Social Security formula may change
WASHINGTON -- The Bush administration has signaled that it will propose changes in the formula that sets initial Social Security benefit levels, cutting promised benefits by nearly a third in the coming decades, according to several Republicans close to the White House.
Under the proposal, the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker's lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by midcentury.
The White House hopes that some, if not all, of the benefit cuts would be made up by gains in newly created personal investment accounts that would harness returns on stocks and bonds.
But by embracing ''price indexing," President Bush would detail for the first time the painful costs involved in closing the gap between the Social Security benefits promised to future retirees and the taxes available to fund them.
The administration plans to produce its proposed overhaul of the system in late February or March, including the creation of personal investment accounts and the new benefit calculation.
''This is going to be very much like sticking your hand in a wasp nest," said David C. John, a Social Security analyst at the conservative Heritage Foundation. ''And the reaction will be similar."
In informal briefings on Capitol Hill, White House aides have told legislators and aides that Bush will propose the change in the benefits formula, an approach recommended by his 2001 Commission to Strengthen Social Security, according to congressional aides and lobbyists.
Currently, initial benefits are set by a complex formula that calculates workers' average annual earnings in their 35 highest-paid years and adjusts those earnings up from those years to reflect standards of living near that worker's retirement age. That adjustment is based on wage growth over that time span. Under the commission plan, the adjustment would be based instead on the rise of consumer prices.
The change would save trillions of dollars in scheduled expenditures and would solve Social Security's long-term deficit, but at a cost. According to the Social Security Administration's chief actuary, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised.
''No decision has been made, but the administration is clearly leaning in that direction," said Michael Tanner, director of the libertarian Cato Institute's Project on Social Security Choice. ''I don't think anything else is seriously on the table."
John Rother, policy director of AARP, the powerful lobby for senior citizens, said, ''There will be price indexing."
The White House has been slowly building the case for the change. Last year's Economic Report of the President, written by the Council of Economic Advisers and signed by Bush, uses the Social Security commission's primary proposal to advocate overhauling the retirement system. Last month, the council's chairman, N. Gregory Mankiw, fingered the current system of ''wage indexing" as a primary culprit for Social Security's problems.
