WASHINGTON -- A Republican “fiscal cliff” proposal to change the way that cost-of-living adjustments are handled in federal programs has sparked renewed interest in a broader overhaul of the way Social Security benefits are calculated.
Republicans are proposing changes to a funding formula the government uses to adjust benefits annually in a host of programs, including Social Security. That might open the door for a broader discussion about further changes in how Social Security benefits for future retirees are calculated.
House Speaker John Boehner, R-Ohio, proposes changing federal cost-of-living adjustments by using a different measurement of inflation. Most adjustments are calculated by changes in inflation as measured by the consumer price index.
Boehner wants adjustments linked to what’s called a chained consumer price index, in which inflation rises more slowly because the calculation assumes that consumers will buy less of a product whose price is rising. This presumes that Social Security and other federal programs have overstated inflation, overpaying recipients with inflated cost-of-living adjustments. Boehner projects savings of $200 billion over 10 years if all government cost-of-living adjustments were done this way.
The proposal, which would affect current retirees, has detractors in both parties. But it’s also helped renew public debate over a bigger change that would link future Social Security benefits to changes in prices over time. The current system calculates benefits based on changes to the average national wage.
This idea is called progressive indexing, and President Barack Obama has expressed interest in it in the past. The Wall Street Journal’s editorial board recently endorsed the concept. Former World Bank President Robert Zoellick, who’s mentioned as a potential U.S. treasury secretary, embraced the idea in a Dec. 10 opinion piece about ways to tackle the nation’s fiscal challenges.
“A deal in Washington should save Social Security by progressively indexing the base payments to future retirees and gradually increasing the eligibility age,” he wrote.
It’s all music to the ears of Robert Pozen, a former Wall Street mutual fund executive who proposed the idea, now called the Pozen Plan, when he was a member of a presidential blue-ribbon commission in 2001.
“It’s getting some miles now,” said Pozen, who argues that his plan offers funding stability for a bedrock government program while still ensuring an intact safety net. “The first question is, if we are going to reform Social Security, we have to have somebody get less benefits. The obvious group that needs the benefits most is the lower third. . . . We have to have a more generous schedule for low earners than high earners.”
Right now, when a worker retires, the Social Security Administration calculates the retirement benefit based on his or her lifetime earnings. Those earnings then are adjusted by a formula that’s indexed, or linked, to the annual change in average national wages.
Under the Pozen plan, progressive indexing leaves the current benefit structure in place for Americans who earn less than $25,000 a year – the bottom 30 percent of workers. Future Social Security benefits promised to the other 70 percent of workers would be less generous.