The President has proposed reforms to address the system’s long-term financial shortfall while making Social Security a better deal for today’s young workers. Under the President's approach, Social Security would include voluntary personal accounts funded by a portion of workers’ payroll taxes. The 2007 President’s Budget includes the estimated impact from the creation of personal accounts. The accounts will be funded through the Social Security payroll tax. In the first year of the accounts, contributions will be capped at four percent of Social Security taxable earnings, up to a $1,100 limit in 2010, increasing by $100 each year through 2016. The President has also embraced the idea of indexing the future benefits of the highest wage workers to inflation while providing for a higher rate of benefit growth for lower-wage workers. This measure would significantly contribute to the solvency of the system. By adjusting the way benefits are calculated, progressive indexing would eliminate nearly 70 percent of annual cash shortfalls by the end of the Social Security Trustees' long-range (75 year) valuation period, trending towards greater improvement thereafter. Because progressive indexing would index benefits for lower-wage workers to wage growth, which generally grows faster than inflation, benefits would grow faster than the poverty level. This will keep a greater portion of future seniors out of poverty than today.
By adopting progressive indexing and allowing young workers to create voluntary personal retirement accounts within the Social Security system, the President’s recommendations would provide future seniors with real money instead of the current system’s empty promises. Indexing benefits partially to inflation rather than wages allows the Government to save significant sums in future decades, money that would be used to maintain faster benefit growth for low-income seniors. Without Social Security reform, benefits for future seniors will have to be cut about 30 percent across-the-board.
I have taken issue in the past with some of the language being used here--a presumption that the poverty level grows only with prices and not with wages and referring to the "empty promises" of the current system. But I still like this plan relative to the status quo (though not relative to the LMS plan).
Writing in today's Washington Post, Allen Sloan discusses the financial impact of the proposal:
Unlike Bush's generalized privatization talk of last year, we're now talking detailed numbers. On page 321 of the budget proposal, you see the privatization costs: $24.182 billion in fiscal 2010, $57.429 billion in fiscal 2011 and another $630.533 billion for the five years after that, for a seven-year total of $712.144 billion.
I view this as a positive step. If the President is serious about the proposal, it should be in his Budget. His Budget is not the law, but at least it gives other policy makers a more concrete place to start, and it competes with other budgetary initiatives for those years. The next step is to specify it in enough detail so that the actuaries at the Social Security Administration can evaluate its long-term effects as a standalone plan, as they have done for other proposals here. Like bakho and Sloan, I share the surprise of having to uncover this in the Budget, rather than hear about it in the State of the Union address.