaps in the future of what you made in your lifetime and that would mean a much less dignified retirement for tomorrow's seniors.

JEFFREY BROWN:

Mr. Pozen, do you think that under your system that 40 percent replacement would be maintained?

ROBERT POZEN:

Well, I think the replacement is a key concept. Forty percent replacement will be maintained for low-wage workers, but for high-wage workers, it would drop, and many middle-wage workers it would drop to somewhere in the 25-30 percent range. And the question is, is that OK?

In 1940, when Gene was referring to, there were no 401(k)s, there were no IRAs, now when we think of replacement ratios, we need to think of IRAs and 401(k)s as well as Social Security. In 2004, we've tax subsidized those programs to the tune of about $55 billion. So we're clearly pouring money into those programs and we're encouraging middle and higher-wage workers to use those programs. So I think we can no longer look at replacement ratios just in terms of Social Security.

Yes, the Social Security replacement ratio for that program alone would drop modestly, but it would be more than made up by these very large tax subsidies that are going for IRAs and 401(k)s. And I think that's a fair way to do it. The low-wage worker doesn't have the 401(k)s and the IRAs so we need to protect their rate replacement ratio in Social Security alone but the high and middle wage workers do have these programs so we have to have a much broader view of their replacement ratios.

JEFFREY BROWN:

Mr. Sperling.

GENE SPERLING:

Well, that's a very idealistic world and I wish that was the world we live in. But here is our real world. 50 percent of workers every year do not have a 401(k) or an employer-based retirement system. Over 70 percent of Hispanics, over 60 percent of African Americans, over 80 percent of part-time and small-business employees do not have a generous 401(k) pension and for women who tend to live longer, the Social Security is an annuity that's always there no matter how long you live. So I would like to see a world where everybody has a generous 401(k).

I proposed a progressive saving account called a universal 401(k). That's the right thing to do. We should be strengthening our pension system. But until we have that pension system much, much stronger, it really is wrong to suggest that typical workers could see Social Security only replacing 20 percent of their benefit and that that's an OK risk to take.

Social Security is the foundation. It's the one thing you can count on. If life takes wrong turns for you, if you become disabled, if the market goes down, you're going to be hurting your housing value, you'll be hurting your pension. Social Security is the risk-free foundation. Cutting that risk-free foundation is much too risky for tomorrow and today's seniors.

JEFFREY BROWN:

Mr. Pozen, finally, the president says that that this approach, making this change would solve about 70 percent of the solvency problem. Is he right?

ROBERT POZEN:

Yes. Progressive indexing alone will solve over 70 percent of the long-term deficit, reducing it from $3.8 trillion to about $1.1 trillion. Moreover, at the end of the 75-year period, which is the period that we use to measure insolvency, the system will be financially sustainable. At that point, the revenues into the system will be roughly equivalent to the benefits that are going out.

So we don't really need to take draconian measures to get that other 30 percent. We need to get to a point of balance in the year 2079, which we can get through progressive indexing and perhaps a few other things. And I would agree with Gene Sperling that as part of this package, as part of the Social Security reform, we ought to have other enhancements and incentives to encourage people to use IRAs and 401(k)s and these can be part of a system.

But the low-wage worker, in my plan, constitutes about 30 percent of workers, and those won't be able to have IRAs and 401(k)s, even if we provide more incentives. So I would suggest that we want to have is something like progressive indexing plus we want to have added incentives to encourage people to use IRAs and 401(k)s more.

JEFFREY BROWN:

All right. Robert Pozen and Gene Sperling, thanks very much.