Hinting at Benefit Cuts or Tax Increases

President Bush indirectly signaled Thursday that keeping Social Security solvent without raising taxes would require cutting back the future benefits of middle- and upper-income seniors.

The president went to extraordinary lengths during his televised news conference to accentuate the positive, saying that any changes in the huge public retirement system should improve the benefits of low-income Americans and that no future retiree should end up receiving less than seniors do today.

He promised that no American who paid his or her share of payroll taxes over the years should “retire into poverty.” Currently, 10% of the nation’s senior citizens fall below the poverty line, and Bush said about 2 million of them contributed regularly to Social Security.

But Bush’s own words, together with comments of his aides and a White House news release Thursday, suggested that the president was moving to embrace a solvency fix that would alter how people’s benefits would be calculated. The change would shrink the percentage of pre-retirement income most future recipients could expect to collect from Social Security.

As he has since the outset of the debate, Bush attributed the cutback idea to a Democrat, rather than a Republican. “A Democrat economist ... put forth this idea,” he said.

The reference appeared to be to Robert Pozen, chairman of MFS Investment Management in Boston and a member of a Bush-appointed Social Security Commission, who had proposed a formula for protecting the benefits of the lowest-earning 30% of Americans, those who now make about $20,000 a year, while trimming those of the remaining 70%.

In an interview Thursday before Bush spoke, Pozen defended his proposal, but distanced it from the president’s call for allowing Americans under 55 to divert some of their Social Security payroll taxes into private investment accounts.

Asked about Bush’s accounts proposal, Pozen said that structured properly, they might be a useful part of a Social Security overhaul package. “But the key to the package has to be solvency,” Pozen said. “We have to do solvency first. Once we’ve done solvency, then we can talk about sweeteners like accounts.”

The president has warned in recent months that Social Security faces a solvency problem, estimated at $3.7 trillion over the next 75 years. But he generally has said that it is up to members of Congress to come up with ways to plug the hole, and has focused most of his attention on promoting personal accounts.

However, with polls showing many Americans deeply skeptical about Bush’s ideas and with the Senate Finance Committee beginning to work on legislation this week, White House officials apparently felt the president needed to be somewhat clearer about what he wanted to do.

As matters now stand, when working people retire, their initial Social Security benefits are calculated according to a formula that ensures they receive about 40% of their pre-retirement income. Their past wages are converted into current dollars using a wage index, a measure of how much average wages have risen during their work lives.

Under Pozen’s plan, the benefits of the bottom 30% of wage earners would continue to be calculated in this way. But the remaining 70% would have their benefits calculated using a “price index” or some mix of wage and price index. A price index measures how much prices have risen during a person’s work life.

Since wages have generally grown about 1% faster annually than prices, switching from a wage to a price index would involve reducing currently scheduled benefits by that fraction annually. After 40 years under the new system, those who now make more than about $90,000 and whose wages would be entirely price-indexed would receive benefits 40% lower than what they are now scheduled to receive.

Pozen acknowledged that his proposal would reduce the percentage of pre-retirement income that most recipients would collect from Social Security from 40% to a little under 30%. Some critics contend that the reduction would be to about 20%. He argued that maintaining the Social Security benefits of low-wage workers would help offset the advantage that more affluent workers have in being able to save and take advantage of 401(k) accounts and IRAs.

Pozen expressed surprise at the criticism his plan has engendered, especially that it would cut back on benefits to many people. “Of course, it has to produce benefits that are less than the scheduled benefits; that’s the whole point -- we can’t afford the scheduled benefits,” he said.

But the political explosiveness of suggesting benefit cuts was evident as the president avoided any mention of cuts. Instead, he flipped the matter on its head.

Although apparently referring to Pozen’s plan, he declared: “As a matter of fairness, I propose that future generations receive benefits equal or better than the benefits today’s seniors get.” Inflation alone would ensure that future recipients receive higher dollar amounts than today’s retirees.

Bush’s promise that no American would be allowed to fall below the poverty line would represent a new commitment on the part of the federal government.

Last year, 3.5 million of the nation’s 34.7 million seniors fell below the official poverty line of $9,060 for elderly individuals and $11,418 for couples. Under the current system, there is no guaranteed minimum benefit. The average benefit paid to retirees is $955 a month.

“This is a welcome step, and one that everyone agrees we should do,” said New York University economist Jason Furman, a Clinton administration economic advisor. “But it does nothing to reassure the majority of Americans who are counting on Social Security for most of their retirement income that their benefits would not be reduced as a result of private accounts.”