Q: Because you do not support private accounts, how do you propose to improve Social Security for the younger people? I'm 85 so my concern is Notch Reform, but I would like to see improvement for my children and grand children.
A: President Bush and advocates argue that private accounts would provide higher benefits than what future retirees could receive under the current system. But allowing workers to divert a portion of their Social Security taxes into private accounts would worsen Social Security's solvency problem rather than help. According to the Congressional Research Service (CRS), because President Bush's individual account proposal would make the Social Security solvency problem worse in the short run, the President's proposal would require larger benefit reductions than what would be required to achieve solvency under current law.
In fact, the President has advocated reducing the guaranteed Social Security benefit for future retirees three ways. Under his proposal for private accounts, Social Security benefits would be reduced to offset not only the amount invested into the account, but by an additional amount that offsets the annual growth of the account by 3%.
President Bush has also proposed reducing the guaranteed Social Security benefit by what is known as "progressive indexing" the benefit formula. Over time, the benefit cuts would grow deeper, reducing Social Security benefits for all future retirees up to 50%, the CRS found. This is a much greater reduction than if Congress made no changes at all. According to the most recent report of the Social Security Trustees, absent any changes in federal law even if the Trust Funds were fully depleted, benefits would be reduced by about 25% in 2041.
TSCL believes that instead of private accounts or progressive indexing the benefit formula, increasing the age at which workers receive full, unreduced benefits — known as the Normal Retirement Age (NRA) — would provide a higher, more adequate benefit for future retirees, while significantly improving Social Security's finances. Since people would work longer before receiving full benefits, the program would receive payroll taxes longer. Working longer would also mean fewer years in retirement, also extending Social Security's solvency.
Under current rules, persons who delay retirement receive higher benefits through delayed retirement credits. In addition, added years of work at higher earnings may also increase the size of benefits. Analysts say that a delay of even one year in retiring can increase annual income by 8% to 10% for many individuals. These increases will be much more important in the future as Medicare premiums and deductibles consume ever-increasing portions of Social Security benefits.
A new analysis for TSCL, by Advisor editor Mary Johnson looked at what a retiree in 2030 with average earnings would receive assuming the NRA was raised as much as two years but benefits continued to be calculated under the current benefit formula. The study assumed the person retired in 2032 and dies in 2050. The study then compared what the same retiree would receive assuming the NRA remained the same (the person retired in 2030) but the initial benefits were calculated by "progressive indexing." In the case studied, the retiree who waited two additional years for full, unreduced benefits received an initial retirement benefit of $3,324 per month instead of $2,796 per month. Even though that person spends two less years in retirement, he or she would receive $33,849 more over an 18 - year retirement than by keeping the NRA the same and retiring with benefits calculated by "progressive indexation."
Because there were two less years spent in retirement, however, the savings to Social Security were similar to those achieved under "progressive indexing." TSCL believes that should the difference in benefits be better understood by the public, the choice would be clear.
Sources: "Social Security Reform: President Bush's Individual Account Proposal," CRS RL32879, April 25, 2005, page CRS-13. "Indexing Social Security Benefits: The Effects of Price and Wage Indexes," CRS RL32900, May 4, 2005. "Raising the Retirement Age vs. Progressive Indexing," Mary Johnson, TSCL, March 13, 2005.
