One Person’s Fix Is Another’s Flaw

The latest wrinkle in President Bush’s plan to shore up Social Security’s finances follows a familiar pattern: Bush and his opponents can’t agree on the most basic facts.

This time, the two sides are at loggerheads over whether the president, in his effort to guarantee the system’s solvency, would cut retirees’ benefits.

Bush never uttered those words in his Saturday radio address, which focused on Social Security. “Future generations should receive benefits equal to or greater than the benefits today’s seniors get,” Bush said. He asserted that under the plan that he had outlined at his Thursday news conference, that would be true.

Some Democrats see the matter differently. “No one should be misled by his offer of sliding-scale benefit cuts,” Rep. Sander M. Levin of Michigan, the top-ranking Democrat on the House Ways and Means subcommittee on Social Security, said after Bush’s news conference, “because the result is the same -- major across-the-board reductions in future retirement benefits.”

Who is right, Bush or Levin? In the arcane world of Social Security benefits, they both are. It depends on how you look at “cuts.”

Retirees’ initial Social Security benefits are calculated according to wages earned over their lifetime. For purposes of the calculation, their earnings are adjusted for wage inflation. After the initial Social Security benefit is established, annual cost of living adjustments depend on price inflation.

For the last century, wages have risen about 1.1 percentage points a year faster than prices have. That has resulted in steady growth in the purchasing power of Social Security benefits.

Bush has proposed adopting a system under which the initial benefit would be based on a combination of wage and price inflation. Under the system, which would start in 2012, low-income workers would be given the more favorable calculation.

For workers retiring that year who earned an average of $113,000 per year (the estimated wage cap for Social Security payroll taxes in 2012) or more, their wages for purposes of benefit calculations would be adjusted for price inflation. For workers earning less than $25,000 (about 30% of wage earners), the adjustment would still be according to wage inflation. And a mix of wage and price inflation would be used for workers in between.

“This should not be considered a ‘benefit cut,’ ” Robert C. Pozen, the Boston investment executive who is the originator of this approach, told the Senate Finance Committee on Tuesday. Pozen, a Democratic member of Bush’s 2001 Social Security Commission, explained that the purchasing power of the Social Security benefit would hold steady over time for the wealthiest retirees and increase for all the rest.

But to Democratic analysts, Pozen’s approach looks, smells and feels like a benefit cut. They reject using benefits’ purchasing power as a suitable yardstick.

The purchasing power of working Americans has increased as wage inflation rises faster than price inflation, said Jason Furman, a senior fellow at the Center for Budget and Policy Priorities, a liberal advocacy group. Any proposal that has retirees’ purchasing power rise more slowly would leave them worse off relative to those in the workplace, Furman said.

Under current law, he said, midrange wage earners ($36,507 in 2005) are eligible for benefits that are the equivalent of 36% of their working income. But under Bush’s approach, he calculated, their benefits would be 34% of former income if they retired in 2025 -- a rate that would fall to 26% in 2075.

High earners ($90,000 in 2005) get the equivalent of 24%, which would fall to 21% in 2025 and 12% in 2075.

“The president shouldn’t pretend that his plan doesn’t cut benefits,” Furman said. “You can’t even talk to each other, much less negotiate the details of a Social Security package, if you can’t start from the same place.”