MFS Chairman Anticipates Painful Political Wrangle Over Social Security Plans
May 9, 2005
MFS Investment Management Chairman Robert C. Pozen, architect of a strategy that President Bush would like to use as the basis for Social Security reform, is now urging lawmakers to move beyond the headline-grabbing issue of private accounts and address the real stickler behind ensuring the pension fund's long-term solvency: the inevitability of benefit constraints.
Critics have assailed Pozen's "progressive indexing" plan because although it would preserve or even enhance the benefits that lower income workers currently receive in retirement, it would trim those that higher earners are awarded. They also don't like its link to Bush's controversial private accounts, which would allow workers to divert a portion of their Social Security payroll tax into a mix of stock and bond funds.
"Mr. Pozen's [plan] would cut benefits for people who earn as little as $20,000 a year," said Sen. Charles E. Schumer (D-N.Y.), in a statement shortly after Bush publicly endorsed progressive indexing on national television on April 28. "Privatization plus deep benefit cuts to middle class citizens is even worse than privatization alone."
Sen. Max Baucus (D-Mont.), who was first to voice concerns over the benefit cuts in progressive indexing during Pozen's April 26 testimony before the Senate Finance Committee, said in a statement, "The plan would mean additional cuts for Americans, and that's just not right."
But what's really wrong, Pozen said in an interview just hours before the president's endorsement, is judging a Social Security reform package by the question of whether it would preserve scheduled benefits.
"Of course it can't get you scheduled benefits, otherwise we wouldn't have a problem to begin with," he said. "There's no magic bullet. Anyone who says the problem with any reform proposal, not just progressive indexing, is that it gives some worker, in 2079 or 2055, 21% less than the schedule is wrong. It's a false criticism because we know that by 2040 the average worker's benefits are going to go down by 25% if we do nothing. They'll actually be better off than they would be under the [current] system.
"The cheapest political date in town is to say some proposal doesn't get people scheduled benefits. We keep concentrating on whether someone reaches scheduled benefits [and] there is no reform proposal that is going to reach that criteria. None. Absolutely none."
That argument, Pozen added, also fails to take into account the anticipated rise in purchasing power of the middle-income worker. Under progressive indexing, it increases 21% by 2055, "so the question is, should we be focusing on some 20% less in benefits or some 20% more in purchasing power," he asked.
The meat and potatoes of Pozen's plan, however, is solvency. Without additional reforms - that means, for example, no private accounts, no payroll tax raises and no adjustments in the retirement age - progressive indexing would close the long-term deficit of Social Security by more than 70%, or, in other words, take it from a present value of $3.8 trillion to about $1.1 trillion. To preserve the scheduled benefits of current retirees and those nearing retirement, it would begin in 2012, Pozen said.
Under the current system, as Pozen outlined in his testimony before the Senate Finance Committee, after workers retire and begin to receive benefits, those benefits are increased annually through "price indexing," which is basically a cost-of-living adjustment based on consumer prices. By contrast, he said, when the initial benefits of workers are set at the time of their retirement, their average career earnings are adjusted upward by the rate at which American wages have increased during their careers. That's "wage indexing."
Progressive indexing would preserve wage indexing for workers who retire in 2012 and beyond whose career earnings are $25,000 or less annually. Pozen said his plan retains wage indexing for low-income workers because most do not have additional sources of retirement income, such as a 401(k) or an IRA. But for those people with career earnings greater than $113,000, their benefits would be increased according to price indexing. For those folks in between, Pozen noted, a proportional mix of wage and price indexing would be applied to their career earnings.
And it's those "middle-earners," whose benefits would grow more slowly with progressive indexing than the current system, that are being shortchanged, critics claim.
"I said at the hearing, that if you don't want to have so much benefit slowdown, I could recalibrate the formula and give you a milder form. But then you're going to have to add revenue, or you're going to have to make some sort of benefit change," he said.
That means raising payroll taxes or rolling back the retirement age, two options no politician is likely to embrace, Pozen said.