Dean Baker Says Progressive Price Indexing Isn't Very Progressive at All

He writes:

The Regressive Impact of the Progressive Indexation of Social Security Benefits: While this schedule of benefit cuts is supposed to be progressive... middle-income earners would see large and growing benefit cuts (measured against currently scheduled benefits) under this formula:

• In 2030, a middle wage earner ($36,500 in annual earnings in 2005) would see a benefit cut of 12.2 percent, while a high wage earner ($58,400 in 2005) would see a benefit cut of 13.2 percent;
• In 2050, a year when the Congressional Budget Office projects that Social Security would still be able to pay full scheduled benefits if no changes are made, middle wage earners would see a cut equal to 21.1 percent of their scheduled benefit, while high wage earners would see a cut equal to 28.3 percent of their scheduled benefit; *By 2080, the benefit cut for middle wage earners and high wage earners will have grown to 40.2 percent and 50.1 percent, respectively. At this point, low earners ($16,400 in 2005) and maximum earners ($90,000 in 2005) will be receiving almost the same benefit, even though a maximum wage earner will have paid more than five times as much money into the Social Security system;
  • Measured relative to retirement income, the benefit cuts implied by progressive indexation are regressive. The projected cut in benefits for a middle wage earner in 2080 is equal to 26.9 percent of their retirement income, while the implied cut for a maximum wage earner would be equal to just 11.9 percent of their retirement income.
• When coupled with private accounts, the benefit cuts create a situation in which the highest earning workers will owe the Social Security system an amount of money that is larger than their remaining Social Security benefit, if they opt for a private account. President Bush has created no mechanism through which this money can be reclaimed. This creates a situation in which the highest wage earners will be able to place money in a private account without any offsetting cut in benefits. As a result, the implied cut in benefits will fall even more sharply on middle--income workers....

Comments

[Ralph]

The Sunday NY Times (May 1, 2005) has a front page article, "In Bush's Plan, Social Security Changes Focus", explaining the benefit cuts expected under "Progressive Price Indexing". On the continuation page, A25, is a nice table showing the percentage reduction in benefits for four income groups, by year of retirement (age 65), for 20 year intervals from 2015 through 2075. As stated by the President at his press conference, the lowest group will not suffer any reductions but in the year 2075, the reductions for the highest income groups will be 28%, 42%, and 49%.