Commentary

Washington Post: Progressive Indexing Merits “Serious Consideration”

By Stephen Moore
This article appeared on Cato.org on July 7, 2005.

In a carefully worded editorial this week, the Washington Post lent cautious support to the idea of progressive indexing, arguing that raising taxes to meet the skyrocketing future demands of indexing benefits to wages is not “sensible given other pressing demands” on the treasury. According to the editorial, based on calculations by Eugene Steuerle of the Urban Institute, “government-provided retirement benefits for the average couple retiring in 1960 amounted to $195,000. Today, that amount has grown to $710,000 ($439,000 in Social Security and $271,000 in Medicare, which didn’t exist in 1960). For a couple retiring 25 years from now, lifetime benefits are scheduled to exceed $1 million. Mr. Steuerle’s numbers are adjusted for inflation, so this is real growth.

“Is this sensible, given other pressing demands? Is it sustainable, given the impending retirement of the baby boomers? The answer to both questions is no, which is why Mr. Bush’s proposal to adjust the way that increases in Social Security benefits are calculated — a method known as progressive indexing — merits serious consideration.”

Progressive indexing has met with fierce resistance from opponents who claim that such a change will erode support for the program by making Social Security a worse deal for high-income workers and by imposing “cruel cuts” on the benefits of middle-income earners. But the editorial points out that the latter of those two criticisms is not a sufficient reason to reject the plan.

“The major critique of the Pozen plan is that promised benefits for the middle tier would be cut too sharply. It’s fair to debate whether Mr. Pozen scales back scheduled benefits too far down the income chain, though it’s important to remember that these are cuts in promised increases, not cuts compared to today’s benefit. Mr. Pozen is the first to say his plan could be recalibrated to be more generous to the middle class.

“But there’s not enough money in the system to pay scheduled benefits, and tax increases can’t be expected to cover all of the shortfall, given other looming demands on the treasury. Deciding what benefits the country can afford to give its citizens — and how much of that amount should go to seniors, as opposed to children and working families — is an essential part of the Social Security discussion. It’s why progressive indexing ought to be considered as part of the solution.”

Meanwhile, in National Review online, Cesar Conda of Freedomworks argued against criticism of progressive indexation from the political right.

“President Bush’s call for the ‘progressive indexing’ of Social Security benefits has been attacked as a ‘benefit cut’ that will land on the middle class,” Conda explained. “Liberal Democrats who support the status quo make this argument. But surprisingly, so do a handful of free-market conservative policy analysts who believe that personal retirement accounts alone will fix Social Security.”

Conda continued: “According to the Social Security Administration’s actuaries, progressive indexing would solve 70 percent of Social Security’s funding problem. The addition of voluntary personal retirement accounts — which replace part of the government benefit with private investments that people own and control — would further improve Social Security’s long-term finances.

“It is ironic that conservative critics of progressive indexing have joined liberals in attacking it as a benefit cut. But as the Washington Post recently editorialized, progressive indexing produces ‘cuts in promised benefits, not cuts compared to today’s benefit.’ Furthermore, progressive indexing offers higher benefits than the current system can afford to pay. As Congressional Budget Office director Doug Holtz-Eakin recently put it:

Under progressive indexing, benefits for high earners would be lower than under current law. But unlike under current law, those benefit reductions would allow the trust funds to remain solvent. As a result, workers in later cohorts would be spared the across-the-board benefit cuts that would occur when the trust funds were exhausted. For lower earners in those cohorts, benefits would be higher than under current law.

“Another argument holds that progressive indexing worsens the already low rates of financial return from Social Security. However, the critics arrive at this conclusion by conveniently excluding the higher returns that flow from personal retirement accounts. By this standard, the ‘personal account only’ plan — which calls for large accounts to eventually fund all of the promised retirement benefits — would also produce lower, and at some point negative, returns from traditional Social Security.”

Stephen Moore is a former Senior Fellow of the Cato Institute, and editorial board member of The Wall Street Journal.